Sunday, September 28, 2008

How the Media Sees the Banking Crisis

Reason, Rational Self-Interest

On Thursday, The Financial Times published an editorial about the banking crisis. It's representative of the views of the vast majority of news organizations:

In praise of free markets

In praise of free markets? If by praise you mean, faint, damning, insincere praise, then yes. Let's go on a journey of philosophical detection...

The financial system has reached the point of maximum peril.

This is debatable, but I'll accept it.

After years of profligacy, banks have all but stopped lending to each other as the US Congress decides whether to extend support. If the unravelling of the banking system continues, the economic consequences will be dire. Yet there is an even greater risk: that the politicians now contemplating Wall Street’s follies draw the wrong conclusions and take the wrong decisions, losing their confidence in markets altogether. It would not be the first time. After the Wall Street Crash, markets were deemed to have failed and US lawmakers attempted to regulate short-cuts through the crisis. The widely-copied Smoot-Hawley Tariff Act quadrupled the effective tax rate on thousands of imports and deepened the “Great Contraction” of 1929 to 1933. The price of popular anti-market sentiment was much higher in some of Europe’s fledgling democracies: fascism.

Despite the severity of the current crisis, such extreme reactions remain very unlikely. Yet there is plenty of room for policymakers to compound the damage already inflicted by the irresponsible conduct of the financial sector.

Well, that's a half-decent start, except for the irresponsible conduct of the financial sector bit, since the financial sector was just obeying the rules imposed upon it by the government and relying on the not-so-implicit promise that the government will bail out anyone and everything that ever goes bad. But why do I get the feeling that you're setting me up?

It is time, then, to remember what open markets have achieved, and what lies in wait for societies that suppress them.

So, what memories do you then have to offer? None, in the entire article.

It is no help that some of the loudest critics have little interest in what went wrong, less in how to fix it, and none at all in safeguarding against problems in future. Rowan Williams, the archbishop of Canterbury, this week applauded the UK government’s ban on short selling. His colleague, John Sentamu, declared that the short sellers of bank shares were clearly bank robbers and asset strippers. These are the words of a well-meaning man who can see no moral or practical difference between a car thief, a scrap-yard mechanic, and a person who insures a car and thus profits if it is stolen.

Andrew Cuomo, New York’s Attorney General, went one step further—looters after a hurricane was his ill-judged analogy. Are short sellers also to be shot by the National Guard? The trouble with such sentiments is that they solve nothing.

[Why do you claim that insurance companies profit when cars are stolen? If that were the case, surely some of them would be in the grand theft auto business in a big way. OOPS! Click here for a correction.] Other than that, those are good points, but...

Criticise in metaphors—unbridled capitalism; unfettered greed—and you duck the tiresome task of specifying what bridles and fetters you have in mind. we shall see, you do not believe in your own admonishments or you think that the bridles and fetters that you would approve of are reasonable.

Consider the Washington rescue package first. Why should taxpayers bail-out millionaire bankers, and what should we force them to give back in return?

So you're recommending a double use of force? First to coerce money from taxpayers: you're not asking why taxpayers should bail out the bankers as a rhetorical device meaning they shouldn't, you're asking as a preface to justification. Next you recommend coercing something from businesses in return for receiving the money extorted from the taxpayers.

Those are natural questions but not the only ones. We should also ask whether taxpayers will profit, directly or indirectly, from spending money to shore up the banking system.

I'm going to be spending my money to shore up the banking system? Spending presupposes execution of my free will; taking the money from me in the form of taxes is extortion, not spending—forcing me to put my money to a use which I would never choose for it. Calling this spending is like calling the forced redistribution of wealth investment. And since when is it government's job to provide profits to anyone?

The answer is yes.

Yes, taxpayers will profit? I will see a return on my $5,072.461 investment? Really? Let's look at that...

The system is close to collapse, and the consequences of collapse would be misery for Main Street. Profitable businesses and creditworthy consumers would suffer. A successful rescue would prevent that and there is even a small chance that it would be profitable in its own right.

While preventing hardship is a good thing, avoidance of misery and suffering is not the same as profit. Also, profitable in its own right here must mean monetary profit, so I expect a check for my $5,072.46 plus the gains I've earned on it. What's that? You say the government will never write such a check? I'm shocked I tell you. Shocked!

That is the justification for the rescue.

Well, that eases my mind. How wonderful that I get to pay for the government's disasterous intrusion on freedom, and business's reliance on it, and get at best a maintenance of the status quo in return. Oh, wait, not my status quo, but my status quo minus my $5,072.46. I'm so happy!

Congress was right to scrutinise it—especially its lack of oversight—but has become distracted by a desire to clip Wall Street’s wings.

Governmental desire to exert more control over the people is a distraction? From what, its otherwise laissez-faire benevolence?

The case for more effective regulation is nevertheless undeniable.

The praise of free markets continues.

It is hard to defend a system where top banking executives walk away with millions in compensation when their businesses are, in retrospect, fundamentally flawed. This looks like a reward for failure. We have witnessed two financial crises—the dotcom crash and the current banking disaster—in the first decade of this century. That is hardly a record which inspires confidence in the current efficiency of capital markets or their transparency.

Right, because those are examples of the failure of the free market, as opposed to a system (I won't dignify it by calling it a market) dominated by the crushing sands of government regulation.2 The dot com crash can be dated to the exact moment Alan Greenspan said the words irrational exuberance. I know this because, among other things, I watched my investment portfolio begin to collapse immediately following that statement.

The current crisis is routinely described as a symptom of deregulation, but it is equally the child of earlier, ill-fated interventions. Subprime mortgages grew because the prime mortgage sector was dominated by Fannie Mae and Freddie Mac, two institutions founded, regulated and effectively underwritten by the government. Securitisation was an effort to sidestep capital requirements. But it also created instruments that few could understand and, in Warren Buffett’s prophetic words, really were financial weapons of mass destruction.

Except for equally, which should be removed, this is good, I'm with you.

Capital markets clearly need better regulation

Huh? Wait a sec, you just said...

but policymakers should guard against unintended consequences.

Gee, ya think? Then again, when have policymakers (read: legalized gangsters) ever guarded against, well, any consequence of their commandments...oops, I mean policies?

Markets are places of trial and, very frequently, error. Their genius is not perfect efficiency, but the rewarding of success and the weeding out of failure. No better alternative has ever presented itself.

Implied here is that a better alternative is possible, implicit support for more intervention in the hopes that some day we'll get it right.

This is a difficult time to defend free markets.

Indeed. It's extremely difficult to defend that which does not exist. Unless...are you saying that you think that what we've had to this point are free markets? And you get to write editorials for a major news organization?

Nevertheless they must be defended, not only on their matchless record when it comes to raising living standards, but on the maxim that it is wise to let adults exercise their own judgment.

So close, so very close, to defending freedom. You just missed it. Which was to be expected: you don't believe in freedom, because...

Market freedom is not a fundamentalist religion. It is a mechanism, not an ideology, and one that has proved its value again and again over the past 200 years.'s just a mechanism, just one of any number of policies from which the government can choose to manage the economy, which you clearly believe it ought to be doing. If a better alternative presents itself, well, we should jump all over it!

The Financial Times is proud to defend it—even today.

Kewl! I'm glad you're proud to defend freedom (even today, as if there's a time not to defend freedom). So let's see your defense, because this article ain't one.

See Also:

America vs. Congress et al. by Edward Cline

John Allison takes a stand by Nicholas Provenzo

Correction, 2008.09.28:
A friend at THE FORUM pointed out that I misinterpreted the article's reference to car insurance. The article is talking about the person who owns the car, not the company that insures it. Still, I don't see how the owner profits from having the car stolen: he receives fair value for the car, so he's lost and gained an equal monetary amount. If there are differences between cars' values and insurance payouts, they're surely so small on average that it's not possible to make a living by stealing cars for the insurance money. Besides, any given owner won't get away with that for very long.

Anyway, from now on I'll take a Reading Comprehension Super Pill before I comment on anything.

1The $700,000,000,000 figure most often stated for the bailout divided by approximately 138,000,000 taxpayers in the U.S. as of 2007. It's even worse if we accept the estimate in that Wikipedia article that a third of those pay zero income tax. That changes the amount each paying taxpayer owes to $7,608.70.

2Nice metaphor, eh? Oh, one little regulation won't hurt, if it's for the public good. ... Hey, how did I wind up at the bottom of this giant hourglass?

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