The Circle Bastiat
Toward the end of his State of the Union speech, President Obama said “I believe what Republican Abraham Lincoln believed: That government should do for people only what they cannot do better by themselves, and no more.” Apparently, he didn’t note the immense irony of those words on the lips of one of American history’s most aggressive expanders of the scope and reach of the federal government, or the cognitive dissonance between that claim and the preceding substantial laundry list of things he wanted to do for (and to) Americans.
But the huge gap between the Presidents limited government words and his expansive government actions shows how limited is the power of such words to constrain centralized power and control. Ritual obeisance to the rhetoric can simply be combined with inconsistent behavior, and his inflation of government even further past any defensible claim of advancing the general welfare is defined out of existence.
Fortunately, this issue has already been considered. In his 1969 Let Freedom Reign, Leonard Read wrote about a loophole in the limited government formulation that now allows President Obama to eviscerate any such limitation. His depressingly current chapter on “Governmental Discipline” merits careful consideration.
During the last century, several of the best American academicians and statesmen — in an effort to prescribe a theory of governmental limitation — have agreed: The government should do only those things which private citizens cannot do for themselves, or which they cannot do so well for themselves.
[T]his is meant to be a precise theory of limitation…
The government should, indeed, do some of the things which private citizens cannot do for themselves…Codifying and enforcing an observation of the taboos gives the citizenry a common body of rules which permits the game to go on; this is what a formal agency of society can do for the citizens that they cannot, one by one, do for themselves… And no more!
This proposal…does not go far enough. It has a loophole, a “leak,” through which an authoritarian can wiggle
What they [citizens] will not do and, therefore, “cannot” do for themselves is to implement all the utopian schemes that enter the minds of men, things that such schemers think the citizens ought to do but which the citizens do not want to do…”only” is utterly meaningless!
Reflect on the veritable flood of taboos — against other than destructive actions — now imposed on the citizenry by federal, state, and local governments. And all in the name of doing for the people what they “cannot” do for themselves. In reality, this means doing for them what they do not wish to do for themselves.
How might we state this idea, then, in a way that…if followed, would restore government to its principled, limited role — keep it within bounds? Consider this: The government should do only those things, in defense of life and property, which things private citizens cannot properly do each man for himself.
The only things private citizens cannot properly do for themselves is to codify all destructive actions and prohibit them…Neither the individual citizen nor any number of them in private combination…can property write and enforce the law. This is a job for government; and it means that the sole function of a government is to maintain law and order, that is, to keep the peace…a task much neglected when government stops out of bounds.
All else — an infinity of unimaginable activities — is properly within the realm of personal choice: individuals acting cooperatively, competitively, voluntarily, privately, as they freely choose. In a nutshell , this amended proposal charges government with the responsibility to inhibit destructive actions — its sole competency — with private citizens acting creatively in any way they please.
The government is engaged in countless out of bounds activities…what private citizens will not do rather than something they cannot do…
[W]e allow government to commandeer resources that private citizens will not voluntarily commit to such purposes. In other words, private citizens are forced to do things they do not wish to do.
Why are private citizens forced to do what they do not wish to do? After all, the formal coercive agency of society — is their agency!
We have one test, and one only, for what private citizens really wish to do: those things they will do voluntarily!
But here’s the rub: There are those who believe we do not know all the things we want or, at least, are unaware of what is good for us. These “needs” invented for us…have no manner of implementation except by coercion. In a word, these people who would be our gods can achieve the ends they have in mind for us only as they gain control of our agency of force: government.
And the primary reason why they can force upon us those things we do not want is our lack of attention to what are the proper bounds of government.
By asserting his devotion to limited government in his State of the Union address, President Obama seems to be trying to blunt criticism of how untrue that statement is. He mouths the same words as those who are truly concerned about limiting over-reach of government, but he clearly means something else than they do. It reminds me of some other words of Abraham Lincoln:
We all declare for liberty, but in using the same word we do not all mean the same thing. With some the word liberty may mean for each man to do as he pleases with himself, and the product of his labor; while with others the same word may mean for some men to do as they please with other men, and the product of other men’s labor. Here are two, not only different but incompatible things.
If there is one thing the 2012 presidential campaign has already taught us, it is that past complainers that politics was negative and underhanded didn’t know how good they had it. Abetted by technologies that increase the reach and power of smear campaigns and mechanisms to allow far more money to be spent on them, electoral politics has turned into an even more intense mud-pit of attacks and fingerpointing about every conceivable issue (including ones made up of whole cloth), along with “O yeah?” responses and counterattacks and bare-knuckle brawling among partisan spinners. And that is just the Republican primary. We haven’t even gotten near the general elections yet.
Given the incredibly bitter invective and the amazingly negative campaigning we have observed, I have concluded that perhaps the most accurate, though accidental, commentator on the current state of politics was C.S. Lewis, just over half a century ago.
In The Screwtape Letters, Lewis used the device of letters of instruction from an experienced Devil on how to successfully tempt humans. In one of them, he turned to how to inflame domestic hatred between two people. But with only a few minor alterations to accommodate the fact that “the names have been changed to protect the guilty,” he seems to equally well describe our current political competition:
When political candidates have campaigned against one another for many months, it usually happens that each has tones of voice and expressions of face which are almost unenduringly irritating to the other. Work on that. Bring fully into the consciousness of your partisan that particular lift of his opponent’s eyebrows which he learned to dislike … and let him think how much he dislikes it. Let him assume that his opponent knows how annoying it is and does it to annoy — if you know your job he will not notice the immense improbability of the assumption. And, of course, never let him suspect that he has tones and looks which similarly annoy the other side.
In civilized politics hatred usually expresses itself by saying things which would appear quite harmless on paper (the words are not offensive) but in such a voice, or at such a moment, that they are not far from a blow in the face. To keep this game up you … must see to it that each of these two fools has a sort of double standard. Your partisans must demand that all their utterances are to be taken at their face value and judged simply on the actual words, while at the same time judging all their opponents’ utterances with the fullest and most oversensitive interpretation of the tone and the context and the suspected intention. Their opponents’ partisans must be encouraged to do the same to him. Hence from every quarrel they can both go away convinced, or very nearly convinced, that they are quite innocent … Once this habit is well established you have the delightful situation of both sides saying things with the express purpose of offending and yet having a grievance when offense is taken.
Lewis seems to have hit the current state of politics on the head. Screwtape politics has intensified. Unfortunately, it may not reveal which initiatives truly advance the general welfare or who the most worthy candidates are. But at least it gives us insight into James Madison’s famous statement in Federalist 51: “If men were angels, no government would be necessary.”
 Alterations from the original are indicated in italics. The original version is given below:
When two humans have lived together for many years, it usually happens that each has tones of voice and expressions of face which are almost unenduringly irritating to the other. Work on that. Bring fully into the consciousness of your patient that particular lift of his mother’s eyebrows which he learned to dislike in the nursery, and let him think how much he dislikes it. Let him assume that she knows how annoying it is and does it to annoy — if you know your job he will not notice the immense improbability of the assumption. And, of course, never let him suspect that he has tones and looks which similarly annoy her.
In civilized life domestic hatred usually expresses itself by saying things which would appear quite harmless on paper (the words are not offensive) but in such a voice, or at such a moment, that they are not far from a blow in the face. To keep this game up you … must see to it that each of these two fools has a sort of double standard. Your patient must demand that all his utterances are to be taken at their face value and judged simply on the actual words, while at the same time judging all his mother=s utterances with the fullest and most oversensitive interpretation of the tone and the context and the suspected intention. She must be encouraged to do the same to him. Hence from every quarrel they can both go away convinced, or very nearly convinced, that they are quite innocent. You know the kind of thing: “I simply ask her what time dinner will be and she flies into a temper.” Once this habit is well established you have the delightful situation of a human saying things with the express purpose of offending and yet having a grievance when offence is taken.
Recently reported in the MIT Technology Review was the results of research modeling billions of interactions between buyers and sellers. The data would appear to undermine the argument used to defend invasive regulation, price-fixing, and anti-trust laws, which operate under the assumption that all inconvenient price increases must be the result of shady conspiracies by industry leaders.
The results make interesting reading. It turns out that a crucial factor is the speed at which buyers and sellers react to the market. When buyers react quickest, sellers are forced to match the best possible value for money and prices tend to drop. By contrast, when sellers react quickest, they are quick to copy others offering poor value for money. This reduces the number of sellers offering good value for money in a vicious cycle that drives prices as high as possible. This is the emergence of a cartel and it happens in these guys’ model without any collusion between sellers. Instead, it is an emergent property of the market place that happens when the sellers outperform buyers in the way they react to market conditions. “This cartel organization is not due to an explicit collusion among agents; instead it arises spontaneously from the maximization of the individual payoﬀs,” say Peixoto and Bornholdt.
I particularly loved the echoes of “Spontaneous Order” in this quote. Of course, the writers of this particular article are still scratching their heads, unable to conceive of a world without regulatory and punitive market controls. Simply leaving market agents alone would be too radical, but at least they acknowledge that even new strategies would still be subject to the law of unintended consequences:
But this work muddies the waters somewhat. If cartel-like behaviour is an emergent property of an ordinary market, how should it be controlled, regulated and punished? The good news is that various strategies could easily be tested using this kind of agent-based model. The bad is that new strategies may themselves lead to emergent properties that are hard to spot in advance.
Their work is refreshing for many reasons: It does not assume the housing bubble is the whole story. It allows that honest ignorance (especially about the interaction of complex regulations) might explain the behavior of bankers and regulators. It asks especially interesting questions about the triple-A mortgage derivatives at the heart of the financial meltdown.
The Basel banking regulations provided the incentive for bankers to load up on mortgage securities, which up to that point history had shown were very safe. Thus, the capital that regulators required to be held against these assets was tiny. Bankers acted logically by investing in what they thought (and importantly what regulators told them) were safe assets that they could grow their businesses with the least amount of capital required.
Messrs. Friedman and Kraus find no evidence for the popular theory that bankers acted recklessly because of Too Big to Fail incentives or because compensation packages induced them to be careless about long-run returns.
Jenkins even gets it right at the end, writing, “One solution is giving back to bank creditors the job of policing bank risk-taking. Roll back deposit insurance, for instance.”
More and more underwater borrowers are deciding it’s time to walk from their mortgage. “Guilt and morality are one side, and objective financial analysis are on the other side,” 68-year old David Martin told msnbc. “They’re coming to two opposite conclusions. I wonder how many other people are struggling with the same question.”
Three out of 10 foreclosures in 2010 were of the strategic variety, an increase from 22% in 2009. The Mortgage Bankers Association believes strategic defaults are spreading like a virus. In a study entitled “Strategic Default in the Context of a Social Network: An Epidemiological Approach,” conducted by Michael J. Seiler of Old Dominion University, Andrew J. Collins of the Virginia Modeling, Analysis and Simulation Center and Nina H. Fefferman of Rutgers University and sponsored by MBA’s Research Institute for Housing America (RIHA) the authors found “One default does little to negatively impact the price of surrounding homes. However, as more and more mortgages in the neighborhood go into default, the negative impact is felt at an increasing rate. Much the same way as a disease spreads throughout a population, so, too, do decisions to ‘strategically’ default.”
Despite some experts projecting that the worst is over for housing, the immense shadow inventory of homes is casting a …well…shadow over the housing market. These estimates of the number of homes in foreclosure or likely to be in foreclosure are all over the map from Corelogic’s 1.6 million to 10.3 million estimated by Laurie Goodman of Amherst Securities.
Michael Olenick pegs the number at 9.8 million with the exposure being $1 trillion. He writes,
It is unclear where the money from these write-offs will come from, or whether they losses have been adequately budgeted. Obvious sources are Fannie Mae, Freddie Mac, European and US banks, none of which have reported anywhere near this level of reserves. We know that the Federal Reserve has been buying up MBS and related instruments in bulk; maybe the central bank plans to print more money to cover the losses and enable the foreclosures. Printing this much money, for this purpose, in this political environment, in secret, seems unlikely.
The Fed can keep printing, but it won’t keep homeowners from walking away.
‘So far we are seeing, at worst, an orderly decline in the housing market,’ he said.”
Fannie Mae’s CEO, Michael Williams, resigned this week. Said Williams: “I am extremely proud of what we have achieved together, and I am confident that they will continue to make a positive difference.” Freddie Mac’s CEO is also on the way out, by the way.
The Obama Administration announced this week that it wants to convert foreclosed properties to rentals. It is ” a pilot program to sell government-owned foreclosures in bulk to investors as rentals.” Since this is a partnership with government-owned corporations Fannie and Freddie, this program is likely to manifest itself as yet another investment opportunity only for massive, politically-connected enterprises. Small investors will very likely need not apply.
Housingwire reported Thursday that bank risk managers still believe that excessive levels of mortgage debt, student loan debt and credit-card debt are still a serious risk.
FICO drew that conclusion from a fourth-quarter survey of bank risk professionals conducted by the Professional Risk Managers’ International Association.
Of those surveyed, 47% of risk managers say they expect mortgage delinquencies to rise, while 13% believe delinquencies will fall.
FICO says that’s more pessimistic when comparing 4Q survey results to the previous quarter.
Student debt also remains a concern, with education loan debt now exceeding credit card debt nationwide.
Evidence is mounting that student loans could be the next trouble spot for lenders,” said Dr. Andrew Jennings, chief analytics officer at FICO.
In short, risk managers are significantly more pessimistic now than they were last quarter. And for good reason. Over the past 10 to 15 years, total debt outstanding in the US has grown as a much faster pace than population, and little has been done to deal with the debt in spite of widespread unemployment, flat personal income, and declining collateral values.
According to this article in the Atlantic Monthly, student loan debt has grown more than 500 percent since 1999. Over a similar period, from 1998 to 2008, household credit-market debt has grown 140 percent. During this period, the US population grew about 10 percent. A similar curve can be observed for mortgage debt as well.
This graph shows that overall debt loads have come down by 5 percent since the financial crisis in 2008. While this is a rare case of total debt actually decreasing, the 5 percent decline is hardly a game-saving drop in the face of debt loads that nearly grew at exponential rates during the height of the bubble.
Some economists have made a big deal out the mild increase in the savings rate. This, however, does not show any big improvements either. The personal saving rate, at 3.5 percent during November, was tied at the lowest level seen since Janaury 2008. There was indeed a period following the initial crisis of late 2008 during which the saving rate hit 7.1 percent (during May 2009), but it has since steadily declined and has been below 4 percent for the past three quarters. This is likely as a result of ongoing efforts, through easy money policies, to keep the consumers spending.
And has it worked? Following a post-2008 drop that was similar to the drops in mortgage and credit market debt, consumer debt has been heading back up since the third quarter of 2010. Consumer debt is now about 5 percent below peak levels, following the initial drop, but has grown at about 3 times the rate of population over the past decade. The feds have managed to get consumer debt back up over the past 18 months or so. Has this increased spending been the result of increased employment and wages? Clearly not, since there are still at least 9 million unemployed Americans, and probably more.
Many of those continue to make payments on mortgages, credit card bills and student loans. How much longer this can continue in the fact of ongoing unemployment, underemployment, and underwater real estate remains to be seen, but it’s not difficult to see why the bank risk professionals suspect that more defaults may be on the horizon.
The economy will fix itself through a long and unpleasant period of deleveraging, but that appears to still be in the very early stages. Ongoing government interventions such as the homebuyer tax credits and continued efforts to push down interest rates continue to discourage saving and capital accumulation.
The one place we have seen a fair amount of deleveraging is in the mortgage markets as homeowners default, foreclose, and walk away, but the inventory there continues to be substantial, and declines in mortgage delinquencies may have stalled. During the 3rd Q of 2011, the percent of mortgage loans in foreclosure, according to the Mortgage Bankers Association, was flat from the second quarter, and it was up from the 3rd quarter of 2010. 4.3 percent of mortgage loans were in foreclosure during the 3rd Q of 2010, but 4.4 percent of them were in foreclosure during the same period this year. The overall trend is downward, but at a very slow pace.
Since one can’t get out of student debt through bankruptcy, and since many households use credit cards to balance household budgets, we could be looking at many years before present consumers begin to engage in some serious deleveraging of household debt. We certainly don’t seem to have seen much of it yet.
What makes democracy work so well? Ignorance. The majority of voters don’t know anything about the issues and of course have no idea what candidates will do once in office. Ecologist Iain Couzin at Princeton figures this makes democracy work great. Jonah Lehrer writes for the Wall Street Journal:
Why are democracies so vibrant even when composed of uninformed citizens? According to a new study led by the ecologist Iain Couzin at Princeton, this collective ignorance is an essential feature of democratic governments, not a bug. His research suggests that voters with weak political preferences help to prevent clusters of extremists from dominating the political process. Their apathy keeps us safe.
Like schooling fishing and flocking birds, people in democracy just go with the flow. And, it all works out fine, right?
One would think Matthew Yglesias had become quite well versed in Austrian Economics by now or at least slightly familiar, but alas that is not the case. Sadly all one can do is shake ones head as I think it is a lost cause and he really is not interested in learning why it was Ron Paul stated that “We are all Austrians now.”
Here is his latest attempt to confuse and befuddle as he leaves one discombobulated and none the wiser. Yglesias crawls along as he confounds fact and fiction and then reaches his crescendo of confusion when he states:
“Many of the original Austrians found their business cycle ideas discredited by the Great Depression, in which the bust was clearly not self-correcting and country after country stimulated real output by abandoning the gold standard and engaging in deficit spending. Then for a long time after World War II, policy elites more or less agreed on a combination of “automatic” fiscal stabilizers (the deficit naturally goes up during recessions as tax revenues fall and social service outlays rise) and interest rate cuts. And it worked, so nobody much cared about Austrian economics outside of crank circles.”
Of course, no prestigious circle cared much about Austrian economics except the one that matters most that gave F.A. Hayek a Nobel prize in 1974 for his pioneering work in the theory of money and economic fluctuations and his penetrating analysis of the interdependence of economic, social and institutional phenomena.
If Matthew or anyone else wants to see the error of their ways it is a quick click away and a short read to the real story behind America’s Great Depression.
In their last desperate months, the management of MF Global instituted cost cutting initiatives to try and save the company. The Wall Street Journal’s Aaron Lucchetti and Mike Spector write that a memo went out to the firm’s 2,800 employees telling them to start printing on both sides of paper and listed other ways to save the company money.
The paper austerity program wasn’t enough to keep the company out of bankruptcy as MF Global filed Chapter 11 on Oct. 31. Saving a few sheets here and there couldn’t overcome the leverage built up by way of the rehypothecation of their clients’ collateral.
The management of Security Pacific Bank stopped providing coffee and Wall Street Journal subscriptions in its last months as the bank lost $775 million in 1991 and $1.45 billion the next year. There was a paper recycling mandate as well.
Security Pacific was famous for being deal makers, lending on real estate and doing business with big-name, big-ego clients. Senior management believed “we can’t possibly make the mistakes the S & Ls did,” ex SP CEO Robert Smith wrote in his book Dead Bank Walking.
Smith candidly writes: “We were caught up in ourselves and the times. We were cattle, running hard to get to the feed bin, to be first, to be a pioneering lender—to build our bank as a world-class operation lauded for its world-class deals.”
When Jon Corzine came aboard to run MF Global he wanted the company to take more risk. Lucchetti and Spector
Roaming MF Global’s trading floor, Mr. Corzine encouraged traders to make larger bets, without fear of losing money. He added new, riskier businesses that wagered the firm’s own money, creating a proprietary-trading desk and increasing the emphasis on higher-risk products like mortgage-backed securities and stock-index derivatives.
Security Pacific got lucky. Bank of America rescued Security Pacific shareholders with a $5.64 billion buyout as the bank was headed for failure.
Mr. Corzine was also working on a buyout. But he ran out of time. If only the company had used less paper or been a systemically important bank.