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Wednesday, November 12, 2008

Are Libertarians Clairvoyant?

No, just smart.

I found this on Mises.org, a libertarian think-tank (named after the Austrian economist Ludwig von Mises). It is absolutely spot on, and then you realize the guy wrote this in 1999.

I am just going to post the part of the article that I found the most interesting, but I would strongly encourage you to read the entire thing. The ridiculous argument that we are in a financial meltdown right now because there wasn't enough "regulation" gets kicked square in the nuts here, in particular the issues with the housing bubble.

Again, keep in mind: this was written almost 10 years ago, while the economy was seemingly moving at light speed and everyone was getting rich off their Pets.com stock. Enjoy.

"Perhaps the most egregious example of all of regulatory blackmail is enforcement of the so-called Community Reinvestment Act (CRA) in the U.S. The CRA was enacted in 1978 under a patently false pretense -- that banks made fewer loans to residents of low-income neighborhoods not because there were fewer creditworthy borrowers there, but because of allegedly pervasive "discrimination" against the residents of those neighborhoods, primarily black residents.

Banks do -- and should -- "discriminate" against less creditworthy borrowers, but in doing so they run the risk of regulatory extortion. An entire industry of sometimes federally-funded "community groups" has sprung up, with names like "Center for Community Change" and Association of Community Groups for Reform Now (ACORN), which essentially extort money from banks with the following ruse: Whenever a bank proposes a merger, expansion, or building of a new branch, it is subject to regulation by the Fed, the Comptroller of the Currency, and the FDIC. If anyone files a complaint to any of these agencies accusing the bank of making too few CRA loans, the merger or expansion is halted. So-called community groups frequently lodge such complaints and do not withdraw them until the banks give them or other groups which they designate large sums of money, sometimes in the tens of millions of dollars.

For example, the "Neighborhood Assistance Corporation of America (NACA)," led by self-described "urban terrorist" Bruce Marks, has "won" loan commitments totaling $3.8 billion from Bank of America Corp., First Union Corp., Fleet Financial Group, and others. These monies are lent to borrowers favored by Mr. Marks, and his organization usually gets a lump-sum fee or a percentage of each loan. NACA plans to operate in all 50 states by 2001 when it expects its annual budget to be in the $80 million range.

Regulatory extortion via the CRA was on display on national television during Bill Clinton's summer 1999 "poverty tour." One of the corporate executives who accompanied Clinton on his tour of economically depressed areas was the CEO of NationsBank, which was at the time in the process of merging. Before granting NationsBank permission to merge, Clinton required the bank to commit to $150 million in low-interest loans to individuals and businesses in areas chosen not by the bank, but by the Clinton administration. One can be sure that the areas chosen for such favorable treatment will be ones in which Al Gore is in need of votes for his presidential bid.
A staff member of the U.S. Senate Banking Committee recently told me that approximately $100 billion in CRA "loans" have been extended in the past twenty years, and that there is currently a concerted lobbying effort afoot to extend the CRA to credit unions and the insurance industry.

The CRA is a welfare program financed by (legal) regulatory extortion. It is bound to have a negative effect on the capital values and stock prices of banks in particular and and on the entire economy in general, because it socializes a portion of the capital markets. The major negative effect on the economy is the diversion of capital from economically sound to politically popular but economically dubious uses. A moral hazard problem is also created, in that a signal is sent to lower-income people that one does not necessarily need to become creditworthy (by working regularly, paying one's bills, and saving part of one's earnings, for example) to have access to credit, but to become politically connected instead.

The Clinton administration has been budgeting over $100 million per year in federal subsidies for "community development banks," which are another (similar) way of politicizing lending. This, along with the expansion of the CRA, possibly into credit unions and the insurance industry, is a recipe for another savings-and-loan-type financial disaster in the future."

Anyway. For further enlightenment, enjoy Ron Paul's op-ed on CNN.com today.

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Clairvoyant? Smart? I don't know, libertarians greatest talent seems to be blaming poor people and minorities.

Here's why pretending the CRA had anything to do with this is dumb:

From Business Week

From Media Matters

From The Center for American Progress

Even if you don't believe the sources, anyone with even a tangential relationship to the banking industry can tell you banks did not need to be encouraged to give out dumb loans in the last few years. Loans make banks lots of money. Money to lend was easy to come by. So banks made loans in order to make lots of money.

Those of you who live in the sub/exurbs should also know how much of a shell game the housing market has been and none of that has anything to do with the CRA.

To blame a 30-year-old law that only applies to banks and thrifts (and not other mortgage lenders) who are making low volume loans seems like a stretch, no?

You guys can drive around your own neighborhoods and see empty houses or see the plummeting value of your own property. What you can't see, is a bunch of scary poor people living like kings in McMansions. Try harder.
I agree. Banks were not strong-armed into the subprime market. Brokers and lenders specifically targeted low-income people, enticing them to buy homes and then dangling no-document loans and other gimmicks to get them to sign. Once they did, the lenders packaged those loans and sent them to ratings agencies, who stamped them and sold them to unsuspecting pension funds and other risk-averse buyers.

Blaming a law from the 1970s for a collapse whose bubble didn't begin until decades after the law's passage makes no sense. It's like Republican loyalists claiming that after six years of one-party rule, the reason that things broke was because of President Clinton (who, except for two years, ALSO had a Republican Congress).
If you two took the time to actually read what I posted, you'll see that it is not blaming the CRA per se; rather, it is blaming what took place down the road in the name of the law.

The point is that laws and regluations--as well-intentioned as they may be--usually lead to unintended consequences. And for anyone to overlook that is simply blindly supporting their argument.

For example, in 1992, a law passed to be used under the umbrella of the CRA:

"Securitization of affordable housing loans expanded, as did the secondary market for these loans, in part reflecting a 1992 law that REQURED the government-sponsored enterprises, Fannie Mae and Freddie Mac, to devote a large percentage of their activities to meeting affordable housing goals."


Furthermore, banks were absolutely strong-armed into providing loans to people that had no business receiving them. In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act loosened regulartory barriers to bank mergers. Because of this--and this according to the Fed itself--"..as public scrutiny of bank merger and acquisition activity escalated, advocacy groups increasingly used the public comment process to protest bank applications on CRA grounds...[as a result], banks began to devote more resources to their CRA programs."

In fact, Fannie Mae held one bank up as an example for all banks in America as to being the role model in terms of its commitment to CRA lending: Countrywide. We all know where this story ends.


The other point, I suppose, is that libertarians have been calling this housing bubble for much longer than 10 years. Specifically pointing to things like the Fed artificially adjusting interest rates. ("The Housing Bubble in 4 Easy Steps: http://mises.org/story/3130)

And Adam, I know you are (kind of) joking about libertarians just blaming "poor people and minorities", in all seriousness, that argument is unfounded and ridiculous. No one--not one person--has the "right" to have their own home. And facts are facts: the government forcing programs on banks that were intended to do good ended up screwing everyone.
I was joking, G.A., and I do like to take on the tone of outraged liberal here, but it's all in good fun.

Seriously though until you can show me one piece of evidence that a majority of subprime loans were given to these poor people you blame (and not, say, the overly leverage middle class who suddenly found themselves with mortgages much bigger than their home's value), I don't think you've got a very good argument.

And it's hilarious to blame what's happened on regulation after a solid half century of efforts to undo all of the regulation done after the last major depression caused in large part by...lack of regulation. Even rapidly anti-regulation, Ayn Rand loving (literally) Alan Greenspan has come around on this. Read here.

That's not an opinion piece from the NY Post, that's the libertarian former head of the Federal Reserve saying the problem was lax regulations. Doesn't this alone end the argument?

Look, I'm not an expert, but doesn't your argument strike you as being naked class warfare? Against the country's worst off? At a time when major financial institutions are failing due to their own dumb lending (CRA or no) but beg for (and get) tax payer money to fix their mistakes?

How is that not worse (and more expensive) than all of the alleged "forced lending" your talking about?

I guess my thing is, there are plenty of things for the libertarians to discuss with heated breath at their lilliwhite gun clubs, but why take it out on the poor? Isn't the bailout much more against your (inconsistently applied) principles?

And no, saying something was going to happen for a decade does not count as being right. It means you were wrong by 10 years. Ask Bear Stearns investors circa 2008 vs Bear Stearns investors 1998 how that feels.
I'll tell you what basically ends the argument: try telling a roomfull of Austrian-preaching economists that Greenspan is a true libertarian, you'd probably get jumped. Greenspan is so far from a true Austrian libertarian it's not even funny.

(See this 27-page pdf file as a beginners guide: http://mises.org/pdf/sechrest-greenspan.pdf)

And that argument--although I do not blame you for believing it--is part of what pisses me off so much about all these ridiculous articles that have come out in the past few months about capitalism being dead, libertarianism being disproved, etc. Just because someone at some point says that deregulation is needed at some juncture or another, liberals take that one statement and label them as a through-and-through libertarian. Greenspan hung out with Rand, Rand was a libertarian, boom--this whole thing proves that free markets cannot work. It is short-sided, ill-informed, and just dumb.

And the original argument is not based on the "poor" whatsoever. As I mentioned above: it's not so much the original laws or policies that were put in place that causes all these problems that we are now facing.

Let me ask you this: is it better that we offered short-term opportunity for people that could not normally afford a home nor qualify for home loans? The reason I ask is because when a serious recession hits, who are--typically--the first people to lose their jobs? The plant manager or the line worker? Here's a hint: it rhymes with fine dorker*.

These policies and laws that are enacted--like the CRA--are utopian and (sorry to keep using this term) short-sided. They are enacted by power-hungry men legislating for votes. They spit in the face of the wisdom of markets. No one takes into account the long-term effects of these follies; rather, they are concerned with shoring up their constituency. Well-intended? A lot of times, I'm sure it is. But that doesn't make it the right thing to do. The family making $30,000 a year are far better off in a decent apartment than having a house they cannot afford with a job, let alone after their job is slashed for cost-cutting reasons.

And your point about it being not just about the poor but just as much about middle-class people buying homes far too big and expensive for their reality is absolutely accurate. But you're missing the real point here, Ad-Rock: banks were able to offer loans to people that couldn't afford them because of the precedent set forth by the CRA, the Riegle-Neal Act, etc. These policies made it required that banks grant loans to people that were simply enrolled in credit councelling programs sanctioned by the government--they didn't even have to provide proof of income! So now you take that model and apply it to people who *are* making good money, and you can shell out outrageous loans. Which, for a few years anyway, can provide some serious income for the bank.

Now we finally arrive at an impasse where upon we agree, my friend. These banks that participated in unsound financing deserve to fail. The managers and executives that green-lighted these extended policies deserve to fly a kite in a lightning storm with a key on the string (thanks, Bizzle). And it is unbelievable that taxpayer money is being thrown at this problem.

It would be quite painful for some of these banks and institutions to fail. But guess what? For every Countrywide there is a First National Bank waiting in the wings to gobble up their good customers and help bring much-needed balance and correction to the market. Short-term, it would suck. Long-term, it is what is needed.

Fact of the matter is that these problems have come about by a long series of regulations, policies, and law enacted for the "greater good" that were abused by politicians and the people funding their campaigns. If a true free market were in place all along, people never would have lived above their means because the market never would have allowed it. And we would all be a lot better off because of it.

Also: your last paragraph doesn't make any sense.

*"Dork" is slang for penis. So a "fine dorker" would be an "all-right penis...er?" Look, I just wanted something that technically rhymed, not something that technically made sense. I'm trying to watch this furious Pistons comeback.

Good night now! (c) Rome
Two more things:

1. Just to be crystal-clear: the idea of government bailouts goes against every libertarian fundamental. I cannot stress this enough.

2. I love the elitism: because an opinion was published in the New York Post, it is instantly discredited. Considering what we are going through is a culmination of many failed Greenspan policies, I would not be too eager to accept his scapegoating as gospel.

That's just me, though.

And one last time, for emphasis: this Detroit/Golden State game has turned into one hell of a game. I thought the Pistons were pulling away for a minute there. But those scrappy Warriors just won't go away--YES!
Last thing (for real): when I said above "liberals take that one statement...", I did not mean that in the condesending, Rush Limbaugh-kind of way. I just mean liberal-leaning economists and blog commentors.

Just want to ensure the proper decorum and tone is being kept here, people. We're all just one happy people under a big welcoming umbrella at the ol' Heavy Soul, no?
Well, I did type that response right before I left work, so I'm glad any of it made sense and I only had one your/you're mistake. What I was trying to say in that in investing (and predicting) timing is everything and it can be the difference between being the guy who sold Bear Stearns at their high (which was actually in 2007) and the guy who was buying. To say that someone called the housing bubble ten years ago (but, obviously, was calling it for the wrong reasons) doesn't make someone clairvoyant, it makes someone a bit of an idiot who has unfortunately been given a forum.

It's easy to predict things and then hope you're alive long enough to see them come true. Watch: The Cubs will win the World Series soon.

There. You're welcome. Come find me whenever "soon" is up. Making predictions like this alone is necessarily dumb--just obnoxious--because dumb would be going to Vegas and putting millions of dollars on them to do it every day until it happened. Which is more or less what people do every day with their 401ks and retirement investments in the stock market and so need a bit better than a 10-year split between a prediction and the event.

And I'm not particularly interested in debating what a "true" libertarian looks like. I'll leave the party purging to you. All I know is that the mainstream position of economists, including Mr. Greenspan who would seem to be a bit of authority and is certainly a deregulator of whatever stripe, seems to blame faulty oversight or no oversight.

In otherwords, financial institutions have largely been living your libertarian fantasy for the last decade and, of course, ended up in the toilet. I guess what I'm saying is: what else can we do to make sure no free market libertarians are ever in charge again? Although they might have taken care of that for us.
Oh, and I was going to mention (in what, I think, completes my quota of yearly comments) that it still seems bizarre to me that during the ongoing bailouts that you'd even care about anything else. This is without question the action most contrarian to libertarian principles ever undertaken by the U.S. government yet the libertarians are demonizing poor people rather than rich, incompetent executives? Odd.

I'm not saying there are any ulter motives (and certainly not any with you personally, G.A.), but I just can't take the libertarians as a movement seriously until the causes they fight for become a little less transparent in their upper-middle-class whiteness.

Gays discriminated against? Don't care.

Assault weapon ban? Worst thing ever!

Abortion rights? Whatever.

Taxes? Flat or nothing!

And the thing is, it's not that libertarians don't have positions on those issues (they have good positions right there in the party platform which I just read), but they can just never seem to care quite enough to fight for those things when they could be railing against some injustice that only affects the priviledged.

For what it's worth, I think we probably agree on most issues. It's just a matter of priority.
Libertarians tend to prioritize economic matters because they believe that a truly free market ensures a truly free people. Everything else will fall into place.

If you read Reason magazine (www.reason.com) or Liberty magazine, you'll see that usually about half of their issues focus on social issues, especially the war on drugs and its incredibly negative impact on--gasp!--poor people.

And to suggest that libertarians don't care about the bailouts is insane. The website I have most often pointed to during this debate--mises.org--has entire special section devoted to it with about one week worth of non-stop reading attached. And to suggest that libertarians blame all this mess on poor people is insane.

First of all, if it were up to us, the incompetent executives and their companies would die a quick, painful death. They are getting what they deserve by overstating the value of their debts and being punished for their greedy behavior. The market is trying desperately to hand out the proper judgement on these fools--their companies no longer existing.

Instead, the government is jumping in and prolonging the inevitable at the cost of trillions of *our* dollars. Would it be costly to allow these institutions to fail? Again, yes, short-term. Long-term, however, companies that do business the right way would eventually take their spot in the void created by the Bear Sterns of the world. Instead, the government is making this problem far costlier than need be.

They say the definition of insanity is to do the same thing over and over and expect a different result, but here it goes anyway:

The problem did not stem from poor people. The problem--that is, what we were originally debating in this post--stemmed from politicians trying to win votes. In turn, banks and lenders were forced to go against their established lending practices to give out loans to people who were uncreditworthy. After greedy douches figured out there was a permanent loop hole, they extended these practices. Years later, the whole thing came crashing down.

If there never would have been pressure from the government to abandon proper credit practices, a lot of what we're seeing now would have been avoided.

Lastly, this:

"And I'm not particularly interested in debating what a "true" libertarian looks like. I'll leave the party purging to you. All I know is that the mainstream position of economists, including Mr. Greenspan who would seem to be a bit of authority and is certainly a deregulator of whatever stripe, seems to blame faulty oversight or no oversight.

In otherwords, financial institutions have largely been living your libertarian fantasy for the last decade and, of course, ended up in the toilet. I guess what I'm saying is: what else can we do to make sure no free market libertarians are ever in charge again? Although they might have taken care of that for us."

One, you're confusing the Libertarian Party with libertarians. Two, and again: a true free-market libertarian would never artificially adjust interest rates as Greenspan did over and over again. And to suggest that any financial institution in this country have been living in a "libertarian fantasy" for the past decade is patently insane.

Here is a definition of laissez-faire capitalism:

"Laissez-faire capitalism is a politico-economic system based on private ownership of the means of production and in which the powers of the state are limited to the protection of the individual's rights against the initiation of physical force. This protection applies to the initiation of physical force by other private individuals, by foreign governments, and, most importantly, by the individual's own government. This last is accomplished by such means as a written constitution, a system of division of powers and checks and balances, an explicit bill of rights, and eternal vigilance on the part of a citizenry with the right to keep and bear arms. Under laissez-faire capitalism, the state consists essentially just of a police force, law courts, and a national defense establishment, which deter and combat those who initiate the use of physical force. And nothing more."

I could go on copying and pasting, but why don't you read this article to give you something to do this weekend:

"The Myth that Laissez Faire is Responsible for Our Present Crisis" by George Reisman, Ph.D. He is the Professor Emeritus of Economics at Pepperdine--I hope that's a good enough source for you.


One last thing I forgot to mention: the article from the Center for American Progress loses me in the first flipping sentence. To say that "the root cause of the financial mess is the failure of Bush administration officials to take action when they saw what was happening in the U.S. housing market...to prevent disasters from happening." is completely offensive. In fact, starting in 2002 (I believe), the Bush administration did in fact attempt try to get hearings started with the leadership at Freddie/Fannie and begin reform for oversight, but their efforts were blocked. Blocked by who?

Chris Dodd, Democrat, United States Senate Committee on Banking, Housing, and Urban Affairs (Chairman).

That's who.

In fact, Senator Dodd received $852,028 for his last campaign from such financial pillars as AIG, Bear Sterns, Goldman Sachs, Merrill Lynch, and Lehman Brothers. (http://www.opensecrets.org/politicians/summary.php?cid=n00000581)
Not to mention he was one of the top four recipients of donations from Fannie/Freddie (along with John Kerry, Barack Obama, and Hillary Clinton).

Here's a couple quotes to consider:

"As recently as last summer, when housing prices had clearly peaked and the mortgage market had started to seize up, Dodd called on Bush to "immediately reconsider his ill-advised" reform proposals. Frank, now chairman of the House Financial Services Committee, said that the president's suggestion for a strong, independent regulator of Fannie and Freddie was "inane."


The Bush Administration--as well as the Clinton Administration--attempted to bring oversight and reform to Fannie and Freddie. But it was Democrat senators--clearly belonging to and chairing committees they have no business belonging to nor chairing--that stopped them.

I know it's easy to blame Bush for anything these days, but this is one issue where he tried to be on the right side of things. That article is patently incorrect. The CRA "works at what it was intended to do: overcoming market failures in low-income communities"???? What market failure is that--not giving home loans to people that cannot afford homes? That's a failure?

My head hurts.
It's not just banks, and lenders, but landlords and realtors that these organizations like ACORN and The Fair Housing Council, and even HUD shakedown.

Here is a Libertarian observation 10 years ago:


And guess what? It still holds true today. HUD and it's sponsored "housing advocates" have quite a racket going.

Very nice write up. Easy to understand and straight to the point.
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