Man is fallen. We need rules.

I think you need to look and see who is in charge. Both sides have elites very wealthy people that have debts to pay to corporations that let them in. imo the Republicans are more to blame than the democrats but the democrats are culpable.

"Remember the recent reporting showing that on Fannie and Freddie, the Congressional Republicans were trying to do the right thing in reining them in, but Democrats wouldn't let them."

I don't remember any such thing before it wasn't too late. I also remember Bush saying hed veto any such bill. If these congressional republicans were serious they would have closed the enron loophole after enron collapsed rather than wait for the Dems to do it in 2008.

Shorter Dreher: The assumption that markets are self-regulating is not true in all sets of possibility.

In the 20th Century, the first creation to regulate the economy was the Federal Reserve Bank. It pumped out lots and lots of capital in the 1920s, which resulted in a huge stock market crash and a recession that followed.

Although the recession was deep, it would have rebounded in a short-while, such as in the UK (the Great Slump) and Europe. Americans, however, thought we needed more regulation. We got a Depression and a panapoly of regualtions, including Fannie Mae.

Along the way there have been several financial crises, and often the response was bailouts. Loans were given to Chrysler in the 1980s. Airlines have been bailed out several times. The Fed pumped money in the system for every crisis, from 1987 through today.

What you end up with is a very skewed system, which is NOT free-market capitalism. The response to this peverse system can be one of two. The conservative/libertarian solution is to end the peversion. Restore free markets and let bad firms fail. No Fed (or a hands-tied Fed that is on a defacto gold standard, a la Steve Forbes), and limited, but strong regulations. The liberal/socialist option is to continue the peversion, by creating new laws to deal with every new manifestation of skewed incentives.

Yes Other Jim, Keynes was reknowned for his libertarian ideals. Keynesian libertarianism was what fueled Britain's recovery.

Both Republican and Democratic ideology are based on incoherent forms of fusionism.

Republican ideology is that since individuals recognize -- or ought to recognize -- the moral authority embodied by tradition and especially by religion, they are -- or ought to be -- able to regulate their own behavior on a personal basis, so that it will not be necessary for rules and limits to be imposed upon them from above by authoritarian elites and bureaucrats who are eager to do so, for self-serving reasons of personal gain in power and money.

Democratic ideology by contrast is that since individuals do not recognize -- or ought not to have to recognize -- the moral authority imposed upon them by tradition and especially by religion, they should liberate themselves to follow their own respective blisses or therapeutic lifestyle-regimens by turning their responsibilities (and by extension their rights) over to elites and bureaucratic experts who know better than the rest of us do what is best for us.

The American ideology is moral and economic laissez-faire and it has produced the mess we are in now, a mess that will continue and worsen so long as we fail to recognize the need to moderate by tacking toward the right in moral terms and tacking toward the center in economic terms, relative to where we are now in both moral and economic terms.

Democrats fail to recognize the fallenness and fallibility of human nature -- that lack a tragic sense of moral life and therefore they lack a tragic sense of political life, failing to remember that regulatory bureaucracies are made up of people who are fallible and fallen.

Republicans fail to recognize the fallenness and fallibility of economic markets -- which are of course made up of human beings who are fallible and fallen. Republicans lack a tragic sense of economic life.

Bravo & ditto, Rufus Thomas and Another Believer.

Yes, it is all a horrible mess and muddle, just like all of human life. I remember the savings and loan crises of the 80's, and eventually it resolved itself. Our nation is huge and a lot is going on all the time which no one person or institution can control, or even understand or know what is happening.

Mark Cuban, the billionaire, whom I've always thought was a somewhat immature and jerky person, was asked recently what books he would recommend to help people to understand the present times. He said:

"I don't think there is such a book. In my humble opinion, people who actually believe they can understand all the issues are the ones that got us to where we are today. In reality, there are so many variables and so little data, it's all a guess. I don't think a book exists that can explain it. Is there a book out there called "No One Has a Clue What Is Going On and the Whole World Is Guessing"?"

This is about the wisest thing I've ever read on economics.

Man is fallen. We need rules.
Of course, the problem with this is that the government is also made up of people, sinners just like businessmen.

Look through history and I think we would see that this business difficulty is related to a governmental decision which produced certain incentives in an effort to correct the over-reach stimulated by previous incentives which ......rinse, lather, repeat.

racial preferences in mortgage lending combined with political opportunism, followed by mandated relaxation of lending practices, followed by excessive lending to unqualified people (as well as people who wanted to own and "flip" homes as a business), followed by collapse of the housing market, followed by political opportunism combined with as yet unknown increased regulations, followed by ???.

Why not let the house flippers, bear stearns, and the over-extended borrowers suffer the consequences of the fallen world so that others will learn lessons from this thing we call "life" and so we don't produce even more disordered incentives which will produce the next problem?

What Simon sez.

Rod, it may be true that human sin requires economic regulations.

Unfortunately for your argument, lack of regulation is simply not among the primary causes of our current economic situation. You would do well not to trust the NYTimes blog for financial analysis.

The current economic crisis is a product of years of specific U.S. economic policy, promulgated through Democratic and Republican administrations. For decades, official U.S. policy has been to encourage home ownership in America, because home ownership lowers levels of social unrest. The U.S. govt did this by the manipulation of interest rates, artificially lowering them for most citizens and increasingly (especially during the Clinton years) for "subprime" loan prospects who were at greater risk of defaulting on their loans. In addition to interest rate manipulation to lower interest rates and make it easier to get a mortgage, Fannie Mae and Freddie Mac increasingly began to back these mortgages of subprime quality, meaning that they implicitly communicated that they would pay lenders money to covers people who defaulted. This was okay, as long as lenders and lendees were not greedy.

Unfortunately, our culture of entitlement combined with rising property values and low interest rates encouraged people to apply for stupid and unaffordable loans, which greedy lenders were happy to provide in excess because the implicit backing of the U.S. government meant their loans would be risk-free. In an actual free market, loans would NOT be risk-free, and that would encourage lenders not to make loans to people who were more likely to default.

It got to the point where Fannie Mae and Freddie Mac were loaning out billions of dollars to investment banks for subprime packages.

So, what happens when the housing bubble burst and prices sank? People started defaulting on their loans, investment banks which had loaned out money with the implicit backing of the U.S. Treasury started having write off their losses, and some investment banks are going under (Hello Bear Stearns and Lehman).

Of course, Fannie Mae had to be rescued by the taxpayer dollar as well to the tune of billions, which means that due to "good intentions" expressed by market regulation (not DE-regulation--Rod, seriously, we don't live in a free market economy, it's simply relatively free compared to others) we now have a much bigger government in places where, admittedly, it was before but only semi-officially. Now the Fannie Mae IS the U.S. government with no pretense of independence whatsoever.

One last thing before someone writes me off as a free market fanatic. I'm not. I actually am a localist; BUT I respect the market and especially the market's capacity for price valuation of goods and services. As a Christian localist, this is what I struggle about most: I only see two options for price valuation: the market, or the government. Neither are ideal (I would prefer Jesus setting the prices of goods) but the government is so incredibly inferior to the market, so I would rather have a free market that allows for voluntarily choosing the local and making that sacrifice.

Sorry for the length, reject the post if you desire.

Irenaeus: ".. also interesting.. use this argument in support of .. regulation and prohibition of family-destroying things.. but not in support of market regulation.. "

A certain school of thought proposes a "theorem" that human action is determined "a priori" by human nature, the "praxis" of which is observed by human agency within communities, recognizable the world over by socialization in family units AND market trading (even "Crunchy Cons" need markets). Your proposition that markets oppose families or, expressed inversely the only valid patriotism is mercantile protectionism, is (according to the Austrians) fallacious, but not novel. The mercantile protectionist British school of Adam Smith et al, born of a Reformation rejection of "a priori" absolute truths expressed in the natural law that determined that human beings are so fallen that they cannot be trusted with negotiating prices by their own subjective free will, that a justice of temporal powers is required to determine the "labor theory of value." Sadly this ignorant rejection of the a"a priori" truth of natural law, gave rise to its equal and opposite fallacy, collectivist protectionism a la Karl Marx.

Roman Catholics unfortunately have been poorly catechized in the dehellenizing fallacies inherent in the German Historicial school that gave rise to the theocracy of "liberation theology." What we are seeing now is the equal and opposite liberation theology theocracy of "American Exceptionalism."

People of faith like M.Z. Forrest (re: "Particularly Keynes was reknowned for his libertarian ideals." NOT) need to look long and hard at their catechisms and before they hand Obama the reins of power . . . Keynes was no libertaraian, heck he wasn't even a good economist, he was a crook of an insurance broker who overturned three centuries of prudential underwriting tradition by betting on the market valuation not the life-term valuation of assets. He could be said to have "invented" the whole credit default swap melee we find ourselves in where banks hedge their losses at market valuations not life-term performance.

I agree that there are those in both parties who have collaborated in allowing abuses.

But the pox on both houses goes only so far: if memory serves, there is one party that has a strong tendency to define the ideal market as an unregulated market.

This makes as much sense as having a football game without referees to enforce the rules and call infractions.

Ms. Krishan,
I was being a touch sarcastic in referring to Keynes as a libertarian.

Generally,
It is hard to speak intelligently about these matters in broad strokes. We aren't in early 1900s America. It helps matters if folks at least know what problem was being addressed by the various reforms. For example, Fannie and Feddie were created to address the reset defaults - the balloon note came due and refinancing could not be found - that percipitated the GP. At that time, many properties were purchased with 5 year balloon notes, often from insurance companies. Since Fannie and Freddie, we have had broad based public ownership and relatively little in the way of housing panics. You don't see a lot of town created in say 1950 that are ghost towns today, unlike towns created in 1850 that were ghost towns by 1900.

Going further down the line, it is similar argument to "Why do we need corporations?" Another way to say all this is ask, "Why do we need complexity?" And the answer is that complexity is already there.

What, you think the banks and financial markets are NOT regulated???

Where on EARTH would you get that idea?

They are regulated by millions of pages of intense, detailed, mumbo jumbo.

The very idea that government is so wise, it can prevent all of these kinds of events or outcomes... It not just stupid, it is willfully and deliberately mindlessly stupid.

"More regulation" would not have saved a thing.

The problems here are actually mostly CAUSED by the actions of Congress, not needing more of it.

1. Fannie and Freddie: Exist to encourage and allow institutions to lend money at higher risk than the markets and banking standards would normally allow - at lower rates than is sustainable. This was never a matter of "lack of regulation", but "when this was going to happen". Any 1st year financial analyst could tell you this, BTW. No mystery or deep dark secret.

2. Enron: Enron's failure came WELL before the GOP congressional takeoever. We saw the RESULTS shortly after Bush was elected, but he had absolutely nothing to do with it. The exemptions from accounting standards grantd to Enron that enabled the disaster were done even before GOP control of Congress. Besides, it was not Congress that granted those exemptions, it was the SEC - and those exemptions were lobbied for by the Clinton administration itself.

3. So far, every bank or institutional failure has been a direct or indirect result of Really Bad Decisions (tm). Bear Stearns had small amounts of stable assets, and huge portfolios of high risk "securities" and instruments. This was a long term issue, and had existed for more than a couple decades. All it took was a rumor to topple them. And a false one at that.

I want to address some of the nonsense that's been posted... such as the "fed pumped large amounts of capital into the market, causing the Great Depression". heck no. There are some parallels today, but it is not the same sitution, by a long shot. Not that a Depression can't happen, but that you can't seriously compare today and then, it's apples and oranges.

What's the same? Economic growth has been fueled by a lot of debt.

What's different? Debt was required then, because there was a shortage of real currency. The moment growth slowed, there was deflation coming, because the fiat currency fueling growth evaporated. Deflation basically caused debt to become unservicable, resulting cascading failures due to insolvency.

Debt is NOT required now, but is encouraged by: The tax code (this is a BIG factor now), a host of government institutions, some of which exist solely to encourage and promote peopel going into debt - specifically higher risk debt. And debt had become the new fad - with everyone "participating". This (everyone participating) is a new trend. It's less than 20 years old.

Currently, many of the firms and banks having issues are directly related to holding a bunch of speculative "securities" whose value is directly related to confidence in them, rather than being backed by any real substance.

The biggest proble, however, has little to do with a lack of regulation, but is, instead, a mindset that simply lacks judgement. Bear Stearns, for instance, held a huge porfolio of high risk mortgage derivatives. They purchased the risk for a chunk of the return.

That's not evil or bad in and of itself. But then it borrowed against them as if they were assets themselves.

It only took a subprime failure rate of less than 4% (the failure rate of jumbo loans, for instance, the kind used to buy rich people's homes) for those derivatives to become worthless as assets. Their value existed solely for purposes of being able to sell to someone else. Not because they had much intrinsic value.

What can you do?

1. Change the tax code to stop encouraging the use of debt instead of equity to finance growth or provide risk capital. One really GOOD way to do this is to abandon income taxes entirely and tax retail sales only. The tax code is highly punitive when it comes to equity finance, and because of that, has encouraged debt financing instead and then the investors buy equity in the firms that bought useless securities...

2. Change the tax code to encourage savings. This is hand in hand with #1.

3. Let the institutions that have made a history of continued bad judgement fail, to remove these decisionmakers from the pool of the financial community.

I was going to make this #4, but then I realized this is not really addressing a specific problem but is, instead, a fundamental thinking shift, from one that's certain disaster, to one that makes sense.

I have to use an analogy, or else this will just be attacked by the know-nothings as More of The Same and it isn't. We need to increase and improve productivity... NOW.

I marvel at the short sighted people who keep posting that we need to create an economic contraction. My goodness, what imbeciles! Let's say that your family is going along ok, not great, but ok. Then, suddenly, within the c ourse of a few weeks, you have a huge medical bill, then your cars break, and you find yourself in a cash deficit you must pay with debt.

You do NOT sit around the table and say "Ok, well, now that we're in trouble, it's time to cut back to part time work."

It IS time to stop being non-competitive in so many things because we've regulated them into the ground. We've got to stop limiting ourselves so arbitrarily, especially those big impediments with basically no observable or measureable benefit.

Let's stop spiraling the cost of a house or land upwards, while the value falls.

Let's stop killing productive businesses with social gobbledygook.

Let's stop killing the incentive to be productive and profitable with punitive tax and other measures.

Let's stop wasting our productivity funding massive court fights over naught.

If there was EVER a time to say "Time to roll up the sleeves and GET WORKING NOW!", now is that time... This is not a time to say "it's time to cut back, ramp down, stop producing" as so many are demanding.

And for Heaven's sake, let's stop this mindlessly idiotic notion that "all we need is just more of the wisdom of Congress" running our lives and institutions. That "wisdom" is the reason we are where we are at, stop pretending it is the solution.

Man is fallen, to be sure.

The authors of regulatory legislation, and the regulators, are also fallen.

It's hard to deduce wise policies from our fallen nature. What we can deduce is that utopian schemes to remake society according to supposedly rational prescriptions, are likely to fail. This is true of market fundamentalism, socialism, and the mixed economy.

As Shakespeare opined "To be or not to be, that is the question"
Does our human existence amount to nothing more than "chattel" to be accounted for using a "labor theory of value" or are we all made in His Image with inate human reason and free will to choose the good and reject evil? For those who do not want to be enslaved as chattle to the hegemony of worldly powers, here's more on catallactics:
encyclopedia.thefreedictionary.com/Catallaxy
A true defense of human rights must defend the dignity of human agency, that is to choose the good, or to face the consequences of choosing otherwise. Failing businesses ought to be allowed to fail. My only caveat, a compassionate clause if you will, it that most businesses who failed were not disciplined by their stakeholders sooner. Why? Stakeholders have no transparent means to compare apples and oranges since the Treasury and the Fed have been manipulating (and wreaking havoc) dollar-based asset-prices for a "century" to use Alan Greenspan's disingenuous turn-of-phrase...

I know that excessive regulation can choke off an economy. But there's a good reason for strong regulation, and we're living through it now.

Rod, the question I think is this: What is "excessive" and what is "strong"?

Prior to so-called deregulation in the late 1970's, airline were regulated in almost every interaction with the public, from fares to routes to seating. The Civil Aeronautics Board even regulated the size of sandwiches served so that no airline could get an unfair advantage by offering more food!! Aviation regulation didn't begin this way, but that is what it became.

As for the "a fallen world needs rules" argument, I only agree to a point. That fallen world is inhabited by independent moral agents exercising free will. There's nothing honorable or noble about doing the right thing only because you have been forced to do so by a coercive state.

Rod,

I would agree with Grumpy Old Man.
The government is made up of the same fallible, fallen people.
Where does one go if those in government decide to use their authority in pursuit of their own aggrandizement?

No abuse of power is more perniscious (I'm sure that's not spelled right) and far-reaching as abuse of government power. There's no redress, except other parts of the government, and if they're corrupt?...

If course, I'm speaking generally. I don't want to go back to The Gilded Age...

Watcher: "60 BILLION in bad (weak?) real estate investments." actually no, not the real estate collateral itself, but the "assets" (ie the debt on the books of the banks that granted mortgages to those who purchased such property).

Lehman's biggest broblem (and AIGs and BankofAmerica/Merrill Lynch's) is their as a purveyor of (and trader in) credit default swaps, ie hedges on firms defaulting on their debts:
online.wsj.com/article/SB122139688846233147.html (add http://)

And this is NOT linked to the subprime mortgage crisis, but rather the Fed/GSE funded real estate bubble - there are many folks with "regular" mortgages that will walk away as their debt mushrooms in comparison to the value of the collateral - that is what Bear Stearns did, and the GOVERNMENT ASSISTED THEM IN DOING IT! For goodness sake, even the FDIC (the fraternity of financial institutions awarded licences of fiduciary trust to guard your deposits thus guarantee avoiding you needing to make a run on the bank to retrieve what's left after they've defrauded you) is asking to be backstopped by the taxpayer!

This is a shake-down, for sure, of earthquake proportions, but its not a natural disaster, its man-made.

mattc:so far so good until: "The fact that it affected the housing market is circumstantial" SAYS WHO?
The political policies of past Federal Administrations right and left, created a moral hazard exactly centered on the housing market. A "conservative" of your ilk is no conservative, but a vulture! A true conservative would conserve the rooves over peoples heads, not devalue whole swathes of urban housing stock by favoring new construction in the suburbs. Why is Germany or the UK not suffering in the same fashion? Because they have known for centuries that their land is a limited resource, and the value of "depressed" real estate is still high enough that investors can turn an honest profit by reclaiming and refloating the housing stock on the market. American's biggest problem is a moral one - that of admitting that their existance is within a universe of limited resources, not the FDR-Disney-Oprah Phantasia of vistas of unlimited opportunity for Angels-on-the Make to shower abundance on the downtrodden ("here, let me pay for your abortion, I'd rather not be bothered with helping you find multiple-occupancy accomodation or affordable nutrition for another mouth to feed, since that's hopeless in the badlands of most of cities - the slumlord helped get me elected, and my other chums at the bigbox stores don't like risking their lives doin' business in crime-infested areas, and of course the ethnics that run the cornerstores vote for the "other" guys -- perhaps they're really your allies? Well, that's only if you agree to settle down with you baby's momma and stop landin' in jail for holding up the ethnic cornerstores at gun point, of course!)

Turmarion: Well, that's debatable. Read your history about the Robber Baron era of the late 1800's, the behavior of people like John D. Rockefeller... This is why the Republican Teddy Roosevelt pursued reformist, regulatory policies.

Your citation of Rockefeller indicates you misunderstand what a free market involves, like many anti-free market moralists. No free-market is without any regulation. For example, there are antitrust laws to prevent the creation of anti-competitive monopolies... like the ones Rockefeller pursued. Citations of presidents like Roosevelt who pursued "reformist, regulatory policies" means nothing to me apart from information as to precisely what the policies were.

So, what's the point? The point is: some regulations that promote competitive practices and disclosure are good, most are bad. Regulation to promote "affordable housing" when housing is, in fact, not affordable, will eventually blow up in one's face.

Also, I might point out that the semi-socialist Scandinavian countries seem to do just fine.

But they aren't, economically and socially, doing fine. I'd be more specific, but I don't know what "fine" means to you.

The problem is, the type of capitalism we now have often makes it impossible to voluntarily choose the local. In my town, for example, the Wal-Mart has driven out or destroyed all other choices for most goods. It's shop there or nothing.

So, the first step in your case would be to persuade your neighbors that buying local would be a good thing. I'm not saying being localist means being stupid and trying to do the impossible immediately. You gotta start somewhere, right?

In any case, it's not all or none, government vs. market.

Obviously this is true at a general theoretical level, but nonetheless, when we're talking specifics, like for example: Should the government promote "affordable housing" by backing subprime loans? Then the answer is all or none, and in this case preferably none.

Even Christ the Lord refused to get tangled in economics!

Well... that's one view.

"some regulations that promote competitive practices and disclosure are good, most are bad. "

There's the rub. If we knew which regulations to use, we would not be talking about this today. Maybe. The other part of the puzzle is what happens when regulations are ignored or not enforced. Sometimes government is in bed (see recent Interior Department scandal) with the business they should be watching.

Steve

You know, I should know how to spell Gramm's name.

To paraphrase an old programmer's adage:

"Some people, when confronted with market failure, think "I know, I’ll use government regulation." Now they have two problems."

old programmer's adage

As an old programmer, I'd say that's silly. One of the roles of govenment is to establish rules (e.g. traffic laws) and enforce them as well as possible (e.g. traffic cops, cameras at intersections) to provide enough order to keep us from stepping on each other.

Not all rules will be effective, but that's a balance that must be sought. Thinking that government regulation per se is a problem is elevating ideology over reality. What is your alternative?

Albert: For example, there are antitrust laws to prevent the creation of anti-competitive monopolies... like the ones Rockefeller pursued.

Yes, there are such laws because reformers such as TR pursued them. And of course, they were opposed by businessmen who argued that they were interfering with their trade.

Citations of presidents like Roosevelt who pursued "reformist, regulatory policies" means nothing to me apart from information as to precisely what the policies were.

To go into this would be a course in history and economics, far beyond the scope of posts here. In a nutshell, in the period from about 1890 to about the New Deal era (1930's), the following reforms were gradually won: anti-trust laws, child labor laws, minimum wage laws, the right of unions to organize (see here for what corporations used to do to union organizers), and the five-day workweek, to name a few. I think most people would say all these were good things. Every single one of them, however, was opposed (sometimes with literal violence) by business, always on the grounds that it was "bad for business" or "forcing unneeded regulations" on business. The more things change....

But [the Scandinavian countries] aren't, economically and socially, doing fine. I'd be more specific, but I don't know what "fine" means to you.

The Scandinavian countries typically are about equal to the US in per capita GDP and they typically exceed the US on Quality of Life Index and livability. Of course, we could debate these all day long, and I'm not claiming Scandinavia is perfect. Just pointing out that semi-socialist countries on many objective measures are comparable to or better than us. Which is how I define "fine".

[Y]ou misunderstand what a free market involves, like many anti-free market moralists.

I'm not so much an "anti-free market moralist" as I am against market fundamentalism. George Soros uses this term a lot. I doubt you like him, but you can't call a multi-billionaire an "anti-free market moralist".

Even Christ the Lord refused to get tangled in economics!
Well... that's one view.

I'm tempted to ask exactly what economic program Jesus put forth, and to point out that the early church as described in Acts is not only not free market, but essentially a commune, but I figure it would lead to a pointless discussion with more heat than light.