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Monday, March 17, 2008

Paul Krugman's Broken Record

In Chris Rock's breakthrough comedy concert, Bring the Pain, he had a joke about why he failed Black History. Since he was never taught black history, Rock explained, no matter what the question his default answer was Martin Luther King. That is what I am reminded of when I read the likes of Paul Krugman. No matter what the economic situation his default answer is regulation. Krugman hasn't met a regulation he doesn't like and he seems to believe that every situation requires more regulation. Of course, now is no different...


So here’s the question we really should be asking: When the feds do bail out the financial system, what will they do to ensure that they aren’t also bailing out the people who got us into this mess? Let’s talk about why a bailout is inevitable.


Between 2002 and 2007, false beliefs in the private sector — the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe — led to an epidemic of bad lending. Meanwhile, false beliefs in the political arena — the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing — led Washington to ignore the warning signs.


So Krugman surmises that if Wall Street is to be bailed out, it also needs to be more regulated so that the next disaster doesn't happen. There are several problems with this line of thinking. The first one is that Bear Stearns wasn't exactly bailed out. Here was a company who's stock was 150 this time last year and it was bought out for 2 dollars. What the Fed did was float Bear Stearns a loan so that it could continue to function rather than having to liquidate its hundreds of billions of dollars worth of assets.
The problem with regulation is that it always fixes the previous crisis' problems. In 1929, one of the things that lead to the market crash was that people were allowed to buy on ten percent margin. That means that people could buy stock with only ten percent of the money. Once the market dove, margin calls became rampant and most folks didn't have the cash to cover and it became a vicious cycle. The government immediately moved to regulate margins to fifty percent, however that was overkill because no investment house was ever going to allow ten percent margins anyway.
The same thing is happening now. While pols struggle to see if what types of loans should be eliminated, the market is moving swiftly to eliminate these loans itself. Both Fannie Mae and Freddie Mac recently removed their 100% loans (loans where no money down is necessary). Most banks are removing any hint of stated loans. Pre payment penalties are nearly nonexistent and option arms are rare.
What Krugman does is mischaracterize what free market thinkers believe...
Meanwhile, false beliefs in the political arena — the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing — led Washington to ignore the warning signs.

Free market thinkers don't believe the market is ALWAYS right. We believe the market is always best. It isn't perfect, but we believe artificial regulation do nothing but stunt proper market mechanics. The sort of hindsight demagoguery that Krugman exhibits is disingenuous. Hindsight is twenty twenty, however I heard no one proclaim that stated loans, no money down loans, or any other loans, were going to lead to disaster when we were booming. No every demagogue is coming out of the woodworks to proclaim that everyone should have seen this coming and regulated it. If Krugman predicted this while it was happening, I would like to see that article.
This is the same guy that proclaimed the Clinton years to be booming years, even though they were also fueled by the same type of speculative market that fueled the Bush years. If there is a lesson it is that speculative markets always end in disaster. This is not the first time we have had a speculative market and every time we have followed that sort of a market with a plethora of regulation, and yet at some point we found ourselves in a speculative market again.
The idea that you can stop the next crisis by regulating the problems of the last one is fool's gold. The market itself regulates the last crisis. Government regulation is nothing more than a pile on. It is the tool of demagogues who swoop in to hypothesis that the market is not perfect. The market is not perfect, it is just the best.

1 comment:

Brad Marston said...

Paul Krugman's fall back answer is "It's Bush's fault."

When the economy was doing well and Krugman denied it, it was "not because of Bush."

Now that the economy is faultering..."it is Bush's fault."

If the economy picks up steam in the 3rd quarter it will be "inspite of Bush". If it does not...It will be "Bush's Fault."

Paul Krugman is no better than a chick named Kristin on a train to DC.