Wednesday, September 17, 2008

What is wrong with Wall Street?

This analysis of the economic situation on Wall Street by economist Robert Samuelson seems to be pretty close to the mark. Thanks to Gene Edward Veith for pointing it out.


kycobb said...


Interesting you would agree with this article. Because its an indictment of laissez-faire capitalism. Capitalism is great, but if you don't enforce some prudence, the financiers will take greater and greater risks pursuing short term profits until the whole house of cards collapses. Such panics were common in the 19th century, but pretty much stopped after regulatory safeguards were put in place in response to the Great Depression. Notice that one of the underlying causes of the current crisis identified in the article was the repeal of one of those reforms, the 1933 Glass-Steagall Act.

Anonymous said...

There's hope for him yet?


Martin Cothran said...

I think if you were more familiar with traditionalist conservatism, the fact that I don't accept capitalism whole hog would not surprise you. I think I've deployed enough disparaging comments about neoconservatism on this blog to make that evident.

Maybe I need to it some more.

Lee said...

Before indicting the free market system, why not at least do a good-faith inquiry and see if perhaps the free market failed because the government's heel was already on them?

The calls are for "more regulation" when it is regulation that got us here in the first place.

At the general level, the typical government regulator works in government for about ten years, and then gets a higher paying job with one of the companies he was regulating. What is billed as "regulation" is actually a cozy relationship.

But about our specific problems, see:

This crisis is basically what happens when liberal Democratic politics and Wall Street greed connect at the hip.

Blame the folks who were convinced that banks who refused to lend money to people who can't afford to borrow it ought to be punished.

"Regulatory safeguards"? Please specify. Perhaps you are not familiar with the work by Milton Friedman on the origins of the Great Depression. The Federal Reserve Board did precisely the opposite of what it needed to do, and between the years 1929-32, and instead of boltering the failing banks with enough cash to get them through the bank runs, they deflated the currency by about a third.

Poltical solutions to economic problems are designed to solve political problems, not economic ones. In politics, the most important consideration is how to deflect the blame.

Martin Cothran said...

By the way, I don't agree with everything in the article, I just thought it had a few good points.

Anonymous said...

lee: What is billed as "regulation" is actually a cozy relationship.

Exactly. It is called "regulation" but isn't.

So how can it be that "the free market failed because the government's heel was already on them?
" when there hasn't been any real regulation in the first place?


Lee said...

The point, jah, is that we don't have the option of putting someone in the role of 'regulator' who is unlike the rest of mankind -- that is, all-knowing, all-wise, good, pure, and dedicated.

We are stuck with human beings for that role.

Humans tend to be ignorant, unwise, depraved, impure, and dedicated mainly to self-aggrandization. No human is without some taint. All humans are open to temptation. Even those humans we refer to as 'regulators'.

The incentives of the situation will dictate how most regulators, most of the time, will behave.

The way to optimize results, therefore, is allow other incentives to rule.

Take a company who needs to insure some of its capital. Take another company who is hired to provide that insurance. The insuring company knows that the company that it insures is run by people who might tend to take advantage of them. Let their greed dictate how big the premiums are, and how intrusive the auditing designed to catch poorly conceived business practices needs to be. The insuring company cannot afford to bail out all of their clients and must trust to their ability to ferret out mischief.

When the government is the insurer, that profit motive is gone -- it's the taxpayers' money, not theirs -- but the regulators still respond to the incentives given them. Hence, the coziness. People are always more careful with their own money than with someone else's.

Liberals seem to think things will be different when they're running things. As long as the incentives are the same, the results will be the same. It is so blinking hard to convince liberals that government employees are no less greedy than private sector capitalists. But it's the same species of human being. There is no way out of it. No system can work if it relies on the incorruptibility of its people. There aren't any people who can live up to that for very long.