Rightwing NZ view of financial crisis

[Stuart Mackey]

Link dressed in fishnets to NZ Herald

Roger Kerr: Lessons to be learned from American meltdown
4:00AM Monday Sep 29, 2008
Roger Kerr

Scholars today widely agree that the Great Depression of the 1930s was largely made by government via excessively tight monetary policy by the US Federal Reserve, beggar thy neighbour protectionist trade policies and other errors.

It was not a crisis of capitalism as many assumed, but this mistaken belief greatly enhanced the allure of socialism and government intervention more generally.

Similarly, many saw the East Asian crises of 1997-98 as a disastrous consequence of open capital markets, and predicted a retreat from globalisation.

Instead they were quickly recognised as largely due to governments maintaining fixed and over-valued exchange rates and controls on capital flows.

Now in response to the turmoil in financial markets we are again seeing claims about the failure of capitalism and globalisation. Recent Herald columns by Tapu Misa, Bryan Gould and Garth George are examples.

How should we understand the current events, which are still unfolding and have a long way to run?

Books will be written on the subject, but plainly the present crisis has a strong made-by-government element to it again.

Recall that it began with the bursting of the US housing bubble and the high default rates on sub-prime mortgages (risky loans to unqualified borrowers).

What caused this bubble? A prime source was easy money. The Federal Reserve cut interest rates in response to the dotcom crash earlier this decade and kept them low despite inflation pressures and the surge in the prices of housing and other assets.

Moreover, the Fed's 1998 rescue of Long Term Capital Management and its response to the dotcom crash led many to believe in the so-called 'Greenspan put' - the expectation that the Fed would bail out troubled financial firms, especially large ones. This arguably resulted in imprudent borrowing and lending (any charges of greed should factor this in, and be levelled at both sides of the market).

Another very important contributor was the implicit government support of Fannie Mae and Freddie Mac, the two huge corporations that back nearly half of the $12 trillion mortgages outstanding in the United States.

This was a train wreck waiting to happen. The government backing undercut private lenders and encouraged risky practices. Efforts to rectify this situation were defeated by the Democrats in Congress.

Another factor was political pressure on banks to lend in the name of affordable housing (sound familiar?). As a Brookings economist put it, banks "had to show they were making a conscious effort to make loans to sub-prime borrowers".

Other ill-conceived government regulation has played a part. This includes the requirements for banks in the United States (and internationally) to hold specified levels of capital. Critics have argued that they encouraged banks into off-balance sheet securitisation of mortgages and other assets which has been a prime source of the problems.

Further dubious regulations include market-to-market accounting requirements (which helped bring down AIG) and those relating to the oligopoly status of the credit rating agencies.

Wider government interventions are also relevant. An example is land supply restrictions that helped drive up house prices in states such as California. The fall-out has been milder in less-regulated jurisdictions such as Texas.

Another is the plethora of regulations restricting mergers and takeovers of under-performing firms in the United States.

None of this is to argue that there were not serious failures by boards and managements of banks and other institutions. Many of them have been rightly punished through shareholder losses and management firings.

Questions will be asked about corporate governance and executive pay. This is as it should be. As Kipling wrote:

"Let us admit it freely, as a business people should - we have had no end of a lesson: it will do us no end of good."

When the dust eventually settles some things will stand out. First, market-based economic systems will not be abandoned: their wealth-generating capabilities relative to alternatives are unsurpassed and recognised worldwide.

Second, many of the pathologies are US-centred: Australian and New Zealand banks have been far less affected (although excessively loose monetary policy earlier this decade and land supply restrictions have unduly inflated the New Zealand housing market).

Third, we have learned yet again that government regulation often does more harm than good. As the Wall Street Journal observed, the great irony is that the banks that made some of the worst mortgage investments were the most highly regulated.

Bank regulators cannot possibly spot all weaknesses. More emphasis must go on caveat emptor - investors and depositors beware.

[Fingolfin_Noldor]

The article does a double speak in 4 sentences.

Third, we have learned yet again that government regulation often does more harm than good. As the Wall Street Journal observed, the great irony is that the banks that made some of the worst mortgage investments were the most highly regulated.

Bank regulators cannot possibly spot all weaknesses. More emphasis must go on caveat emptor - investors and depositors beware.

It points out that regulation is bad, then goes on to say, regulators can't spot all the weaknesses.

Yeah sure, but hey, it's because mortgage investments weren't regulated enough, since regulators didn't spot the weaknesses, that the banks made the worst mortgage investments.

Bravo, trying too hard to prove a point, only to shoot themselves in the foot.

I'm surprised NZ has its share of libertarian economists however.

[Stuart Mackey]

I'm surprised NZ has its share of libertarian economists however.

You have just read an article by the lead NZ libertarian 'economist'

[Covenant]

"Let us admit it freely, as a business people should - we have had no end of a lesson: it will do us no end of good."

He should have read the rest of the poem.

For remember (this our children shall know: we are too near for that knowledge)
Not our mere astonied camps, but Council and Creed and College—
All the obese, unchallenged old things that stifle and overlie us—
Have felt the effects of the lesson we got—an advantage no money could buy us!

Unless he's trying to assert that regulation is an outdated thing, apparently so outdated it was taking a break during the robber baron periods, colonial periods and plantation periods of economic past, he's just spouting a line of poetry without much reason for it. I would hope he's saying that their hard-fought lesson is that executive pay and executive oversight is necessary to restrain the excesses of the top-end of the business world. Business has had a chance to remake the world in it's own image and it's done a fairly lousy job of it. This isn't to say the free market is a wonderful system of competing interests that drives upwards the standards of living that we all enjoy, but to say they haven't had a hand in their own downfall is ridiculous. Kipling's got a line for that too:

It was our fault, and our very great fault, and not the judgment of Heaven.
We made an Army in our own image, on an island nine by seven,
Which faithfully mirrored its makers’ ideals, equipment, and mental attitude—
And so we got our lesson: and we ought to accept it with gratitude.

Honestly, I wish the Libertarians were right. It seems to make so much sense on paper, but it works so poorly in the real world. People's self-centered motivations destroy any sense of fairness in the system almost as quickly as it can be established. An entirely free market may be the best economic underpinning for a society, but it's hardly the one with the best quality of life for the workers and salarymen. Quality of life for your average joe means more to me than executive compensation or free market worship

[Spyder]

Honestly, I wish the Libertarians were right. It seems to make so much sense on paper, but it works so poorly in the real world. People's self-centered motivations destroy any sense of fairness in the system almost as quickly as it can be established. An entirely free market may be the best economic underpinning for a society, but it's hardly the one with the best quality of life for the workers and salarymen. Quality of life for your average joe means more to me than executive compensation or free market worship

Libertarianism, in a nutshell, involves going with the first idea that pops into your head without thinking it through. "Yeah, this sounds like it should work. Let's go with that."

It's funny that he goes on to say that regulators can't spot everything because that's exactly what the free market needs in order to work: perfect knowledge. Unless all individuals know exactly what's going to happen when their money is spent in a particular way then a free market system can never be fair.