I hear this argument all the time, yet the events that would lead to the recession happened while I was politically inattentive. Could someone help point me to how government, not the free market, caused the problems we have? How it wasn't "greed" that the free market would have allowed but poor government policies?
I have begun my journey with this:
http://online.wsj.com/article/SB10001424052970203633104576623083437396142.html?mod=WSJ_Opinion_LEADTop
And I hope to find good arguments to use in discussion.
The market is highly regulated.
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
Voluntaryism Forum
Yes, but the argument claims that there was much deregulation that caused the current recession.
In a way, that's true. For example, the Glass-Steagall Act allowed banks and other financial companies to become even more leveraged.
leveraged
Sorry, but what does this mean?
Leverage: http://en.wikipedia.org/wiki/Leverage_(finance)
Also, I believe Autolykos meant to say the repeal of Glass-Steagall allowed banks to become more leveraged.
It is certainly possible for any given act of deregulation to cause problems, but the source is always previous regulations. Glass-Steagall is a great example. The government enacts regulations or policies that screw something up. They then pass Glass-Steagall to cover their screwups. Decades later, they repeal Glass-Steagall and the original problems surface again. But the free market isn't causing those problems, it's the original regulations and policies.
Can you explain what those original problems were?
Peter Schiff explained some of it briefly when he talked to the "99%" in the streets of New York. He also offered a great background in his Hazlitt memorial lecture. Other great lectures include this one in which he speaks to a group of students who just went through Bernanke's four-part college lecture series, and Schiff rebuts many of the Federal Reserve Chairman's claims about the cause of the housing crisis, the role of the Federal Reserve, the value of the gold standard, and more.
Here he lectures in a Congressional setting and explains "What About Money Causes Economic Crises?". And of course there's also the now-famous lecture he gave to a conference of mortgage bankers in 2006, in which he predicted largely everything that was going to happen: [full lecture], [highlights].
In text form, he of course went into great detail in Crash Proof.
If you want a really good explanation, Meltdown is the definitive Austrian text so far, and Financial Fiasco is actually a bit more detailed since it was written later, when more data became available. (Of course there's been debate.) The film Overdose [backup link] is based on the latter, and is actually narrated by Norberg himself. It's the best overview of the boom/bust I've seen so far (but that may change [new, working link] soon enough).
But here's a breakdown:
Typical day at a bank in early to mid 2000s: A bank makes a loan to a shitty customer with a 600 FICO who paid nothing down. It doesn't matter to them if the guy isn't able to make good on his payments because the bank that made the loan gets to turn around and sell it to Government-Sponsored Enterprises Fannie Mae and Freddy Mac, who basically pay the bank back more than what it just lent out. So the bank gets to keep making loans. The fact that the bank essentially doesn't have to worry about the quality of the borrower to pay back the loan is what is referred to as "moral hazard." The person (or company, as it were) who originally decided the borrower was good enough to make the loan to doesn't have anything to lose if the borrower defaults...so there is really no incentive to originate loans with good quality borrowers. Now normally, even though banks were able to sell off their notes on the secondary market before, they maintained higher standards because the buyers of the notes demanded higher standards (i.e. Freddy and Fannie wouldn't buy notes in which the borrower was below a certain standard of quality). With the government intervention and the push of people like Barney Frank, those two Government Sponsored Enterprises lowered their standards on the types of notes they would buy...which allowed the banks to then make loans to shittier customers. Then of course the government can push banks in other ways too, as economist Walter Williams said "I challenge anyone to come up with one thing banks can do that's not covered by a regulation." So if everything you do is regulated by the government, the government then therefore has a lot of power to influence what you do. So what happened?:
For a great visual representation of most of this, see here. And this was an animation that used Bush's speech as the audio and mixes in some facts...but if you click the link you'll see what happened to it.
Glass-Steagall is nothing more than a beloved buzz word that people like to throw around to sound like they know what they're talking about. They don't know what it is, they don't know what it says, they don't know when it was enacted and they don't even know what president signed the (partial) repeal...(not Bush...and I guarantee you more than 99 times out of 100, they won't be able to tell you it was a partial repeal). All they know is it was a financial regulation repeal that took place at some point in history close enough to be able to blame the crisis on it...and the only reason they know that is because they heard someone else say it. And of course this is perpetuated by useless films like Inside Job.
As Golden State Liberty blog notes:
The best they can do is to cite the partial repeal of the Glass-Steagall Act in 1999, and even this argument weakens on examination. The repeal (known as Gramm-Leach-Bliley) merely eliminated a provision that prohibited commercial banks and investment banks from existing under the same corporate umbrella, a provision that exists nowhere else in the world; other elements of Glass-Steagall, including those prohibiting commercial banks from underwriting or trading in securities and those prohibiting securities firms from taking deposits, were left intact, and other laws exist to prevent investment banks from unloading toxic securities onto commercial affiliates. Are we really supposed to believe that this repeal created some new sort of trading activity whose effects brought the world's financial system to its knees?
When people mention the words "glass steagall", ask them what it is. Just ask "what is that?" See what happens. Same thing when they have any policy recommendation.
The Fed -- a government mandated monopoly on money creation, and (Soviet-style) central planning for the price of the asset at one side of ALL transactions in the economy: money. Easy to guess, the distortions to the economy and the abuses by the entities closest to the wellspring of easy money would be epic. Unregulated, you say? The free market, the poor thing, never even got a chance to crawl from being smothered like this, much less to get up and do any damage to anyone.
Market regulations were destroyed by government intervention, for example by guaranteeing firms against possible losses.
Fed gave so much cheap money through low interest rates that people had great incentive to invest into housing. Even with high regulation, that incentive would have stayed. And there actualy was much regulation, but it was build to help everyone to get a chep house. And what happened? Meltdown by Tom Woods is best book about it.
John James:Glass-Steagall is nothing more than a beloved buzz word that people like to throw out to sound like they know what they're talking about. They don't know what it is, they don't know what it says, they don't know when it was enacted and they don't even know what president signed the repeal (not Bush). All they know is it was a financial regulation that was repealed at some point in history close enough to be able to blame the crisis on it...and the only reason they know that is because they heard someone else say it. And of course this is perpetuated by useless films like Inside Job. As Golden State Liberty blog notes: The best they can do is to cite the partial repeal of the Glass-Steagall Act in 1999, and even this argument weakens on examination. The repeal (known as Gramm-Leach-Bliley) merely eliminated a provision that prohibited commercial banks and investment banks from existing under the same corporate umbrella, a provision that exists nowhere else in the world; other elements of Glass-Steagall, including those prohibiting commercial banks from underwriting or trading in securities and those prohibiting securities firms from taking deposits, were left intact, and other laws exist to prevent investment banks from unloading toxic securities onto commercial affiliates. Are we really supposed to believe that this repeal created some new sort of trading activity whose effects brought the world's financial system to its knees? When people mention the words "glass steagall", ask them what it is. Just ask "what is that?" See what happens. Same thing when they have a policy recommendation.
When people mention the words "glass steagall", ask them what it is. Just ask "what is that?" See what happens. Same thing when they have a policy recommendation.
Thanks John. I admit to being fuzzy on the details of the Glass-Steagall Act and its partial repeal. What I had read - I believe it was an article on this site - was that, in the absence of any (significant) restraint on fiat currency and fractional-reserve banking, capital would gain the appearance of being super-abundant instead of scarce. The partial repeal of the Glass-Steagall Act led to fewer restraints on those things.
However, I found a gem in the Wikipedia article on the Gramm-Leach-Bliley Act:
Crucial to the passing of this Act was an amendment made to the GLB, stating that no merger [of a commercial bank and an investment bank] may go ahead if any of the financial holding institutions, or affiliates thereof, received a "less than satisfactory [sic] rating at its most recent CRA exam", essentially meaning that any merger may only go ahead with the strict approval of the regulatory bodies responsible for the Community Reinvestment Act (CRA).[16] This was an issue of hot contention, and the Clinton Administration stressed that it "would veto any legislation that would scale back minority-lending requirements." [17]
Essentially, then, the people who blame the (partial) repeal of Glass-Steagall for the ongoing financial crisis have only a small piece of the overall picture. Commercial banks and investment banks could merge only if they kept feeding into the subprime-mortgage behemoth. This behemoth, of course, was entirely the product of government legislation and regulation. Combine that with the highly loose monetary policy from the Fed and you get a financial crisis just waiting to happen.
Autolykos:Essentially, then, the people who blame the (partial) repeal of Glass-Steagall for the ongoing financial crisis have only a small piece of the overall picture.
I say you're giving them way too much credit.
"It doesn't matter to them if the guy isn't able to make good on his payments because the bank that made the loan gets to turn around and sell it to Government-Sponsored Enterprises Fannie Mae and Freddy Mac, who basically pay the bank back more than what it just lent out."
That right there, that is the piece of information missing from the Occupy Wallstreet folks.