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What Social Animals Owe to Each Other

Friday, April 30, 2010

TGIF: Financial Regulation and the "Money Power"

In one of his essays criticizing inflationary free-silver proposals in the late nineteenth century, the great laissez-faire champion William Graham Sumner wrote:

"We hear fierce denunciations of what is called the 'money power.' It is spoken of as mighty, demoniacal, dangerous, and schemes are proposed for mastering it which are futile and ridiculous, if it is what it is said to be. Every one of these schemes only opens chances for money-jobbers and financial wreckers to operate upon brokerages and differences while making legitimate finance hazardous and expensive, thereby adding to the cost of commercial operations. The parasites on the industrial system flourish whenever the system is complicated. Confusion, disorder, irregularity, uncertainty are the conditions of their growth. The surest means to kill them is to make the currency absolutely simple and absolutely sound. Is it not childish for simple, honest people to set up a currency system which is full of subtleties and mysteries, and then to suppose that they, and not the men of craft and guile, will get the profits of it?"

It seems to me that this point is entirely applicable to the current debate over stepped-up financial regulation. In the end, it will best serve the insiders, the “money power.”
The rest of TGIF is here.

Thursday, April 29, 2010

Markets and Correction of Error

If money can be made bucking market trends (shorting, etc.), people will have an incentive to uncover, correct, and limit the damage from errors in the market.

Corollary: Restrictions on shorting, etc., lock in error and magnify the damage.

Isn’t it funny that those who try to make hay out of the imperfection of markets are most enthusiastic about measures that would exacerbate the imperfections?

Tuesday, April 27, 2010

Thoughts on Goldman Sachs

See addendum below.

Goldman Sachs is taking a beating in the press because a Senate committee and the SEC are investing whether it engaged in wrongdoing by betting against the shaky mortgages fueling the housing boom and allegedly failing to disclose that fact to buyers of its "synthetic collateralized debt obligations."

The allegation of wrongdoing is an empirical question, of course, but a few things occur to me at this point:

Financial firms have been roundly criticized for their "herd mentality," that is, their incentive to run headlong into too-risky mortgage-backed instruments because everyone else was doing it. No firm wanted to be on the sidelines having to explain to its clients why everyone was making tons of money but them. Yet here Goldman went against the herd and it's coming under fire precisely for that reason. By betting against the sustainability of the boom on the basis of hedge-fund trader John Paulson's analysis, it injected needed information into the market. More information is always better than less, and there would be no social good from restrictions on short selling. Whether fraud was in the picture, I can't say, but I am confident that Goldman's hedge strategy -- and its delight over making money when mortgage-backed securities started losing value -- would have drawn criticism in any event. It's a no-win situation.

Second, the absolutely worst place to get to the bottom of things is in Congress. Every member of the committee has an overriding incentive to engage in demagoguery. Goldman Sachs is not exactly a positive household name, so which congressman will resist the temptation to denounce the company in public? If there is evidence of criminal activity, there are agencies for such investigations. This is not to say that those agencies are above demagoguery -- politically ambitious U.S. attorneys are notorious for it -- but at least we should be spared the spectacle of self-righteous congressmen pontificating on matters for which the Congress itself is heavily responsible. We already must suffer the obscenity of Chris Dodd and Barney Frank rewriting the financial rules to prevent, so they say, a repeat of the debacle that they themselves did so much to bring about. These people are the systemic risk. Enough is enough.

Finally, we must not lose sight of the fact that whatever Goldman did, it was in the context of a corporatist State, a banking cartel, and loose fiat money, in which Big Finance exercises extra-market power derived from the rules written by Congress and the regulatory agencies. These are hardly free-market enterprises, and it is no coincidence that former Goldman principals have their fingerprints all over the government's bailout response to the meltdown and the firm was a major beneficiary.

In an actual free market—without inflationary fiat money, implicit guarantees behind underwriters of dubious mortgages, and regulatory protection against open competition—a financial debacle such as we’ve seen is unlikely to have occurred. Even so, that doesn’t mean that everything that went on constitutes a crime.

Addendum, April 29: Rather than have the SEC or a criminal-justice agency pursue this case, the alleged victims -- if that's how they see themselves -- ought to sue Goldman Sachs and John Paulson and at least front the costs of adjudication, saving the taxpayers the money. It is noteworthy that at the Senate hearing, no "victim" testified. Do they not see themselves as victims? Perhaps not. These are sophisticated institutional investors, one of which had a hand in creating the bundle of mortgage-backed securities (MBS) that underlay the synthetic CDO. (It rejected some MBS in favor of others.) The other investor would have been able to examine the contents. Clearly, they knew they had a different outlook on the future of those MBS from those who bet against them. For every buyer, there's a seller, for every bull, a bear. One does not become a victim simply because one's outlook proved to be wrong.

Nevertheless, this is worth reading. Other links worth following that case doubt on the SEC case:

Sebastian Mallaby

Richard Epstein

One Last Time: Markets Don't Ration!

The Wall Street Journal takes Donald Berwick, likely the next Medicare chief, to task for saying, “The decision is not whether or not we will ration care—the decision is whether we will ration with our eyes open. And right now, we are doing it blindly.”

Fine. But then the editorial writer adds, “In fact, the real choice with medical care, as with any good or service, is between rationing via politics and bureaucratic lines or via a competitive market and prices.”

Wrong. Markets don’t ration, for the reasons I explain here.

Monday, April 26, 2010

Abolish This Derivative

The most threatening derivative is overlooked in Washington: the power Big Finance derives from the State.

Saturday, April 24, 2010

Another Day in the USA

GM gets kudos for repaying a government loan with other taxpayer money.

The governor of Arizona signs a bill that requires immigrants to carry papers and authorizes cops to demand those papers of anyone they suspect of being in the country without government permission. Obama said the new law demonstrates the need for comprehensive "immigration reform" at the national level. Leading proposals include the requirement that all workers carry biometric identification.

Have a good weekend.

Friday, April 23, 2010

TGIF: The Washington-Wall Street Kabuki Dance

There’s something eerily ritualistic about the current occupant of the White House berating Wall Street for its irresponsibility and proposing new regulations, while his targets send a swarm of lobbyists to Washington to keep the regulatory overhaul from getting out of hand. (History says they’ll be on good terms with the regulators in any case.)

I’m reminded of journalist and historian Walter Karp’s book Indispensable Enemies. These apparent adversaries need each other.

The rest of TGIF is here.

I'm happy to say that Counterpunch has reposted the article.

Tuesday, April 20, 2010

TGIF: Is Capitalism Somethng Good?

The question concerning the relationship (if any) between the free market and capitalism can be addressed at many levels. Let’s start with history. The word capitalist was indeed first used disparagingly by opponents of “capitalism.” But it is important to realize that among those opponents were advocates of property rights and free markets, such as Thomas Hodgskin and later Benjamin Tucker. Why?

The reason is this: In the periods regarded as classic “capitalist” eras, government intervention on behalf of capital was commonplace. Moreover, it was integral not incidental.
The rest is here.

Thursday, April 15, 2010

Happy Birthday, Thomas Szasz

Thomas Szasz, the great champion of liberty and critic of what he has dubbed the "Therapeutic State," is 90 today. For the last 50 years, no one has worked harder or more eloquently to defend the individual from the State-medicine complex than Szasz. His specialty -- so-called "mental health" issues -- puts him virtually in a class by himself among libertarians. These issues include civil commitment ("a crime against humanity"), forced drugging and other "treatments," the insanity defense and verdict, and more.

Aside from Szasz, few people have been willing to condemn psychiatry's medical pretensions or psychiatry's assaults, backed by State power of course, for what they are.

He has also been a persistent opponent of the "war on drugs," including the prescription system, and a defender of the right to commit suicide.

Emeritus professor of psychiatry at the State University of New York Health Science Center/Syracuse, Szasz is the author of some 25 books, most famously The Myth of Mental Illness, a 50th anniversary edition of which has just been published, hundreds of scholarly and popular articles, and a column in The Freeman. His latest book is Antipsychiatry: Quackery Squared.

Among Szasz’s other books are Psychiatry: The Science of Lies; The Medicalization of Everyday Life: Selected Essays; Coercion as Cure: A Critical History of Psychiatry; The Therapeutic State; Ceremonial Chemistry: The Ritual Persecution of Drugs, Addicts and Pushers; Our Right to Drugs: The Case for a Free Market; Insanity: The Idea and Its Consequences; Schizophenia: Sacred Symbol of Psychiatry; Cruel Compassion: Psychiatric Control of Society’s Unwanted; Fatal Freedom: The Ethics and Politics of Suicide; Pharmacracy: Medicine and Politics in America; Liberation by Oppression: A Comparative Study of Slavery and Psychiatry; “My Madness Saved Me”: The Madness and Marriage of Virginia Woolf; and Faith in Freedom: Libertarian Principles and Psychiatric Practices.

I first met Tom in the 1970s. Since then he has been a constant inspiration to me. I am proud to know him.

All lovers of liberty should be familiar with is heroic life.

Saturday, April 10, 2010

TGIF: Obey the (Natural) Law

This week's TGIF explores Lysander Spooner's thinking on the natural law and its relationship to legislation.

Thursday, April 08, 2010

Where's the Outrage?

From Glenn Greenwald on Obama's assassination program:
George Bush's decision merely to eavesdrop on American citizens without oversight, or to detain without due process Americans such as Jose Padilla and Yaser Hamdi, provoked years of vehement, vocal and intense complaints from Democrats and progressives. All of that was disparaged as Bush claiming the powers of a King, a vicious attack on the Constitution, a violation of Our Values, the trampling on the Rule of Law. Yet here you have Barack Obama not merely eavesdropping on or detaining Americans without oversight, but ordering them killed with no oversight and no due process of any kind. And the reaction among leading Democrats and progressives is largely non-existent.... Just imagine what the reaction would have been among progressive editorial pages, liberal opinion-makers and Democratic politicians if this story had been about George Bush and Dick Cheney targeting American citizens for due-process-free and oversight-less CIA assassinations.
Are we witnessing George W. Bush's third term -- or Richard Nixon's?

Wednesday, April 07, 2010

Nation Building in Iraq

These videos of what surely looks like U.S. cold-blooded murder in Baghdad in 2007 have been widely distributed. Included among the victims were two people working for Reuters; two children were also in the group attacked.

A few comments:

1. The helicopter personnel seemed to be enjoying themselves;

2. The people on the ground were no threat to the American people whatever. Even if they were a threat to the U.S. military, that is only because it is occupying Iraq. There's a simple way to end any such threat -- withdraw.

3. What happened to Obama's promise to get out?

4. See Glenn Greenwald's "Iraqi Slaughter Not an Aberration."

In case anyone has missed the videos, here they are: