The following letter showed up in the Chronicle of Higher Education
It is interesting to read the above from the point of view of an academic scientist whose life has been spent in research and teaching. Clearly, the Nobel prize in economics should be abolished, when the two sides of an economic debate can not come to closure.
Oddly enough, both sides appear wrong to me. The left, arguing for more regulation since less regulation led to the problem, and the right arguing that offering cheap loans caused the problem. Apparently, the middle ground, that banks offered loans recklessly since they'd discovered securitization which allowed them to sell the loans, wash their hands of the risk, and continue making poorer and poorer loans risk free, is ignored by the ideologues.
Certainly, the government wanted more loans made to poorer people, encouraging home ownership to stabilize neighborhoods, making people have a stake in their own local environment. Certainly, the lack of regulation (especially concerning risky loans) existed. But loaning someone else's money rather than your own, which is what, de facto, the banks did, is what seems to be the problem.
What was broken can not be fixed by more or less regulation, more or less "cheap" money. What is needed is that the banks make prudent loans because they can not offload the risk elsewhere. It is the offloading which severed the umbilical cord between loaning money and getting the loan repaid.
Ideology is perverse in preventing thinking!
To the Editor:
Christopher Phelps's essay cannot go without comment. Phelps asserts, apropos of the current economic turmoil, "The recent riot of capitalist irresponsibility has shattered the fantasy that the free market, left to its own devices, will automatically produce rationality and prosperity." He also contends that what he calls the conservative position regarding the New Deal "ought, by all rights, to be on the ropes."
More indefensible claims have never been made. Phelps, a historian, simply doesn't know what he's talking about.
Ever since the economic implosion began, the standard line from statist politicians and intellectuals has been that it was due to "laissez-faire ideology" and deregulation. That notion has been refuted over and over. The great economic bubble could never have arisen but for an array of government interventions that caused artificially low interest rates and then steered most of that money into the housing sector. The Federal Reserve is a nonmarket actor. Fannie Mae and Freddie Mac are government-sponsored enterprises that gave investors the impression that the securities they issued were backed by the federal government. The Community Reinvestment Act and the political mania for maximizing the number of people owning rather than renting was equally a creation of politics, not the market.
How those and other federal interventions created the conditions for the housing bubble has been frequently demonstrated; for example, in Steven Horwitz's "An Open Letter to my Friends on the Left" (http.7/myslu.stlawu.edu/~shorwitz/ open_letter.htm).
What many economists have to understand is that whenever the government promotes artificially cheap money and credit, the result is to distort the pattern of investment and resource allocation in the economy. We get overexpansion in those sectors of the economy most sensitive to interest rates, such as housing. Cheap credit leads to, as the Austrian economists Ludwig von Mises and Fricdrich Hayek explained, malinvestrnents that cannot be sustained in the long run. Far from putting that argument "on the ropes," the events of the Great Depression and of our current recession strongly confirm it.
Blaming laissez-faire capitalism for the consequences of government interference with our system of money and credit, with the standards of lending institutions, and with many other aspects of the free market's allocation of resources, is an egregious case of blaming the victim.
GEORGE C. LEEF
Director of Research
John William Pope Center
for Higher Education Policy
Raleigh, N.C.
It is interesting to read the above from the point of view of an academic scientist whose life has been spent in research and teaching. Clearly, the Nobel prize in economics should be abolished, when the two sides of an economic debate can not come to closure.
Oddly enough, both sides appear wrong to me. The left, arguing for more regulation since less regulation led to the problem, and the right arguing that offering cheap loans caused the problem. Apparently, the middle ground, that banks offered loans recklessly since they'd discovered securitization which allowed them to sell the loans, wash their hands of the risk, and continue making poorer and poorer loans risk free, is ignored by the ideologues.
Certainly, the government wanted more loans made to poorer people, encouraging home ownership to stabilize neighborhoods, making people have a stake in their own local environment. Certainly, the lack of regulation (especially concerning risky loans) existed. But loaning someone else's money rather than your own, which is what, de facto, the banks did, is what seems to be the problem.
What was broken can not be fixed by more or less regulation, more or less "cheap" money. What is needed is that the banks make prudent loans because they can not offload the risk elsewhere. It is the offloading which severed the umbilical cord between loaning money and getting the loan repaid.
Ideology is perverse in preventing thinking!
| Christopher Phelps's essay cannot go without comment. Phelps asserts, apropos of the current economic turmoil, "The recent riot of capitalist irresponsibility has shattered the fantasy that the free market, left to its own devices, will automatically produce rationality and prosperity." He also contends that what he calls the conservative position regarding the New Deal "ought, by all rights, to be on the ropes." | |
| More indefensible claims have never been made. Phelps, a historian, simply doesn't know what he's talking about. | Clearly (to me), the Nobel prize in economics should be abolished, when the two sides of an economic debate can not come to closure. |
| Ever since the economic implosion began, the standard line from statist politicians and intellectuals has been that it was due to "laissez-faire ideology" and deregulation. That notion has been refuted over and over. The great economic bubble could never have arisen but for an array of government interventions that caused artificially low interest rates and then steered most of that money into the housing sector. The Federal Reserve is a nonmarket actor. Fannie Mae and Freddie Mac are government-sponsored enterprises that gave investors the impression that the securities they issued were backed by the federal government. The Community Reinvestment Act and the political mania for maximizing the number of people owning rather than renting was equally a creation of politics, not the market. | Generally, impressions are not enough to cause anything. Blaming the governmnet policy seems counter-intuitive. Their argument, if memory serves me right, is that putting roots into a community, i.e., owning property, would stabilize neighborhoods and prevent continuing decay. One has to argue against that idea, not the ultimate economic error, if one is to have sanity in this debate. |
| How those and other federal interventions created the conditions for the housing bubble has been frequently demonstrated; for example, in Steven Horwitz's "An Open Letter to my Friends on the Left" (http.7/myslu.stlawu.edu/~shorwitz/ open_letter.htm). | Horowitz also doesn't address the idea that no one forced banks to lend inappropriately (and offload the risk to others). |
| What many economists have to understand is that whenever the government promotes artificially cheap money and credit, the result is to distort the pattern of investment and resource allocation in the economy. We get overexpansion in those sectors of the economy most sensitive to interest rates, such as housing. Cheap credit leads to, as the Austrian economists Ludwig von Mises and Fricdrich Hayek explained, malinvestrnents that cannot be sustained in the long run. Far from putting that argument "on the ropes," the events of the Great Depression and of our current recession strongly confirm it. | Certainly, the government wanted more loans made to poorer people, encouraging home ownership to stabilize neighborhoods, making people have a stake in their own local environment. Certainly, the lack of regulation (especially concerning risky loans) existed. But loaning someone else's money rather than your own, which is what, de facto, the banks did, is what seems to be the problem. |
| Blaming laissez-faire capitalism for the consequences of government interference with our system of money and credit, with the standards of lending institutions, and with many other aspects of the free market's allocation of resources, is an egregious case of blaming the victim. | Egregious? When left to its own devices, laissez-faire capitalism moves money up the ladder, from the poor to the wealthy. The disparity in wealth seems proof that this is true, at least over the last few decades. Belief in the "free market" means that departments of weights and measures are irrelevant (which is absurd). The truly free market cheats whenever and where ever it can, when there are puny punishments available for cheating and knowledge of cheating is localized. |
