In Praise of Free Markets. A Partial Response to The Limits of Libertarianism

Eli,


In your "The Limits of Libertarianism," you say "voluntary transactions between equals in the marketplace are a wonderful ideal, but often a fantasy." I would say they are the norm. When I purchased my newspaper at the train station I had a high degree of confidence it would be there and how much it would cost. When I could get my newspaper on my iPad instead I arranged other equal transparent transactions with the NY Times and the Wall Street Journal. The three or four breakfast places I frequent have a quality and price I find acceptable and our transaction is open and transparent. I purchased an app from the Apple Store the other day and I knew going in to the transaction there was a risk of it not working, but I paid the $4.99 because I found the risk acceptable. Turns out the app doesn't work, but because Optimum blocks router ports, not because the app maker created a bad set of code. What I found in my app purchase was another reason to not like my cable company. If I could convince the rest of my family, we would stop buying cable TV video service and only buy Internet connectivity and maybe phone. Until then I reluctantly enter into a transparent and voluntary transaction with Cablevision. For dinner we had the food prepared from the grocery store, one of the three or four we frequent, and we engaged in transactions where we knew mostly what we would get and the prices were clearly marked. If I happen to McDonald's today I know what quality of food I'll get at what price. Like I said, I would argue most of the transactions in our life are transparent and voluntary.


As far as not all transactions being equivalent, you are referring to your "Health Care is Not a New Car or a New Coat." Why not? What makes it different? Because people need it? People need food. People need shelter. On Maslow's hierarchy of needs the most basic needs are breathing, food, water, sex, sleep, homeostasis and excretion. But you aren't arguing for public toilets.  (Yes, that is a joke). 


There are market failures. Clearly, there are market failures. And often-times there are failures that are blamed on the market but I would call policy failures. For instance, deposit insurance and bank regulation. I'm not going to argue deposit insurance and bank regulation are bad ideas or good ideas. Let's just look at the consequences. To protect depositors from bank failures deposit insurance was created as well as restrictions on what banks could do. Regulation Q restricted the amount of interest  that could be paid on checking and savings accounts. As interest rates rose with inflation in the '70's savings and loans (remember those) were squeezed because the rate they could pay for deposits were capped, so depositors moved their cash somewhere else. The policy response to this failed policy was to loosen up the type of deposits S&L's could take, resulting in a rush of cash used for real estate development, financed by S&L's in the states that seem to breed real-estate fraud: Texas, Arizona and Florida. Were there bad actors? You bet. Was there a market failure? Well in the economic sense, no, but for our purposes, yes. But was much of this driven by a policy that failed, replaced by another bad policy? Absolutely.


Look are our recent experience. Were there bad actors? Of course. Was there a market failure? I would argue yes, there was a run on the banking system, which was scary. Was some of this a result of bad policy? Absolutely yes. Deposit insurance gave banks a ready source of no-risk capital. There was an implicit guarantee of bail-outs of the banks and an almost explicit guarantee of bail-outs for Fannie and Freddie. There were market distortions from the Community Reinvestment Act. There was political meddling like Barney Frank's advice to roll the dice a bit, see here, and here. Throw in an excessively easy Fed policy replaced by an excessively tight Fed policy, driven by the hubris, that we can fine tune the economy. Add to it, a bunch of smart guys figuring out how to make money within the rules set by the Feds. Mix throughly, bake at 350. 


So if we create a law, to fix the failure of a prior law, that fixes the failure of a prior law, without ever stepping back and recognizing maybe the laws themselves had a role, a large role, in creating the negative events, then we are just spinning our wheels and we'll be having this conversation again in five, ten or twenty years.


Bill

How Dodd-Frank is Like the Iraq War

On 9/11 I watched people die. And I wanted retribution. Not my finest hour.

I would be lying to tell you I paid close attention to the decisions leading up to the Iraq War. Although I didn't pay much attention, I do know it was a popular decision. It had overwhelming support in Congress and among the people. For me, my rage still burned. Someone, somehow had wronged me and I wanted justice. Given the popular support for the war, I was far from alone in my feelings.

Dodd-Frank appeals to a similar sentiment. Somehow, someone almost ruined the country, or almost put us into a Second Great Depression. It was subprime lending, it was evil bankers, it was derivatives, it was deregulation, it was Greenspan, it was capitalism, it was Fannie, it was Freddie, it was the CRA.  It's similar to the hunt for weapons of mass destruction. We just KNEW they were there. So to exact revenge we passed Dodd-Frank and continue to seek out the criminals who brought about our suffering.

But like our search for WMD failed, so too will our search for WMD that almost blew up our country. Our rage makes us blind to what happened, which means it will be mostly sheer dumb luck we come up with a right solution.

The Limits of Libertarianism

Bill

When  my kids were young we had a housekeeper named Mathilde Bosun. She was the second oldest of nine from a dirt poor family in Montserrat, and she left school at the age of 12 to help her mother care for the seven behind her. She made her way to Roxbury in middle age on a temporary visa and after her island home began exploding continuously an immigration judge granted her permanent residency status. She took care of my two like they were her own and she bought a 2 Decker in Dorchester from her earnings.

Then came one of those voluntary marketplace exchanges you honor so. In 2006 a couple of parasites called mortgage brokers convinced her trade her perfectly good 30 year fixed rate mortgage for an adjustable sub prime deal. I’m sure I don’t have tell you what happened next. The house is gone. She is gone.

So I’m not quite a libertarian yet. Perfectly transparent, voluntary transactions between equals in the marketplace are a wonderful ideal, but often a fantasy.  Knaves, like the vermin who brought us the subprime crisis that nearly destroyed the country are always out there. You can include Fannie and Freddie among the damned but they are a small part of what happened. So I say huzzah too. Huzzah for Dodd Frank with all its inevitable flaws. Huzzah for Richard Cordray. Huzzah for a government that cares about protecting our soldiers from the swindlers and cheats. Huzzah for balancing private and public interest . 

And finally, as I have argued previously, all transactions are not equivalent. You can do without an Ipad , like the vast majority of folks who don’t have 500 bucks to spare do. Some things you can’t do without. That never makes for a free an equal transaction.

BTW you’re pretty good at setting up those straw men yourself. Dennis Kucinich? Talk about a guy who doesn’t have a clue about the way the world works. If we let idiots like him run the show we’d have an economy that runs like this:

Eli