Detailed Abstractions

Oil leaks into the Gulf of Mexico from the end of the pipe that was supposed to pump oil from the sea floor before the Deepwater Horizon oil rig exploded Photo: AP

The audacity of writers will never cease to amaze me and today is no exception.

In a piece at Salon.com, authored by Andrew Leonard, and titled Gulf oil spill gas price blackmail Mr. Leonard tries to make the case that the Obama Administration should:

Ignore critics of regulation who warn of rising pump prices. They are obsessed with the wrong bottom line.

Though his only reasoning seems to be that the opponents of new regulations only came to be after a major crisis. First, he starts with some of the current opposition statements:

The International Energy Agency is frightened, reports the Financial Times that “a knee-jerk reaction by regulators, banning new offshore licensing altogether,” in response to the Gulf oil spill, will end up increasing costs for the oil industry, and “therefore oil prices.”….

This helps us understand why he uses words like blackmail and frightened…. because these people are only looking at the bottom line.   From here, now that we understand these people are greedy and uncaring for anything other than money, he moves quickly into the timing of this opposition:

…it’s impressive to see how quickly the clamor advising the White House not to go overboard on offshore regulation has flared up. The parallels with the financial crisis are irresistible: A massive failure of markets and government oversight leads to a disaster, but before the wreckage has even been cleared away, we are told that regulatory overkill will be bad for business….

What he seemingly fails to grasp is, well, with all due respect to Mr. Leonard, he is failing to grasp the obvious – people generally don’t oppose or support regulations when they aren’t being proposed at all. So this argument about timing is completely irrelevant.

Logically, people, groups, communities, companies…. all of us have enough to worry about that we don’t usually worry about those things that aren’t happening.

It’s possible the author is unaware, but most of the pro-life movement didn’t really exist until 1973 as it wasn’t necessary prior to that. Maybe he finds this suspect as well?

But logic be damned, he uses this to springboard into the current investigation to explain why drastic changes in regulations are needed right now:

…But focusing only on the bottom line without taking into account the larger picture of what could go wrong — and what is going wrong — is exactly how we ended up with a giant Gulf oil slick in the first place….

Ironically, & potentially unwittingly, he then gives reasons why major regulation change should be avoided. By trying to conflate some idea of greed into this, but still keep the appearance of some factual stance, he states some of the issues clearly and properly notices that we don’t yet know what happened.

The main reason we don’t know – the only real people currently talking are those with a stake in not being blamed and there are 3 primary private actors and a multitude of government actors. Independent investigators will sort through all parties statements, responsibilities, duties, actions, and all the rest and hopefully come to some answer as to what really took place. Until then, any newly proposed regulation will be premature and wholly inconsistent with wise decision-making.

Additionally, he never refutes the words used by opponents, because he simply can’t. Economics shows us without emotion or emotion-filled words such as “blackmail” that regulations cost businesses money and those costs have to be borne out by the consumers.

The one interesting thing he noted was about the parallel to the financial market, but here he sees reverse of reality. The parallel Mr. Leonard should easily see is that we have a government bent on adding more and more power at the federal level attempting to use fear of another crisis to grab more power before even understanding why the crisis happened in the first place. Instead, of fearing this, he seems to be concerned only for some hypothetical lack of regulation, as if that has been the problem all along.

The reality is there. Going back historically, let’s say, going way, way back to… how about 6 months ago? When fear of another financial crisis was & is still being used to add regulations on entities such as pay-day loan companies, on investment vehicles such as derivatives, on compensation of employees, and many, many more things which had absolutely nothing to do with the current crisis, his concern for lack of regulation seems oddly misplaced.

After all, this is not only the same administration which is pushing for specious financial regulations, but they are also the same group which after years of railing against the Patriot Act, when the time came to do something, they did. They reauthorized its use to maintain their power.

Please note though – it’s not just this administration. Historically, governments seek to expand their power, they use crises to do so, and once those crises are mitigated, they keep the power they promised us was only necessary under the circumstances.

Whether a terrorist event, an economic crisis, or even an oil spill by greedy business people, allowing the government to take more and more powers before we even have an idea of what took place is the perfect move for those who want reduced freedoms.

As Hayek stated:

‘Emergencies’ have always been the pretext on which the safeguards of individual liberty have been eroded.

DA has several posts on the reasons behind the economic collapse as well as financial reform itself.  &, as is usual, the government is using the “crisis” as a power grab.

@ MarketWatch (here):

…The comprehensive bill is an attempt fix holes in the regulatory system that helped lead to the Great Recession….

At this point, Republicans are blocking a Senate vote:

…Among the sticking points are provisions that would give regulators the authority to guarantee debts of large financial institutions, provisions that would give the Federal Reserve authority to lend money to banks in an emergency, and a proposal to deal with failing systemically important companies by setting up a “burial insurance” fund….

Now I’m no fan of the Republicans and understand full well some of their opposition is about politics and not the actual bill, but I’m pleased with this block. First, guaranteeing debts of larger financial institutions does the exact opposite of the administration’s consistently stated goal – end too big too fail. @ MarketWatch (here):

NEW YORK (MarketWatch) — The U.S. must pass legislation to reform the financial system , in particular to make sure that no bank operates on the assumption that it will be bailed out by taxpayers, Lawrence Summers, the director of the National Economic Council and President Barack Obama’s top economic adviser, said Sunday.

“We must end too big to fail,” he said on Face the Nation. “There is no one associated with the White House who believes “too big to fail” is acceptable, or that it’s acceptable for financial institutions to rely on a bailout.”…

@ Daily Finance (here):

Too big to fail? This isn’t a designation that the Obama administration wants to exist any more….

& the President himself via YouTube (here). Insuring potential debts for very large institutions which might fail, is insuring too big to fail continues.  In this particular case, the logic is obvious and inescapable.  If an institution becomes very large, then the government designates them as whatever, which in turn tells the investing public that that institution is backed by the federal government. This will not only give larger banks an advantage (would you rather invest in a business you know won’t be allowed to fail or one that you know will be allowed to fail?), making it more difficult for smaller banks to compete, but actually incents banks to become big enough to get the designation itself. But why stop there? @ MarketWatch (here):

…The legislation would set up a new agency to protect consumers from lending abuses. It would also give the government the authority to wind down big financial institutions, and expand oversight of the derivatives market….

Soooooo… the government, which continued to support Fannie and Freddie after being told by numerous groups the risk they posed, the government which regulated ratings agencies who gave triple-A bond ratings to MBSs, the government who’s economic predictions have failed again and again needs yet another agency from which to fail?  Maybe it’s just me, but I thought the justice system was supposed to protect consumers… But that’s simply not enough power either.  They also need more control over the derivatives market.  You know, the market which had nothing to do with the economic crisis.  They also plan to more heavily regulate pay-day loan companies.  Not sure what they had to do with the crisis either… I think Alan Reynolds @ Cato stated it very well (here):

The Obama administration thinks it has discovered the perfect formula to cram legislation through in a hurry:  Demonize some prominent firm within an industry you plan to redesign, and then pass a law that has nothing to do with the accusation against the demonized firm.  They did this with health insurance and now they’re trying it with finance.

However it’s said and whatever is said, this legislation will do the opposite of its theoretical intent.  It will not protect anyone, but  hurt all consumers.  By adding more and more layers of of regulations, the barriers to entry are increased for everyone, hurting competition, and raising prices for the end consumer.

Over @ HBR Blogs, Jeff Goldsmith asks the following question: Has the U.S. Health Technology Sector Run Out of Gas?.  Looking historically, he notes the amazing progress since the 1970s, but a decline in that growth since 2000:

…Technological innovation — in pharmaceuticals, biotechnology, medical devices including imaging, and enterprise IT — exploded in the thirty year period 1970 to 2000…

…Then about a decade ago, the US medical technology sector entered a prolonged innovation drought. In pharmaceuticals, new drug introductions declined by almost two thirds, while drugs patented in the latter part of the boom period lost protection, this despite a near tripling in R+D outlays. (New drug introductions rebounded modestly in 2008 and 2009, but still haven’t regained their 2004 levels)….

He goes further to note that this dip in activity wasn’t just about new drugs:

…The drought wasn’t confined to pharmaceuticals and biotechnology. Imaging, a dazzling success story for three decades, has seemingly run out of gas. Imaging equipment sales collapsed precipitously in the US, by roughly 40%…

…Enterprise clinical information technology seems to have hit a similar flat spot. The major commercial IT platforms for hospitals and health systems are more than a decade old.

& all of that makes complete sense based upon what we know about the last couple of decades.

Since the mid-1990s (well really, since the 1960′s), we have increased regulation on the medical industry on a constant basis.  From minor changes in who qualifies, to new regulations such as HIPA, to very large new regulatory pressures such as the Medicare Prescription Drug Benefit, resulting in an explosive growth in government expenditures of health care:

There have also been additional pressures.  Increases in financial and IT regulations through SOX and other legislation have increased companies’ weariness to put themselves at risk and increased costs of doing business.

These pressures in increasing the costs of doing business, combined with the federal government expenditures crowding out private spending, has resulted in higher costs for businesses and therefore consumers as well.  The new heath care and financial overhaul bills will continue this pressure.

The big cost however is what the author notes:  the lack on innovation.  When the government seeks to consistently erect new and more costly barriers to entry, competition will naturally decline.  The correlation to that behavior is that costs will grow more rapidly as we know competition in the long-term generates downward pressure on prices.

As we see now – prices are increasing, availability is decreasing, as the government decreases the availability of future competition in industries the government tightly controls such as health care.  Conversely with those industries with fewer barriers to entry have downward pressure on prices, such as cell phone or internet providers.

While I consider this failure of centralized control as a major factor, Mr. Goldsmith posits three contributing factors, risk aversion from management, size and increasing bureaucracy, and the fact that we are losing out globally for scientific talent:

1. Firms that used to be run by scientists and engineers are now run by attorneys and marketing executives….
2. Their ability to foster innovation has succumbed to a bureaucratic management culture….
3. Bright young foreign science and technology graduates are returning to India or China instead of staying here and creating new products or companies….

While I agree with all of these things, I think reasons 1 & 3 can be combined easily to a more basic point about government interference and centralized control.  Indeed they are symptoms of the problem and not necessarily the disease.

Having said that, I think it’s also important to note that reason number 2 exists due to the same thinking reasons 1 & 3 do – the belief that centralized control is a nominal good (DA post on business trends here).

The author seems remiss in not making the connection, even if he did eloquently, maybe unwittingly, stumble across it when writing about global competition:

…If they have more freedom to innovate in their home countries, that’s where they’ll go….

For as long as we continue to discuss symptoms and not the actual disease, we will continue to miss the point.

Via Buzz.Yahoo.com (because I refuse to send people to the Huffington Post), the Huffington Post reports (here):

President Obama will unveil on Thursday a proposed levy on the nation’s biggest financial firms structured not just to repay taxpayers for the bank bailout, but to recoup some of the public subsidy that “too big to fail” banks have enjoyed on account of their implicit government backstop, a senior administration official tells the Huffington Post….

First, I honestly have a problem with senior administration officials lending their knowledge to such a highly partisan propaganda site as the Huffington Post.   They long ago stop pretending to care about being news or even being accurate and moved straight into MoveOn.org territory.

Now, I’m not saying the President or his staff must chose the outlets I would prefer, but they could definitely send out press statements or use seemingly “real” and more honest news organizations.  It’s not like the NY Times isn’t on the President’s side – why go to Huffington?

Either way – regardless of the merits (or lack thereof0) for this specific  marketing strategy – it seems quite obvious that Mr. Obama and his team lacks a fundamental understanding of economics.  Their continued reliance on government solutions to all economic problems, demonstrates a misunderstanding of the dynamics needed to keep this economic engine and society moving forward.

It seems they have an idea that they can model the economic behavior of institutions they define as “Too big to fail” as if this equilibrium is: A) possible to spot & B) static enough to allow the slow moving government the ability to legislate in a helpful way.

Indeed the current economic crisis itself lends credibility to the idea that the government is in no position to grasp the complexities that exist when dealing with so many interconnected businesses (here):

…”We are here to examine what happened in the public sector, what happened in regulatory agencies, what happened in enforcement agencies,” said Phil Angelides, the chairman of the Financial Crisis Inquiry Commission….

While investigating the public portion of the failure:

…Questions focused on failures around regulatory decisions to loosen bank leverage and capital limits, faulty credit rating agencies, a warning about epidemic of mortgage fraud and a decision by Congress and the FDIC to stop collecting vital insurance fees from ‘well capitalized” banks between 1996 and 2006….

They grilled DOJ:

…Panel members asked Attorney General Eric Holder to conduct an investigation into what, if anything the agency did after the Federal Bureau of Investigation in 2004 warned that mortgage fraud was so rampant that it was a potential “epidemic.”…

& the SEC:

…SEC Chairwoman Mary Schapiro was inundated with questions about the agency’s failure to oversee credit rating agencies, which provided overly rosy debt ratings for problematic mortgage securities….

The FDIC & Congress:

…Meanwhile, the FDIC and Congress were criticized for its decision not to collect deposit insurance premiums from well capitalized banks for roughly a decade between 1996 and 2006….

But it’s ok, because the FDIC agrees with them:

…Both Schapiro and FDIC Chairwoman Sheila Bair agreed that an SEC decision in 2004, under its chairman at the time, William Donaldson, to allow banks to identify how much capital and leverage they must have on hand, based on their own model-based formula, was a mistake that allowed banks to expand their leverage to problematic levels….

Where the lead to the obvious conclusion they were searching for the entire time – government help:

…Bair said. “I think the only place to tackle that on a system-wide basis for both banks and non-banks was through consumer protection rules that gave the Fed the authority to apply rules against abusive lending across the board to both banks and non-banks.”…

Now it might just be me, but thinking federal regulators with new powers over banks and abusive lending standards will get it right next time seems a tad optimistic…. you know, especially considering their massive failure with the current crisis.

Which is of course only a portion of the story.  The government, through various GSE’s, exacerbated the problems with global capital flows, by giving banks incentives to make riskier and riskier loans (here):

…The actual causes of our financial troubles were unusual monetary policy moves and novel federal regulatory interventions. Regulatory distortions intensified in the 1990s. Poorly chosen public policies distorted interest rates and asset prices, diverted loanable funds into the wrong investments, and twisted normally robust financial institutions into unsustainable positions.

We can group most of the unfortunate policies under two main headings: (1) Federal Reserve credit expansion that provided the means for unsustainable mortgage financing, and (2) mandates and subsidies to write riskier mortgages….

Please don’t misunderstand me – just because someone leaves their keys in their car doesn’t mean you should take it – so immoral actions on behalf of lenders, home buyers, and an inaccurate understanding of the true risks were also present in the prelude to this tragedy:

…There is no doubt that private miscalculation and imprudence made matters worse for more than a few lending institutions and individual borrowers….

& therein lies the true rub.  This imprudence is something for which the market should bear the price of their mistakes.  Only through bearing the true cost will their incentives ever line up with true moral behavior.  If you think a local bank or lender wasn’t able to sell every single loan to a GSE, they would’ve continued to allow bad loans to be made which they knew would sink themselves… well, that’s just not very likely and not very rational.

But don’t worry – I’m sure with these new and smarter people, this time they’ll figure out which banks are too big to fail, do it right, and only tax them in the amount they need to insure against the risk.

With the recession ending (@MSNBC):

WASHINGTON – More than 90 percent of economists predict the recession will end this year, although the recovery is likely to be bumpy….

Or maybe a double-dip (@Politico.com):

…All that’s enough to convince some observers that the economic recovery is faltering and could be heading for a “double dip” recession. And that would mean the recent green shoots of recovery turn out to be just a pause in a much longer economic slide….

& a stimulus which has saved jobs (@USA Today):

WASHINGTON — States have reported using stimulus money to create or save more than 388,000 jobs so far this year, buttressing the Obama administration’s claim that the $787 billion plan has had a significant impact on the economy….

Or maybe not (@WashingtonExaminer):

…Even if we take at face value the White House claim that it created or saved all these jobs with approximately $150 billion of the economic stimulus money, a little simple math shows the taxpayers aren’t getting any bargains here: $150 billion divided by 650,000 jobs equals $230,000 per job saved or created. Instead of taking all that time required to write the 1,588-page stimulus bill, Congress could have passed a one-pager saying the first 650,000 jobless persons to report for work at the White House will receive a voucher worth $230,000 redeemable at the university, community college or trade school of their choice. That would have been enough for a degree plus a hefty down payment on a mortgage….

Maybe some perspective is needed.  To truly put it in context, let’s look at the Great Depression (@Cato):

…According to most accounts, the stock market crash of October 1929 was the spark that sent the economy spiraling downward.

How could this be? After all, by November 1929, the stock market had started to recover, and by mid-April 1930, it had reached its pre-crash level. Contrary to the received wisdom, massive government failure — not the stock market crash — pushed the United States into the Great Depression….

As written here before (here, here & here), economic predictions are inherently tricky and the government does a very poor job because politics always gets in the way of objective truths.  NBER who is usually the group society follows for when a recession starts and ends told us in December of 2008 that December 2007 was the beginning of the dive demonstrating that most “objective” economic truths are only found in hindsight.

In fact, some brilliant legal minds have made just this point to contemplate delaying financial regulations intended to mitigate similar future scenarios in which we might find ourselves (here).  Richard Posner’s analysis:

The Report is premature in two respects. The first is that it advocates a specific course of treatment for a disease the cause or causes of which have not been determined. Now it is not always necessary to understand the cause of something you don’t like in order to be able to eliminate the effect. If you have typical allergy symptoms you may get complete relief by taking an antihistamine; it is not necessary to find out what you’re allergic to. But generally, and in the case of the current economic crisis, unless the causes of a problem are understood, it will be impossible to come up with a good solution. The causes of the crisis have not been studied systematically, and are not obvious though they are treated as such in the Report. (Remember, the Great Depression of the 1930s ended 68 years ago and economists are still debating its causes.)…

Note – this doesn’t mean that we don’t understand basic incentives and most likely results.  Like chaotic systems in which minor changes in the beginning state of a system can show drastic changes in the end results, our economic system is so complex as to defy attempts to model very specific changes.  Though with hindsight and true analysis, we can get to a point where we know with probabilities what has happened and what will likely happen given specific policies.

For instance, if we make houses cost less by giving tax breaks or whatever, sales will increase for the time that incentive exists.  If the incentive is timed, then some sales will just be premature sales and show corresponding decreases in future quarters.

Meaning, we can use a basic understanding of incentives in order to gauge most likely results, but today only with hindsight can we show real numbers on very specific things such as the stimulus bill’s impact on house sales or jobs.

& even then, given the inherent difficulty in defining a “saved” job and politicians willingness to ignore any data contrary to any rosy picture they wish to present, any economic predictions or numbers coming from politicians should be suspect by default.

This morning, news outlets everywhere carried recent news out of the Treasury Department.  The Pay Czar, who is certainly living up to the moniker Czar, announced today (WallStreetJournal):

The U.S. pay czar will cut in half the average compensation for 175 employees at firms receiving large sums of government aid, with the vast majority of salaries coming in under $500,000, according to people familiar with the government’s plans.

As expected, the biggest cut will be to salaries, which will drop by 90% on average. Kenneth Feinberg, the Treasury Department’s special master for compensation, also intends to demand a host of corporate governance changes at those firms….

Even without bothering with the fact that the government is not in any position to understand what kind of compensation any single employee should have, this is still a radical and arbitrary move that if continued can work to destabilize the economy.

Beyond that, this decision is an anathema to a free society breaking not only the contract rights of ordinary citizens, but also violating all individuals by pushing a blatant ex  post facto punishment.

In a free society, within reason, individuals should be able to contract for any reason they want.  In this case, you have employees who have privately contracted with their employers for certain remuneration based upon their perceived worth to the company.

I say perceived work, because obviously not all hiring decisions work out for the company even if the employee does very well at their job.  Personality conflicts, culture conflicts, and even performance problems are some of the reasons why a new hire might not work out as expected.  Unless specifically stated in the employment contract, even in these cases the employer’s general resource is firing, not taking back pay.

Adding to this is the simple, real, true fact that this is by its very nature an ex post facto punishment for perceived mismanagement.  It has been a legal tradition for centuries, a that passing laws, which retroactively punish people, is against a free in democratic society.

In fact it’s in the US Constitution and universally recognized by a number of treaties including Universal Declaration of Human Rights and American Declaration of the Rights and Duties of Man (from Wiki):

…no person be held guilty of any criminal law that did not exist at the time of offence nor suffer any penalty heavier than what existed at the time of offense. It does however permit application of either domestic or international law….

To be fair, there are some uses for ex post facto laws which have been recognized by our supreme court including allowing for Congress to grant administrative agencies the ability to do just this thing.  So legally speaking, this might be ok, however to anyone who proposes to value freedom, it should be obvious that even allowing administrative agencies this power was a massive failure of all branches of the government.  They are supposed to protect our freedoms, not remove them one at a time.

Either way – it’s intuitive that both contract rights & ex post facto laws are required for a free society.  If the government can interfere at will in private contracts and retroactively punish you for perceived wrongdoings, you have no ability to make relevant decisions for your life as you have no ability to be secure that those decisions will continue to hold true.

This insecurity is what creates instability in most third world countries today.  This lack of basic economic & legal foundation is what continues to plague most of the planet and yet we seem to be moving on the same path.

A week ago or so, a Democratic non-profit held a focus group of GOP members & Independents (here).  Among other interesting things they found, they noted how the GOP members opposed the President because they felt he was attempting to fundamentally move away from our founding principles.

They went further to note how this differed from Independents “underscoring the extreme disconnect of the conservative Republican base voters”.

I will say this move is absolute proof that the GOP members have it right.  If the administration allows this travesty, it is without a doubt a complete move away from not only our founding principles, but away from freedom in general.

In a rush to ensure that no good crisis goes to waste, the Obama Administration, through the Federal Reserve and other bureaucrats are passing “laws” without even a wink & a nod to the public who didn’t elect any of these people to write laws.

In the Washington Post:

The battle to pass regulatory reform legislation in the face of intense opposition launches in earnest Wednesday morning with a hearing featuring Treasury Secretary Timothy F. Geithner, who will once again champion a package of sweeping changes that only Congress has the power to make…

…But outside that spotlight, the Obama administration, and the independent agencies with which it is increasingly synchronized, are moving forward with changes that do not require new laws, but could match or exceed the impact of anything that emerges from Capitol Hill…

I guess talking to the public about things like health care, auto buyouts, and the Olympics were proving to be too difficult.  All those pesky citizens with their rights and stuff standing up in opposition.  It will be much better now that they are out of the way:

…The Federal Reserve is cracking down on Wall Street’s legendary paydays. The Treasury Department plans to require banks to carry larger capital reserves. The Securities and Exchange Commission has eight pending proposals to clean up financial markets….

…The Federal Reserve, meanwhile, is asserting authority to review bank compensation policies. There is widespread agreement that many bankers were paid during the boom for spectacular short-term results achieved by taking massive risks that ultimately produced the global crisis.

Keep in mind this is the exact same government agency who kept interest rates too low even whiles trends were predicting the internet bubble in early 2000 and continued that behavior even when the next bubble, housing, was easily spotted.  I’m sure they’ve learned their lesson.

…The Fed is expected in the next few weeks to release for public comment a proposal instructing banks to make sure that compensation reflects risk. For example, if two employees generate the same amount of profits while taking different amounts of risk, regulators would like to see more reward for the less risky approach….

Oh – this ought to be fun.  The same group who can’t be bothered to even mention that their policies might have had a negative effect are now going to be in a position to tell bankers what they can make based upon what a government agency sees as the risk associated with any particular investment.

That assumes the government has the ability to accurately define risks and define compensation.  Dealing with risks only, the government has a poor track record.  The Soviet Union was much weaker than we thought, Iraq was without weapons we all knew was there, and even in the most recent crisis, politicians pushed Fannie & Freddie right up to the edge of the cliff even as people continued to tell them the drop would hurt.

As Nicholas Taleb, author of The Black Swan said when asked if the housing bubble was a black swan (an outlier), replied, “But to me that wasn’t a black swan; it was a white swan. I knew it would happen and I said so.”

What does Mr. Tableb know anyhow?  After all, the esteemed Mr. Greenspan said the low interest rates weren’t the problem and we all know he doesn’t have any conflict of interest in saying so.

This is the government though.  Why would they go through this exercise in certain failure without at least doubling down? (here):

…The SEC also is flexing its muscles. The commission has proposed restrictions on short selling…

Never mind the fact that short selling by itself can’t force a market go down.  Never mind the fact the government had their hands in this every step of the way.  Never mind the fact that un-elected bureaucrats are subverting the representative process of legislating by making sweeping regulatory overhauls with little oversight.  Never mind economic freedom is just as important to the human condition as social freedom.

Yep, that’s the government, telling us, “never mind”.

Some weeks ago, Judge Richard Posner wrote two policy analysis pieces on Harvard Law School Forum on Corporate Governance and Financial Regulations (part 1 & part 2).  They addressed a government report discussing the financial crisis along with legislative solutions.

One of his main points, was that due to the recency of the events,  we likely don’t know all the mechanisms which helped put is into the current mess (from part 1):

The Report is premature in two respects. The first is that it advocates a specific course of treatment for a disease the cause or causes of which have not been determined. Now it is not always necessary to understand the cause of something you don’t like in order to be able to eliminate the effect. If you have typical allergy symptoms you may get complete relief by taking an antihistamine; it is not necessary to find out what you’re allergic to. But generally, and in the case of the current economic crisis, unless the causes of a problem are understood, it will be impossible to come up with a good solution. The causes of the crisis have not been studied systematically, and are not obvious though they are treated as such in the Report. (Remember, the Great Depression of the 1930s ended 68 years ago and economists are still debating its causes.) We need some counterpart to the 9/11 Commission’s investigation of an earlier unforeseen disaster.  The Report asserts without evidence or references that the near collapse of the banking industry last September was due to a combination of folly—a kind of collective madness—on the part of bankers (in part reflected in their compensation practices), of credit-rating agencies, and of consumers (duped into taking on debt, particularly mortgage debt, that they could not afford), and to defects in the regulatory structure. This leaves out many potential causes that other students of the crisis have emphasized….

The Report is premature in a second sense, one illustrated by the proposals (discussed in greater detail in the second part of this two-part article) for limiting the provision of credit to high-risk borrowers. In an economic boom, thrift (restraint in consumption) reduces the amplitude of the business cycle by reducing consumption and increasing savings, savings that can be reallocated to consumption at the bottom of the cycle. Thus thrift makes the peak of the cycle lower and the trough higher. But in the trough of the cycle, thrift, by reducing consumption, retards economic recovery, because the less that people spend on consumption goods the less production there is and therefore the higher the unemployment rate, which by reducing incomes further depresses spending, which further depresses production, and so on. To tighten credit at the bottom of the cycle is therefore bad timing. And while the Report creates the impression that high-risk borrowers are feckless consumers unable to curb their greed for material goods, many high-risk borrowers are small businesses dependent on credit-card debt to finance their business….

Additionally, there should be little fear that businesses and investors are going to make the same set of mistakes before the recovery has even begun in full force (in part 2):

…For a time at least, the world’s central bankers, and the financial industry itself, will be hyper?alert for another housing or credit bubble. The wisdom of delay is confirmed, in my eyes at least, by the proposals in the Report….

What Mr. Posner failed to see (as did I) is that the government would, in less than a microsecond,  decide to continue the same policies which helped cause the current mess.  Reported by WSJ:

WASHINGTON — The Obama administration is close to committing as much as $35 billion to help beleaguered state and local housing agencies continue to provide mortgages to low- and moderate-income families, according to administration officials.

The move would further cement the government’s role in propping up the housing market even as some lawmakers push to curb spending at a time of rising debt.

The effort, which could be announced as early as this week, is aimed at relieving pressure on government-operated housing finance agencies, which have been struggling to find funding amid the downturn….

For those playing the home game, this means we are taking a problem caused by excessive credit and government incentives and trying to fix it by:

1. Preventing the normal contraction that needs to happen by artificially propping up failed business and bad home purchasing decisions.
2. Keep money cheap by keeping interest rates very low.
3. Then, repeat the same process that got you to the recession in the first place by incentivizing the market to buy a commodity (housing) which is still overvalued in some places.

As Einstein was once quoted saying, “The definition of insanity is doing the same thing over and over again, but expecting different results.”  With all due respect to Mr. Einstein, I’m beginning to think that “insanity” is too nice of a moniker as the word connotes misunderstanding due to ignorance or failure to be able to understand.

In this case, I’m not sure what word or phrase will have encompass the idiocy of our government, but I’m thinking this is willful stupidity combined with a big helping of arrogance.

Of course if voters refuse to punish those people responsible, we’ll continue to have the same government.