Detailed Abstractions

Over @ Concuring Opinions, Nate Oman has an interesting post about the defenses of a free market (whole thing here):

Broadly speaking, I think that there are three families of arguments that can be made in defense of markets. Most commonly within the legal academy markets are defended on the basis of efficiency….

The second defense of markets is libertarian. This looks a lot of like the efficiency argument but is actually quite different, notwithstanding the fact that libertarians frequently confuse the two. In the libertarian argument what matters is not welfare but freedom. Freedom is taken as a good in and of itself, even if choices might result in reductions of welfare for the chooser….

The third argument is a defense of markets as markets.

Both the efficiency and the libertarian defenses of markets are reductionist in the sense that they see the good of markets in a unitary way. Markets are good because — properly constructed — they move resources around to maximize welfare….

Markets are good because they provide cooperation in the face of disagreement over the definition of the good and “social stability.”…

It’s a very decent article, though as a non-card carrying libertarian, I need to disagree with some of his minor points.  Namely, that libertarians are by group interested in freedom alone.  In fact, libertarians, just like other demographic groups get to the same answers through different paths and all three paths are prevalent in the current party.

For some libertarians, it is an…. intellectual/efficiency argument alone.  They believe markets aren’t necessarily moral or perfect at rationing, but they firmly believe that a free market leads to the best possible solution for the most people.

For me, I take the freedom approach.  To maximize individual welfare means one must maximize individual choices.  This might seem as too moralistic or philosophical for some as to be practical or useful, but it seems logical that reducing one mans’ freedom is antithetical to maximizing welfare.

& to be thoroughish, lots of libertarians are just tired of all the other parties and joined that cool one with that goofy, “Who is Ron Paul” stuff.  In reality, like most organizations, libertarians are not absolutists either way using a combination of thoughts to form their basis for their beliefs, but I digress.

The author continues about the third way:

On this view, traders are not cowardly, greedy, souless parasites (see, e.g., Shylock) constantly tempting the virtuous away from the path of justice with filthy lucre. Rather, commerce encourages courage, honesty, and fidelity. It encourages cooperation rather than predation. It allows people with widely disparate views of the ultimate ends and purposes of life to peacefully cooperate with one another. Commerce rewards the frugal and the farsighted, while punishing the wastrel and the spendthrift…..

But he tells us….

The third, pluralist view of the good of markets gets scant attention…

While this maybe a true statement, but the reality is that all three defenses coexist to form both a cohesive political and philosophical framework (though I do have issues with libertarians on foreign policy).

If we can start with the idea that maximizing welfare includes maximizing freedom, efficiency, freedom, & moral markets work together.

When starting with the paramount of freedom in economics, one also gets into the land of (un)intended consequences and perverted incentives.  Hayek talked about this a great deal – the fact that due to the shear size and complexity of the market, any attempted centralized interference will change incentives and unlikely for the better.  Unlikely, because the “status quo” we all question exists through millions and millions of individual transactions.

For lack of a better term, a collective wisdom emerges, order out of chaos.  An answer, that we might not like, but something for which a centralized system is (highly) unlikely to do better than free individuals.  The result is the most efficient use of resources we can hope to achieve while maintaining the most individual freedoms we can.

What about the morals? Well….it’s not as if we don’t have recent examples to help us out.  Leaving out the current mess of a tax code, take the recent financial crisis.

Predatory lenders?  Sure.  Fraudulent and speculative borrowers? Sure.  The reason why it worked so well?  Government incentives pushed quasi-government agencies to purchase loans without much oversight.

Why no oversight?  No skin in the game.  They couldn’t fail.  The market believed it & they believed it.  & in the end, the government proved them right.  Do the wrong thing, over and over and over and over again until it finally collapses and someone else ends up paying the bill….

So while the author is probably correct that we don’t use a moral market argument much, especially in an atmosphere of language such as “fat-cats”, he’s incorrect that this moral option is a “third” argument.  It is indeed part and parcel of the framework that markets are more efficient, better at maximizing freedom, and yes, even better at incenting moral behavior as well.

More on market morals here

Come on…. we can’t find any good justices to nominate to SCOTUS?  This is what… the third (including the previous administration) uninspired justice nominated in just 5 years.

For such a prestigious and life long appointment, we should expect much better (via Cato here):

Elena Kagan, President Obama’s nominee for the Supreme Court, seemed to shock many people when she dodged questions about the Declaration of Independence during her testimony before the Senate Judiciary Committee…

DA posts here & here

Via Freakanomics here, which will hopefully put to rest the idea that nurses go on strike to “help” patients, from the NBER paper:

…Controlling for hospital-specific heterogeneity, patient demographics and disease severity, the results show that nurses’ strikes increase in-hospital mortality by 19.4% and 30-day readmission by 6.5% for patients admitted during a strike, with little change in patient demographics, disease severity or treatment intensity….

Robert Reich via Salon.com here demonstrates once again how much politics effects his economic analysis.  According to him, this whole economic mess, including a potential backslide can be blamed solely on deregulation:

…starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It increased the cost of public higher education and cut public transportation. It shredded safety nets…

Which he believes is causing greater wage disparities:

…We’re back to the same ominous trend as before the Great Recession: a larger and larger share of total income going to the very top while the vast middle class continues to lose ground….

Because with deregulation, of course, companies can become EVIL:

…Companies were allowed to slash jobs and wages, cut benefits and shift risks to employees (from you-can-count-on-it pensions to do-it-yourself 401(k)s, from good health coverage to soaring premiums and deductibles)….

I submit what Mr. Reich fears is freedom – freedom of business owners to hire and fire as they wish, freedom of employees to change jobs easily (401K allows this, pension does not), just freedom.

Secondarily, you can see in his writing that the only thing the government has ever done wrong, is by not getting involved enough.  He doesn’t mention government meddling, deficit spending, enormous new health care expenses, entirely new federal agencies which more money will be needed, idiotic regulations like a moratorium on all oil drilling due to one company’s failure….

Nope, for Mr. Reich, it’s all because the government hasn’t taken enough control over the little people.

Via Cato here, more news on the Obama Administration’s transparency:

The Social Security’s trustees’ annual report is, by law, supposed to be published by April 1. This year, however, the trustees have postponed its release indefinitely. The program’s financial condition continues to remain hidden from public view — and by many accounts will continue to be so until the end of the fiscal year….

Wonder if Reich views this as an issue?

More bad news for Obama & the Democrats for 2010 elections.  Via The Atlantic here:

Chris Cillizza’s Morning Fix reports new data from Gallup showing that independents now favor a generic Republican candidate for Congress over a generic Democrat by 12 points….

& as is continually the case with this congress, more bad news for freedom.  Via The Hill here:

The 30-second campaign ad could become a thing of the past for third-party groups if the Democrats’ campaign finance legislation becomes law.

Media strategists argue the new disclosure requirements would eat into the majority of their ad time….

& while we’re talking about lack of freedom…. what might Kagan do about this “disclose” act?  Via Reason.com here:

As solicitor general of the United States, Elena Kagan argued in front of the Supreme Court that the federal government had the constitutional authority to ban certain political pamphlets. She also strongly implied that some political books, if they were partisan enough, could also be censored…..

Does is matter that she’s against free political speech?  Unlikely…. via Yahoo News here:

…Kagan’s performance in the Judiciary Committee drew praise from Democrats and compliments even from some critics, putting her on a path to confirmation by the full Senate sometime in July.

“She will be confirmed. I believe she will be confirmed,” said Republican Orrin Hatch, a member of the Judiciary Committee, predicting there would be at least some Republican support…..

& least we forgot, there’s still an oil spill…. which is being screwed up by the same government that is promising to “fix” healthcare….  Via The Heritage Foundation here, all kinds of people are offering help, but we’re still considering it:

In total, there have been 27 countries and 5 international organizations offering boom, dispersants, skimmers, vessels, bird rehabilitation equipment as well expertise. Along with the other important action items for the administration to undertake, accepting international assistance must be a more urgent priority. The Department of State has a chart that lists the equipment and expertise sitting on the sidelines with most of the status orders “under consideration.” Owners of the equipment have been rapid in their response to government queries but the equipment remains idle. It simply needs to be better….

Not to mention the economic killing impact the asinine moratorium is having:

Meanwhile, the Gulf continues to suffer. It’s not just government incompetence when it comes to the environmental cleanup; the administration’s policy decisions are making the economic harm much worse – especially the offshore drilling moratorium. Although the ban was only meant to affect those rigs operating in water 500 feet or deeper, it has led to a de facto ban on shallow water drilling….

Butler said that only one of his four drill rigs are operating; all four were drilling before the spill. Spartan has six contracts that would put his entire fleet back to work, but he can’t get going until the permits come through, he added. The week before last, Butler said he had to lay off 72 employees. Come Tuesday he’ll have to let another 140 go. “That’s 140 families, is how I look at it,” Butler said….

Not only incompetence in the clean-up, idiocy in quickly implemented, but poorly thought out regulations (DA post here), The Atlantic takes all this and poses an interesting moral question here:

In this video from Climate Desk partner Need to Know, Atlantic correspondent and oil expert Lisa Margonelli talks to Jon Meacham about halting drilling in the Gulf. She explains her view that Americans don’t have a right to drive cars and use gasoline unless we’re willing to drill for it in our own backyard….

For good news – research conducted on parents and children in reference to video games demonstrates that most parents actually don’t need government help.  Via The Technology Liberation Front (here):

• 93% of the time parents are present at the time games are purchased or rented
• 64% of parents believe games are a positive part of their children’s lives
• 86% of the time children receive their parents’ permission before purchasing or renting a game
• 48% of parents play computer and video games with their children at least weekly
• 97% of parents report always or sometimes monitoring the games their children play
• 76% of parents believe that the parental controls available in all new video game consoles are useful

It might be scary to those in government who are continuing to try to push more laws concerning how parents raise their children as it discounts the need for those laws, but for us normal folk – it gives us what we see everyday:

Once again, these findings illustrate that parents are parenting!

The high school, which erupted over hurt feelings when some wore flag shirts to school on Cinco De Mayo, and then erupted further when an incompetent management structure got involved has apologized.

The statement given ignores any of the real issues.  Like all political statements, they even pretend something is true that they know isn’t.  Their school & their decisions, are anti-free speech and to pretend otherwise should be seen as the absurdity it is.  He then talks about being “proud” of the students for handling the media coverage…

You mean the ones’ who protested, to get media coverage?

…On Thursday, May 6, about 50 students, many carrying the Mexican flag, walked out of classes. The students told reporters that they thought it was disrespectful for the students to wear the American flag on their shirts while others were celebrating Cinco de Mayo….

First, what the hell were they protesting?  Maybe it’s just me, but if Joe Friday sticks by the facts it seems it went like this:

1. Some students wore American flag t-shirts on a Mexican holiday.
2. Some fragile students complained that they were “hurt” by this.
3. Incompetent management then forces the students to change or go home.

For all intents and purposes, it seems the idiots protesting won the fight.

But yesterday, according to the  statement…. “they (the students) wore purple and white for solidarity”…. so all is well I suppose.

Meanwhile, you still have children who were “taught” in this “teachable” moment that they should never, ever have to be disrespected.  I’m unsure where this belief about respect has come, but I believe it’s a dangerous and intolerant belief.  I seem to recall when respect was earned, not deserved, but I digress.

It seems logically obvious that true freedom is to allow things you won’t/don’t like.  Allowing freedom actually means  (please read carefully you spoiled little brats) people are going to do things you don’t really like and there’s absolutely nothing you can or should do about it.

Additionally, on the plethora of things you should be grown up enough to deal with in a free society, speech by way of t-shirts is the least intrusive and offensive thing I can think of.  Seriously, I have what some would call a pretty dark sense of humor, and the things I can think to wear if I were to purposefully wanted to disrupt Cinco De Mayo…. well, let’s just say while it make me laugh, my imagination can lead me to t-shirts which might actually be cause for a protest (assuming the school allowed it).

In a free country, not only do we not allow the cops to arrest people simply for demonstrating their beliefs, but we also respect freedom in general.  For instance, when some comedian or cartoonist creates something satirical, yet disparaging to the Catholic Church, no one demands protests, no one demands censorship, and no one ever demands death.

Sure, people rightfully offended might debate about it, write about it, might boycott products, but they don’t close schools to protest over being disrespected.  They prefer to get their respect through their actions towards helping others, not through mob scenes.

What’s also buried in here,  is that no one (especially the “Mexican” students) seems to understand the holiday has nothing to do with Mexican independence and its history is actually a shared American/Mexican holiday for a Mexican victory of one battle over the French.  It was a hard fought victory for 4000 barely-trained Mexicans over 8000 well-trained and well-equipped French.  So the holiday was never meant to be “celebrated” exactly, as it was meant to be more like a D-Day remembrance.   (Mexican Independence day is the 16th of September)

Indeed, to be really offensive students could’ve chosen to have worn French flag t-shirts, not American flag t-shirts.

Back to the history:  It was used in early American history, mid-1800s, by Mexicans & Americans in California to tick off the French.  Now, I’m all for doing anything that irritates the French, but that obviously died out over time.  The holiday, then became almost nonexistent.

However, with money to made…. over the past 30 years or so, corporations & a willing populace have changed everything.  The remembrance, which should come from such a bloody, yet surprising victory, was turned into a holiday to sell more Mexican food, beer, and flags;  just like St. Patrick’s day might have one time had something to do with St. Patrick, but now serves only as a reason to drink green beer and buy “Kiss me I’m Irish” stuff.

My point: that looking at this from each angle seems to show the American public should be angry at one thing only.  How high school kids, in a well-funded school system, in one of the richest states in one of the richest countries in the world are so… frustratingly ignorant of their ancestral history and know nothing about even about the basic idea of freedom itself.

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.

In January’s edition of Wired Magazine, they detail an article about rail systems and advocate high speed rail as a solution for congestion.  The problem is identified correctly (here):

…Getting California’s train up and running will be expensive. But doing nothing would cost two to three times more. Why? Currently, gridlocked lanes waste $20 billion in fuel and productivity annually. And it’s only going to get worse. The Golden State is growing — quickly. By 2030, another 12 million people could be calling it home. Without an infrastructure overhaul, drivers can expect a 10 percent congestion increase every year. To accommodate the billion trips between cities that residents and visitors will make annually, the state would need to build 3,000 more miles of freeway lanes, five more commercial airport runways, and 90 more airline departure gates. The price: at least $100 billion. Oh, and all that construction wouldn’t alleviate traffic; it would simply keep pace with it….

The article goes on to detail rail as a solution, showing a brief history of rail in the US, including the really cool technological advancements in rail systems.  The main problem with the idea however, isn’t that new rail systems aren’t cool or that rail couldn’t become much faster and more efficient, the main problem, which they slightly acknowledge, is getting people to use it:

…To be cost-efficient, any high-speed rail system needs an ample supply of riders. San Francisco hopes to deliver them through a new million-square-foot terminal. Dubbed the Transbay Transit Center, it will connect the new rail line with nine regional transportation systems…

And

…No city epitomizes the insane appeal of driving like Los Angeles, whose citizens cling to their steering wheels even as they face the worst congestion in the nation. Will high-speed rail persuade them to give up their autos? Maybe. Ridership on the local rail system has increased to 306,000 on weekdays, up from 265,000 in 2007. A faster, cheaper trip — the high-speed ride between Ontario and LA will save the average commuter at least 85 hours and as much as $6,400 a year in gas, parking, and lost productivity — might pry even the most dedicated motorist out of the driver’s seat….

Looking historically though, they’ve made this argument over and over again and it’s always failed.  Due to constant regulation of the transportation industry, we’ve wasted billions and continue to poor billions more into this mess (from 2007):

Rail transit is a huge waste of money that harms transit riders and mainly benefits a few politically powerful interest groups, such as rail contractors, at the expense of ordinary taxpayers….

Thanks in part to the high cost of rails, transit systems in Atlanta, Baltimore, Buffalo, Chicago, Cleveland, Philadelphia, Pittsburgh, St. Louis, and the San Francisco Bay Area carried fewer riders in 2005 than two decades before….

…Due to financial stresses caused by the high cost of rail transit, San Jose cut its transit service by 20 percent and lost a third of its transit riders.

The mass transit system in Portland, Ore., carries only 7.6 percent of the region’s commuters, down from 9.8 percent before rail construction began.

The subway in Washington, D.C., is wonderful for tourists, but not commuters: Though the region gained more than 100,000 jobs between 1990 and 2000, the transit system lost more than 20,000 daily commuters….

& it fails for the very same reason most centralized planning fails – there is no one-size fits all solution which can magically come from government that will ever be better than what the market can provide.  Over thinking the obvious, that if rail lines could honestly save the average individual 6400 dollar a year, they should be willing to pay 4000 dollars a year to help fund it.

The simple truth is that government inefficiency will only increase the costs of rail overtime, increasing the subsidies and making a large portion of the population fund what a small portion of the population will use.  As Cato notes (here):

….Second [problem with highs peed rail], highway users paid for interstate highways, whereas high-speed rail will be almost entirely subsidized by general taxpayers who will rarely use it….

Why do “smart” people seem to espouse imposed solutions by default?  Well, as with a lot of scientific minded individuals and magazines, the search for solutions to problems becomes an end by itself.   This certainly helps when it comes to innovation – always looking for that next step or next increase in efficiency is extremely valuable ideal which helps many be successful.

Conversely, we also try to decrease known defects, a valuable skill in a fairly closed system, but I think a detriment to larger scale thinking.

Engineers, computer programmers, process engineers, CFOs, IE those in the industries where daily critical thinking tasks ask not only what we can do better, but also attempting to steam line, standardize, and reduce defects through control mechanisms, seem to be more prone than others to view imposed solutions as a solution default.

Indeed, in their lines of work, lots of systems are routinely imposed on clients, employees, and others with typically, minimal involvement from the end user. & often for good reason.  Allowing untrained users to have open access to say a client database would be too risky.  Allowing any employee to spend the company’s money on what they thought was a good idea, would be a huge preventable risk as well.

The difference however between these critical thinking endeavors is that they have somewhat of a closed system.  Sure, market dynamics affects the controls companies can exert on their clients, but the cost benefit analysis for decisions in these closed system will be much more accurate than a similar analysis for the market as a whole.

The idea of imposing these new systems through tax payer funds has a further assumption as well: if the market is currently in state A and many experts believe it should be in state B, that’s because the market has failed.  Inside of that assumption holds that we have the requisite knowledge to take literally billions of individual transactions which led to the creation of the current transportation system and with a few nifty math tricks and a good sales pitch from the experts -  impart a better solution than all those transactions managed to build.

& lastly, but not an inconsequential difference, is a company’s ability to control the results.   One of the keys to any systems update success, will always be in checking the results.

For instance, if I changed process X, hopefully to make the time spent on X lower on average or hoping to reduce defects in products for which process X can affect – I should be able to look back in time after making the changes and ask the question – did my solution work for the problem we attempted to solve?

This doesn’t seem all that radical and certainly seems like something our government could be doing now, but the historic reality is always the same.  Governments seek to grow by expanding power.  Governments by nature move slowly.  Good government is stable and therefore moves more slowly.

This means when the government proposes changes in X process to solve problem Y, they have a known tendency to exaggerate the benefits and obfuscate any attempts to prove that changes in X didn’t affect Y, by constantly shifting goal posts (example of just one, tiny government program employing this strategy  here – 2002):

…This is essentially the strategy that DARE, the country’s leading drug education program, has successfully used to stay in business for nearly two decades. One study after another has found that students who complete DARE (a.k.a. Drug Abuse Resistance Education) are just as likely to use drugs as students who don’t. Yet DARE claims it is constantly revising its curriculum, so any research indicating that it doesn’t work is immediately outdated….

In a classic example of not being able to see the forest for the trees, this default condition of believing in solutions which will be imposed for benefit of others might be well meaning, but still one of the largest logical & philosophical impediments to true freedom.

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.

To me, and indeed historically, that a fear society & freed society are mutually exclusive.

& like all consistent lessons from history, we haven’t seemed to have learned this lesson and seem to be determined to repeat it.

Towards that end, the Wall Street Journal online published two articles on Friday, under the shared title, Undressing the Terror Threat. The first article by Paul Campos & Nate Silver explains correctly:

…The world’s greatest nation seems bent on subjecting itself to a similarly humiliating defeat, by playing a game that could be called Terrorball. The first two rules of Terrorball are:

(1) The game lasts as long as there are terrorists who want to harm Americans; and

(2) If terrorists should manage to kill or injure or seriously frighten any of us, they win.

These rules help explain the otherwise inexplicable wave of hysteria that has swept over our government in the wake of the failed attempt by a rather pathetic aspiring terrorist to blow up a plane on Christmas Day. For two weeks now, this mildly troubling but essentially minor incident has dominated headlines and airwaves, and sent politicians from the president on down scurrying to outdo each other with statements that such incidents are “unacceptable,” and that all sorts of new and better procedures will be implemented to make sure nothing like this ever happens again.

Meanwhile, millions of travelers are being subjected to increasingly pointless and invasive searches and the resultant delays, such as the one that practically shut down Newark Liberty International Airport last week, after a man accidentally walked through the wrong gate, or Tuesday’s incident at a California airport, which closed for hours after a “potentially explosive substance” was found in a traveler’s luggage. (It turned out to be honey.)…

The authors make a very good point here, though I do object to the term “rather pathetic aspiring terrorist”… as I saw on a blog somewhere in retort “What you really need are suicide bombers with experience!”.

Beyond that, they then try to take some statistics too far.  Using murder & suicide rates to show how are fears aren’t lined up with a real assessment of risks, they write:

…The country’s homicide rate is approximately six times higher than that of most other developed nations; we have 15,000 more murders per year than we would if the rate were comparable to that of otherwise similar countries. Americans own around 200 million firearms, which is to say there are nearly as many privately owned guns as there are adults in the country. In addition, there are about 200,000 convicted murderers walking free in America today (there have been more than 600,000 murders in America over the past 30 years, and the average time served for the crime is about 12 years)….

Taking those numbers, they conclude that which doesn’t follow:

…Given these statistics, there is little doubt that banning private gun ownership and making life without parole mandatory for anyone convicted of murder would reduce the homicide rate in America significantly….

& Even though they aren’t advocating such a policy, they basically state that the number of guns in private hands necessarily affects either homicide or suicide rates.

I think this ignores the historical evidence that governments typically ban weapons prior to mass murdering their own citizens, but it also isn’t proven by the numbers they give.  Because regardless of how people kill themselves or others, removing the primary instrument doesn’t necessarily means those actions will halt.  Lastly of course, even that assumes the government has the ability to remove the primary instrument in question, which is highly unlikely.

Either way, overall they use the example that is hysteria over terrorism to show parallels to the war on drugs, traffic accidents, and other risks to conclude:

…What then is to be done? A little intelligence and a few drops of courage remind us that life is full of risk, and that of all the risks we confront in America every day, terrorism is a very minor one. Taking prudent steps to reasonably minimize the tiny threat we face from a few fanatic criminals need not grant them the attention they crave….

The thing is that I agree with the authors’ basic premise, or what seems to be their basic premise, that fear based policies are wrong, even though I disagree with the facts they’ve lined up and think that using terrorism as too narrow an example has severely undermined their case.

First, while it’s certainly true that the gap between objective terrorism threats and hysterical policies seems large, there are valid reasons for that.  They discuss one, which is we need to focus money on preventing mass catastrophes such as a nuclear detonation, but they fail to mention the organizations themselves and how they differ from murder in general.

It’s true, that in any free society, a lone nut, bent on killing others, will have the opportunity to do so and there’s little we can do, while maintaining a free society to prevent that from happening.

However, were terrorism and even gangs, the mob, and other criminal organizations differ is that we have to attack those organizations directly.  Dealing with each instance of terrorism as non-related criminal events is exactly what allows their organizations to gain grounds on operational abilities.  Ignoring the organization therefore, seems to dictate a increase in the likelihood of a major incident.

Outside these specific critiques however, I think our society has become very easily motivated by fears instead of reason and logic.  When we allow victims of drunk driving incidents dictate the driving laws, or say a murdered victim’s family members to seek emotional healing through a policy of revenge, or use those in the most destitute of scenarios to control medical policy… whatever it is, if  we allow fear to take a hold of our government policy, new legislation, or even on a personal level, allowing fear to control our own lives… if we allow this, we should at least be doing so with the knowledge that it’s not conducive to freedom.

Detailed Abstractions has more articles about fear based policies here, here, & here.