Government Logic: If at first you don’t succeed, keep doing the same thing…
September 29, 2009
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Posted by Michael S. Langston
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:
- Preventing the normal contraction that needs to happen by artificially propping up failed business and bad home purchasing decisions.
- Keep money cheap by keeping interest rates very low.
- 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.
Categories: Economics, free market, Legislation, Politics
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Tags: Corporate Governance, Economics, Financial Regulations, genuis, government spending, harvard law school forum, Legislation, Logic, Obama Administration, People/Blogs
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