The Eternal Death of Libertarianism
Matt Welch | October 20, 2008, 4:53pm
Writing in both Newsweek and Slate, Jacob "In Defense of Government" Weisberg blames the recent financial crisis on, then declares the official death of, libertarianism. Here's how it begins:
A source of mild entertainment amid the financial carnage has been watching libertarians scurry to explain how the financial crisis is the result of too much government intervention, not too little. One line of argument casts as villain the Community Reinvestment Act, which prevents banks from "redlining" minority neighborhoods as not creditworthy. Another theory blames Fannie Mae and Freddie Mac for subsidizing and securitizing mortgages with an implicit government guarantee. An alternate thesis is that past bailouts encouraged investors to behave recklessly in anticipation of a taxpayer rescue. But libertarian apologists fall wildly short of providing any convincing explanation for what went wrong.
Needless to say, this is the last time in the piece that the subjects of Fannie Mae, Freddie Mac, and moral hazard are so much as mentioned. Why? Because Weisberg, despite his world-weary, just-the-facts shtick ("as with any failure, inquest is central to improvement"), has a political need to pin the whole blame for the would-be Great Depression 2.0 on "libertarian ideas." And nothing says "unlibertarian ideas" more than Washington bailouts and the mother of all subprime lenders.
Other subjects absent from Weisberg's self-described "forensic work": The Sarbanes-Oxley Act (which, you know, regulated financial markets, and had some impact on current events), and the thesis-harshing fact that the Bush administration has increased regulatory spending by more than 60 percent in real terms.
Weisberg continues:
Utopians of the right, libertarians are just as convinced [as Marxists were after the fall of communism] that their ideas have yet to be tried, and that they would work beautifully if we could only just have a do-over of human history. Like all true ideologues, they find a way to interpret mounting evidence of error as proof that they were right all along. [...]
The best thing you can say about libertarians is that because their views derive from abstract theory, they tend to be highly principled and rigorous in their logic. Those outside of government at places like the Cato Institute and Reason magazine are just as consistent in their opposition to government bailouts as to the kind of regulation that might have prevented one from being necessary. "Let failed banks fail" is the purist line. This approach would deliver a wonderful lesson in personal responsibility, creating thousands of new jobs in the soup-kitchen and food-pantry industries.
The worst thing you can say about libertarians is that they are intellectually immature, frozen in the worldview many of them absorbed from reading Ayn Rand novels in high school.
There is no space in Weisberg's conception of "libertarians" for people like, for instance, me: Not remotely a utopian, not "of the right," never read an Ayn Rand novel, spent high school playing sports instead of reading political philosophy, don't want to do history over (except for Game 5 of the 1986 ALCS), and don't pine for some presumably awful world where everyone shares my political views. (And, I might add, unlike Weisberg, I don't want to convert my political views into increased state power over fellow citizens who don't happen to agree with me.)
No, I just think that, all things being equal, capitalism is vastly superior to socialism, government is by definition inefficient, and would be much better off focused on essential tasks, rather than, say, nationalizing hundred-billion-dollar chunks of the mortgage industry, or trying to guarantee that asset prices never depreciate. In my world, at least, not all regulation is automatically evil, just ripe for being gamed by the very interests being regulated, and so better when pruned back.
In fact, reason has consistently called for more, not less, regulation of Fannie Mae and Freddie Mac. It certainly wasn't Slate who in February 2004 was sounding the warning gong against the "often unmonitored use" of derivative financial instruments "by government sponsored agencies." A snippet from that Gene Callahan and Greg Kaza article in reason:
While there has been increased legal and social pressure on private corporations to be transparent in their use of derivatives, politicians have shown little interest in similar standards for government derivatives trading.
Some of the biggest users of derivatives are government-sponsored enterprises (GSEs) such as the mortgage-lending institutions Fannie Mae, Ginnie Mae, and Freddie Mac. Doug Noland of PrudentBear.com, a site that advises investors from a bearish perspective, notes, "We have Fannie Mae, Freddie Mac, and the Federal Home Loan Bank system with total holdings [of derivatives] approaching $2.2 trillion and guarantees for another $1.5 trillion of securities."
This year, FM Watch, a coalition of financial service and housing-related organizations dedicated to monitoring GSEs, reported: "One of the GSEs was able to make its RBC [risk-based capital] virtually disappear through use of derivatives and other risk-hedging devices." FM Watch recommends that GSEs' "disclosures should be at least as complete as those provided by other publicly-traded companies and issuers."
The lack of transparency in governmental derivatives trading has resulted in the loss of billions of tax dollars in a string of mishaps spanning a decade.
As reason columnist Veronique de Rugy and Philippe Lacoude recently put it,
[A] critical mistake was made by allowing financial institutions such as Freddie Mac, Fannie Mae, and investment banks to hold significantly smaller capital ratios than commercial banks, while implicitly guaranteeing certain banks' losses.
Weisberg's beef with libertarians stretches back from even before the speculative capital-fueled Internet boom helped create his current job (along with the charity of a man whose wealth Weisberg finds downright immoral). No doubt he, like Thomas Frank and everyone named Naomi (not to mention their ideological cousins on the neoconservative side of the aisle), wants to use a second blip in a quarter century of consistent growth and worldwide poverty-reduction as an excuse to pretend that capitalism is fundamentally flawed, or that libertarians ever had anything to do with George W. Bush.
Is this the New Regime getting ready to round up the first ideological suspects against the wall? I'd suggest something far more comical. There's something almost poignant about the bland Process Liberal center-left, with a financial crisis in its quiver and a super-majority wind at its back, still feeling wobbly enough to attack a set of ideas that are marginal at best to the two-party debate. Why, it's almost as if Weisberg's not confident that Americans will join him in Defending Government!
Hazel Meade | October 20, 2008, 5:59pm | #
Part of the propblem is that people like Weisberg think that if only we regulated more that crises like this wouldn't happen.
What they generally fail to understand is that, like the space shuttle, the engineers can never anticipate everything that will go wrong in a vastly complex system, and attempting to do so merely creates inefficiencies. The result, for the space industry is that the system trends towards a situation where nothing can go wrong, because nothing goes at all. You get multi-billion dollar cost overruns and repeated delays, so that hardly any project ever gets completed (see the space station). Economically, this same effect translates to the gridlock that characterized socialist economies.
By the time something DOES go wrong anyway, because the regulators/safety people aren't omniscient, it's too late to regulate. Nobody will try the same thing again, anyhow. Unless of course you bail them out so they don't suffer the consequences.
The major problem with the "free markets caused this" thesis is that in order to let the free market work, you have to allow for the correction, which we aren't doing. The feedback loop is an essential element of the free market. It's the entire point of why markets work - negative feedback. Of course markets produce bubbles. Of course banks will make bad loans and go bankrupt sometimes. Free market advocates make absolutely no claims that they won't. What we do claim is that if you let the businesses fail that such things will tend not to happen again. Business failures are not market failures. Failure is how inefficiency gets punished. Recessions are not market failures. Recessions are necessary restructurings.
This is exactly the same mindset that leads to the belief that asset prices should never depreciate. Downturns are always bad. Bank failures are necessarily a problem.
A more useful point to address is the "too big to fail" argument. The left actually has a good opportuntiy here to argue for anti-trust on the grounds that company size can be a threat to stability. But instead they are too busy using the bailout as an excuse to argue for nationalizing everything.
But then, they always opt for centralization over decentralization, so I'm hardly surprsed.
Famous Mortimer | October 21, 2008, 2:58am | #
Exhibit A:
"Anyone have the feeling that the Left is trying to use the economic situation to discredit the libertarians now so no one will listen to the libertarian arguments against the coming-up-fast federal bans on smoking, drinking, eating, and generally merriment?"
Honestly, are you so entrenched in this world of Libertarian thought that you believe that mainstream political affiliates are actually devising a plot to counter act a relatively small, inconsequential group of grumpy old men?
Exhibit B:
"The phrase "intellectually immature" is a vague and objectively meaningless statement intended to judge without addressing any specific, measurable criteria."
This is an opinion piece, not a Graduate paper on Libertarian group-think.
How can so many of you sit there with a straight face, and rail against his impression of Libertarians, when you routinely do the same thing on here, day in, and day out? It's some kind Libertarian bizarro world, where the rules of logic are suspended when it comes to Libertarians.
I'm truly shocked at the blatant inconsistency.
There's very little that is REASONable about many of these "sneers."
If these responses prove anything, it's that he has hit a button... forcefully. An appropriate response would be to ruminate about these criticisms, not unconvincingly dismiss them, and revert to stale, ad-hominem attacks.
FYI: It makes you look guilty.
You lazy twats need to change your way of thinking if you ever hope to enact any politcal change, beyond engaging in these stressed out, bored house-wife style pissing matches.
Abhishek Saha | October 21, 2008, 4:00am | #
Look I am a libertarian. And there has been a flood of responses by libertarians today to Weisberg's article.
What do Weisberg’s article and its libertarian rebuttals achieve?
Here’s my radical suggestion: They achieve nothing.
There are some features that are common to every article — by both sides — on this topic I have seen. They cherry-pick facts. They deflate the opponent’s views and inflate their own. Every sentence is intended to further their own cause. In short, they counter, not analyze.
I am not saying that both sides are wrong. I do happen to think my side has the better arguments. In sum though, we are approaching this whole issue as if it were a debate.
Now there is nothing wrong with a debate. The problem though is that we have seen all these points many many times. None of the articles I have quoted above contain any fundamentally new points of view. Basically, there has appeared a flood of arguments since this crisis started but little attempt at unbiased analysis. We are all guilty of this extreme partisanship — yes, I am too.
It’s like we are stuck in different ideological echo-chambers. And there are intelligent people on both sides. And you know what, none of them are changing their minds. Weisberg’s article is not going to convince anyone who is not already on his side. And the libertarians aren’t going to win any Weisberg types — or even any moderately liberal types — over with their responses.
So here’s my humble suggestion to everyone. Analyze rather than attack. It will be difficult, especially when you think that the other side is spouting nonsense. But bite the bullet and address your opponent’s strongest arguments. Do so logically, unbiasedly. Take the best arguments from both sides — if you feel the other side isn’t making its point correctly, try to help them — and the most accurate data available to you and reason as if there was nothing at stake, except rigor and accuracy. Get beyond bumper-sticker sloguns and into details. Ultimately your ideas and arguments must stand on their own. Do not be afraid of the possibility that they may lose, at least temporarily.
There is a word for this approach. It is called intellectual honesty. And it is our best bet at conversion.
joe | October 21, 2008, 1:26pm | #
This neat, little theory, however, doesn't explain how Europe and Asia got suckered into this.
Europe and Asia just bought the securities. There's no ideology behind looking at highly-rating American real estate securities and treating them as you always have.
I suppose I should take some satisfaction, joe, that libertarians are just that much smarter than everyone else, and can so easily fool them. Well, I wouldn't count on your deregulatory gospel, or much else you have to say, having much traction from here on out.
Sure, joe. You go right ahead and maintain the WMD party line on this: they lied to us! We had no idea! I've answered this already. I trust that, were you able to mount a rebuttal, you would have.
What exactly was deregulated and how did it effect this meltdown?
Well, there was the elimination of firewalls between different types of financial institutions that increased the number of loans that got packaged into MBSs, and also created the situation of securities-rating firms having an financial incentive to over-rate MBSs.
But more important than that, in my estimation, was the deregulatory mindset behind such laws as the Commodity Futures Modernization Act of 2000 - you know, the one you couldn't understand except to note that it didn't create a libertarian utopia?
One example is the Act's ban on regulating credit default swaps, which forbade the government from requiring capital standards for the insurance policies on MBSs, leading to massive overleveraging by firms using MBSs and collateral, on the theory that the "insured" MBSs were safer than they actually were.
The problem here is one of regulating not keeping up with new practices, rather than removing regulations on existing practices.
Bill | October 21, 2008, 4:46pm | #
@jW
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@the angry optimist
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@Famous Mortimer
@Zincfinger
@joe
Okay, please bear with me...I sent this email to to Matt Welch, hopefully he doesn't mind me reposting it here, but here's the brunt of it...sorry in advance for the length.
The center piece of Weisberg's contention (if there was anything specific) was "deregulation". Liberals who actually try to name something specific focus on GRAMM-LEACH-BLILEY ACT that changed Glass-Steagall. While the jury is out on that charge Ron Paul himself opposed it and put the following in the congressional record in 1999: http://www.house.gov/paul/congrec/congrec99/cr110899-glb.htm
* Government policy and the increase in securitization are largely responsible for this bubble. In addition to loose monetary policies by the Federal Reserve, government-sponsored enterprises Fannie Mae and Freddie Mac have contributed to the problem. The fourfold increases in their balance sheets from 1997 to 1998 boosted new home borrowings to more than $1.5 trillion in 1998, two-thirds of which were refinances which put an extra $15,000 in the pockets of consumers on average--and reduce risk for individual institutions while increasing risk for the system as a whole.
* The rapidity and severity of changes in economic conditions can affect prospects for individual institutions more greatly than that of the overall economy. The Long Term Capital Management hedge fund is a prime example. New companies start and others fail every day. What is troubling with the hedge fund bailout was the governmental response and the increase in moral hazard.
* This increased indication of the government's eagerness to bail out highly-leveraged, risky and largely unregulated financial institutions bodes ill for the post S. 900 future as far as limiting taxpayer liability is concerned. LTCM isn't even registered in the United States but the Cayman Islands!
* The better alternative is to repeal privacy busting government regulations. The same approach applies to Glass-Steagall and S. 900. Why not just repeal the offending regulation? In the banking committee, I offered an amendment to do just that. My main reasons for voting against this bill are the expansion of the taxpayer liability and the introduction of even more regulations. The entire multi-hundred page S. 900 that reregulates rather than deregulates the financial sector could be replaced with a simple one-page bill.
It's pretty amazing that Ron Paul was this prescient. Wiesberg even cited LTCM as the canary in the gold mine but Paul (again amazingly) addressed it 9 years ago and but cited it as a moral hazard in a corrupt pseudo deregulated system. This argument challenges Wiesberg on his own premise.
I'm sure the liberals would scoff at his suggestion of completely deregulating the system but isn't Paul's statement prima facie evidence that a libertarian (the only one in government) opposed the bill and predicted the hazard accurately? Wiesburg hangs the crisis on the neck of libertarianism so that it may be forever discredited. But wouldn't it be fair for us to now expect him to advocate Ron Paul's position of deregulation now given this evidence? If your going to blame an entire movement for it's supposed deficiency shouldn't the most prominent libertarian figure be given credit. Shouldn't his solutions now be given a fair hearing to the same extent Wiesberg's besmirched his philosphy? If not could it be because Wiesberg "like all true ideologues, [he] finds a way to interpret mounting evidence of error as proof that [he was] right all along."?
The problem I have with Wiesberg and his ilk is not necessarily his argument about regulation (which he doesn't even point to specific prescriptions) but his smearing and discrediting of an entire movement based on some marginal(if any)influence. The Jew argument is a bit over the top but admittedly somewhat apt.
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