Re: Is Bigger Government Better
 

I didn't say they always worked well, I just said they always worked (in the sense that, sooner or later, they always sorted themselves out). There have been recessions for as long as there have been markets.

The question isn't whether markets always work well or are always free of corruption (because they don't and aren't) but whether the alternative is better. Is government any better at sorting out market failures than the market is? Or in somehow preventing those failures in the first place? In my opinion and experience, I'd have to say no.
I was mostly referring to this letter signed by over 200 economists in various universities around the country and sent to Congress in September 2008 in opposition to the bailout then under consideration. It got a bit of attention here in the U.S. but maybe not elsewhere.

I don't know if you consider a professorship of economics as an acceptable credential, but their names and institutions are listed and you can decide for yourself.
I suspect many people may have believed that last year but I think a lot fewer people believe it now that they've seen where the TARP and 'stimulus' monies have gone. 90% of the TARP funds went to bail out the banks and the car companies (read: the United Auto Workers Union). If they don't think that banks + UAW spells "powerful interests" then I've got two car companies and a bridge in Brooklyn I'd like to sell them. ;)

6.5 million Americans have lost their jobs since last September (and more to follow). These are people who did not and will not get a bailout. Paying additional money for "bailout insurance" might be a reasonable option as long as you believe your employer will be bailed out when needed; but as more and more people don't get bailed out then it doesn't look nearly so attractive.

Re: Is Bigger Government Better
 

"It does not reflect all signatories views on subesquent plans or modifications of the bill"

This would lead me to believe that the people whose names appear on the list are against the specific bail out plan presented by the above mentioned government institutions. This does not mean that they'd be against bail outs per principle, or that they'd think that simply not bailing out would be a better option, or that the bail out plan could not be improved through modifications or follow-up actions.

I'll ask again, and I'll try be more specific: could you please point me out an economist with creditentials that will specifically state that the bail outs should have never happened, and bail outs should never happen, because they are "wrong" (because markets clear as per efficient markets model). It's worth mentioning that nobelists like Krugman and Shiller would follow the list to argue that the bail out plan was poor. Yet, they'd probably not argue that it was worse than doing nothing, or, that the whole of the financial sector should be left for free markets to reign.

I doubt any sensible economist nowadays would so trust some pristine efficient market model.

I do. Your citation does not support your case for above reasons. What I'm arguing is, that in the case, bail outs were necessary. I'd even be tempted to support Krugman's case for temporary takeovers could be necessary. The way I see it, you are arguing that markets alone should be left to handle the financial sector unsupervised, and that markets such as that would clear. And that govenrment intervention on markets causes more adverse reactions. This is what I'd like to hear argued.

In fact, in this aspect, I'll quote your own citation. Please, read this part carefully.

"We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan"

I'll ask again, in case you misunderstood. I'm not supporting the Paulson plan vis a vis. But I'm a fan of certain bail outs. I'll quote myself.

The source you cite is a critisism towards the propsed plan by the senate. It in fact underpins, that it does not state that no action is needed: in fact, it specifically states, that bold action is needed. C'mon. Mostly refering to a source that in fact backs up the need for action to ensure the functionality of the financial system in an attempt to argue against the need for such action is a bit of a numb point, especially as citing to it does not really answer the question I presented to you in any way.

Re: Is Bigger Government Better
 

In a further attempt to elaborate why your citation is not a valid argument to back up your claims I've researched a bit of it for you. I picked up the name Robert Lucas from the list, mostly due to his background as a famous macroeconomics/public sector focused economist (Lucas Critique), and also for the fact that he carries some special weight as a nobel laureate. Last but not least, his opinion is easy to track.

This text written by Robert Lucas dates after the last update on your paper. The source link is here. He is discussing the fed's 600 billion dollar actions, under the name "Ben Bernanke is the best stimulus right now".

He admits that it's essentially a bailout.

Then he continues to praise Bernanke's implementation of this $600 billion as "most helpful counter-recession action taken up to date", entailing "important virtues", and being "fast and flexible". I find it hard to believe that Robert Lucas is in principle against bailing out, or in principle against government intervention, when he's so full of praise for Bernanke, the lead fed wizard. Naming Robert Lucas to back up your cause on the subject "bail outs are a mistake and should have never been done" is, under this article written December 23rd 2008 not a really great way to proceed.

I can see Ben go "WTB: Some about-to-sink sub-prime loan packages chopped into bits and pieces in order to disguise their real risk, also WTB: some likely-to-fail derivatives". (on the background, Robert's doing golfclap). Yes, I know what I'm doing: this is different. This is fed. This is monetary policy. It's not "government", and it's wrong to say "taxpayers have to pay it". Because fed is, well, fed. Independent and all.

Let's be honest here.

Read the article, and come back and claim to me that the person you named to support your argument, Robert Lucas, is saying that the bail outs were a bad thing, and that it shouldn't have been done. I'm prepared to find more professors that are putting their word out for actions and against free markets. Clearing up: treasury bailout bad, fed bailout good? Supports your argument, how?

I'll start with another nobel laureate, Paul Krugman, mostly because he's also a very prominent (and loud) figure speaking on the current situation. It, link here, also provides some background on May and Mac you can feed your free market flamebait on. Yes, I know: "Mac & May failed because of their background, which is inherently detrimental".

It's just Krugman though. Take it with a grain of salt, and twist Robert Lucas into whatever you want, too. Oh, and, also, the fact that I'm quoting Lucas for you doesn't mean that I'd agree with his or Bernanke's solutions, I simply did it because you named Lucas as a person that supports your arguments. The fact that someone suggests a bailout plan where Mr. Paulson becomes near divine and does the descisions mostly based on his digestion and is not to be held responsible in any way of his choices doesn't mean that all bailout plans are inherently bad just because this particular one is somewhat retarded.

Re: Is Bigger Government Better
 

Yes, I made it very clear that the letter was in reference to the plan then under consideration. As I said initially, some economists were opposed to specific details of the bailout and some were opposed on more general principles. You've asked for an example of the later, which is reasonable, and I provide that below.
That's interesting, because of the three "fatal pitfalls" listed in the letter, two of them (#1 and #3) would appear to be valid objections to almost any bailout plan. Of course, people sign petitions for different reasons; but I wonder why you think the letter included pitfalls #1 and #3 if everyone who signed it was really only concerned about pitfall #2?
Well OK; I typed 'libertarian economist' into my search engine and started cross-checking the names against those on the letter I cited. The first match I found was Jeffrey Miron from Harvard. I found this article he wrote for CNN. In it, he argues unequivocally against the bailout. I don't see any way to read his comments as to suggest he was holding out for a better bailout.
I hope you're not trying to beg the question. :(

Re: Is Bigger Government Better
 

Great. I'm itching. Why you'd proceed to provide me with a list of names half of which are against your very own argument puzzles me, though. Mostly to waste my time before even producing anyone with an argument to actually support your claim?

So essentially, it took you halfway into the alphabets to find first of these to actually publicly claim that bailouts are inherently evil.

This is the part where we enter a discussion that'll never end: one economist (here, Princeton professor, nobel laureate Paul Krugman) will argue to you that FM/FM didn't actually participate in excess risk taking; another will argue that they did exactly that (here, Harvard senior lecturer Jeffrey Miron). This is part of the academic nature: different views argue with each other.

The problem with claiming that Freddie Mac and Fannie May took excessive risk is that the loans refered to as toxic waste wouldn't have qualified for Mac's or May's portfolio - because their portfolios, unlike such of say Citibank, had strict requirements (this is the Krugman argument; Miron seems to think diagonally opposite: which is right and wrong comes down to a question of perspective). The argument as such is never going to end - but most definitely, if you look at equity-asset rates, and portfolios from early 2000s onwards, you'd probably agree that if anything, FM/FM ran considerably less risk than the investment banks did (hence, Bearn, Lehman, et cetera)?

Why did the investment banks run such a high risk to cause several of them to collapse? They weren't government regulated - in fact, they had very little to do with the act mentioned by Miron. Unlike conventional banks, they weren't "encouraged" to spread their portfolio anywhere. Yet, only a few of them (f.ex GS, as Johnny mentioned) have emerged alive. While Miron can build a case on what was wrong with the act as per regulated banks, it's hard for these. Why do these Wall Street institutions seem to have participated in systematic high short term term profit high long term risk investing? Does their spillover play a role more significant than FM/FM, or, even amplifying the problems of FM/FM, as suggested by Krugman? I'm not completely familiar with all the installations of the CRA, but I'm fairly sure it didn't force anyone to go subprime - which is essentially what Miron agrees should've never have happened.

Why did so many investment "banks" participate in high risk activity, such as subprime mortgage securitization? Because of the high short term profits that would reward their CEOs with high bonuses they'd keep whether the company would sink or not? Because of their responsible long term business plans?

This one I completely agree with: I disagree though, that the reason subprime happened was a government act. Actually, it was relaxation of regulatory laws that allowed banks to enter such activity, which would in case speak for more regulation needed to prevent people from entering such. Securizitation definately did not help: did this happen due to a government act too? Certainly, I agree with Miron that in the case where a government regulation is causing adverse market reaction the regulation needs to be readressed: I disagree though, that the subprime was simply a cause of this instead of reckless private sector behavior. This is why I think the regulatory government (not only in US, but also say, in Iceland) should've taken a heavier hand restricting the amount of subprimes you're okay to pass. The fact that, if I remember correct, the share of subprime borrowers of total borrowers exceeded 50% at a point would imply that this risk taking wasn't probably "just due to a housing act".

I do think simply citing that the league of PhDs that have signed a letter that objects a very particular case of a bailout plan to support a case of "bailouts are always bad" is really, really bad form, and why you want to grasp back into this mudhole you dug for yourself beats me.

Could you please elaborate why the mentioned #1 and #3 should be valid objections to almost any bailout plan? I can't quite grasp it. Seems that Robert Lucas can't either. He seems to think that the Bernanke route is really good. Maybe Mr. Miron can? To be fair, unparalleled prosperity can also equal unparalleled national debt.

(I'm not sure where you got the implication that I'd say people were only concerned over #2; I don't also believe that all bailout plans by default need to have adverse long term effects, but I'd really like to hear why you think so; in fact I just linked you a piece where one of the persons you cited as to back up your claims elaborates why he thinks a bailout plan would have positive long term effects, here I'm refering to the Robert Lucas part).

Of course, people are concerned of #1 and #3 too. #3 is very ambiguous (ironically) to begin with, and seems to mostly be specific to this very plan: I can't see why every possible bail out plan would have adverse effects to the innovative markets which came up with securizitation of subprime mortgages. Krugman's especially concerned about #1 in what he spits out: this is one of the prime reasons he thinks temporary nationalization (ie. ownership over subsidy) would be a better idea, although he does also argue that this would function to remove some of the "heads I win tails you lose" incentive for the owners.

Re: Is Bigger Government Better
 

On the other hand, Jeffrey Miron's CNN article seems to imply that he thinks the market should be left to itself: I'd be curious what he thinks the "we agree with the need for bold action to ensure that the financial system continues to function" (which Miron signed) mentioned in your original link to support your cause of "all bailouts are evil" would include? Bold inaction? Bold abolishing of all financial market regulation?

Re: Is Bigger Government Better
 

Yeah, I said "sooner or later". As in "by giving these assholes big truckloads of cash the economy will become less volatile and you're less likely to get laid off". Not "this money is going to be used to bail out Mom and Pop's Home Depot Store in Bum****, Arkansas". People just want to believe that there are actions that can be taken that can prevent the current recession turning into a decade long 40% unemployment catastrophe. It's not like by not bailing out anything a bunch of bankers and brokers or whatever are actually going to end up destitute and everyone else can be like "serves them right" and just get on with their lives. It's not even like by doing this we'd teach society or the financial sector or some other vague entity the 'errors of their ways'. No, the whole country will just end up looking something like this instead.

Re: Is Bigger Government Better
 

Believe is a nice word. The Onion (yes, Shindler-Akerlof-Animal-Spirits) put it along the lines "every American deserves a false sense of security". Liquidity trap is really what the likes of Lucas and Krugman are fussed about; a lot of people find a liquidity trap a relatively uncomfortable a state. Libertarians call it "slow adaptation".

Re: Is Bigger Government Better
 

the celtic pussycat got colic :(

Re: Is Bigger Government Better
 

This might be the case in the US (as I am not familiar with their education system), but I would have thought that this kind of result could be explained through some form of adverse selection - parents who are most motivated for their children to have the best education would be more likely to prioritise their disposable income into school fees. Thus, these students when they get home have parents who would be more likely to be interested in their child's academic progress (given the financial investment), and beat them with a stick if they're playing PA instead of doing their homework.

(apologies for reply to such an early post, I'm still progressing through the thread).

Re: Is Bigger Government Better
 

I'm an outsider so not completely up to speed with the goings-on in the US political debate, but how is Obama's government already 'ruining the country'?

My limited understanding would suggest that he is getting frustrated at every step by the Congress (particularly the Senate), in the areas of Health, financial services re-regulation, the stimulus package back in January, and I'm sure other things too.

If you have one arm of government trying to do something, and an other arm preventing them from doing it, how are their intentions ruining the country?

Re: Is Bigger Government Better
 

I wouldnt be so sure about this. I must acknowledge that I am somewhat prejudiced as I am now a Commonwealth public servant.

At least in Australia, government departments have strict chains of accountability and responsibility which is enforced through freedom of information law and the principle of responsible government.

Sometimes I wonder that government activity and 'frank and fearless advice' is constrained by those FoI laws: if adverse advice is given to the Government, and then made public, the Department is placed in the position of embarrasing it's Minister, which causes ovbious problems for the relationship of trust between the two.

I was talking about this to friends of mine who work in the private sector (actually, in banks), and they actually envied me because they also are burdened by large amounts of documentation should there ever be civil action by either their clients or their customers, who then have to provide those documents prior to court cases.

Also, just because someone is a public servant, doesnt mean that they are a slacker. I work longer hours than most people in the private sector. Annectodal evidence of other (public & private sector) graduates in Canberra would suggest that private sector grads work essentially the same hours. Whether they are as equally productive in those hours or not is much more difficult to measure.

I think, however, that competition is the key factor. A business has to keep looking to make itself more efficient by cutting costs, innovating, adopting new technology, better targeting its products to their customer's needs, because if they dont then they loose money to their competitors. Governments dont really face this - if you dont like the way a country is being run, you cant just switch your subscription to an alternative government. You have to move countries (at least), and that can have significant cost attached to it.

The way most (western) government agencies are funded through annual budgets is that they have great incentives to spend all of the available funds for their purpose, and no less. There is little incentive to save here, pinch pennies there, make things work smarter elsewhere etc. There are big disencentives for underspending as then the department will loose funding the following year, there are also disencentives for overspending (but this is less of a problem for the department - it may embarrass the Minister during Senate estimates/Question Time however).

Competition really is the key.