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Unread 7 Aug 2009, 13:05   #45
Tietäjä
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Re: Is Bigger Government Better

Quote:
Originally Posted by Tactitus View Post
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.
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?

Quote:
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.
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?

Quote:
Originally Posted by Miron
The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place.
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".

Quote:
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?
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.
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