How the Right loses

Chris Bowers complains about "the corporate welfare style typical of American government--privatize the profits, socialize the risk".  This is not a left-wing criticism - it's a genuine problem, both for the country (as illustrated by Freddie Mac and Fannie Mae going "under government control") and for the Right (which sets itself up to lose a fight about the size of government with every intervention in industry).

This is how government grows...

  1. Socialize Risk: Government intervenes in an industry to "solve" some apparent and visible problem.  This is done "for the people."
  2. Unintended Consequences: This intervention merely shifts the costs to new areas and sweeps problems under the carpet, where they accumulate.
  3. Blame The Market: Government intervention is not blamed, because the people who support it assume their good intentions could not be responsible for bad things.
  4. Socialize Profit: The Left demands Something Be Done by people with Good Intentions. Politicians comply.  This is done "for the people."

Unfortunately, our political structure comes at this from four different places.

  • Democratic politicians, organizations and activists are happy to go along with Steps 1-4, because, hey, #4 was their goal in the first place.
  • Republican politicians and organizations go along with Steps 1-3, only objecting at Step #4.  By which time it is too late.
  • Business goes along with Step #1, and attempts to use Step #2 to get more of Step #1.
  • Libertarians believe the problem occurs at Step #1.  Once Step #1 is conceded, we've already lost on steps 2-4.  But libertarians and limited government conservatives have relatively little power.

Now, we are at Step #4 - essentially nationalizing Freddie Mac and Fannie Mae.  As Chris Bowers writes, "nationalizing industries ... is the literal definition of socialism and big government".  Of course, he thinks that is a good thing, also writing that "nationaliz[ing] the mortgage industry ... actually seems like a good idea to me."


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The GSE's tried to get both sides of the bread buttered

They wanted to have the ability to pay huge salaries and dividends to shareholders and fund political campaigns while holding themselves out as living under the federal umbrella.

The current model they were working under in present years was probably as bad for the taxpayer as outright state ownership.

The two GSE's should probably be split into about 6 new firms ala the "Baby Bells" and statutory provisions put in place to prevent them from merging with each other. Then none of the firm' would be "too big to fail" but each would be robust enough to properly access the capital markets. 

The new firm's charters must also contain provisions banning the establishment of PACs and limiting their lobbying budgets as a condition of doing business with the FHA.



It seems to me the problem with the group you label "Business" is that nobody self-identifies as "Business".  It's not a community; it's an activity.  The other groups you list are steered by actors who care about the identity and success of the group, wheras in business the actors often seek to subvert and harm those most like them, because that's the competition.

Individuals who do long term harm to their company in order to get short term gains are aware that they will not be around for the harm when it eventually does get there.  They'll be at a different company, or a different industry, or retired.  It's completely against the mindset of politically motivated actors, who at least think they are planning for the long term.

Revolution #4

Uh, so we're "socializing profit" by taking Fannie Mae and Freddie Mac in hand? Huh?

That's not what I read in the WSJ today.

One problem you have, Mr. Henke, is that there are a bunch of other industrialized nations out there that seem to be working pretty well, notwithstanding the fact that they aren't operating according to von Hayek's playbook. And they seem to be doing manifestly better than the ideology-besotted robber barony that is the United States today. We are burdened with a business and managerial class that has lost all contact with reality and has become kleptocratic in its expectations and in the price it exacts for perpetuating its petty commercial imperiums. The notion that a certain class of people should, by virtue of their position as, say, beer distributors, have the right never to see the horizon of their wealth and to wear a third of a million dollars' worth of adornment to a public party is profoundly decadent, dysfunctional, and unsustainable in a world of limited resources.

To sane adherents of the quaint, recently-pronounced-dead persuasion known as social democracy, socializing risk actually makes a hell of a lot of sense. If you're predisposed not to like the notion of national health insurance, how about the FDIC? Got a problem with that this merry morning? And I suppose you must be ideologically opposed to every instance in which a governor declares a national disaster area to bring the federal government in to deal with some act of god or nature that would otherwise utterly beggar and devastate hundreds of thousands or millions of people.

These are just a few reasons why libertarianism is peurile and superficial. Ayn Rand is no match for Edmund Burke, it must be said.

And the Beat Goes On...

I looked at Yahoo! Finance to check on the Freddies.

There was a headline about the auto industry.  Last year an energy bill authorized $25B in loans.  I hadn't know that energy independence can be achieved by government subsidies to noncompetitive US automakers...

But that wasn't the headline.  The headline was that the industry wants $25B ($50B?) more.   "The White House said last week it was talking to members of Congress and the industry about the financing."  Thanks, Dubya!  Btw, what's next year's deficit, you fiscally responsible Harvard MBA Republican you?  $400B?  $500B?


Twenty years ago we were the last best hope of man.  Ten years ago we were the locomotive of the world economy.  Ten years from now, will we be a nuclear-armed banana republic?




RISK is a 4 letter word

This is a good dissection of what has happened in a number of arenas, and not just in finance. We are caught in a vicious cycle of inciting risks by socializing them, then paying for the moral hazard they create, blaming the 'market' for Govt-induced and encouraged misbehaviors, then socializing the whole kit n kaboodle.

We see that Govt gets more an more involved, via FEMA, into emergency/disaster management, to the point where the expectation is for no loss nor misery nor hardship when Nature Unleashes Its Fury. Yet with each giveaway to those suffering from floods, we get more houses build on floodplains, with each hurricane recovery funding, we get more million dollar homes on outer banks sandbars.

"the corporate welfare style typical of American government--privatize the profits, socialize the risk" this was said in the bailout of the Savings and Loans. It has merit, but the demerit here is that it's not as if shareholders getting anything but wipedout in the bailout of bankrupt companies. Who is really helped is the portfolio owners (aka 'bagholders') holding written down risky paper.

I came to this article via Pejman at RedState who observed:

And unless we find a way to break out of that dynamic, we will be left to lather, rinse and repeat the next time a similar situation rolls around.

Yes, this is a slouching towards Socialism. Some thoughts on the mindset components:

1) Step #3 - blaming the market for individual misbehaviors - is the most flawed step in the 'logic' of the process: The free-market economy is blamed, when in fact a free market means market players can choose to incur risk. Dont blame the game for the misbehavior of player. The existence of market risk is not a 'bug' in free market economics, its a feature inherent in freedom. Risk is the flipside of opportunity and the reduction of risk is good free-market behavior that comes from: Being contrarian, being diversified, having good market information, resisting the urge to believe bubble-market pie-in-the-sky.

Some blame deregulation, not noticing that deregulation allowed and allows for market based risk mitigation and has opened up so many opportunities for wealth-creation that have not been abused, and to cite it is a 'throw the baby out with the bathwater' perspective. That said, if we know there is a "risk of excess govt intervention down the road" due to market bubble, we'll have to trade off certain regulations that curtail risk-behavior to avoid more invasive regulation later. In the case of the mortgage market, it would have been so easy to have simple rules like no ARMs and no high-risk/sub-prime loans above 80% LTV, and stricter limit on actual owner-occupancy to get residential (vs commercial) loan programs.  Those simple rules I suspect would have kept housing from bubbling and bursting. But it begs the question: How do we estimate risk of future Govt intervention or market blowups to decide if such market sail-trimming regs are needed?

2) the "Crisis stampede" - Just as markets have bubbles, politics has stampedes, the group-think of "Let's do it now" that gives us bad laws often. We should consider the flaw in the "Dont just stand there, regulate something" attitude of Congress towards problems we face. Govt cannot regulate away risk or failure. All it can do is redistribute the pain. The pain of mortgagee and foreclosed property owners is spread to taxpayers and the next generation.

The best thing we can do as conservatives and Republicans is make sure that we do not create permanent regulations and agencies to address a one-time event. So if there is a dramatic proposal, let it be a 5-year term (like the patriot act was done), so we can discuss 5 years later if the regulation worked or has unintended consequences.

3) Economic risk tolerance as a cultural indicator that can resist the siren call of socialism:

Socialism today exists in America largely as a result of various forms of risk-mitigation after-the-fact, but is done in a way that fails to encourage risk-avoidance. It brings with it problems of free ridership, socializing of unwarranted risk, and regulating activities best left to the market.  The term often used is "moral hazard".

Socialism is not rational, but when it comes to risk, people are often irrational. The gambling industry depends on it. For example, would you rather have 100% chance of $1 million or a 20% chance of $6 million? What is 'rational' there?

Consider: Social Security and Medicare is risk-mitigation. They exist because people had a fear of what might happen to them. The whole concept of "social insurance" should be broken into 2 components - the insurance of individuals and families on behalf of themselves (which should be privatized as much as possible), and the redistribution of wealth for insurance and security of those not able to pay their own way - which should be provided to only those in need. 

We  need a culture that is more tolerant and accepting of the existence of economic risk, at least when it comes to the 85% of us who are not in poverty and in no danger of starving, etc. we need with that a market and financial system more able to weather financial bumps without a 'systemic risk' . We need an economic system with enough 'upside' of prosperity that makes taking on that additional risk worth it - to investors, workers, retirees, etc.

We need to contine to push "ownership society" and "choice" agenda items to help Americans stand on their own. When they do they will resist the calls to stick it to investors. This has to be a growth, opportunity and prosperity (GOP!) message.

4) We pander to groups 'in need' but the real beneficieries are the providers, often corporate, of that need/service. The mindset should be: Help those in hurt and in need, not those who merely have red ink this year but plenty left in the bank account. After all, I am hurting too this year. The Stock market is lower now than when Nancy pelosi and the Democrats took control of Congress. Where do I get a refund? Oh, I dont get one? So why do Wall Street types/insiders get refunds on their bad loans?

There is firm ground here: Yes to help targeted to 'those in need' but no to corporate welfare to 'those in greed'.

5) The false thinking of "Its the End of Civilization" just because one of the periodic financial crises occurs - We heard it in 1992 from Perot. I heard it in the 1980s. It keeps getting recycled. I'm reminded of it even here, with:

"Twenty years ago we were the last best hope of man. " - Really? The NYTimes had assured us back then that Reaganomics was a failure and we would be in hock to the Japanese by now. Peter Peterson assured us in Atlantic Monthly that Social Security would bust us by now.

"Ten years ago we were the locomotive of the world economy.  "  Bring back $10/barrel oil and a lot of things would look better. But US exports are higher than ever.

In truth, we werent that good then and we are arent that bad now. America is still a strong country and a strong economy, the largest and most productive economy in the world. We shouldn't buy into false doomsday preaching.

We shouldn't buy into false

We shouldn't buy into false doomsday preaching.

We shouldn't expend time in building strawmen and knocking them down.