The Economist's Cookbook

Recipes For A More Free Society

  • "The curious task of economics is to demonstrate to men how little they know about what they imagine they can design."

    - F.A. Hayek

So I've been promising this for a long time. It's about time I got around to it.

I'm looking at the Sept. 29th 2008 version of TIME magazine. Ya know what's on the cover?

Here have a look:


Right off the bat I'm scratching my head. Wall Street sold us out? Really? So if you will flip to page 32 of this issue you'll see a nice picture of our new finance czar Paulson and the article is titled "The Price of Greed". I'm already rolling my eyes. And they start in on "The Roots of the Problem".
Allow me to quote the article:

Warren Buffett, the nation's most successful investor, back in 2003 called these derivatives -- which it turned out almost no one understood -- "Weapons of mass financial destruction." But what did he know? He was a 70-something alarmist ... who had cried wolf for years.

Besides a few prescient financial sages ... who could have seen this coming in the fall of 2006...?
I have an answer for that: The Austrian School of Economics. Rothbard, Hayek, White, Horowitz, and Garrison have all written extensively about the problems created by "easy credit" and a fiat money system that is backed by nothing but the word of a government. I know people are going to try and dismiss me as one of those nutty Gold Standard people, and they are more than welcome to take that shot. The simple fact of the matter is that it is absurdly dangerous to give a central bank the power to print money as it sees fit and then on top of that, you allow them to inject money into the economy in such a way that completely distorts the market for loanable funds.

Please please go to Dr. Roger Garrison's Website here. Download the Time and Money powerpoint presentation for a rundown on how the Federal Reserve's Open Market Operations distort the entire loan market.

So TIME spends paragraphs talking about easy money. But they neglect to clearly state that the easy money is the fault of the Federal Reserve! It's asinine to blame all of this on the greed of wall street. Greed is a constant factor of life. It's like blaming gravity when a plane crashes.

The federal government's over regulation of financial securities might actually have contributed to all this mess as is argued by Frank Partnoy [Hat Tip to Marginal Revolution for this bit]
...[Frank] Partnoy is a former derivatives salesperson, and he clearly suggests that regulation is often the derivative salesman's best friend. Complicated rules encourage complex transactions that seek to conceal or re-shape their true nature. Regulated entities create demand for complex derivatives that substitute proscribed risks for admitted risks. If a new risk is identified and prohibited, the market starts inventing instruments that get around it. There is no end to this process.
So is more regulation the answer? I doubt it. though that's what all the pundits and candidates are saying. This is the fault of wall street and "corporate greed".

So ... let me get this straight. The Federal Reserve sets the stage, the lighting and the soundtrack. The Government writes the script and the stage directions and then when we find out the production sucks you all want to blame the actors who did exactly what they are going do given the incentive structure put in place? That sounds ... odd to me.

So here's the final deal folks. The Austrians called it a long time ago. The Federal Reserve and Government regulation of both the accounting methods and politically motivated BS like the Community Reinvestment Act (CRA) have constructed a house of cards out of the housing market and then the government and the people get really pissed off when it falls apart. And this anger is well justified, the problem is that they are directing their ire at the wrong people!

Now I should note several things at the end of this.
1.) The CRA did not cause the sub-prime meltdown. It did contribute to it, but in a smaller way than many conservative critics want to make it out to be.

2.) Actors on Wall Street did do things that I believe are morally and ethically questionable. Some of these acts include the absurd AA or AAA ratings of some of these collateralized debt obligations (Essentially investments which package portions of mortgages and then are supposed to return a portion of all interest profits) No one really knows what the value of these are right now (my guess given the instability is damn near zero). How can an investment with an unknown value be given a AAA security rating?!

Still despite these things people want to address the smaller more short term issues rather than deal with the long run effects. The gold standard is NOT politically viable in the beltway. The idea that by relaxing regulations we get a more stable system, is not politically popular.

The problem was created by the Fed and government agents ... why look to them for salvation?

Hayek's Knowledge Problem has never been more important.

EDIT: Please please read this article at Reason: What Would Mises Do?: Confessions of a free-market, anti-bailout operator

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3 Response for the "Economist's Cookbook vs. TIME Magazine"

  1. VH says:

    Great post and I agree wholeheartedly with your assessment. Financial manias throughout history have shared one trait: the excessive expansion of credit. Time magazine has turned into a populist rag with little intellectual gravitas over time. You've made an excellent point about regulation--it is usually crafted to serve somebody's interest other than those that it is supposed to "protect." (Read Bruce Yandle's "Bootleggers and Baptists.) I'm afraid that Americans are going to get a band-aid solution to a very complex economic problem. Again.

    I'm linking to this post.

  2. The_Chef says:

    Thanks VH!

  3. Mark says:

    Thanks for the post? Question: What is the appropriate role of regulation (by government) of the financial system (specifically, banks)?