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Did small government policies cause the big crisis?

Ironslave

Ironslave

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Awesome article. What, Bulkboy, what!

http://mises.org/story/3694

As soon as I saw the headline of an August 10 article by financial columnist Peter Cohan, I knew that something was terribly wrong. It reads: "How did the politics of small government lead to big government bailouts?" This is akin to asking, How did the extinction of the elephants lead to Barack Obama's election as president? If you make a claim of the form "A caused B," but A never happened, then you are wasting your time by delving into the historical details of a bogus relationship.

Yet we continue to see one example after another of what suspicious readers may be tempted to view as the Big Lie: that deregulation or other obliging government measures caused the present economic mess. I won't go so far as to characterize this claim as a Big Lie. Although some of its purveyors, acting out of partisan motives, surely know that they are blowing smoke, others may simply suffer from economic ignorance, analytical confusion, or loss of historical memory. In any event, the public is ill-served by commentators who purport to speak with authority about our current economic troubles, yet merely peddle this worse-than-sophomoric tale.

The Cohan article in question consists of so much nonsense that a full critique of it might be enough to compose a student's senior thesis. But the part that interests me right now is the claim that

the idea of small government … helped create the ineffective regulatory agencies which allowed all kinds of questionable practices to thrive in American business, especially in the world of finance. By helping create a record debt bubble, which thrived in an era of weak regulatory oversight, small government nearly ruined the global economy last fall.

So, there you have it in plain English. To repeat: "small government nearly ruined the global economy last fall." Cohan spares us any evidence that we actually had a small government at any time during the past 25 years. I would be especially interested in such evidence, inasmuch as I have written a number of articles and books brimming with evidence that in fact the governments of this country at every level were growing in size, scope, and power during those years.

Like Cohan, those who continually blame insufficient regulation for our present plight offer little or no evidence. They rely instead on the implicit assumption that if only the regulations had been much stricter, the bankers and other business-sector malefactors never would have perpetrated their evil deeds. This faith in the regulators is touching, to be sure, but it is also extremely naïve. We now have — and long have had — miles of regulations on the books and legions of regulators at work in scores of government agencies. What specific power did they lack? And had they been given even greater powers, budgets, and staffs, what enchantment would have transformed these ostensible guardians into smart, dogged champions of the public interest, rather than the time-serving drones and co-conspirators with the regulated firms that they have always been?

Somehow, no matter how many regulations are created and how many regulators are put on the government payroll, when these rules and enforcement agents fail to prevent a disaster, many people's response is to propose that the government write more regulations and hire more regulators. If these advocates of expanded government intervention had been in New Orleans as it was being submerged under Katrina's floodwaters, they no doubt would have proposed that the Corps of Engineers dynamite the remaining levies — to prove that they favored "doing something."

"Ironically," writes Cohan, "another Republican, Ben Bernanke … decided that in the midst of a catastrophic economic collapse … the prescription for the problem was the biggest government in American history." And thank goodness, too, he opines, because owing to all of the wonderful mitigation that the Fed's unprecedented actions have produced to soften and reverse this inexplicable, out-of-blue episode of financial panic and recession, "there is a good chance that historians will look back on Bernanke as the man who saved the world."

I can't speak for all historians, but I can guarantee that no such story will be disseminated under my name. On the contrary, by taking into account how the government and the Fed created necessary conditions for the financial bubble that burst last September — as many competent analysts have already shown — notwithstanding Cohan's disregard of their findings — we quickly appreciate that Bernanke's supposed world-saving would never have been deemed necessary had he and others in high government places not done so much to place the world in jeopardy in the first place.

Never one to linger over a single piece of nonsense when another beckons, Cohan proceeds without transition to the question, "How do we keep this from happening again?" To which his amazing answer is "The most important way is to change how bankers get paid." Oh, sure, that will turn the trick. Never mind the government's countless measures from the 1930s onward to steer money into mortgage loans to borrowers with little likelihood of repaying them. Never mind the massive efforts of the government-sponsored giants Fannie Mae and Freddie Mac to create secondary markets for rotten mortgage-related IOUs galore. Never mind the Fed's pumping up of the real-estate bubble by rapidly expanding credit and holding interest rates at absurdly low levels for years on end. Never mind all of this and a great deal more. Simply change how bankers get paid, and the sun will shine on us again.

"We [by which Cohan seems to mean the government] need to change banker's pay so that they only get rewarded if their risks are profitable," he declares, "and punished if they lose money." Some readers might find this idea appealing, if they don't spend much time thinking it through. In truth, however, the government already plays too large a role: if the government and the Fed did not stand in the background, ready and willing to bail out reckless bankers, the bankers would act a great deal more prudently, as would their boards of directors when deciding how to compensate the managers. Moreover, I venture to remind our financial guru — who is described as the president of a consulting and venture-capital firm, a management teacher at Babson College and the author of eight books — that how bankers get paid lies properly within the domain of the banks' boards of directors. It's really none of my business, or his.

In contrast, how the government and the Fed act is my business because they purport to act on my behalf, and even if they didn't so purport, they still act in many ways that harm me. So I'm entitled to hold them to account for their actions. As long as the Cohans of this world continue to blame private actors and "the idea of small government" for the economic disasters that the government and the Fed produce, however, we have little chance to clarify what can — and should — be done to remedy our plight and preclude serial repetitions of such destructive actions.

Not content with having embraced several stupendously erroneous and misguided ideas, Cohan plows to an equally dim-witted conclusion by declaring that besides setting the compensation of bankers, the government should establish "an independent government agency to create financial statements for companies and money managers." Sure. Let the government keep the accounts. After all, the government has a flawless record of keeping honest accounts and scrupulously avoiding multi-trillion-dollar Ponzi schemes such as Social Security, and pie-in-the-sky promises such as Medicare, which stretches to the limits of the known financial universe.

The Department of Defense, which since 1994 has been required by law to perform an annual financial audit, has yet to perform one. Each year a DoD accounting functionary dutifully testifies before Congress that the department's accounts are in such a mess that its records cannot be audited. Is this the kind of financial-accounting proficiency we want to impose on the private sector? Cohan thinks so.

Got a problem? Just give the government even more power, and our friendly, competent rulers will take care of everything. I shudder to think that columnists may actually get paid for spouting such childish twaddle.
 
R

Ryeland

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Very interesting article presenting some very solid ideas and examples to support them. The flamingly biased rhetoric takes away from the overall educational value of the message to those who would oppose its ideas though. However I guess in today's times of financial ignorance and general public apathy, such inflammatory language may be warranted.

And while the man clearly possesses a decent knowledge of the system and its configuration leading up to the collapse, the author does not supply any data to support his view, the same mistake he criticizes his opponent for.

He also fails to suggest an alternative for "fixing the problem" or preventing it from happening again, or lessening the severity of the inevitable recession to come in the future.

I do, however, agree that the government and the Fed were implicit in the creation of this current financial predicament as much as the general public and financial sector were. This is everyone's fault, not a single group's.
 
Ironslave

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Eh, I don't agree that the biased rhetoric takes away from the article. It's refuting an article and its fairy tale claims of small government, deregulation and what not. I'm not sure what data he could have provided, other than data showing that the government has grown in size, the government's subsidizing fannie & freddie, keeping interest rates low, and there are already boat loads of regulations in place (which are all pretty obvious).

His solution should be pretty self explanatory, shrink government, and let the real free market work to not create the massive booms and busts.
 
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Ryeland

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Eh, I don't agree that the biased rhetoric takes away from the article. It's refuting an article and its fairy tale claims of small government, deregulation and what not. I'm not sure what data he could have provided, other than data showing that the government has grown in size, the government's subsidizing fannie & freddie, keeping interest rates low, and there are already boat loads of regulations in place (which are all pretty obvious).

His solution should be pretty self explanatory, shrink government, and let the real free market work to not create the massive booms and busts.

Biased rhetoric takes away from any logical dissection and rebuttal of any article. If you can thoroughly destroy an opponents without resorting to inflammatory and belittling language you demonstrate a much better argument.

I agree, I am not sure what data the author could provide, but he does criticize his opponent for not supplying data. It would seem logical to supply data when you point that out as a weak point in your opponents piece.

Unfortunately we have very little evidence available to us to show if a truly free market would be free of booms and busts. Due to the cyclic nature of the market and the incredible number of variables to be analyzed. Perhaps the free market would fare better, in all likelihood they would. However the author does not present his solution, or the arguments to support it. Whether it should appear self explanatory it takes zero effort to criticize an opponent and not offer a solution of your own.

Like I said, the author presents some very true and accurate ideas, but falls far short of writing an incredible or truly insightful article due to his use of rhetoric and lack of explanation on how exactly a free market would have prevented this collapse.
 
Ironslave

Ironslave

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I don't think it was meant to be overly thorough, and discuss comprehensive alternatives and what not... it was just to refute some of the garbage in the article mentioned. (he even admittingly said the response could have been much more elaborate). It's an article on Mises, not a peer reviewed review. You're being too harsh.
 
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Ryeland

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I don't think it was meant to be overly thorough, and discuss comprehensive alternatives and what not... it was just to refute some of the garbage in the article mentioned. (he even admittingly said the response could have been much more elaborate). It's an article on Mises, not a peer reviewed review. You're being too harsh.

Perhaps I am, but it doesn't change the use of some poor literary devices that take away from the validity of his message.

As I mentioned in my first post, he brings up some excellent ideas, but his inflammatory language will prevent the people who really need to hear the message in this article from getting behind it. You didn't need to read this article to have your mind opened or expanded IS, other people did. By using the language he did he will have turned those people off. It was all going well until the last three paragraphs, which contain some good stuff, but its hidden behind some very biased wording.

Anyways, thanks for posting the article, it was a good read. Hopefully some people who would disagree with it would try to look past the clearly biased portions.
 
Ironslave

Ironslave

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What inflammatory language? He uses sarcasm in saying things like

"Sure. Let the government keep the accounts. After all, the government has a flawless record of keeping honest accounts and scrupulously avoiding multi-trillion-dollar Ponzi schemes such as Social Security, and pie-in-the-sky promises such as Medicare, which stretches to the limits of the known financial universe."

and

"Got a problem? Just give the government even more power, and our friendly, competent rulers will take care of everything."

..... because that is precisely the kinds of things that people like Bulkboy and others with similar nonsensical views about what happened think is the solution. Sometimes sarcasm is needed to demonstrate how illogical the arguments of those who think that more government involvement would have been the solution are.
 
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Ryeland

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What inflammatory language? He uses sarcasm in saying things like

"scrupulously avoiding multi-trillion-dollar Ponzi schemes such as Social Security, and pie-in-the-sky promises such as Medicare, which stretches to the limits of the known financial universe."

and

"Got a problem? Just give the government even more power, and our friendly, competent rulers will take care of everything."

..... because that is precisely the kinds of things that people like Bulkboy and others with similar nonsensical views about what happened think is the solution. Sometimes sarcasm is needed to demonstrate how illogical the arguments of those who think that more government involvement would have been the solution are.

"Ponzi Scheme" evokes a very negative and visceral reaction from most people. "Limits of the know financial universe" what the hell does that even mean? There is no value in that statement, it adds nothing to the conversation, it is there to evoke a reaction. That is inflammatory language.

Yes and these people are going to respond well to being marginalized and talked down to? They're going to be more receptive to an opposing viewpoint after being belittled and humiliated? They won't get defensive and clam up?

The best way to demonstrate how illogical an argument is, is by responding with pure logic. Not by responding with arrogance and a holier than thou attitude. This author has written this article clearly for people who already share his view point, so why did it need to be written?

If you intend to educate someone it is usually best not to stir up their defensive and illogical emotions by talking down to and belittling them.

I will agree that sometimes drastic measures are needed to make people pay attention, and that sometimes sarcasm and teaching people some humility is a good thing. However this author did no such thing.
 
Ironslave

Ironslave

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"Ponzi Scheme" evokes a very negative and visceral reaction from most people. "Limits of the know financial universe" what the hell does that even mean? There is no value in that statement, it adds nothing to the conversation, it is there to evoke a reaction. That is inflammatory language.

Yes and these people are going to respond well to being marginalized and talked down to? They're going to be more receptive to an opposing viewpoint after being belittled and humiliated? They won't get defensive and clam up?

The best way to demonstrate how illogical an argument is, is by responding with pure logic. Not by responding with arrogance and a holier than thou attitude. This author has written this article clearly for people who already share his view point, so why did it need to be written?

If you intend to educate someone it is usually best not to stir up their defensive and illogical emotions by talking down to and belittling them.

I will agree that sometimes drastic measures are needed to make people pay attention, and that sometimes sarcasm and teaching people some humility is a good thing. However this author did no such thing.

You're being way too dramatic.
 

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