The Right Questions

Thomas Pynchon said something like: if they get you asking the wrong questions, they don't need to worry about the answers.

With so many aspects of our current economy in trouble, we find ourselves back in the midst of that great debate over government's role in the economy. The problem is, we risk answering the wrong questions. Or, to be more precise, we risk not going nearly far enough in probing what's right and wrong with the American economy.

It is widely agreed that the pendulum has swung too far toward deregulated market fundamentalism. Market failures abound, and enough people have a sense that these failures are connected to their current stressors, from job losses to gas prices, that the status quo is under the microscope, if not on the run.

President Bush, a fierce adherent of YOYO (you're on your own) for the masses, socialism for the rich, is about to sign the new housing bill, with all its market corrections, including a taxpayer funded lifeline to Fannie and Freddie (if they turn out to need a solvency infusion). Hank Paulson, the Treasury Secretary, has been advocating for more market interventions than a rabid Keynesian. The FDIC is spending its weekends arranging takeovers of failed banks, and the Federal Reserve, when they're busy with their own takeover matchmaking, is inventing new government-backed funding tools well beyond anything they've undertaken in the past.

The reaction to all this by the chattering classes, including yours truly, has been interesting as well. Bob Davis et al at the WSJ provide a useful overview, but it's in the opinion writing that you get the real sense of unease caused by all this market intervention. There may be a few true Milton Freidmanites out there ready to let even the alleged "too big to fail" institutions go down, but there are mostly nervous middle-grounders and faux fundamentalists.

The latter talk the anti-interventionist talk, but when the chips are down, they call for a lifeline from the government. I debate them on CNBC with great regularity. They endlessly tout the virtues of unfettered markets, demand endless deregulation, while constantly nudging the Fed to lean one way or the other, insisting that the government to "support the dollar" (see Wall St. Journal oped page), and, most recently, reluctantly agree to the taxpayer funded bail outs.

The nervous middle-grounders, like Roger Lowenstein over at the Times today, agree that we maybe need some new rules, but worry that as long as the government is underwriting risky investors, those investors will escape the market discipline so fundamental to the system.

That sounds reasonable, but doesn't really help anyone draw the line. All economies, advanced or otherwise, will experience market failures, and government will be tapped to offset them, which is as it should be. Lowenstein writes "The government should get out of the business of assuming risk..." But, as Peter Gosselin writes in his must-read new book, High Wire, government at its best has assumed all kinds of risk, from pension risk (Social Security), to market risk (SEC, Federal Reserve, FDIC), to medical risk (Medicare), to environmental risk. Government at its worst has ignored (most recently, market risks) or exacerbating these risks (environmental).

Obviously it's a balancing act, but instead of complaining about vagaries, we need deeper thoughts about what went wrong and what it will take to reset the balance between government and market risk. As I said in this space last week, the time to worry about moral hazard is not the weekend when the bank is failing. It's now, when many in the public, along with policy makers from both sides of the aisle are connecting the dots between failing markets and the economic pain caused by job and wage losses, the housing bust, the energy crunch, and the financial market turmoil.

In testimony last week, I ticked off a bunch of ideas -- not all my own by any means; most of this is conventional wisdom -- to re-regulate financial markets, and these ideas were well received by the members of Congress on the Joint Economic Committee. But, having read a bunch of the analysis, including my own, I have a nagging feeling that we're missing the big picture.

We're arguing about slight moves down a continuum, necessary moves designed to offset the bubble and bust economy of the past few cycles, and inject some overdue oversight needed to ratchet down obvious excesses, like the trashy loan practices in the subprime housing market, or the off-balance-sheet entities held by investment banks. It's a measure to just how limited our debate has become that even these moves bring cries of "French socialism," the end of Reaganism, with accompanying visions of the invisible hand in shackles.

All that any of this re-regulation will do, if it works, is to diminish damaging excess. If it prevents bubbles from inflating, it will keep the macro-economy more on track. These rules might prevent some bank failures and unscrupulous lending; they might provide some transparency that investors need to price risk.

They won't reconnect the living standards of the middle class to the growth in the economy. They won't reverse the slide in health and pension coverage. They won't lift the bargaining power of workers unable to claim their fair share of growth they themselves are creating. They won't get us any closer to the investments we need to make in our children, our environment, our public infrastructure. They won't rebalance the risk shift that underlies much of today's economic insecurity.

They'll make the gears deep inside the machine of capitalism turn more smoothly, and that is a good thing. But the question is, what comes next? Once we get a little common sense back into the system and hopefully shut down the bubble machine that's characterized the last few cycles, will we take the steps to craft the economy we want? Will we do everything we can to ensure the occurrance of that which has eluded too many for too long: broadly shared opportunity and ultimately, prosperity?

These are the questions we should be asking McCain and Obama over the next few months. And the one with the right answers deserves first, your vote, and second, your scrutiny to make sure they walk the walk once they win.

Comments

[livewire19]

Some interesting perspectives:

Jared Bernstein
Senior Economist, Economic Policy Institute
In the short-run, Fannie and Freddie define “too big to fail,” so the bailout is, unfortunately, necessary (note that CBO predicts that the expected cost to taxpayers will be $25b, not chump change but less than I thought). In the long-run, you’ve got to nationalize these companies. It’s the only way to put a stake through the heart of the moral hazard they invoke.

Robert Reich
Former Clinton Labor Secretary
In the short run, the credit and housing crises would become far worse if Fannie or Freddie were allowed to fail. But over the long run, bailing them out sets a dangerous precedent, just as does the Fed bailout of Wall Street investment banks. How can we expect Fannie, Freddie and their Wall Street brethren to manage risks more properly in the future when they know Uncle Sam will come to their aid if they make bad bets? Socialized capitalism -- private gains combined with public losses -- doesn't work.

Jerry Bowyer
Chief Economist, Benchmark Financial Network
It’s bad in the short run, unless you are either a highly paid Fannie executive or currently a staffer for any democratic member of a Congressional banking oversight committee, in other words, a future highly paid Fannie exec. In the long run, this will be a huge transfer of wealth to a corrupt bureaucratic and inefficient bureaucracy from the rest of us tax payers.

[livewire19]

Forgot to post the link to more comments: http://www.cnbc.com/id/25820039

[Soundofthunder]

The attitudes of Mr. Potter are reflected in many posts here. Common people, little people should just "save up", "wait", "live in an apartment". George Bailey's response was classic: is it too much to ask that the people who do the living and dying in this town (this nation) do it in a house of their own? These people's biggest error was thinking that for a second they should pursue the American Dream, that when offered the opportunity to live in a house they dared take it.

You naysayers are advocating what Potter, that scurvy little spider, did, that the common clay of the world best check their dreams and aspirations at the nursery, yours is a lifetime of desperation, so why bother.

To that I say: why bother with YOU.

SOT

[NoMoFearNoMoHate]

what!?

[ChiMan1]

Follow Up Suggestion, for the Uneducated Economically Challenged, . . . . go to Google
type in (the box) Economics 101- Community College, then ckeck back in after completing the class.
Wishing you all the Best!

[RevengeIsNear]

We all need to re-read William Ophuls, "the Politics of Scarcity". We are mistaken that economies will continue to GROW forever. Resources are limited and FINITE, and sustainable approaches are what is needed to keep steady growth and avoid decline. Combine this with John Kenneth Galbraith's ideas, and a responsible welfare state, and then we can develop and grow a middle class for people around the world.

[NoMoFearNoMoHate]

yes but greed isn't which is why Wall St. and Republicans try to convince us that it's good but what they don't realize is that greed is a dead end in and of itself and once we are all fed and housed then everything else is just surplus.

Think. If all of the effort and work put towards toys for the rich were put toward food and shelter we would realize that all we are really doing in this world is playing a gigantic game with our lives.

[ChiMan1]

The Solution is Obvious, We should all be locked up in Padded Cells so we don't hurt ourselves. But, we will demand Cable, and a bucket of Non-Tras-Fat Fried Chicken. Thanks! I feel safe now.

[MourningDude]

Dems were too busy writing up their new slush fund to do what's right for the country in this bill.

Right now Fannie and Freddie are quasi-federal entities. They have stock and stockholders, and multimillionaire boards and CEOs. But if they go into free-fall, the government will be there to back them up with your money. Privatize the profits and socialize the risk.

During the debates, almost every Republican that spoke pointed this out and called for reform. Either make them fully private companies, or fully public companies. Either cut them loose and let them bear the losses, or bring them into the government and stop handing out profits to investors.

Some of the Republicans pointed out that they had been calling for Fannie/Freddie reform for years and years. Some since the 90's. Others since 2003. Bush himself called for reform back in 2003. But nobody did anything about it then, so here we are. And now that we have a crisis, and the government has to step in, we should be fixing it. But no, the Dems kicked the can down the road.

It's irresponsible. The only "reform" they implemented was one extra government regulator. That's fine and dandy, but it doesn't fix the fundamental problem of these companies being "too large to fail", and thus leaving the taxpayers on the hook no matter who is regulating them.

[aofh]

What kinds of reforms were the Repugs calling for? After all, they controlled Congress from 95 through 05.

[Alterion]

Philosophy of the right wing:

Single mother who grew up with absent parents who never had a chance living in the ghetto getting $500 a month from the government for minimal substinance: This is an OUTRAGE!! It was her own bad choices!!

Billionaires with Harvard degrees and MBAs who screw up entire corporations and banks and get bailed out to the tune of $30 billion: NOT THEIR Fault!! Government should bail them out.

This right wing insanity has been an 8 year unstoppable synergy of bad ideas. How far did they want to take it I wonder, before the people wised up? I hope the most left wing congressmen get elected, and I hope they tax the super-rich at 99.99% of their income.

Sad thing - before 2000, I didn't give the rich a second thought (and I was a lot poorer then).

[peterg76]

Why do people always try to decipher the "philosophy of the right wing"? They're liars - there's nothing complicated about it.

[manicallday]

Nobody has explained to me yet why I need to bail anyone out? How about my student loans? I got student loans while you were collecting debt, now I am supposed to bail your sorry ass out? I was actually waiting for these people to foreclose so I could afford a house. Seriously, I was hoping for this day to come. I understood the market and waited for it to swing my way, but I never expected the government to do this. The market will take care of itself and those of us who were waiting for our time are now frustrated.

[MourningDude]

There is a clear conflict of interests here. The problem with just letting everything get foreclosed is that the banks would all fail. And even if the banks somehow survived, the local governments around the country would implode, since property taxes would go into free-fall. The public schools would have to be shut down for lack of funds.

At least one Democrat in Congress stood up and said exactly that. We can't let these banks fail because property taxes would dry up and the schools would all go broke. So if you're a Democrat that has been bashing school funding for years, and the schools are facing a cataclysmic reduction in funding, you have to intervene.

Cities across the country have been faced with similar situations, were school funding is no longer adequate, and they put a necessary tax hike on the ballot, only to have it rejected by the voters. This has been especially true in inner cities and slums, where they need it the most. For all the good intentions people talk about, most of them vote their own wallet at the end of the day.

[NoMoFearNoMoHate]

you think these people in foreclosure are going to be able to pay their property tax... HA!

[Oldtimer]

Spot on. I'm in the property management business in Southern California and I saw first hand
regular homeowners buying a second home as a can't lose investment. There was a feeding frenzy here in California. People were buying property just to flip it for a quick buck and prices
tripled in just seven years.
That's right folks. Prices tripled in just seven years between 1998 and 2005.
Now nobody can afford to buy a house here. The stark fact is prices have to decline by more
than half from their all time peak before we see a reasonable market once again.
yet all I'm seeing is every talking head talking about passing new bailouts, anything to
prop up an inflated market. The time has come for the crash to happen and it will be a good
thing to see for those of us who waited for sanity to return to housing here in California
and places like Arizona, Florida and Nevada.

[NoMoFearNoMoHate]

us too... this is a travesty to those who are intelligent and called the bluff of the ridiculous market and the loan charlatans...

to those who claim the school funding would dry up... suck it up and take an income tax... problem solved... plus you can claim your local income tax as a federal deduction, correct?

[ibivi]

This administration has done nothing for working people. They don't exist in their world. They cater to a tiny percent of the electorate. Their wealthy, powerful friends. You bet it's YOYO!
Good riddance to them. It can't be soon enough.

[Chavez08]

What is slavery?

[c1ee]

I think it's an absolute travesty these so called conservatives failing to practice what they preach. In Australia when Ansett AIrlines went kaputs, there was a nationwide movement to try and get the government to step in and save the company. John Howard resisted that, and said that it's not the government's job to save private companies. Now John Howard is a conservative, but not a neo-con like Bush. I hated the guy, but i respect him highly for being consistent in his convictions. These Republican neo-con chickenhawks have no substance. They are empty suits that will say and do anything to fit their agenda.

[Herrington]

Blame the lenders. Blame the borrowers. Blame the regulators. Blame capitalism. Blame socialism.

All, and none of the above. Capitalism fails for the same reason communism fails, the one percent of humans of any socioeconomic philosophy that are so self centered that it leads to shortsightedness. They destroy themselves and the rest of us in the bargain. And these are the people who will do anything to gain and hold power and money, precisely because they are pathologically self centered.

We make law to protect ourselves from people who criminally disregard the effects of their actions on the people who do behave. Ken Lay was a criminal, Keating, on and on. For every one hundred businessmen or workers, there is one that is a criminal. The worker criminal goes to jail as should the businessman criminal and the penalties should match the damage done.

Deregulation does not make banking work better, it makes it a playground for grifters and con men. Who, incidentally, find their soul mates in unscrupulous borrowers. This crisis was caused by engaging in practices that were expressly forbidden under a half century’s worth of regulation. And as we now see, again, there was a reason for them.

Case closed.

Now, as many of the wealthy are finding out, money is worthless without the economic stability to support its value. Without the markets created by a strong middle class through productivity sharing, the ability to make money is limited, therefore the value of money is limited.

[flatus]

Well said, Herrington. I have always maintained the Communism can not succeed in the long run because there will always be a segment of the population to drag it down due to their greed and sloth.

During this administration we have heard nothing but praise about how wonderfully well the 'tax cuts for the wealthy' were for the economy as it chugged upward. Little did we know that, behind the scenes, predatory lending practices and house flipping were the true economic engines.

Millions, including myself, will be hurt by this, another banking outrage. My retirement plans are now being moved forward in time almost daily as the stock markets continue to fall. If I had another twenty years in me then this could all be tolerable. But as it stands, I need to see perps walking and heads rolling.

[RevengeIsNear]

And I just spoke with my banker cousin in Canada who has educated me more about this whole credit/mortgage crisis. Why is there not more MSM coverage that this credit crisis is due to Bush policies, that allowed rampant wheeling dealing and selling of mortgage notes to boucoup investment firms.... this was not mostly the unsuspecting buyers' fault (except for the greedy flipper developers). Finally a good move buy the Dem congress to save the average joe/josephines!

[kcmookie]

Because if MSM did pick up the story, you would just turn the page. It is a dry read and doesn't have anything to excite the senses. It is a real problem, but people don't want to read about a broad based economic problem caused by government deregulation. By deregulating the lending industry, 1000's of new suckers were born every minute from that point on.

[ibivi]

I don't think that people who want to own homes are suckers.
The lending industry got the changes they wanted so that they could increase their profits. They did away with the usual checks on borrowers and gave loans to people who couldn't really afford the payments because they had low wage jobs. Then they turned around and sold those risky mortgages to investors. I blame the lending industry and the government that gives them whatever they want regardless of what will ultimately happen-collapse.

[liberalloons]

No, its soley the fault of the "unsuspecting buyer." Becuase of their stupid mistake, taxpayers are going to have to bail them out. They bought houses they couldn't afford, so now taxpayers are going to have to cover the rest. thats all their is to it.

[exxman]

That's not true. They bought houses they could afford until the interest rate adjusted up astronomically. The assumption was that the mortgage could be refinanced to a more favorable rate before that occurred. The bubble burst before that could happen. Now they have homes they can no longer afford the payments on who's market values have dropped well below what they owe. So, now we're back to predatory lending practices as the culprit.
All the "unsuspecting buyer" wanted was a piece of the "American Dream", to own their home. That is hardly stupid or a mistake.

[daddysboy]

The economy desired by those that have everything and want it to stay that way has already been carefully crafted. It is a ridiculous notion to even operate with the idea that this class of people wants anything but increased inequity for everyone else. It is the most basic function of a good government to enforce limitations on the ability to capitalize for those already advantaged with money through nothing other than simply having it. Acquiring wealth stops being a skill at a certain level and becomes ubiquitous; it is at this point that government needs to step in and create opportunity for all.

[Overd0g]

Amusing how the banks "unscrupulous lending" is trashed, but long forgotten and forgiven are the millions of unscrupulous borrowers. Funny how Freddie and Fannie, long encouraged to let the "downtrodden" with their crappy loan qualifications get mortgages, now have to be rescued by the same morons that opened the doors for the deadbeats in the first place. Then, naturally rush in the statists, ever looking for opportunities to expand the already unimaginable size and scope of the government, to save the day by protecting the benighted masses from themselves. And so the wheel turns...

[saibotchilizm]

The lenders are the professionals. They made careers out of lending to little people. Who is more at fault, the lifetime mortgage broker or lower-middle-class person who has never before taken out a mortgage?

Your attack on "unscrupulous borrowers" has echoes of Reagan's "Welfare Queen", which was really just an implicit attack on poor black women-- a cheap hit below the belt, harping on the racism and classism pent-up deep inside in America. It's easy political points to attack poor people in general here-- it doesn't matter if they are black, white, Hispanic, or etc.

Your libertarian ideals are spiteful and misguided.

No one in the government is "protecting the benighted masses from themselves," unless the benighted masses are multinational corporations and their fantastically wealthy CEOs. Poor people in general don't receive most of the welfare in this society-- wealthy white males, like (I assume) yourself do.

My blog:
http://www.saibotchilizm.org

[kcmookie]

Oh please. While I am all for people taking personal responsiblity for the decisions they make, mortgages are not the easiest thing in the world to understand, which is the whole point of regulating an industry. While people should apply common sense to their purchases, they should also be able to achieve a fairly clear understanding of what it is they are signing up for, and this industry has been over-run by used car salesmen, I should know, I used to be one. They get paid to "act" like they care about you and want to do whats in your best interest, and the truth is the more they could hide from you regarding what you were signing, the fatter their margin and commission could be. A single percentage point on a 30 yr filxed mortgage could cost you $20-30K over the life of the loan, and the broker only cares that it puts a couple extra thousand in his pocket, sad and disgusting.

[liberalloons]

You can't blame anyone except the morons who bit off more than they could chew. When they sign off, everything they need to know is there, why is it anyone else's problem if they don't quite understand it or not? It's ridicoulus that 5% of homeowners have to be bailed out by everyone else who did everything right. They need to stop blamming everyone else becuase when it comes down to it, its up to the individual whether they go through with the deal or not.

[Alethea]

How is what the banks did in anyone's best interests? Their shortsightedness ended up destroying themselves too...

Sure, people need to be careful with their money and only take on as much debt as they can afford. But that assumes people know how to handle their money wisely, and can remain skeptical when the lenders swearing they'll be fine. That ability only comes with education and/or experience.

Instead, the moral (and fiscally responsible) thing to do, was not lend people money when they can't afford the debt and lie to them saying they can. Face it, the banks made a horrible investment choice and they are reaping the consequences of doing so. People assume that the banks know what they are doing, so when they get lied to, they fall for it. Therefore, the banks should have done what was ultimately in everyone's best interests and just invest wisely. And when they can't figure that out for themselves, then people need someone else to step in and referee. In this case the government in the form of regulations.

You're upset that the masses didn't take responsibility for their actions, the problem is, that no one else did either. That includes the banks themselves, AND the government. And who ultimately suffers (especially when the gov't bails out the banks)? The masses. That's 1 responsible party out of 3 which seems pretty unfair to me.

[Jeffin90019]

Are you familiar with the stock market term of "selling short?" That's what these lenders did. They sold out their industry, collected big paydays, and now they are free to walk away from the mess with the blessing of the Democrats in congress and all their money.