Regarding the title of the statute: “Man Controlling Trade” (which happens to be located two blocks from where I work), I think you could title your article (by juxtaposing the words of tthat title) to be: “Trade Controlling Men.” How about a statute of two men facing each other with two Stallions situated between them, with each horse rearing up on its hind legs and each of the horses facing one of the two men. This statute, of course, would have the inscription “Trade Controlling Men.”

http://comedieus.blogspot.com/2009/06/sheldon-richman-le-faux-probleme-de-la.html

“Pourquoi Il n’y a Rien de Tel qu’un Marché Non Régulé

Par Sheldon Richman

Publication: 5 Juin 2009

Le Faux Problème de la Régulation

La plupart des gens croient que le gouvernement doit réguler le marché. La seule alternative à un marché régulé, selon ces derniers, est un marché non régulé. A première vue, cela a du sens. C’est la loi du milieu impossible. Un marché est régulé ou il ne l’est pas.” (french translation)

I am in no way trained in economics. In the end, it seems to me that neither swing of the pendulum is the answer. In fact it is the swing itself, from left to right, from libertarian to socialist, from highly regulated to unregulated that keeps everyone on their toes.

I am thinking today of the group of 400± newly minted MBS’s who have taken a pledge to behave morally in business. It seems silly to me. How can a businessman self handicap and plan to survive. Sure, we all have our limits, but that doesn’t mean we can predict another’s behavior.

More logically, just as we have laws against murder, driving on the wrong side of the road, speeding, selling improperly designed and dangerous goods, we should logically have some rules of behavior in business. The benefit of that is that then businessmen will be able to unleash their ruthless natures most effectively, knowing the limits of acceptable behavior. Of course, as in the 70’s, if the business schools start preaching the social value of ‘greed’, eventually the Phil Gramms and Tom Delays, even Hollywood, will usurp those thoughts for their own gain. Then the Congress acts on our behalf and relaxes regs in all the wrong ways That is what I meant when I referred to a “trend”.

As to the swing of the pendulum- rules will change over time. The Germans have a different attitude about auto speed than we do. Fine. In fact, rules have to change over time or they will be gamed too effectively, or bureaucracies become to entrenched, like in the Japanese banking system.

I completely agree with your comments about the FM’s. But a reasonable level of FDIC insurance doesn’t mean the big investors can ignore the quality of their bank; on the other hand it protects the little saver. That is what is was for.

Now the Fed, that is another matter. I don’t have a clue about that. The argument goes all the way back to Hamilton, of course. My instinct is that it is a kind of a cartel. It the very least it is the banks picking their own regulator. In 1907, Carnegie (I think it was) functioned as a one man Fed. There are times when that function is kinda needed to avoid “the end”, though eventually “the end” will arrive. Is there a better way than having a Fed? Certainly Congress isn’t the answer. They are even less reliable. Perhaps our Supreme Court is a model. Certainly it was formed with many of the same goals of objectively and fairness in mind.

You and I will have to agree to disagree on the need for something to play the role of Fed, I guess, though I am inclined to think that we may not have the best answer. Functionally it is supposed to be no more than a governor- as on a motor- is it not?- a kind of dampener to limit the swings of mad business?

If I may both defend the author and toot my own horn, I wrote a piece on the various ways the government destroyed regulation by the market in the case of the housing crisis last year:

http://cooperationwithoutcoercion.com/2008/10/10/housing-crisis-and-credit-meltdown/

Many people say the housing crisis and subsequent credit meltdown were caused by inadequate regulation: they’re right. In a free market, business behavior is severely regulated by the potential to lose money when bad decisions are made. What the government did was eliminate that regulation by guaranteeing people against losses, thereby encouraging outrageously risky behavior:

(1) Two government-sponsored enterprises, Fannie Mae & Freddie Mac, bought mortgages from banks, eliminating the risk to banks of lending to people with poor credit and inadequate down payments.

(2) An implicit guarantee by the government that it would bail out the FMs (make up your own obscene alternative meaning for the initials), allowed them to borrow at extremely low rates and profit from accumulating TRILLIONS of dollars of debt to acquire mortgages: they were able to borrow amounts equal to FORTY TIMES their net worth.

(3) FDIC insurance has caused depositors to pay no attention to the soundness of the banks where they keep their money. Thus, prudent behavior by banks not only isn’t rewarded, but is actively discouraged, as they make more money by taking on risk and don’t need to fear a loss of confidence when they engage in irresponsible behavior.

(4) Having a central bank (the Fed) with the power to create money in unlimited quantities creates a false sense of security throughout the banking industry, one which will last until a hyperinflation that destroys the buying power of those dollars makes it clear that the government can’t create wealth just by printing it.

The bottom line is that past government interventions have destroyed the regulatory nature of markets, and the current proposed ones only make it worse. We SHOULD regulate bankers and punish bad behavior. By ENDING government intervention.

Actually, I didn’t leave that fact out. Phil and Wendy Gramm (and of course, many many others) were, in effect those very actors.

But of course, they and the (lack of ) regulation they fostered were only possible because of the “trend” of those years. I partially agree with your tenants, but only partially. Bubbles cannot be prevented, I’m betting, but they can be abetted. Prevented for too long they become much worse. For instance, had Bush succeeded in putting our Social Security money into Wall Street, the bubble might have been delayed. The consequences would have been much worse.

On the other hand, had “OTS” had real oversight capability, Indy Bank and WAMU might not have imploded so badly. Similarly, Enron might have been prevented from taking down its 401 owners and the state of California. Madoff could have been discovered much earlier. For that matter, 911 should have been uncovered. These events only occurred because of a purposeful abandonment of “oversight”. But of course oversight is never infallible. It often depends on those in charge! Isaac Newton saved the Bank of Briton. Thank God his motives were good. Similarly, in 1907 our banking system was saved by an individual. I’m betting he understood better than anyone the benefit to himself of that “altruistic” act, but the reciprocal to that problem was that almost no-one understood what was going on in the banking world but him!

The point is that some regulation is absolutely required. I object most to the word being given a negative meaning. The missing ingredient is thinking and debate. I object even more to ideological belief systems like Libertarianism. Look where it got Greenspan- and us- when he substituted that ideology for thinking. I think Libertarians think that their system would be the fairest, but in fact, unfettered Libertarianism more likely leads to a feudal stasis where those who have have, and those who do not don’t- the opposite of Libertarianism, in fact. See Guatemala.

In the end, there is no single answer. Multi party systems force the change that hopes to contain “gaming” and other market behaviors. The only constant that works is change. Perhaps future 401 owners will maintain their accounts more attentively, and maybe more Libertarians will be inspired to distrust their Libertarian neighbors. Both trends would be an improvement. Oh yeah- great wealth breeds great stupidity. Perhaps this is all to the good.

Since your writing is so good and your points so spot-on, I will pick one nit because I have one to pick.

You wrote, “I keep specifying ‘in a free market’ because in a state-regulated economy, market forces are diminished or suppressed.”

But I disagree, and I think so would Mises. One of his most important insights was: not only does government intervention not work, it can’t work because it can’t diminish or suppress the forces of the market. The very reason government interventions in the economy can’t work is that market principles are always and forever acting on everyone and everything in the economy. This includes coercive gangs that are trying to abrogate those principles. Market forces don’t change and they can’t be messed with. Professional criminals can evade, lie about, deny, or cover up the consequences of these market forces, but they’re always acting, no matter the level of freedom in the marketplace.

You’re amazing. Not only do you find excellent shibboleths to deconstruct (ie the long-standing statues and their titles, which represent fallacies that require refutation), you provide long-lasting lessons for people both new to the free-market concepts and those who are familiar with them.

This is an essay that should be shared with as many people as possible. It’s a true classic… Well done!

I wasn’t convincing enough? Besides, there IS no better authority than Bastiat.

You left out a rather important fact. The government, through Fannie, Freddie, and other devices, encouraged the writing of weak loans. It was called \"Affordable Housing Policy.\" Then the government stood in the background winking and saying, \"Don\\\’t worry, banks and investors, we\’ll bail you out if things go wrong. We know you\’re too big to fail.\"

Without that scheme going on, you don\’t get a housing bubble and financial breakdown.

Keep it up, all the best.

What you don’t mention is that the sweet flow of the “unregulated economy” can be disrupted for brief periods of time by lies and stupid forms of deregulation (oops- I guess I meant regulation).

When Phil and Wendy conceived of the mortgage backed security as a cool way of collecting all the new money that the burgeoning worldwide middle class was earning and needing to save, they sold the stupid millions on the idea that an un-appraisable instrument (let’’s call it an apple) would never go down in value. Well, but you are right. In the end the public decided that the apple wasn’t worth $100. Unfortunatley, by then their betters, the Masters of the Unverse who run their 401K’s, etc, had already bought the apple’s for them.

Regulation can be light handed, but it takes thinking. Henry Paulson actually admitted he didn’t understand mortgage backed securities: Real Estate isn’t his specialty! Come on. Even I get them!!

The biggest banks and insurance companies in the world were regulated by the OTS (not sure about the acromin, but at least I admit it). This agency was to be paid by the regulees. The regulees were allowed to pick their regulators!!!!!!

That’s not a regulator. That’s a servant!

Get a grip you ideological ….

A few years back I heard about a survey where Americans were asked what would keep them from becoming an entrepreneur and starting their own business. About 70% of Americans said they felt that the number one issue would be complying with all of the government regulation. Strangely, the American public has demanded this onerous regulation over the years yet cannot see how much it has hurt our economy.

There was an editorial on this website some time back where a young man mused that the costs of complying with regulation were about 10% of our GDP.

Finally, I am one who believes that the EPA has actually hurt the prospect of alternative fuels and the FDA has diminished the quality of healthcare in our country.