Has Libertarianism Ended?
The recent financial crisis has been a source of new hope for those who despise capitalism. The Democratic presidential candidate has gone out on a limb by declaring that the current crisis is the result of deregulation during the Bush presidency. (No such deregulation took place.) Slate.com's Jacob Weisberg has taken a more cautious approach. According to Weisberg, the current crisis is the result of the lack of new regulations rather than the shredding of old regulations. While Weisberg is not as obviously wrong as Obama, his claims are unsubstantiated, poorly argued, and false.
Weisberg ignores the fact that the Community Reinvestment Act (CRA) pressured banks to ignore supposedly outdated criteria like the size of the mortgage payment relative to income, credit history, savings history and income verification. The new criterion for creditworthiness became "participation in a credit-counseling program."
The failure of Lehman and AIG has prompted the federal government to take swift action to reward one of them. Furthermore, the federal government is moving to put $150 billion into the purchase of preferred stock. Weisberg dismisses the idea that government bailouts will encourage irresponsibility as libertarian paranoia, the type of stuff that one finds only in novels by Ayn Rand. However, the idea of moral hazard is standard textbook economics, with universal acceptance among economists. It is also worth noting that AIG reacted to news of its impending bailout by holding an expensive party at a posh resort. Does Mr. Weisberg need further evidence of the existence of moral hazard?
Weisberg dismisses the idea that Fannie Mae and Freddie Mac contributed to the recent crisis. Weisberg also claims that libertarians deal in theories that do not apply to the real world. The fact of the matter is that libertarian-minded scholars saw the potential for trouble with Fannie Mae and Freddie Mac years ago. Weisberg counters the arguments and evidence of economists with empty assertions. It should further be noted that Fannie Mae and Freddie Mac have lobbied both major political parties aggressively. Those who claim that more regulation will stabilize financial markets ignore the obvious fact that corporations lobby those who write regulations. They ignore the less obvious truth that special interests, corporate or otherwise, hold inherent advantages in politics. It is much easier for narrow special interests to organize lobbying efforts. Proponents of increased regulation dream of a world where the state promotes the public interest, but this runs counter to the nature of large activist governments.
We should also note that the federal government was supposed to have set corporate America straight with the Sarbanes-Oxley Bill. Sarbanes-Oxley supposedly dealt with the most pressing problem in corporate America: accounting fraud. The SEC had its budget doubled, while also gaining greater authority to oversee accounting practices. New laws imposed stiff fines and lengthy prison sentences for corporate malfeasance. Yet legislators in Washington were well behind the curve. New problems emerged in the financial industry, precisely because our regulatory authorities encouraged unsound banking practices.
It is important to note that the federal government is always explicitly trying to solve yesterday's problems while it creates tomorrow's crisis.
We are now hearing the usual chorus of how the government must act to make sure that this type of crisis "never happens again." It won't. Each government-spawned crisis has unique elements because real-world conditions change continuously. This is a major source of government failure: the failure to anticipate future development. Government is always behind the curve in dealing with crises because policy is driven by politics, and politics is driven by public opinion. Ordinary voting citizens are by and large not experts on financial markets. Since most of us are not financial experts and do not have intimate knowledge of financial markets, future financial trends and problems are generally not well understood. Politicians are therefore in a position where they must please those who know the least about the future situation by reacting to high-profile news stories regarding past events only. Worse still, those who do posses intimate knowledge of financial markets have an incentive to capitalize on public policies through their lobbying efforts.
Finally, we should acknowledge the role of the Federal Reserve in the recent crisis. The Fed has financed many booms and busts since it began operating in 1914. Most recently, the Fed financed the housing boom with low interest rates and a steady supply of new credit. The Fed has been a part of every boom-bust crisis since its inception, yet it remains in operation and the prospects of reforming the Fed are remote. This is further indication of government failure. The government has consistently failed to alter or abolish its own defective institutions. Instead, government failed by creating institutions like Fannie Mae and Freddie Mac, which are "too big to let fail." The government has proven susceptible to special interests in writing new regulations. Given that government has failed to enact "effective regulations" in the past, but has instead catered to special interests, why should we believe any politician who now champions regulation in the public interest? Government has proven its inclination to reward private-sector failure with its 85 billion bailout of AIG. Bailouts, reregulation, and tax increases are not the solution; such measures are the root cause of our current crisis.
Weisberg is wrong in all of his allegations against libertarianism. While he correctly recognizes that libertarian arguments derive from sound reasoning, he is amazingly unaware of how closely the current crisis fits with libertarian theory. In contrast, his own arguments lack not only empirical validity, but also logic. The market succeeds by rewarding efficiency with profits and eradicating inefficiency through bankruptcy, as is evident by the bankruptcy of AIG and Lehman. These two companies did create some of their own problems, but government has proven itself to be the cause rather than the solution to such crises. Contrary to what Weisberg claims, the philosophy of freedom has, once again, been proven right. The current financial debacle is cause for concern not only because some Americans have incurred real financial losses, but perhaps more so because we are all in danger of losing personal and economic freedom. The American public must come to recognize the true nature of our current problems if we are to avoid further loss of liberty.
Hayek, F.A. Prices and Production.
McChesney, Fred. Money for Nothing: Politicians, Rent Extraction, and Political Extortion.
Olson, Mancur. The Logic of Collective Action.
Peltzman, Sam. Toward a More General Theory of Regulation.