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You appear to have a sentiment that is roughly equivalent to the "market is right". The problem with this is that I don't think it scales. One person who buys

You appear to have a sentiment that is roughly equivalent to the "market is right". The problem with this is that I don't think it scales. One person who buys a house they can't really afford is not a big deal. Let such a person make that bad decision if this is their inclination is a libertarian attitude. But millions of people make a similarly bad decision affects us all. The market isn't always right. Imbalances can and do occur. The effects can be devastating to nonparticipants. Cartels, monopoly rents, etc. are some other types of bad effects that markets can devolve into.

jerf 15y ago
The market did not create the housing crisis. The government fiddled with the market all to hell, with the Community Reinvestment Act, the regulations surrounding the ratings agencies, Fannie Mae and Freddie Mac's unmarket-like backings of loans, and a hodge-podge of other lesser interventions. When the market was allowed to make decisions about who should get loans, the standards were a lot higher. But it wasn't "right" for people to have to put 20% down and have a very solid credit rating, because it discriminated against poor people (and Democratic voters), so the government fiddled until it produced the result it (thought it) wanted, forcing banks to lower mortgage standards until we eventually worked our way down to no-money down ARMs. (BTW, the claim the government had nothing to do with it is to claim that all the regulation like the CRA and Fannie Mae and anti-discrimination all had absolutely no effect at all, in which one must answer the question, if regulations like that are so ineffectual that you can't lay any responsibility for the current crisis at their feet, then why do you think government regulations are the answer to anything? Either they are effective or they are not, but you can't flip back and forth depending on whether you like the effect or not.) The problem is that people think of "the market" as a fundamental property, but in fact it is a derived property. The reason why the market tended to correctly allocate mortgages prior to the government's heavy-handed decades-long intervention is the incentive structure. Always look at the incentive structure. If my bank is going to issue me a mortgage, and the government leaves them alone, they are going to take a lot of steps to protect themselves, such as setting the requirements for your credit strength very high, and requiring large downpayments, and generally ensuring they aren't going to be left holding the bag when the mortgage falls through. Alternatively, if they're going to sell that risk, the receiving party is going to want the same due diligence. The government interventions basically systematically tore than incentive structure apart, by allowing them to just dump the mortgage off on Fannie Mae/Freddie Mac, by requiring them to make loans that they basically knew would fail but the government held guns to their head to do it, etc. If I had to pick one thing that really enabled the housing crisis, it was the ability to dump mortgages off on the FMs for what were in actuality above-market rates, then for the seller to be free-and-clear of the responsibilities. Other things may have accelerated it, but that structure guaranteed disaster on its own. No, the market isn't "always right", but that's not really the question. Nothing is "always right". The question, which is more likely to be right, the market system or the government system? One of the big reasons I tend libertarian is that I empirically observe that the government almost inevitably creates incredibly broken incentive structures where the market tends to create ones that are much more connected to reality. In this particular case, the "reality" that the market is much more connected to is the question of "will X be able to pay their mortgage back?" I have to use the broad term "reality" when discussing it in general, but it actually comes back down to specifics like this. One much also distinguish between "the market" being broken, and reality being "broken". Yes, mortgage requirements were quite high; that's because in reality it's a huge risk. It turns out the market wasn't broken here, and the efforts to "fix" it were the true brokenness.
- yequalsx 15y ago
  I was only providing an example of how libertarian principles don't always scale. I said nothing about the housing market in the U.S. and I don't know why you bring up the U.S. housing market.
  - jerf 15y ago
    "One person who buys a house they can't really afford is not a big deal. Let such a person make that bad decision if this is their inclination is a libertarian attitude. But millions of people make a similarly bad decision affects us all." I don't think it's exactly a stretch to assume that such a (putatively) topical example was related to current events. Besides, in the process of describing why the crisis wasn't caused by markets, I answered your objection anyhow. When the free market was making the decisions about mortgages, they did in fact make it in a sustainable way. Once the lenders were detached from the consequences of their decisions by the government, that broke. There's no better way to ensure that we don't have a housing crisis than to use those market mechanisms. Note carefully I didn't say "if we use those mechanisms, we'll never have a housing crisis". I said there's no better way. It's basically impossible to completely prevent periodic crises.
    - yequalsx 15y ago
      I did write, "The problem with this is that I don't think it scales." before the quoted line. It was a stretch. Lenders weren't detached from the consequences of their decisions by the government. They were detached from the consequences of their decisions by selling securities based on the loans they made to dupes. That it was done at a massive scale without the dupes properly pricing in the risk caused a meltdown.
      - jerf 15y ago
        The fundamental underlying reason they could sell those securities was that they were exploiting the arbitrage from being able to dump the mortgages off on the FMs, at which point everybody knew they were unrealistically guaranteed by the Federal Government. I would point out that here in 2011, that's no longer a theory or mere rhetoric; it is now historical fact that the mortgages are in fact being covered by the Feds, as manifested by all the bailouts. Check out the FM's current financial situation if you need more proof. Without that risk sink in the system, they would never have been able to fly as far off the handle as they did. The securities were just ways of slicing up the stuff that was broken by the government-created risk sink.
SwellJoe 15y ago
I find it interesting that you use the recent home mortgage crisis as an example of market failure. Libertarians often use it as an example of governmental failure. Markets and governments were involved in the creation and fallout of the crisis...and people on either side want to blame the other. It's actually pretty analogous to the problem Eliezer pointed out about the balance of heredity vs. environment. While the mortgage crisis would not have happened without market forces (+ human greed) and government involvement. The question becomes which of those factors we can alter or remove to make such an occurrence impossible in the future, rather than which factor to blame. From a pragmatic perspective, since we can't remove human greed, the other option is to not implement government programs that make it easier for millions of people who can't afford a house to get a mortgage. So, more government might have prevented the problem, perhaps in the form of education programs for home buyers who only qualified because of the government programs. But, less government could have prevented the problem, as well, since the vast majority of those loans would have never happened without government programs to encourage them. My instincts tell me to go the less expensive route, and let the market decide who can afford a house or not. If a bank knows the government isn't going to bail them out (as would be the case if these loans weren't government-backed), they're going to be more careful about who gets those loans.
- yequalsx 15y ago
  I was only providing an example of how libertarian principles don't always scale. I said nothing about the housing market in the U.S. and I don't know why you bring up the U.S. housing market. From what I've read about libertarianism (the economic principles of libertarianism) it is highly impractical. It seem like a set of principles that work at the local level provided there is plenty of competition. Libertarian principles don't scale at a macro level. Especially in the presence of cartels or monopolies. Or in an environment when risk is being transferred to parties who don't understand the risk that is being transfered to them and when this risk transfer is being done on a truly massive scale.
  - SwellJoe 15y ago
    "One person who buys a house they can't really afford is not a big deal. Let such a person make that bad decision if this is their inclination is a libertarian attitude. But millions of people make a similarly bad decision affects us all." I assumed you were describing a recent real-world scenario where exactly this occurred. What did you have in mind, if not the recent US mortgage crisis? It seems, to me, that real examples are more useful than imagined ones. If we are using imaginary problems, we can come up with all sorts of interesting solutions, but they don't necessarily carry over to real world problems. Thought experiments can be useful tools, but when the results conflict with reality, you have to be willing to adjust and accommodate new data. "Especially in the presence of cartels or monopolies." Which cartels and monopolies do you have in mind? The biggest monopolies and cartels I can think of in the US are those that have government support to protect their monopoly. Phone, cable, power, water, are the most firmly held monopolies (occasionally duopolies) in the US, for instance, and all are protected by government. Toll roads in the northeast are another good example of government-endorsed monopolies (I'm not saying the toll roads are necessarily a bad thing, just that they are solidly a monopoly; you can't really drive from NYC to anywhere without travelling on those toll roads, and they are, by far, the most expensive toll roads I've ever driven on, and I travel full-time in a motorhome, so I've seen a lot of toll roads). Microsoft was frequently called a monopoly for several years, but the market eventually removed those monopolistic powers. Anti-trust actions barely put a dent in their power, and targeted quite small, quite unimportant elements. The market is where the real change came from. Heck, many of the remaining strongholds for Microsoft are in governments, which are unable to move as fast as private organizations. And, a not insignificant amount of Microsoft's power came from having a stranglehold on government schools, offices, etc. I can't think of many other good monopoly examples that aren't government-backed, though I'm sure there are some examples. I'm willing to believe that anti-trust legislation has a place; but I'm also very suspicious of the argument that all government is good government because monopolies and cartels are dangerous, which seems to be the root of your bias against libertarianism or reduced government.
jdietrich 15y ago
It doesn't matter whether the market is right or not. What matters is that the market is. Politicians routinely forget that. Communism's core failure was ignoring the irrepressible nature of market forces. The same applies to our system of capitalism. One of the core factors that drove the credit crisis was ignoring market forces. "Too big to fail" led directly and obviously to recklessness. Bankers knew that they had nothing to lose and everything to gain. In a system where a government explicitly or implicitly guarantees banks, there is little incentive for anyone involved to guard against cataclysmic failures. As we so often do, we privatised gains and nationalised losses. The desire to fix "market imbalances" is only that, a desire. The evidence is that most attempts to fix the market only make things worse. If we merely want to be seen to be doing "the right thing", then it's reasonable to legislate and hope for the best. If we actually want to improve the world, we must recognise that the market is tantamount to a force of nature. Decades of trying to control wildfires led only to fiercer, more devastating fires. It was only when we realised that fires are a natural part of a forest ecosystem that we began to reduce the damage caused. Attempting to prevent any negative outcomes of a free market is similarly futile. We can't control markets. Khruschev and Breshnev couldn't, nor Greenspan or Bernanke. All we can do is nudge it a little, build a firebreak here, drop a bucket there. Until we recognise that, we're doomed to the cycle of boom and bust that has dominated post-industrial economies. People do stuff. You can attempt to change their incentives, but they'll still do whatever makes sense to them. That's the core of libertarian thought. Accept that lack of control, accept that the drug war can't be won, accept abortion and gambling and credit default swaps, then try and work out how best to mitigate the externalities of those things. Legislate based on what is not on what we think ought to be.
- yequalsx 15y ago
  In a truly free market system too big to fail can occur. Bank runs, financial panics and collapses occurred for centuries before governments made explicit or implicit guarantees to banks or other large enterprises. That there wasn't a total collapse of the banking system in 2008 was precisely because of government intervention. Everyone would have withdrawn their funds from banks had it not been for FDIC. Imbalances can't be prevented. What can be prevented is a total collapse and the effects of imbalances can be mitigated. This is one of the main reasons for the modern interventionist view of governments with regard to market regulation. The goal is to prevent millions of small bad decisions ending up adversely affecting the whole country. This is my problem with libertarianism. There is no mechanism for dealing with the scaling issue. Negative externalities are not dealt with.

jerf 15y ago

The market did not create the housing crisis. The government fiddled with the market all to hell, with the Community Reinvestment Act, the regulations surrounding the ratings agencies, Fannie Mae and Freddie Mac's unmarket-like backings of loans, and a hodge-podge of other lesser interventions. When the market was allowed to make decisions about who should get loans, the standards were a lot higher. But it wasn't "right" for people to have to put 20% down and have a very solid credit rating, because it discriminated against poor people (and Democratic voters), so the government fiddled until it produced the result it (thought it) wanted, forcing banks to lower mortgage standards until we eventually worked our way down to no-money down ARMs. (BTW, the claim the government had nothing to do with it is to claim that all the regulation like the CRA and Fannie Mae and anti-discrimination all had absolutely no effect at all, in which one must answer the question, if regulations like that are so ineffectual that you can't lay any responsibility for the current crisis at their feet, then why do you think government regulations are the answer to anything? Either they are effective or they are not, but you can't flip back and forth depending on whether you like the effect or not.) The problem is that people think of "the market" as a fundamental property, but in fact it is a derived property. The reason why the market tended to correctly allocate mortgages prior to the government's heavy-handed decades-long intervention is the incentive structure. Always look at the incentive structure. If my bank is going to issue me a mortgage, and the government leaves them alone, they are going to take a lot of steps to protect themselves, such as setting the requirements for your credit strength very high, and requiring large downpayments, and generally ensuring they aren't going to be left holding the bag when the mortgage falls through. Alternatively, if they're going to sell that risk, the receiving party is going to want the same due diligence. The government interventions basically systematically tore than incentive structure apart, by allowing them to just dump the mortgage off on Fannie Mae/Freddie Mac, by requiring them to make loans that they basically knew would fail but the government held guns to their head to do it, etc. If I had to pick one thing that really enabled the housing crisis, it was the ability to dump mortgages off on the FMs for what were in actuality above-market rates, then for the seller to be free-and-clear of the responsibilities. Other things may have accelerated it, but that structure guaranteed disaster on its own. No, the market isn't "always right", but that's not really the question. Nothing is "always right". The question, which is more likely to be right, the market system or the government system? One of the big reasons I tend libertarian is that I empirically observe that the government almost inevitably creates incredibly broken incentive structures where the market tends to create ones that are much more connected to reality. In this particular case, the "reality" that the market is much more connected to is the question of "will X be able to pay their mortgage back?" I have to use the broad term "reality" when discussing it in general, but it actually comes back down to specifics like this. One much also distinguish between "the market" being broken, and reality being "broken". Yes, mortgage requirements were quite high; that's because in reality it's a huge risk. It turns out the market wasn't broken here, and the efforts to "fix" it were the true brokenness.

yequalsx 15y ago
I was only providing an example of how libertarian principles don't always scale. I said nothing about the housing market in the U.S. and I don't know why you bring up the U.S. housing market.
- jerf 15y ago
  "One person who buys a house they can't really afford is not a big deal. Let such a person make that bad decision if this is their inclination is a libertarian attitude. But millions of people make a similarly bad decision affects us all." I don't think it's exactly a stretch to assume that such a (putatively) topical example was related to current events. Besides, in the process of describing why the crisis wasn't caused by markets, I answered your objection anyhow. When the free market was making the decisions about mortgages, they did in fact make it in a sustainable way. Once the lenders were detached from the consequences of their decisions by the government, that broke. There's no better way to ensure that we don't have a housing crisis than to use those market mechanisms. Note carefully I didn't say "if we use those mechanisms, we'll never have a housing crisis". I said there's no better way. It's basically impossible to completely prevent periodic crises.
  - yequalsx 15y ago
    I did write, "The problem with this is that I don't think it scales." before the quoted line. It was a stretch. Lenders weren't detached from the consequences of their decisions by the government. They were detached from the consequences of their decisions by selling securities based on the loans they made to dupes. That it was done at a massive scale without the dupes properly pricing in the risk caused a meltdown.
    - jerf 15y ago
      The fundamental underlying reason they could sell those securities was that they were exploiting the arbitrage from being able to dump the mortgages off on the FMs, at which point everybody knew they were unrealistically guaranteed by the Federal Government. I would point out that here in 2011, that's no longer a theory or mere rhetoric; it is now historical fact that the mortgages are in fact being covered by the Feds, as manifested by all the bailouts. Check out the FM's current financial situation if you need more proof. Without that risk sink in the system, they would never have been able to fly as far off the handle as they did. The securities were just ways of slicing up the stuff that was broken by the government-created risk sink.

SwellJoe 15y ago

I find it interesting that you use the recent home mortgage crisis as an example of market failure. Libertarians often use it as an example of governmental failure. Markets and governments were involved in the creation and fallout of the crisis...and people on either side want to blame the other. It's actually pretty analogous to the problem Eliezer pointed out about the balance of heredity vs. environment. While the mortgage crisis would not have happened without market forces (+ human greed) and government involvement. The question becomes which of those factors we can alter or remove to make such an occurrence impossible in the future, rather than which factor to blame. From a pragmatic perspective, since we can't remove human greed, the other option is to not implement government programs that make it easier for millions of people who can't afford a house to get a mortgage. So, more government might have prevented the problem, perhaps in the form of education programs for home buyers who only qualified because of the government programs. But, less government could have prevented the problem, as well, since the vast majority of those loans would have never happened without government programs to encourage them. My instincts tell me to go the less expensive route, and let the market decide who can afford a house or not. If a bank knows the government isn't going to bail them out (as would be the case if these loans weren't government-backed), they're going to be more careful about who gets those loans.

yequalsx 15y ago
I was only providing an example of how libertarian principles don't always scale. I said nothing about the housing market in the U.S. and I don't know why you bring up the U.S. housing market. From what I've read about libertarianism (the economic principles of libertarianism) it is highly impractical. It seem like a set of principles that work at the local level provided there is plenty of competition. Libertarian principles don't scale at a macro level. Especially in the presence of cartels or monopolies. Or in an environment when risk is being transferred to parties who don't understand the risk that is being transfered to them and when this risk transfer is being done on a truly massive scale.
- SwellJoe 15y ago
  "One person who buys a house they can't really afford is not a big deal. Let such a person make that bad decision if this is their inclination is a libertarian attitude. But millions of people make a similarly bad decision affects us all." I assumed you were describing a recent real-world scenario where exactly this occurred. What did you have in mind, if not the recent US mortgage crisis? It seems, to me, that real examples are more useful than imagined ones. If we are using imaginary problems, we can come up with all sorts of interesting solutions, but they don't necessarily carry over to real world problems. Thought experiments can be useful tools, but when the results conflict with reality, you have to be willing to adjust and accommodate new data. "Especially in the presence of cartels or monopolies." Which cartels and monopolies do you have in mind? The biggest monopolies and cartels I can think of in the US are those that have government support to protect their monopoly. Phone, cable, power, water, are the most firmly held monopolies (occasionally duopolies) in the US, for instance, and all are protected by government. Toll roads in the northeast are another good example of government-endorsed monopolies (I'm not saying the toll roads are necessarily a bad thing, just that they are solidly a monopoly; you can't really drive from NYC to anywhere without travelling on those toll roads, and they are, by far, the most expensive toll roads I've ever driven on, and I travel full-time in a motorhome, so I've seen a lot of toll roads). Microsoft was frequently called a monopoly for several years, but the market eventually removed those monopolistic powers. Anti-trust actions barely put a dent in their power, and targeted quite small, quite unimportant elements. The market is where the real change came from. Heck, many of the remaining strongholds for Microsoft are in governments, which are unable to move as fast as private organizations. And, a not insignificant amount of Microsoft's power came from having a stranglehold on government schools, offices, etc. I can't think of many other good monopoly examples that aren't government-backed, though I'm sure there are some examples. I'm willing to believe that anti-trust legislation has a place; but I'm also very suspicious of the argument that all government is good government because monopolies and cartels are dangerous, which seems to be the root of your bias against libertarianism or reduced government.

jdietrich 15y ago

It doesn't matter whether the market is right or not. What matters is that the market is. Politicians routinely forget that. Communism's core failure was ignoring the irrepressible nature of market forces. The same applies to our system of capitalism. One of the core factors that drove the credit crisis was ignoring market forces. "Too big to fail" led directly and obviously to recklessness. Bankers knew that they had nothing to lose and everything to gain. In a system where a government explicitly or implicitly guarantees banks, there is little incentive for anyone involved to guard against cataclysmic failures. As we so often do, we privatised gains and nationalised losses. The desire to fix "market imbalances" is only that, a desire. The evidence is that most attempts to fix the market only make things worse. If we merely want to be seen to be doing "the right thing", then it's reasonable to legislate and hope for the best. If we actually want to improve the world, we must recognise that the market is tantamount to a force of nature. Decades of trying to control wildfires led only to fiercer, more devastating fires. It was only when we realised that fires are a natural part of a forest ecosystem that we began to reduce the damage caused. Attempting to prevent any negative outcomes of a free market is similarly futile. We can't control markets. Khruschev and Breshnev couldn't, nor Greenspan or Bernanke. All we can do is nudge it a little, build a firebreak here, drop a bucket there. Until we recognise that, we're doomed to the cycle of boom and bust that has dominated post-industrial economies. People do stuff. You can attempt to change their incentives, but they'll still do whatever makes sense to them. That's the core of libertarian thought. Accept that lack of control, accept that the drug war can't be won, accept abortion and gambling and credit default swaps, then try and work out how best to mitigate the externalities of those things. Legislate based on what is not on what we think ought to be.

yequalsx 15y ago
In a truly free market system too big to fail can occur. Bank runs, financial panics and collapses occurred for centuries before governments made explicit or implicit guarantees to banks or other large enterprises. That there wasn't a total collapse of the banking system in 2008 was precisely because of government intervention. Everyone would have withdrawn their funds from banks had it not been for FDIC. Imbalances can't be prevented. What can be prevented is a total collapse and the effects of imbalances can be mitigated. This is one of the main reasons for the modern interventionist view of governments with regard to market regulation. The goal is to prevent millions of small bad decisions ending up adversely affecting the whole country. This is my problem with libertarianism. There is no mechanism for dealing with the scaling issue. Negative externalities are not dealt with.