Straightening the Record

by G.J. Gardner
3/3/09

This essay is an attempt to clarify some of the current goings-on in the financial news and
markets. The blame for the meltdown of financial markets and the entire economy in general has
been placed upon many alleged culprits. Markets being complex, it is likely that there are
multiple reasons why things are they way they are. There are however, some culprits who are
easy targets and who deserve exoneration.
We should keep in mind that markets are not perfect. Markets are nothing more than people and
their interactions with one another. People are fallible, therefore, markets are fallible. (This is
true also of governments. Although governments have the ability to imprison and murder people
who disagree with them, something few private interests and business firms are able to do.) That
being said, consider the following culprits: laissez faire capitalism, deregulation, and greed.

As George Reisman points out in his article “The Myth That Laissez Faire Is Responsible For
Our Present Crisis”, laissez faire capitalism is a sociopolitical system with a distinct definition.
Specifically it is: a "system of government that upholds the autonomous character of the
economic order, believing that government should intervene as little as possible in the direction
of economic affairs." So when French President Sarkozy and The Nation editor Katrina Vanden
Heuvel say that the crisis is due to laissez faire capitalism or economics, we need to consider the
implications of their statements. There are so many governmental agencies and dictates which
influence the economy that one would be at pains to list them all, there is also the Federal
Register - the rules, proposed rules, and notices of Federal agencies - which averaged around
74,000 pages during the Bush Administration. As should be clear from the dictionary definition,
under laissez faire capitalism there wouldn't even be a Federal Register.

Apparently, the fact that someone somewhere is making money in a way that Sarkozy or Vanden
Heuvel don't like constitutes the existence of "laissez faire". It makes one wonder if we
supposedly have laissez faire currently with 15 cabinet positions and the IRS, the FDIC, the
EPA, FDA, SEC, NLRB, FTC, FCC, OHSA as well as many other agencies which influence and
control the economy - at what point will we NOT have "laissez faire"? Are Sarkozy, Vanden
Heuvel, and their ilk sane? Virtually everything that we use or buy has some governmental
dictate which affects it. The debate over whether such governmental influence and control is
beneficial is another discussion, but to say that such a system is somehow representative of
laissez faire capitalism is dishonest.

Would it make sense to say “Clearly Calvin Coolidge is to blame for the market turbulence we
are now experiencing!” Of course not, Calvin Coolidge hasn’t been alive for quite some time, it
is clearly impossible that he could have anything to do with current market fluctuations.
Similarly, the same reasoning applies to the defamation of laissez faire capitalism during the
current meltdown. It is an incontrovertible truth that nothing even close to laissez faire capitalism
has existed in the United States since the New Deal. The crisis wasn’t caused by laissez faire
capitalism because such a system doesn’t exist in the United States, or in the UK, or in the
European Union, or the other countries which are currently in turmoil. Whoever says that the
current situation is due to laissez faire capitalism is lying; a non-existent sociopolitical system
cannot cause real suffering.

Similarly, many - such as Speaker Nancy Pelosi - have claimed that the meltdown is due to
deregulation of the financial sector. (Which is interesting considering that she voted for the most
recent piece of financial sector deregulation, the 1999 Gramm-Leach-Bliley Act.) Consider the
fact that during the Bush administration, no financial deregulation occurred. Not only did no
relevant deregulation occur during the Bush administration, financial regulation didn’t even stay
static – it dramatically increased. Remember Enron? Due to that company's scandal, congress
passed the bipartisan Sarbanes-Oxley Act of 2002, which President Bush correctly labeled "the
most far-reaching reforms of American business practices since the time of Franklin D.
Roosevelt."

The most recent financial deregulation legislation was the Gramm-Leach-Bliley Act, which
passed in 1999 under Clinton. What that Act did was repeal certain provisions of the Glass-
Steagall Act of 1933. Basically, it allowed different types of banks -"commercial" and
"investment" banks - to offer a wider array of services and to merge. Both President Obama and
Nobel Prize winning economist Paul Krugman say that the 1999 deregulation directly caused the
financial meltdown. President Clinton and Senator Gramm defend their actions. The detractors of
the Gramm-Leach-Bliley Act are able to marshal many statistics and facts to make their case, but
logic is on the side of those who supported deregulation, FactCheck.org has an article that
explains why. The deregulation made it easier for banks to diversify their holdings and to expand
into new markets. Yet the two banks which had the most problems, Bear Stearns and Lehman
Brothers, were ones that were not diversified and had significant exposure to the housing market.
The more diversified banks seem to be surviving (to the extent that any bank is surviving under
the present circumstances). In other words, the banks that did not take advantage of the freedom
afforded them by the 1999 deregulation were the ones that faired worst. So much for the idea that
deregulation caused the meltdown.
(For those interested in an opposing viewpoint, see the Mother Jones article 'It's the
Deregulation, Stupid' which argues that deregulation is the primary culprit of the meltdown.)

All other things being equal (including the deregulation of 1999), had there been no housing
bubble, the "toxic" assets which are now troubling the banks would have had realistic values or
might not have been sold at all. It is also worth noting that the bailout of "toxic" assets, the
Troubled Asset Relief Program (TARP) is not a market-based phenomenon, nor is it connected
with deregulation. TARP is the government intervening in the market, not deregulation or laissez
faire capitalism. Readers who find TARP to be reprehensible should remember to place the
blame for it where it belongs - on the government.

Finally, consider the case of much-maligned 'greed'. Greed often gets a bad rap, conjuring up
pictures of the bonus-receiving AIG employees in the minds of many people. (Never-mind that
they had signed contracts obligating the payment of the bonuses and that it is the government
which is using taxpayer money to pay them.... No, it can never be the government's fault.) Greed
is what makes the world go around. To paraphrase Milton Friedman: Is there a modern society
that doesn't run on greed? Civilization is built on the division of labor and individuals pursuing
their own interests - i.e. greedy people looking to take care of themselves first and foremost.
History has shown that the way societies become wealthy is by allowing people to pursue their
own interests relatively unabated from state control, in a sense, by allowing people to be greedy.
Hoping and praying don't grow food or build shelter or invent things. All of the amenities upon
which our life and happiness rest require a process of thought, effort, and compensation. Of
course people do things selflessly for others. But there are clear limits to this. In order for
someone to donate to charity or otherwise act selflessly, they must first have taken care of
themselves sufficiently for them to have the ability and means to give part of their time or
income. Taking care of oneself and making money is an ethical activity, despite moralists who
claim the contrary.
To summarize the point, Sheldon Richman, of the Foundation for Economic Education recently
mused that "Blaming greed for this is like blaming gravity for a plane crash. There is always
greed. It is constant throughout history. So you can't explain this particular crisis by that. The
question is 'Who set up the environment of incentives that channeled greed, however you define
it, into destructive activities?' "

What motivates people to scapegoat easy targets like deregulation or greed and to disparage a
long deceased sociopolitical system when analyzing the financial situation? Reporters are at least
in theory supposed to be objective and unbiased. But if you hear someone bring up deregulation
or laissez faire as causes of the crisis you can be sure that that reporter/commentator isn't
objective. (Further examination of bias in the news is beyond the scope of this essay.) One could
speculate at length on the motivations of people who twist logic and the facts to associate laissez
faire and deregulation with the current situation. Indeed, John Stossel, in a recent interview
mused:

"This hatred of business - I'm not sure what that's about. I used to think it was envy, that the
college professor is angry that his slightly stupider roommate is making more money than he is
because he's in business. Then you think about the kings and queens of Europe. People didn't
hate them for all their wealth, and their wealth proportionately was vastly greater than now, but
the hated the bourgeoisie. They hated the very people who sold them the things that they needed
to make their lives better. What's that about? My best guess is that it's the intuitive reaction that
the world is a zero-sum game, that if he makes profit off you, you must've lost something. If you
don't study economics, that is how people think. We have ...to explain that free commerce
doesn't work that way, that everybody gains." Source: Balaker, Ted. (2009, April). 'We Have a
Lot of Work to Do'. Reason, Vol 40, No 11.

What did cause the crisis? ...Mortgage-backed securities? ...Collateralized debt obligations?
...Derivatives? ...Credit default swaps? All of these investment vehicles have received some
blame but it is rarely mentioned that all of them existed and were traded prior to the deregulation
of 1999. So obviously it cannot be these investments per se or their very existence which caused
the crisis. They are only "bad" because they were connected to the housing bubble. To say that
MBSs or CDOs or CDSs or Derivatives were the cause of the crisis is to confuse the symptoms
and the disease. In order to determine what caused the meltdown, we must determine the cause
of the housing bubble. Financial markets as complex as they are, significant time and analysis is
needed to understand the boom which is now a bust. What can be said is what didn't cause it.
Laissez faire capitalism didn't; greed didn't. Deregulation seems a tenuous hypothesis at best.

In closing, it should be noted that the point of this essay is not to defend the legacy of President
Bush. He is certainly one of the more despicable figures in a rouges gallery of 'Killers-In-Chief'.
Rather, the goal here has been to clear the air and apply some elementary logic in order to
combat the misinformation that passes for "news" and "analysis" these days. This essay has
examined three accused culprits of the meltdown and found them not guilty. Laissez faire
capitalism, deregulation, and "greed" are easy targets, the actual cause(s) of the crisis are likely
less glamourous.

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