Two Myths

[Michael]

Two myths

I keep seeing two pernicious myths being repeated in the blogosphere. Neither of them has any factual basis, but they get repeated endlessly because these myths just 'feel right' given the unprecedented problems in the financial markets. It is important to debunk these myths because these myths are in danger of becoming 'conventional wisdom' of the mob and that will result in bad policy being enacted based on a wrong analysis of the economy. That's essentially the same game that got us into this mess (believing in myths).

1. The banking/financial crisis proves that classical economic theory is wrong. Apparently classical economic theory has either caused the present mess or was unable to prevent it, or has been unable to address it - and is thus useless for trying to fix the problem.

This is categorically wrong. Followers of classical economic theory have been saying for over two years that the economy was due for a crash. They were asserting that the real estate mortgage market was a huge asset bubble and that the US balance of payments deficit was a big nasty problem waiting to blow up and that the 'invisible hand' of the market was going to slap the US economy upside the head real soon. That is precisely what happened. Bottom line here is that classical economic theory is the only economic theory that has performed well over the last couple of years. It is the only theory that effectively explains what happened in a meaningful way (even Marxist theory fails here).

The fact is, the people running Wall Street, the government, central banks and various banks and financial institutions were attempting to run their businesses on the basis of assuming that classical economic theory was dead and that they were using a 'new' (but not yet defined) economic theory that held that the classical economic business cycle was a thing of the past. It wasn't. They were wrong. Classical economic theory wasn't.

2. The banking/financial crisis proves that market capitalism, laissez-faire capitalism or free market principles are all deeply flawed - or alternatively, the cause of the present debacle.

Again, this is categorically wrong. There is NOTHING that is even remotely 'free market' about the world capital markets, or mortgage securities markets. These are closed and highly regulated markets by defintion.

When one selectively removes regulations on select parts of the system for the benefit of a small number of market players, that is crony capitalism. The question here is, how much does one pay to get a law changed that entirely benefits only you?

Please note: There is no 'free market' in mortgage securities when Fannie Mae was required to buy the mortgage. And when interest on mortgages is tax deductable, that constitutes a 'government subsidy' for mortgages. And there is no 'free market' in credit when interest rates are controled by government sponsored oligopolies (Federal Reserve) or government fiat (Central Banks).

For free markets, or laissez faire or unregulated capitalism to fail, it first requires that we actually utilize these things. We don't. All our financial markets are tightly controlled, regulated and run by oligopolies. We pretend to call this a 'free market' but that's only because the oligopoly is a private one, not a public one.

Fact is, we are in this mess because our elite rulers and their media lapdogs chose to believe in fairy-land ideas about transcending classical economic theory with some 'new' economy. It was all snakeoil (or turtles all the way down!).

[Michael]

Here's a great article that utterly demolishes the assertion about the failure 'laissez faire' economic theory. In short, our present economies - US economy in particular is as far from 'laissez faire' as it is from doctriniare Marxism.

The news media are in the process of creating a great new historical myth. This is the myth that our present financial crisis is the result of economic freedom and laissez-faire capitalism.
...
The mentality displayed in these statements is so completely and utterly at odds with the actual meaning of laissez faire that it would be capable of describing the economic policy of the old Soviet Union as one of laissez faire in its last decades. By its logic, that is how it would have to describe the policy of Brezhnev and his successors of allowing workers on collective farms to cultivate plots of land of up to one acre in size on their own account and sell the produce in farmers' markets in Soviet cities. According to the logic of the media, that too would be "laissez faire" — at least compared to the time of Stalin.

Source (http://www.mises.org/story/3165)

As always, it is in times of crisis that the agents of ideology will be most active in trying to frame the crisis (usually fraudulently) in such a way as to justify the application of their pet ideological solutions (the same one that they've been offering in response to every policy question for decades of course).

We saw this after 9/11 when the neoconservatives railroaded the American people to 'buy-in' on their radical neocon agenda that had nothing to do with the reality of 9/11.

There is great danger that the same thing will happen here. By mis-diagnosing the problem, there is a great probability the 'mis-diagnosis' will be used to launch some new ideological agenda that has no relation to the financial crisis.

One can see this in all the talk about the 'need' for a new type of financial regulations for the 21st century.

Fact is, good old 20th century financial regulations were plenty sufficient to prevent this kind of massive fraud and confidence game. However, one would actually have to enforce the existing laws on the books and close the loopholes that the agents of capital have found so easy to purchase from our politicians.

As I've pointed out previously, every regulatory tool needed to prevent every aspect of the present financial crisis still exists on the books and/or has only recently been recinded (circa late 1990s) in order to enable the present financial problem.

And I really want to stress here that it has been Democrats in office that have been the primary enablers of the present debacle on Wall Street. Bush's Administration didn't cause this mess - they just let it roll (and chose not use the regulatory powers at their disposal). The regulatory loopholes needed to make it all happen were a product of the Clinton Administration - with Larry Summers as the point man.

New regulations are not required and probably are more dangerous than the problems they "allege" to address. The old regulations are just fine. All we need to do is actually apply them (that's truly radical).

[Greendruid]

This idea of myth production on this scale is eerily reminiscent of 1984. We're now at war with Oceania, or is it Eastasia? I am reminded of our countryman McLuhen who quite aptly pointed out "The medium is the message". I honestly think the vast majority of people are unable to make judgements of whether these statements are true or false because they are addicted to receiving tele-information.

For good or evil, this medium is able to transmit the opinions of anyone powerful enough to control it. The information is not vetted for content, it is simply broadcast. People lack the knowledge that falsifies statements and so, the statement, no matter how true or false, fills the void of knowledge that they are scrambling to fill to give explanation to this situation - to their clients, to their electorate, to their families, to themselves, to life.

People, as I often point out in my classes, are ultimately lazy and this is a human universal. We want a one-liner to spit out. We want a summary statistic that rolls all of these issues into one succinct, neat, little ball that we can lob over to the other side of the court in what is ultimately a grooming exercise. Unfortunately, we often don't care what's inside that ball, whether it's one colour or another, represents us in a particular way or explodes when it lands. As long as we have something to retort with this allows us to fire off the satisfying neuron that quells our urge to say something ... anything. The more we chatter on about the same things, nodding our heads in agreement, we are ultimately happy little apes. The dialogue of Coronation Street is no different than that of 99% of the other TV programmes that are a reflection of someones' lives. Some of us solve big problems and others solve little ones. The conflict comes when there seems to be fewer actual solutions and more assumptions about things being done than anything else.

My fear is not about what gets done about the present situation but what everyone thinks the cause was, thinks should be done and thinks is getting done by the action we collectively give power to our governments to take. And before anyone makes an anarchism argument here let me say this; holding a belief system while participating in another is hypocrisy, plain and simple. Not voting but paying your taxes, hell using money, and using the services of a society is not anarchism. I worry that the real message will go unnoticed, that the real problems will not be discovered realised for 50 to 100 years and that the wrong decisions on the part of the public, on the part of the agents of capital and on the part of the governments will be made and at that irreversibly so.

[Michael]

I am reminded of our countryman McLuhen who quite aptly pointed out "The medium is the message". I honestly think the vast majority of people are unable to make judgements of whether these statements are true or false because they are addicted to receiving tele-information.
One of the key elements of McLuhan's famous statement is that television is a 'stone cold' medium - a one-way passive communications channel that is authoritarian in perspective. The visual aspect makes it a particularly suitable medium for emotive persuasion.