Sunday, July 3, 2011

"Let the people who made these terrible decisions go bankrupt"

Thank you, because it had to be said:

Well, you guys wrote your book in the shadow of the Great Recession, but the book never actually addresses how the recession happened in the first place. And critics of libertarianism often cite the different actors in the subprime mortgage crisis, arguing that they took advantage of an unregulated system to consolidate power, and took advantage of a lack of understanding amongst consumers to sell them products that they didn't fully understand.

MW: It's a big question, so I'll just take on little bits of it. One is the notion that the financial crisis was caused by deregulation... The central libertarian argument about what to do in the wake of a financial crisis is let the people who made these terrible decisions go bankrupt. And when appropriate -- and do it early and often -- send the motherfuckers to jail, you know?

If they did something illegal. But one of the problems is that if the system's been deregulated, then it's not illegal.

NG: But fraud is always illegal.

MW: Yeah, fraud has never been deregulated.

NG: When you talk about -- OK, think about it this way. If mortgage companies knew that they were on the hook for the mortgages they underwrote, they would be very careful in who they lent money to... What happened was that every mortgage originator basically knew that they would get $500 to $2,000 in fees for simply originating loans, and then when they sold them they didn't sell them to simply derivative companies -- they sold them to Fannie Mae and Freddie Mac. Because the government told these guys to buy every loan that they could get. They kept pushing banks and said, "We're going to regulate you to extend credit to more and more people who might not meet the gold standard credit regulations." ... In fact, the housing collapse tracks with a libertarian understanding in that it's caused by government interventions in the private sector.

Regulatory bodies, if you look closely, are never put in to restrain business. They're called in by big business in order to freeze the market at a certain place in time ... And look at this in terms of the financial banks and investment banks in the country. Going in there were six major banks that had something like 60 percent of the market. Now there are four that have like 70 percent of the market. So in fact, all of this regulation, all of this government-supported intervention to fix things, led to a high concentration in this market.

MW: You can't keep monopolies anymore unless you give consumers what they want, or if your [market control is] set in stone by the government. It's easy to fall into the trap of thinking we're going to be under the thumb of corporations with a capital C, but those corporations are desperate to sell you crap. And you don't like it, or you suddenly have choice, that's it, they're screwed.

This passage simply congeals the point I have been trying to make in short, on-the-fly debates, namely, that people are often incapable of making the distinction between morality and legality.

This Salon interviewer makes the assumption that regulation inhibits immoral economic behavior, which is laughable to anyone who has experienced the unfocused and futile attempts of typical government intervention.

But the point remains: deregulation does not mean legalization of fraud.

Fraudulent activity, which by its very definition has a strong moral component, stands in stark contrast to activity free of regulation, and I wish those critics of private practice could understand the distinction.

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