Ok Steve, and banker's aren't?

No Tom, they aren't, but then again they aren't setting national policy are they? They are setting policy for their bank. Bit of difference don't you think?

In your last post on this subject you seemed to lay the blame squarely on the CRA....

You need to brush up on reading comprehension. The politicization of the home loan market is one of the things what got this thing going. Was it the sole cause? No, but to pretend otherwise and look for a sole cause is fools errand.

My contention is that the real problem is that these bankers, thru their lobbyists, had these regulations written for their own (short term) benefit. Your view?

My view is that discretionary government policy is able to be manipulated and that is rarely a good thing. It is failure of government no matter what happens since it results in profits for some and losses for others that really aren't earned, rent seeking.

To put it a little more succinctly, the real problem is the interface between private enterprise and gov't regulation, and how do we make that work?

You don't, at least with discretionary policy. That was what won Kydland and Prescott their Nobel in economics a few years ago. Rules rather than discretion. But then policians don't like that since they can't do favors for their friends.

And I am sorry, but I do not think "getting the gov't out of it" is a viable answer.... Remember the "Golden Rule", "The man with the gold, makes the rules." which leaves you and I out of it, because "craven and greedy" are not qualities limited to politicians.

A bit overly simplistic since no single person has all the gold, and I'm not sure I that the "golden rule" is worse than the "gun rule". You know, the one where the man with the most guns makes the rules, and that would be the U.S. government.

Any crisis can be blamed, in part or in full, on the government, either by act or omission. But I'm not sure I follow the libertarian corollary at all, that because the government screws up (and ahem the private sector will screw up from time to time), the government cannot be part of the solution.

It's certainly true that if the government eliminated the home mortgage interest deduction tomorrow, it would make the problem worse by further devaluing home prices. Certainly there are government policies that can make the situation better. That we are not certain what those policies should be should make us cautious, but not gun shy.

The government is run by politicians, who by their nature are craven and greedy (for power),

Ok Steve, and banker's aren't?

In your last post on this subject you seemed to lay the blame squarely on the CRA (banker's never would have made these loans if Gov't had not made them do stupid things) except that everything else I read lays it on Credit Default Swaps (which were unregulated) and hid the inherent risks. Your view?

My contention is that the real problem is that these bankers, thru their lobbyists, had these regulations written for their own (short term) benefit. Your view?

To put it a little more succinctly, the real problem is the interface between private enterprise and gov't regulation, and how do we make that work?

And I am sorry, but I do not think "getting the gov't out of it" is a viable answer.... Remember the "Golden Rule", "The man with the gold, makes the rules." which leaves you and I out of it, because "craven and greedy" are not qualities limited to politicians.

The other, and better, option was simply to let the market play itself out without putting any tax money into it. But if the gov't is going to get involved, it should do so with an eye to making a long term profit for taxpayers - otherwise its just welfare for bankers.

Goodness gracious, does this mean New Deal II is on the way?

But my point is the bigger one... limiting government intervention is all well and good, but it requires a corollary principle of letting the chips fall where they may... and that can be very, very painful.

And the Great Depression wasn't painful? 1938 wasn't painful? This time around isn't going to be painful? Sorry, but this is just lame, "It could hurt without Uncle Sugar propping us up...." When the reality is Uncle Sugar helped get us into some of the worst economic crises in history.

If you insist on reading the daily market ups and downs as vindication or condemnation of particular policies you will be disappointed.

Boy somebody flunked reading comprehension. I didn't insist on anything. My point is that the market appears extremely pessimistic despite the grand and glorious rescue plans. Could it be a vanilla recession? Maybe, but the current loss to the DJIA seems overly large for just that. I'm thinking the market is thinking the bailout wont work and might make matters worse. Maybe I'm wrong though.

Steve

But my point is the bigger one... limiting government intervention is all well and good, but it requires a corollary principle of letting the chips fall where they may... and that can be very, very painful.

What I object to is the hidden argument in much of the conservative bailout critiques -- which is that absent government intervention, the market would effectively self-regulate and somehow avoid cycles of boom and bust. I think the historical evidence is clear that is not the case.

So you can live with booms and busts or you can try to smooth things out. But there is no panacea here unfortunately.

And Bernard, I would say the government had a hand in the Panic of 1837. First, Jackson killed the national bank and encouraged land speculation as the result of his Indian removal policies. Then to curb land speculation Jackson issued his Specie Circular which undermined confidence in the remaining banks.

I take from that history that attacking banks as corrupt and spendthrift in the middle of a financial crisis doesn't do squat for the economy.

The issue is this... if you are going to have a doctrine that some firms are "too big to fail" then there needs to be government involvement.... because the doctrine itself is government involvement, and it encourages risky behavior by counter-parties.

At this point, if you are rescuing firms and banks, then it is only fair to have the government get equity -- it is the best way to ensure that tax payers have a change to get their money back.

The alternative approach is to (a) scrap the TBTF doctrine, (b) reduce regulation, (c) allow banks and firms to fail.

But the alternative approach isn't a panacea. Finance did not begin in the 1930. Look at the panics/collapses of 1837, 1857, 1873, 1893, and 1907. None of the government's dirty hands on those, and yet market collapses ensued, banking runs occurred, and the "real economy" suffered severe consequences.

I really wish people would stop assuming that there is no relevant economic history here other than 1929 and 2008.