Conservatives, Bubbles, and Business

A quick note on conservatives’ view of businesses appears to be in order.
In general, we do not believe businesses are inherently pure, moral actors. We do not look at the housing bubble and the derivatives market and defend them on the grounds that they were legal, so nyaa, nyaa, the CEOs got away with it and everybody else is obligated to pick up the pieces.
Rather, we see business leaders as behaving rationally (if badly) within the environment that they are given. We observe that the function of government regulations is essentially to reduce people’s fear of risk and volatility, as is the implicit taxpayer support for government-originated economic backstops, like Fannie Mae and Freddie Mac.
Libertarians can make a persuasive case that society will come up with other mechanisms for reducing risk in the absence of government involvement, but if you’re going to have regulations, they’ve got to function, and over the past decade, they failed. Indeed, many of us consider such failure to be inevitable, as the human traits of greed and self-interest infiltrate both government and business.
The appropriate response, given those observations and assumptions, is clearly not to increase the depth of partnership between political forces and economic forces, which will thereafter merely conspire to better hide bubbles and pawn off the consequences to the rest of us when they explode. In the meantime, the culture itself must not absorb and normalize the recklessness and self-interest that has been on display among the powerful.

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Warrington Faust
Warrington Faust
11 years ago

While I don’t think this can be said for the derivatives market, I think the public must accept some responsibility for the housing bubble. As with all bubbles, the public adopted the idea that there was no top. The popular understanding of a house became that of an “investment”, rather than a home. They allowed themselves to be persuaded to “tap into the equity” of their homes, rather than save. Somehow, before the government pulled the rug out from under it, it was “wise” to take a tax deductible equity loan to purchase a car. Think about that, a second mortgage on the family manse to buy a car. I once attended a closing where I saw a woman making $38,000 sign a mortgage for $425,000. She was in foreclosure and the house up for sale within 8 months. The bank called the former owner to see if he would be interested in re-purchasing it at $325,000. While I am sure the mortgage company had convinced her that she could “afford” it, I had seen enough of these transactions to find it hard to believe that she was without culpability. I had heard too many stories about buyers allowing the mortgage agent to “fill out the papers” concerning income and expense. I had heard too many stories of mortgage brokers signing people up at 2 o’clock in the morning. Perhaps “Arithmetic of Finance” should be a High School subject, but I think the buyers were overwhelmed by the idea of a large profit in 12 months. That is what creates bubbles. Perhaps High School history should include the “Tulip Mania”. How about the idea of buying an expensive home as an investment for retirement? That is fine, so long as you are prepared to sell the home and move to… Read more »

Stuart
Stuart
11 years ago

Claiming to speak for conservatives views is a mistake in itself. Only by their actions can you tell what their words might be!
One of the purposes of government is to protect people from predators – often predators who they are not on a level playing field with.
The basic idea of hands-off is a good one, but conservatives have shown much more than a hands-off attitude. They have actually intentionally put their hands ON…..in the wrong places. This usually involves working for large businesses against the people as a whole.
Examples include removing or failing to pass environmental regulations – this hurts everyone who breathes or drinks water! The same goes for their fighting against higher CAFE standards and other energy improvements. They always come down on the side of the Hummer SUV (Freedom, in their opinions, includes the Freedom to consume all you want, despite the other 300 million Americans and 6 billion humans).
So, maybe you speak for yourself – or maybe you are developing your opinions – but this is certainly not the conservative way of modern times as expressed and put into play by the Republicans over the last 20-30 years.
As to bubbles, I am a believer that we should have bubbles, but much smaller ones. This is what might happen with better regulation. The dot-com bubble, for instance, was probably an OK bubble – those who gambled too much lost, but it was a subset of the economy. However, the two giant bubbles of my lifetime – those being the current Great Recession and the S&L Crisis were both created by those in government and power specifically to enrich themselves and their business partners – and deregulation was the weapon they used to prime the pump.

Robert Balliot
11 years ago

Well said, Stuart.

BobN
BobN
11 years ago

Stuart, your ignorance is jaw-dropping.

Warrington Faust
Warrington Faust
11 years ago

Stuart makes a few good points. But does not seem to comprehend human nature in the same light I do. Let us take the Hummer example. Owners should do without because of the need to “share” the petroleum. That might be fine if the supply of petroleum was infinite (it does seem larger than we have many times been told). Truth is, “necessity is the mother of invention”. We will produce other energy sources when it becomes necesary. That necessity will wipe away many of the current objections. As to “environmental regulations”, they are not all of the same validity. Many are promulgated by people who simply like to exercize control. An example, a friend was held up on his development becasue the local water supply contained “one part per billion” of an objectionable material. He had two parts per billion. I would like to see the machine that can accurately determine between one, and two, parts per billion. The “S&L Crisis” was far easier to understand than our current problem, it is constained in the name. Prior to de-regulation, S&L’s were confined to home mortgages. That was a business they knew well. Unfortunately, it lacked sex apeal, they wanted to play with the big boys. De-regulation allowed them to enter commercial lending, a business about which they knew nothing. The results were predictable. To top it off, the government behaved badly. The government formed an agency to take over servicing mortgages held by failed banks. I can’t recall the name, but let’s call it GTC. GTC, had no computers, nor any other ability to handle the loans. Borrowers were sent letters telling them to pay nothing until further notice. Dealing with them was pure hell. The government knew this and would use it as a threat with struggling but… Read more »

Russ
Russ
11 years ago

“we see business leaders as behaving rationally”
That’s quite an assumption and begs the question what that even means? Is it rational for a business leader to maximize short-term profits and their own bonus over the long-term health of their firm? Is it rational to maximize a firm’s profits over the health of the economy or the environment?
What you’re claiming here is that all conservatives believe in neoclassical economic models, which is nonsense.
See:
What is Behavioral Economics?
Fooled by Randomness

Warrington Faust
Warrington Faust
11 years ago

Russ:
“Is it rational for a business leader to maximize short-term profits and their own bonus over the long-term health of their firm? Is it rational to maximize a firm’s profits over the health of the economy or the environment?”
It is entirely rational. The aim of a businessman is to maximize profits, that is his purpose.
Any system of economics which does not take this into account is irrational.
As to the “long term”, regard must be given to that favorite economist of the liberal element, Maynard Keynes. “In the long term, we are all dead”.

Russ
Russ
11 years ago

“It is entirely rational. The aim of a businessman [sic] is to maximize profits, that is his [sic] purpose.”
Not so. In the case of my first question, it’s a serious breech of fiduciary responsibility. Businesses quite frequently reinvest rather than take profits. You also seem to be saying that any nonprofit corporation by definition behaves irrationally, which is even more ridiculous than Justin’s assertion.
More importantly though, I question the very idea that humans (including business leaders) are some type of rational automata in our interactions with markets. Ask any marketer how rational folks are in their choices. Or for fun, check out some of the demonstrations from the site I mentioned above.

Russ
Russ
11 years ago

“the function of government regulations is essentially to reduce people’s fear of risk and volatility”
It is? I thought that regulations generally are created to ensure public good and/or to protect individual rights.
It might be profitable for me to build an oil well in my backyard, but the neighbors likely wouldn’t be too happy about it (thus the zoning regulations). I’m guessing you simply missed the mark on this one because I’m hard pressed to understand how most regulations have any effect on people’s fear of market risk and volatility.

Justin Katz
11 years ago

Please try to keep up, Russ. We’re talking regulations of the financial industry, here, Russ, not environmental policies or zoning. In the context of the bubble and burst, government regulations are “serve the public good” by purporting to provide a ceiling for risky behavior. They don’t work, but that’s the point.

Stuart
Stuart
11 years ago

Both the S&L Crisis and the current Great Recession are/were caused by the partnership of Government AND Business!
Heck, John McCain was one of the Keating Five!
http://en.wikipedia.org/wiki/Keating_Five
Neil Bush, the Presidents brother, took the government for a billion or more in the S&L crisis.
Do y’all think this is coincidence? If so, you must regularly flip coins and have them land on their edges!
THINK.
The current Depression or Recession or Great Theft was promoted by the same forces – mostly the same Conservative and Republican names we are so used to hearing – that is Phil Graham and Dick Armey and their Texas Oil and Banking friends. Not to say a lot of Democrats and unaffiliated businessmen didn’t push for it – what do you expect? Ask anyone if they want free money, and what do you expect them to say?
I cannot understand how conservatives like Justin can read current history – like Phil Graham – who was the main man behind the repeal of the depression era rules separating banks and investment houses – and his wife – who, oh yeah, was a director of ENRON – and, yes, Enron which was run by Ken Lay who is a good friend of George Bush and family.
You could go on and on with all these direct connections – but how many do you need?
Justin, did you just live through the same decade or two the rest of us did? If so, how can you even suggest that conservatives think like you state in that post?
They don’t. They think like the law of the jungle – the strong should be able to eat the weak.

Warrington Faust
Warrington Faust
11 years ago

Russ: “It is entirely rational. The aim of a businessman [sic] is to maximize profits, that is his [sic] purpose.” “Not so. In the case of my first question, it’s a serious breech of fiduciary responsibility. Businesses quite frequently reinvest rather than take profits. You also seem to be saying that any nonprofit corporation by definition behaves irrationally, which is even more ridiculous than Justin’s assertion.” First question, have you examined the salaries in any large “nonprofit” lately? They are astounding. Perhaps that is why they now prefer the term “not for profit”. “Fiduciary responsibility”. Interesting point, but raises the question of who the reliant parties are. If it is a large corporation with numerous stockholders, the question becomes whether they want a long term dividend stream; or, a rise in the value of their stock. These can only be combined in extraordinary cases, usually in regulated businesses such as telephone or utility stocks. Such “regulated businesses” were usually granted a de facto monopoly. Remember the telephone company when there was only one game in town? But, how about a smaller businessman, for instance a construction company with 10 employees. Isn’t his obligation to secure all the business he can, on the best terms he can get? If he doesn’t, how do his employees get paid? More importantly though, I question the very idea that humans (including business leaders) are some type of rational automata in our interactions with markets. Ask any marketer how rational folks are in their choices. Or for fun, check out some of the demonstrations from the site I mentioned above. I checked out some of the demonstrations you linked from Duke University, while they don’t embarrass me for being related to those Dukes, I think that they are not demonstrative of your point. Unless your… Read more »

Stuart
Stuart
11 years ago

Justin, the glass steagall act worked fine from the Great Depression until about 2000, when it was repealed in an effort put forth by Phil Graham and friends.
You can’t rescind things that work and then tell us they don’t work…..when things fail.
Regulations DO affect behavior just like laws do. No, nothing is perfect, but most people will play somewhere within the rules unless the reward for NOT doing so it very high.
Same goes for the S&L crisis. Both of these were effectively GOP-Led debacles.
“The deregulation of S&Ls gave them many of the capabilities of banks, without the same regulations as banks”
Hmmm, guess what that lack of regulation caused? Yes, the S&L crisis.
Fact is that FDR laid much of the foundation for our successful financial system post-Great Depression.
It worked pretty well – that is, until Reagan, Bush, McCain, Graham and others dismantled it. Then what happened?
Look and think.

BobN
BobN
11 years ago

Stuart, if you’re going to lie about Phi Gramm you should at least try to spell his name correctly.
Every statement you made about the S&L crisis is laughably wrong. Deregulation had nothing to do with it. Regulation had everything to do with it.
S&Ls were caught with high concentrations of real estate in their loan portfolios because regulations forced them to do so. In fact, they were created, and allowed to pay higher interest rates on consumer deposits than banks, specifically to encourage real estate lending. While the causes of such “perfect storm” events as financial crises are many, the two biggest ones in 1980-82, 1991-92, and 2007-present were deposit insurance, which removed responsibility from depositors for analyzing the financial prudence of their savings; and the Community Reinvestment Act, which forced banks and other lenders to make bad real estate loans from the start. Both government programs.
Glass-Steagall did nothing to make banks more secure.
Almost everything FDR did about the economy turned out to have negative consequences. You would learn much from comparing the 1920-21 recession and its quick recovery against the Depression to see how destructive the Democrats’ programs really were.

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