The End of Libertarianism

[one...two...tree 2,762]

By Jacob Weisberg, Slate

A source of mild entertainment amid the financial carnage has been watching libertarians scurrying to explain how the global financial crisis is the result of too much government intervention rather than too little. One line of argument casts as villain the Community Reinvestment Act, which prevents banks from "redlining" minority neighborhoods as not creditworthy. Another theory blames Fannie Mae and Freddie Mac for causing the trouble by subsidizing and securitizing mortgages with an implicit government guarantee. An alternative thesis is that past bailouts encouraged investors to behave recklessly in anticipation of a taxpayer rescue.

There are rebuttals to these claims and rejoinders to the rebuttals. But to summarize, the libertarian apologetics fall wildly short of providing any convincing explanation for what went wrong. The argument as a whole is reminiscent of wearying dorm-room debates that took place circa 1989 about whether the fall of the Soviet bloc demonstrated the failure of communism. Academic Marxists were never going to be convinced that anything that happened in the real world could invalidate their belief system. Utopians of the right, libertarians are just as convinced that their ideas have yet to be tried, and that they would work beautifully if we could only just have a do-over of human history. Like all true ideologues, they find a way to interpret mounting evidence of error as proof that they were right all along.

To which the rest of us can only respond, Haven't you people done enough harm already? We have narrowly avoided a global depression and are mercifully pointed toward merely the worst recession in a long while. This is thanks to a global economic meltdown made possible by libertarian ideas. I don't have much patience with the notion that trying to figure out how we got into this mess is somehow unacceptably vicious and pointless—Sarah Palin's view of global warming. As with any failure, inquest is central to improvement. And any competent forensic work has to put the libertarian theory of self-regulating financial markets at the scene of the crime.

To be more specific: In 1997 and 1998, the global economy was rocked by a series of cascading financial crises in Asia, Latin America, and Russia. Perhaps the most alarming moment was the failure of a giant, superleveraged hedge fund called Long-Term Capital Management, which threatened the solvency of financial institutions that served as counter-parties to its derivative contracts, much in the manner of Bear Stearns and Lehman Bros. this year. After LTCM's collapse, it became abundantly clear to anyone paying attention to this unfortunately esoteric issue that unregulated credit market derivatives posed risks to the global financial system, and that supervision and limits of some kind were advisable. This was a very scary problem and a very boring one, a hazardous combination.

As with the government failures that made 9/11 possible, neglecting to prevent the crash of '08 was a sin of omission—less the result of deregulation per se than of disbelief in financial regulation as a legitimate mechanism. At any point from 1998 on, Bill Clinton, George W. Bush, various members of their administrations, or a number of congressional leaders with oversight authority might have stood up and said, "Hey, I think we're in danger and need some additional rules here." The Washington Post ran an excellent piece this week on how one such attempt to regulate credit derivatives got derailed. Had the advocates of prudent regulation been more effective, there's an excellent chance that the subprime debacle would not have turned into a runaway financial inferno.

There's enough blame to go around, but this wasn't just a collective failure. Three officials, more than any others, have been responsible for preventing effective regulatory action over a period of years: Alan Greenspan, the oracular former Fed chairman; Phil Gramm, the

former chairman of the Senate banking committee; and Christopher Cox, the unapologetic chairman of the Securities and Exchange Commission. Blame Greenspan for making the case that the exploding trade in derivatives was a benign way of hedging against risk. Blame Gramm for making sure derivatives weren't covered by the Commodity Futures Modernization Act, a bill he shepherded through Congress in 2000. Blame Cox for championing Bush's policy of "voluntary" regulation of investment banks at the SEC.

Cox and Gramm, in particular, are often accused of being in the pocket of the securities industry. That's not entirely fair; these men took the hands-off positions they did because of their political philosophy, which holds that markets are always right and governments always wrong to interfere. They share with Greenspan, the only member of the trio who openly calls himself a libertarian, a deep aversion to any infringement of the right to buy and sell. That belief, which George Soros calls market fundamentalism, is the best explanation of how the natural tendency of lending standards to turn permissive during a boom became a global calamity that spread so far and so quickly.

The best thing you can say about libertarians is that because their views derive from abstract theory, they tend to be highly principled and rigorous in their logic. Those outside of government at places like the Cato Institute and Reason magazine are just as consistent in their opposition to government bailouts as to the kind of regulation that might have prevented one from being necessary. "Let failed banks fail" is the purist line. This approach would deliver a wonderful lesson in personal responsibility, creating thousands of new jobs in the soup-kitchen and food-pantry industries.

The worst thing you can say about libertarians is that they are intellectually immature, frozen in the worldview many of them absorbed from reading Ayn Rand novels in high school. Like other ideologues, libertarians react to the world's failing to conform to their model by asking where the world went wrong. Their heroic view of capitalism makes it difficult for them to accept that markets can be irrational, misunderstand risk, and misallocate resources or that financial systems without vigorous government oversight and the capacity for pragmatic intervention constitute a recipe for disaster. They are bankrupt, and this time, there will be no bailout.

A version of this article also appears in this week's issue of Newsweek.

Jacob Weisberg is chairman and editor-in-chief of the Slate Group and author of The Bush Tragedy.

http://www.slate.com/id/2202489/

[IAMX 3,055]

It's very interesting how those who associate themselves as Libertarian have increasingly become pushed out of the Republican Party.

At very least one thing I respect about Libertarianism is, in practice, it usually means fiscal and personal responsibility.

[Danno 1,228]

NIce try.

For a more interesting (and timely) view you might want to go at the angle of...

Why is it the politicians in Washington are investigating everyone except the people paid to represent us THEM?

They sat took the money, they hushed what little opposition there was and now they are the ones asking who-done-it.

Edited October 20, 2008 by Danno

[IAMX 3,055]

No wonder there's lots of stench coming from Barney's mouth. When he's not eating a$$ with a spoon, he has his head up Fannie's and Freddie's, with everything he says spewing sh!t straight from them. This is really disgusting.

Edited October 20, 2008 by SRVT

[Trumplestiltskin 5,791]

Perhaps this is why Lucky seems to have a hard-on for McCain.

[lucyrich 20]

It's interesting, because I consider myself more of a libertarian (small 'l') than a Republican or Democrat. But I'd call myself a moderate libertarian, because I believe the ideology has its practical limits, and I believe there ARE times when government regulation is a very good thing.

In order for the free market to work, the three R's of responsibility, risk, and reward need to be tied together. And the fourth R, Regulation, needs to work to tie the other three together. When the person responsible for making the decision takes BOTH the risk and the reward of the decision, that decision maker is likely to do something that's reasonably good for society, or at least not too bad for society. But the free market isn't working right when somebody makes their homebuying or loan underwriting decision with the thought in the back of their mind that, "If this works out, I'll be rich, but if it doesn't work out, I'll walk away. At least this is somebody else's money I'm playing with." That moral hazard from separation of risk and reward is not libertarianism -- that's rampant thieving greed.

And I'm one small-l libertarian who feels much more strongly aligned with the Democratic party than the Republican party, though both parties have been known to turn my stomach at times. The Democratic party is clearly the fiscally conservative one (look at the deficit under the past few administrations). The Democratic party is the party who passed welfare reform. And the Democratic party is the party that tends to allow individuals to make individual personal choices with the accompanying rights and responsibilities in such areas as choosing whether they want to marry a man or a woman.

[one...two...tree 2,762]

It's interesting, because I consider myself more of a libertarian (small 'l') than a Republican or Democrat. But I'd call myself a moderate libertarian, because I believe the ideology has its practical limits, and I believe there ARE times when government regulation is a very good thing.

In order for the free market to work, the three R's of responsibility, risk, and reward need to be tied together. And the fourth R, Regulation, needs to work to tie the other three together. When the person responsible for making the decision takes BOTH the risk and the reward of the decision, that decision maker is likely to do something that's reasonably good for society, or at least not too bad for society. But the free market isn't working right when somebody makes their homebuying or loan underwriting decision with the thought in the back of their mind that, "If this works out, I'll be rich, but if it doesn't work out, I'll walk away. At least this is somebody else's money I'm playing with." That moral hazard from separation of risk and reward is not libertarianism -- that's rampant thieving greed.

And I'm one small-l libertarian who feels much more strongly aligned with the Democratic party than the Republican party, though both parties have been known to turn my stomach at times. The Democratic party is clearly the fiscally conservative one (look at the deficit under the past few administrations). The Democratic party is the party who passed welfare reform. And the Democratic party is the party that tends to allow individuals to make individual personal choices with the accompanying rights and responsibilities in such areas as choosing whether they want to marry a man or a woman.

Very interesting. Great post.

[dalegg 143]

To which the rest of us can only respond, Haven't you people done enough harm already? We have narrowly avoided a global depression and are mercifully pointed toward merely the worst recession in a long while. This is thanks to a global economic meltdown made possible by libertarian ideas.

You have GOT to be kidding me with this. This is Liberatarians fault? Let me get this straight. Democrats- who currently hold a majority of Congress get to say the condition of the U.S is not their fault because a Republican is in the white house, but the blame for this crisis is going to be placed on a group that has-- let me count....ZERO members in control of government?

You cannot simply point to one facet of a Liberatarian viewpoint and say - "aha- that type of thinking is to blame" when you don't encompass any of the other ideas. First of all each of the three examples the author sites in the opening of his rant are in fact valid arguments. Second of all there seems to be some sort of attempt to tie the current administration to Libertarism somehow which is just nonsense. Liberatarians would not be attacking any foreign country or put any interest in "faith based initiatives". Honestly I thought the end of Libertarianism happened 8 years ago.

[IAMX 3,055]

To which the rest of us can only respond, Haven't you people done enough harm already? We have narrowly avoided a global depression and are mercifully pointed toward merely the worst recession in a long while. This is thanks to a global economic meltdown made possible by libertarian ideas.

You have GOT to be kidding me with this. This is Liberatarians fault? Let me get this straight. Democrats- who currently hold a majority of Congress get to say the condition of the U.S is not their fault because a Republican is in the white house, but the blame for this crisis is going to be placed on a group that has-- let me count....ZERO members in control of government?

You cannot simply point to one facet of a Liberatarian viewpoint and say - "aha- that type of thinking is to blame" when you don't encompass any of the other ideas. First of all each of the three examples the author sites in the opening of his rant are in fact valid arguments. Second of all there seems to be some sort of attempt to tie the current administration to Libertarism somehow which is just nonsense. Liberatarians would not be attacking any foreign country or put any interest in "faith based initiatives". Honestly I thought the end of Libertarianism happened 8 years ago.

Depends on what you define "the end". Surely, neo-conservatives have been pushing Libertarians out of the Republican Party since Reagan.

[one...two...tree 2,762]

To which the rest of us can only respond, Haven't you people done enough harm already? We have narrowly avoided a global depression and are mercifully pointed toward merely the worst recession in a long while. This is thanks to a global economic meltdown made possible by libertarian ideas.

You have GOT to be kidding me with this. This is Liberatarians fault? Let me get this straight. Democrats- who currently hold a majority of Congress get to say the condition of the U.S is not their fault because a Republican is in the white house, but the blame for this crisis is going to be placed on a group that has-- let me count....ZERO members in control of government?

You cannot simply point to one facet of a Liberatarian viewpoint and say - "aha- that type of thinking is to blame" when you don't encompass any of the other ideas. First of all each of the three examples the author sites in the opening of his rant are in fact valid arguments. Second of all there seems to be some sort of attempt to tie the current administration to Libertarism somehow which is just nonsense. Liberatarians would not be attacking any foreign country or put any interest in "faith based initiatives". Honestly I thought the end of Libertarianism happened 8 years ago.

I think the author means libertarian ideas in terms of economic policies and in that sense, he is correct. Even Bill Clinton had embraced liberal economic policies. Under his administration, he favored privatization of many government operations and was a big proponent of free trade. In the sense of laissez-faire economics, it has failed miserably. Such libertarian economic ideals rely on a level playing field, which doesn't exist in the market.

[dalegg 143]

To which the rest of us can only respond, Haven't you people done enough harm already? We have narrowly avoided a global depression and are mercifully pointed toward merely the worst recession in a long while. This is thanks to a global economic meltdown made possible by libertarian ideas.

You have GOT to be kidding me with this. This is Liberatarians fault? Let me get this straight. Democrats- who currently hold a majority of Congress get to say the condition of the U.S is not their fault because a Republican is in the white house, but the blame for this crisis is going to be placed on a group that has-- let me count....ZERO members in control of government?

You cannot simply point to one facet of a Liberatarian viewpoint and say - "aha- that type of thinking is to blame" when you don't encompass any of the other ideas. First of all each of the three examples the author sites in the opening of his rant are in fact valid arguments. Second of all there seems to be some sort of attempt to tie the current administration to Libertarism somehow which is just nonsense. Liberatarians would not be attacking any foreign country or put any interest in "faith based initiatives". Honestly I thought the end of Libertarianism happened 8 years ago.

I think the author means libertarian ideas in terms of economic policies and in that sense, he is correct. Even Bill Clinton had embraced liberal economic policies. Under his administration, he favored privatization of many government operations and was a big proponent of free trade. In the sense of laissez-faire economics, it has failed miserably. Such libertarian economic ideals rely on a level playing field, which doesn't exist in the market.

Our Market place is anything but laisse-faire. There is no basis in reality to say that it has failed because it hasn't been tried in almost 100 years.

Not saying I want to fully embrace pure Libertarianism either. It relies too much on everyone being smart, responsible, and motivated, and the truth is 95% of our population doesn't fit that definition and I don't frankly want half of our population walking around begging off the other half of our population after they retire.

[peejay 327]

It's interesting, because I consider myself more of a libertarian (small 'l') than a Republican or Democrat. But I'd call myself a moderate libertarian, because I believe the ideology has its practical limits, and I believe there ARE times when government regulation is a very good thing.

In order for the free market to work, the three R's of responsibility, risk, and reward need to be tied together. And the fourth R, Regulation, needs to work to tie the other three together. When the person responsible for making the decision takes BOTH the risk and the reward of the decision, that decision maker is likely to do something that's reasonably good for society, or at least not too bad for society. But the free market isn't working right when somebody makes their homebuying or loan underwriting decision with the thought in the back of their mind that, "If this works out, I'll be rich, but if it doesn't work out, I'll walk away. At least this is somebody else's money I'm playing with." That moral hazard from separation of risk and reward is not libertarianism -- that's rampant thieving greed.

And I'm one small-l libertarian who feels much more strongly aligned with the Democratic party than the Republican party, though both parties have been known to turn my stomach at times. The Democratic party is clearly the fiscally conservative one (look at the deficit under the past few administrations). The Democratic party is the party who passed welfare reform. And the Democratic party is the party that tends to allow individuals to make individual personal choices with the accompanying rights and responsibilities in such areas as choosing whether they want to marry a man or a woman.

I've pretty much been an independent voter all my life. Good post, but you also failed to note that welfare reform was passed by a Republican majority congress and signed by a Democratic president. The Republicans held the majority in congress for the last 6 years of Clinton's presidency. Ditto for passing the budgets during those 6 years too. You give the Democrats way too much credit. Correct me if my memory is wrong about that.

That said, the Republican majority Bush enjoyed in his first 6 years has not bode well. I have grave doubts about an Obama administration with the present Democratic majority congress and don't believe it will bode well either. As much as I dislike McCain, I'd prefer him in there with a Democratic controlled congress. That's my 2 cents.

Edited October 20, 2008 by peejay

[mawilson 2,133]

Our Market place is anything but laisse-faire. There is no basis in reality to say that it has failed because it hasn't been tried in almost 100 years.

Exactly. If the government hadn't provided Fannie and Freddie an advantage over their

competitors through the implicit taxpayer guarantee (thus encouraging irresponsible

lending), market discipline would have stopped them from taking excessive risks, and

we wouldn't have had to bail them out.

[lucyrich 20]

I've pretty much been an independent voter all my life. Good post, but you also failed to note that welfare reform was passed by a Republican majority congress and signed by a Democratic president. The Republicans held the majority in congress for the last 6 years of Clinton's presidency. Ditto for passing the budgets during those 6 years too. You give the Democrats way too much credit. Correct me if my memory is wrong about that.

That said, the Republican majority Bush enjoyed in his first 6 years has not bode well. I have grave doubts about an Obama administration with the present Democratic majority congress and don't believe it will bode well either. As much as I dislike McCain, I'd prefer him in there with a Democratic controlled congress. That's my 2 cents.

You raise some good points. I'll add that I don't believe the Democrats will hold on to Congress for long under a Democratic president. They'll go overboard, ignoring middle America, angering enough voters to set the stage for another "Contract with America" style Republican election sweep in 2010 (maybe 2012).

Wild conspiracy theory: Maybe McCain's nomination of Palin was his brilliant strategy not to win the White House, but to intentionally lose it, so as to give the Democrats enough rope to hang themselves, and give the Republicans motivation to reform themselves, and thereby set the stage for a future Republican takeover.

Or maybe it wasn't an evil conspiracy, but just incompetence and desparation all along. Regardless, I expect a Republican controlled Congress for Barack's second term. You heard it here first.

[one...two...tree 2,762]

Our Market place is anything but laisse-faire. There is no basis in reality to say that it has failed because it hasn't been tried in almost 100 years.

Not saying I want to fully embrace pure Libertarianism either. It relies too much on everyone being smart, responsible, and motivated, and the truth is 95% of our population doesn't fit that definition and I don't frankly want half of our population walking around begging off the other half of our population after they retire.

I agree it isn't, but politician such as Phil Gramm have been working towards that goal, piece by piece, which is a big the reason why we got into this mess.

Full article here.

"In the early evening of Friday, December 15, 2000, with Christmas break only hours away, the U.S. Senate rushed to pass an essential, 11,000-page government reauthorization bill. In what one legal textbook would later call "a stunning departure from normal legislative practice," the Senate tacked on a complex, 262-page amendment at the urging of Texas Sen. Phil Gramm. There was little debate on the floor. According to the Congressional Record, Gramm promised that the amendment -- also known as the Commodity Futures Modernization Act --along with other landmark legislation he had authored, would usher in a new era for the U.S. financial services industry.(...)

With the U.S. economy now battered by a tsunami of mortgage foreclosures, the $30-billion Bear Stearns Companies bailout and spiking food and energy prices, many congressional leaders and Wall Street analysts are questioning the wisdom of the radical deregulation launched by Gramm’s legislative package. Financial wizard

Warren Buffett has labeled the risky new investment instruments Gramm unleashed "financial weapons of mass destruction."

They have fed the subprime mortgage crisis like an accelerant. While his distracted peers probably finalized their Christmas gift lists,

Gramm created what Wall Street analysts now refer to as the "shadow banking system," an industry that operates outside any government oversight, but, as witnessed by the Bear Stearns debacle, requiring rescue by taxpayers to avert a national economic catastrophe."

One part of that bill was what's called the 'Enron Loophole':

"The impact of the "Enron loophole" has been enormous. Since its passage, the Senate Permanent Subcommittee on Investigations has concluded that the loophole contributed to inflated energy prices for American consumers. In 2006, its report found credible expert estimates that the loophole -- by encouraging speculation -- accounted for $20 of the price of a barrel of oil, then at $70. In 2007, the same committee blamed the loophole for price manipulation of the natural gas market by a single hedge fund, Amaranth Advisors."

But Gramm's legislation also seems to have legalized what are known as 'credit default swaps':

"Prior to its passage, they say, banks underwrote mortgages and were responsible for the risks involved. Now, through the use of credit default swaps -- which in theory insure the banks against bad debts -- those risks are passed along to insurance companies and other investors.

Maryland law professor Greenberger believes credit default swaps "were a key factor in encouraging lenders to feel they could make loans without knowing the risks or whether the loan would be paid back. The Commodity Futures Modernization Act freed them of federal oversight."

Before passage of the modernization act, the Commodity Futures Trading Commission was attempting to regulate the swaps market through rule-making. The modernization act, Gramm noted in his remarks on the Senate floor, provided "legal certainty" for the growing swaps market. That was necessary, Greenberger says, because at the time, "banks were doing these trades in direct violation of federal law.""