Sometimes nonsense deserves attention; not because the author has anything interesting, new, or intelligent to say, but rather because of the danger that his nonsense may taint the minds of uneducated people, lead them down a false path, and deprive the world of potential talent that may have contributed to valuable scientific discourse.
Prudence dictates that if we want to refute false statements with clarity and sincerity, we have to treat the propositions in question as if they deserve the attention, regardless of how false, uninformed, confused, unstructured, and amateurish they are. Such is the case with a piece called The End of Libertarianism, on which I shall comment piece by piece in order to gracefully bury it amongst the myriad irrelevant and pedestrian rants that roam through cyberspace:
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.
OK, we shall see how well the author does in proving that too little government intervention was the cause of the US financial crisis, as opposed to the libertarian position which is the opposite, and has by the way always been the same during all the years when libertarians warned about the consequences of central bank induced credit expansion and continuous expansions of the scope and size of government.
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.
This statement is obviously confused. The author pretends that there are 3 alternative lines of reasoning. But in fact they are all part of the same consistent position. The Community Reinvestment Act was indeed a program that contributed to the US financial crisis. It precipitated loans to people who could never pay them back. These loans were defaulted on. Loan defaults were the beginning of the US financial crisis, the credit crunch. There is, in fact, nothing mystical or controversial about this fact. We were all able to witness it with our own eyes.
Fannie Mae and Freddie Mac were the main institutions to implement this act, and in addition to this they were in fact guaranteeing lots of mortgage credit instruments. And due to this practice the two companies had to write down an enormous sum of credit and became worthless. Again, this is not even a subject matter of discussion. This is all well known and recent US economic history.
I may point out that back in 2003, Ron Paul, THE champion of libertarian principles, pointed out the inevitable results of these policies, way before the crisis struck:
The special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital that they could not attract under pure market conditions. Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing, the damage will be catastrophic.
And of course past corporate bailouts of companies such as Chrysler and Citigroup encouraged those businesses and their competitors to continue unsustainable practices which, as we could all witness, led to Chrysler’s bankruptcy and will be the cause of Citigroup’s demise sooner or later. Again, there is nothing arcane about these facts. The author doesn’t even attempt to refute them, which makes it all the more curious why he even brings them up. Rather than exposing any supposed shortcomings of libertarianism, they actually vindicate libertarianism.
But on top of that, the author is completely oblivious to the ultimate source of the crisis, namely the consumption business cycle, induced by credit expansion by a central bank, the Federal Reserve Bank. Above all things that were instrumental in bringing about this financial crisis, libertarianism is completely opposed to central banking and its corollary, fractional reserve banking. Libertarians, in fact, want the government to stay out of the way of banking altogether, banking being an industry with more government decrees, regulatory institutions, and oversight than most other industries in the 20th century.
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.
How so? Nothing could be farther from the truth than this. Libertarianism has exactly explained what went wrong. I just pointed it out above. Not only that, it has predicted the outcomes while the music was playing and virtually everybody was dancing to it. In fact, the one who has so far been unable to explain what went wrong is the author himself.
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.
It is besides the point of this discussion, but I may add that libertarians, such as Ludwig von Mises, have indeed predicted the downfall of the Soviet Union, and explained with precision the exact shortcomings of socialism.
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.
But unfortunately the author does not point out what is supposed to be wrong about libertarian concepts. He makes empty statements with no backing whatsoever. He resorts to calling libertarians “utopians from the right” without debunking their supposed utopia. Does he even know what left vs right means? So far he has not in the slightest explained where libertarians went wrong. He has instead done the opposite, as I pointed out above.
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.
It is indeed puzzling, if not outright ridiculous, that the author implicitly blames the financial meltdown precisely on that political movement that has not been in power in the US for hundreds of years, has never even been permitted to join in the major political debates, and has time and time again, via shady tricks and court rulings, been removed from ballots on local, state and federal levels. Where in the US today have libertarian policies been implemented? Where did we get rid of the Federal Reserve system? Where did we get rid of the income tax, or even just lower taxes on the net? Where have we gotten rid of the SEC? Where have we done even one single thing that libertarians asked for? This goes to the author: Go thou, read the program of the Libertarian Party (just as an example), and tell me which one of its agenda items have been implemented? Or read the statement of principles of the Campaign for Liberty. Point out precisely which of those policies were even remotely implemented.
There is not need to delve in detail into the mindless claim that “we have narrowly avoided a global depression”. Time will prove the author wrong. In the meantime, he might want to read up on how we have precisely repeated the mistakes from The Great Depression.
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.
Which libertarian has ever said that we should not figure out what happened? As I pointed out, libertarians didn’t even need to do a whole lot of work to figure this out. Why? Because they have been talking and warning about it for years and decades. They have, as a matter of fact, predicted what will happen. To the author: Go ahead and read Ludwig von Mises’ Human Action. This book was written in the 1940s! It explains exactly what happened now, decades later, on p. 572 he says:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion”
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.
Unfortunately the author doesn’t point out who was in charge of regulating these markets: It was the government. But much more importantly, he doesn’t point out how credit expansion fostered by the central bank and fractional reserve banks, all part of the governmental Federal Reserve System, has been the very cause for abundant credit and the ensuing speculation and misallocation of resources that lead to the inevitable collapse. Libertarians want to address the root cause of the issue. What is more appropriate than that? Libertarians want more regulation. We do need more regulation:
Maximum regulation can only be attained in one way. And that is to limit the extent to which matters are organized in a bureaucratic fashion. Since the main bureaucratic organization in any society is the government, this inevitably entails the limitation of the size of government and the scope of its intrusion into the lifes of individuals within the territory it oversees. So long as the government confines its activity to the protection of individuals against aggression and theft only little harm can be inflicted. Every expansion of governmental powers, however, will inevitably lead to a bureaucratic misuse of the scarce factors of production available, an increase in poverty, a lack of regulation, and a lower standard of living for everyone.
Maximum liberty and limited government lead to maximum regulation, order, stability, prosperity, and peace. Maximum government control inevitably leads to chaos, disorder, instability, poverty, and wars.
The author continues to say:
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.
…and again, libertarian ideas would have helped avoid the root causes of the crash. The 08 crash was unavoidable, precisely because those who supported the prevailing policies throughout the 20th century were not listening to the numerous warnings from the libertarian side.
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.
No, the subprime debacle was a result of consumer credit expansion. Unless this is addressed,the results that libertarians have warned against again and again will be inevitable. The author does not say anything on how to address this issue. He doesn’t even bring it up. He may plead not guilty for blatant ignorance. I give him that.
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 heartless 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.
… yes, in fact, blame all of them, for not doing anything to end consumer credit expansion, to end the Federal Reserve System.
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 author’s confusion is obvious: He believes that these officials’ actions were based upon libertarian ideas. If they were, then Greenspan would have closed down the Fed and Cox would have abolished the SEC and allowed for more regulation by letting the exchanges themselves regulate their business. Greenspan calls himself a libertarian. So what? What does it matter if he doesn’t actually implement libertarian policies?
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.
Yes, libertarian ideas are principled indeed. And, contrary to the authors claim, had we followed them there wouldn’t be a depression/recession right now.
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.
I won’t address the irrelevant and obviously mindless part of this paragraph. But I do want to point out again that libertarians are not reacting to the worlds failing: They have predicted it, all based upon their long established and proven principles. They have been waving the flag all along. The author needs a lecture in the History of Money and the business cycle. If he were sincere about broadening his horizon, he would read what I wrote in there and correct himself.
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.
The author suffers from a lack of understanding what libertarianism actually means. Thus he conjures up alleged shortcomings left and right. Libertarians never said that markets can’t be irrational. Businesses fail all the time. The entrepreneurial profit & loss system ensures that people quickly adjust and reallocate resources properly. Again, we need more regulation, not more “vigorous” government decrees, rules, and intervention. Why? Because then The Trouble With Bureaucracy ensues. It is this that causes disaster. It is, in fact, what has caused the present disaster, as I have pointed out above and in numerous blog posts.
They are bankrupt, and this time, there will be no bailout.
Who is bankrupt? It is the people who ignored the libertarians’ warnings which they uttered again and again. It is the fractional reserve banks and the auto companies, all shaped by massive government intervention and decrees. Who else? It is people like this author who have to feel utterly confused about what is going on right now. And his confusion will only grow as the economic situation continues to deteriorate, and, once again, all the warnings posed by libertarians during this entire bailout/stimulus bonanza, will have turned out to be true.
If anything is bankrupt it’s the concepts of socialism and interventionism. At this point, their defenders are awfully lost and confused. But people can change. I wish for this author’s own sake that he have the ability to correct his rampant errors after actually informing himself on the subject he tried to cover.
Libertarians are not bankrupt. They are growing in numbers faster than ever. The Campaign for Liberty is sweeping the nation. The Libertarian Party is steadily growing in supporters. Things like Ron Paul’s Audit the Fed bill are suddenly finding majority support.
Libertarians are not bankrupt. They have only just gotten started. They have a great future ahead of them. As I said before:
It is hard to tell how long it will take for all the false ideas that still prevail in economic matters to be rejected by the majority. But one thing is for sure: Whoever opens up his mind, and begins reading up on libertarian ideas, the correctness of their predictions, the clarity and precision of their analyses, will never again listen to the proponents of false ideas.
He will stand upon firm principles and realize that the creed that has opened his eyes, that has given him clarity in a sea of confusing contradictions and falsehoods, is the creed that will remain eternal and unshakable. For that simple reason, the future in the realm of economics undoubtedly and inevitably belongs to libertarianism.
3 thoughts on “Anti-Libertarian Nonsense Debunked”
In all fairness it should be pointed out that Weisberg’s article dates back to October 18th 2008!
He might have changed his mind in the meantime … at least I hope so :-)
I would be delighted to learn that he did :)