City Journal Spring 2014

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Guy Sorman
Steady As You Go « Back to Story

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"......but I think he is wrong that more regulations and more regulators will take care of problems in the future."

Bill, I don't recall saying that I am in favor of more regulations and regulators. I instead was emphasizing the fact that at the time regulators weren't doing their job of oversight, hence the financial crisis of 2008.
I think Mr Airth's comments show why we need a new economic approach. He is correct that government regulators "stood aside", but I think he is wrong that more regulations and more regulators will take care of problems in the future.

I was still working in the 1990's and it was obvious even then that business (including corporations, financial firms, and professions) had developed a culture in which merit was judged on the basis of short term results and how much money a firm or individual was making compared to its/his peers. I refinanced my mortgage several times in the 90's and following, and it was obvious what a racket this was: each party (mortgage broker, original bank issuing the mortgage, etc.)took its immediate cut from the transaction and then passed the risk on to someone else. I didn't put this all together, in understanding how the risk was further fragmented through exotic financial instruments, and how the whole system was underwritten and affirmatively encouraged by government programs (including Fannie and Freddie) devoted to the proposition that everyone should be able to get a mortgage and own a home. But it isn't as if this elephant wasn't known to many both inside and outside the government.

In retrospect, it is difficult to understand how anyone knowledgeable about what was going on didn't see what would happen to this house of cards. But no one did, and that included not just the regulators, but the politicians and those (individuals and entities) at all levels who were working within the system. Recently in the news were notes of meetings from the Federal Reserve from around 2005 in which its members specifically considered the various components of this house of cards, and presumably their risks, and concluded that there was no reason for concern that the real estate boom would not continue. How many other regulators in agencies with responsibility for some portion of this rickety house of cards must have been reaching the same conclusion.

This should give anyone concern who believes that government bureaucrats, armed with the right laws, can order the future so as to remove risk from the economy. Had the Federal Reserve had the foresight to see the risk of the bubble, it would have been opposed by the politicians and everyone in the real estate business. People were making MONEY and a lot of JOBS were at stake. No one wanted to believe that the good times would end. The point is that EVERYONE had a stake in the system -- not just the financial firms who had found very profitable ways to exploit the system. And if we attempt to explain what happened by blaming just the banks, or just the regulators, we will fail to learn anything from what happened.

Life carries inherent risks. Business by definition includes risk. The economy by definition has risks. As is apparent from the above, a large part of the risk is inherent in the fact that what underlies all of these are humans and human nature. Nothing government can do will eliminate this risk, or even reduce it to a minimal level. Further, in advocating that government should increase its size and power in an effort to keep human nature from tripping over its lesser angels, one should consider the consequences. By definition, in order for the government to have such control that it could force people and businesses to avoid or greatly minimize any risk, it would have to significantly reduce the "animal spirits" inherent in the private economy. The result of that would be a timid economy that struggled along afraid of its own shadow. We would be more safe from surprise economic upheavals, but we all -- lower class, middle class and the rich -- would be substantially poorer economically than we are now.

Why can't conservatives like Taylor and Sorman understand that the economic crisis we're facing today was in great measure due to government regulators standing aside and allowing 'business' to go crazy. Moreover, these conservative want more freedoms for business. I can only think that it comes from an insistence on remaining contrary and devil's advocates.
Alena Hromádková February 02, 2012 at 7:36 AM
One has to appreciate the content of the article very much with the exception of the last paragraph.The so called liberation of the C/E Europe was based on hidden cartels, unchalleged monopolies, lack of the rule of law and the endless cynical pillaging of the last remnants of the state assets from the very beginning.
At the moment e.g.Czech republic has no native bank and people had to learn the new tricks of the financial speculations like the derivative transaction, philosophy of different City boys etc.
Communists and their offsprings are happy, healthy, wealthy and enjoy the U.S.diplomas in Bussiness studies enormously.F.von Hayek´s and M. Friedman´s rhetorics recycled the old wine in the new bottles in a sort of Molotov coctail few people had taken seriously, I am afraid.
Why is it that some things suggested for government action seem to make sense, yet it seems to be the fact that much of what government does is ineffective or inefficient, or even misplaced? I haven't read any good analysis of this question: commentators (including economists) seem simply to restate a belief -- a FAITH really - that Government either can (almost)always do Good things or it never can. Each side of the political debate believes - reasonably - that if it acknowledges some truth to the other side's position, it will lose all credibility within its own constituency. So we are stuck with the assumption that either Keynes or Hayek has provided all the wisdom we will ever need to decide how government should function in today's world.

What we need is a new economic theory for the modern, global world. This does not mean the abandonment of all previously held positions, but does require an open mind as to what will work best in today's world -- with an emphasis on practical results.

I don't pretend to have any such theory, but it seems to me it should include the following:
~ Firm reliance upon, and respect for, the rule of law.
~ Recognition that,wherever possible,
reliance upon the free market should be preferred.
~ Recognition that government necessaily will play a greater role than it did 50 plus years ago. And a recognition that this necessarily carries with it the dangers of inefficiencies, political interference and crony capitalism.
~ An open discussion and debate about where to draw government vs private lines in light of the foregoing point, and how best to achieve the goals assigned to government
without incurring the downsides noted in that point.
~Critical to achieving whatever comes out of this debate will be finding a way for the public and private sectors to cooperate in pursuing the goals. E.g.,How can the government support scientific or medical research without resulting in the politicians deciding (in their self-interested and corrupt manner)how to allocate resources. The same re investment in industries that (clearly) cannot be adequately funded through the private sector.And so on.
~Further re the foregoing, an acknowledgement of the limitations of our current system of government. These may be, at least to some extent, beyond fixing and therefore we need an approach which accounts for the failings.Critical to this is finding a way to create entities/vehicles which can bring the best of public and private human and other resources to accomplishing our common goals (economic, educational etc.), while insulating the entities and their decision making as much as possible from politics.
~Finally but very importantly, recognizing that there are limits to what we can do as a society and what government can do (practically and financially) and putting in place binding limits (preferably not Constitutional)on government expenditures and debt.









I read that John B. Taylor served under George W. Bush. Did he see, in all his economic astuteness, the great financial crisis coming which grew under that administration? Does he realize that much of what he stands for and promotes led to that crisis?
Well, I find this article fuzzy and empty of facts but full of ideology, typical of Mr. Sorman.

What happened in 2008 was extraordinary. If he made an argument reflecting that, then he might be more convincing and credible.
I think what Taylor is saying is true in general but falls apart in the new global market in which overseas outsourcing of manufacturing and skilled American jobs have been a serious contributing force to what is now a long-term unemployment trend for college-educated and skilled working-class individuals.
Political candidates can promise whatever they want about job creation but they have little to do with it. Job creation is done by businesses and large corporations have found it cost-effective to outsource jobs at the expense of financial stability, home ownership, retirement, a stable tax base and the formerly high standard of living most Americans enjoyed.
Out-of-work and underemployed Americans shop at stores with poor quality foreign-made goods like Wal-Mart. All these corporate employment policies have resulted in are enriching 3rd world country populations such as India and China, at the expense of Americans.
The "free market" has completely failed with respect to the real estate market. Not only did banks create an fictitious run-up in residential and commercial property values by gutting long-standing, sensible underwriting standards and even engaging in various forms of mortgage and loan fraud, their response to the mess that resulted has been to create more market and pricing distortions. Any attempts by the government to intervene are equally as incompetent and ineffective. Milton Friedman-credited solutions, therefore, have been more damaging to working Americans than Keynesian economics.
With large corporations running the country, there is no longer such a beast as "the free market" - just monopolistic and oligopolistic institutions, that as any first-year economics student can explain, do everything they can to control and manipulate markets. The last thing they believe in is a "free market."
The case against Keynesian economics based on the observable fact that it hasn't worked, is defective. Keynes made two suggestions, one that Government should stimulate the economy by running deficits in times of depression or recession; secondly that governments should dampen the economy in boom times by running a surplus.

In fact Keynes's recommendations have never been adopted in full; only the stimulus has been tried, sometimes even when the economy was performing fairly well.

As it is likely to be politically impossible to adopt the second side of the Keynesian coin, it is best that governments adopt policies that work automatically.

Unemployment insurance is a good example, as the amounts paid out automatically decrease when the economy improves.

A true Keynesian solution would be for the Federal Government to amplify and support UI in poor conditions, and tighten up when the economy improves. This could be built into a permanent legal arrangement which would be more politically feasible than ad hoc decisions.
"Economics does not lie" but does not tell the whole truth. Firstly, one has to look at the economy and economic indicators at the time Reagan took office, while in office and after. Reagan didn't come in with high unemployment, no major economic crisis, and no hysteria over social security. During the first 2 years of Reagan's first term, unemployment rose significantly (2%) before dropping. What did poverty look like and urban policy under Reagan? Ironically-under Clinton, unemployment dropped as well but so did the US deficit. Under Reagan with decrease in taxes, the deficit was huge (no one seemed to worry about that -or did they?)
Surely Germany, a mixed economy, provides a good example of continued economic success under very difficult circumstances.Therefor
cannot Germany provide the model for the rest of the world to follow ?
Other examples are Canada and Australia.
Each has a well regulated banking industry and reasonable government involvement in the sound working of the market place.
Baloney - he's a hack for the right wing. We're in a liquidity trap - that is the one condition that calls for massive Keynesian stimulus.
Thanks for the review. I purchased the Kindle edition and can't wait to get into it.