It's rarely a good idea to pick fights with one's friends--especially the clever ones--but I'll take issue with Gideon Rachman's column, "Conservatism overshoots its limit". Gideon writes:
The market for ideas - like the market for shares - always overshoots. Ideas become fashionable and get pushed to their logical conclusion and beyond, as their backers succumb to "irrational exuberance". Then comes the crash.
What we are experiencing now is the bust that has followed the 30-year bull run in conservative ideas that began with the Thatcher-Reagan revolution of 1979-80.
You can get a sense of how quickly the intellectual atmosphere has changed by picking up a copy of Alan Greenspan's The Age of Turbulence, which was published last year. Mr Greenspan, head of the Federal Reserve from 1987 until 2006, heaped praise on the magic of financial markets and decried the foolishness of those who called for more regulation: "Why do we wish to inhibit the pollinating bees of Wall Street?" he asked rhetorically. Why indeed?
Mr Greenspan was considered such a guru that last year Senator John McCain suggested putting him in charge of a committee on tax reform, adding: "If he's alive or dead it doesn't matter. If he's dead, just prop him up and put some dark glasses on him." But Mr Greenspan's reputation is now on the slide and Mr McCain has reinvented himself as a champion of regulation - and is denouncing the "corruption and unbridled greed that has caused a crisis on Wall Street".
This kind of ideological whiplash is what happens when an intellectual bull market crashes. The current financial crisis can be traced to three of the central ideas of the Reagan-Thatcher era: the promotion of home ownership, financial deregulation and a fervent faith in the market. Each of these ideas did sterling service for 30 years, increasing prosperity and freedom. But pushed too far - and combined - they have created a disaster.
This seems to me to conflate three quite separate points, one true, one false, and one questionable.
What is undoubtedly true is that intellectual fashions come and go. The default rhetorical position that many governments (by no means just conventionally conservative ones) have lately adopted--favouring market forces and competition, accepting of globalisation (with varying degrees of reluctance), sceptical about big regulatory initiatives--stands discredited all right. If ever an economic and political philosophy were out of fashion, this one now is. But I say "default rhetorical position" advisedly. What is certain is that the terms of political debate are transformed, and this will surely have consequences. I will come to what these might be in a moment. If Gideon had confined himself to what politicians say, as opposed to what they do, I would have been nodding in agreement all through the column.What is false, I think, is the claim that pushing too far the central ideas of Reagan-Thatcher--said to be home ownership, financial deregulation and a fervent faith in the market--created this disaster.
I'm not sure even Reagan and Thatcher had a "fervent faith in the market", but I would not accuse Bill Clinton, George Bush (1 and 2), Tony Blair or Gordon Brown of such a thing. And has the role of government been transformed by three decades of this fervent belief? I grant you privatisation: there has been a lot of that. But privatisation is regarded (even now, is it not?) as a mostly uncontroversial success. Is anybody in Britain calling for the steel industry to be renationalised? In other regards, though, fervent belief in the market has made rather small advances, I would say. I don't see that public spending's share of GDP (a vastly larger cake, after decades of growth) is much, if at all, lower anywhere.
As for policies supporting home ownership, these have been a bipartisan undertaking in the US, and if anything Democrats have pushed this agenda harder. Financial deregulation has happened--but not so much recently. It was certainly not a conservative project. In the US it was a messy decades-long process and arguably made its greatest strides during the Johnson, Carter and Clinton administrations. What drove it was not ideology but facts on the ground: the rules then in place were breaking down because of inflation (to begin with) and innovation. By the time the present crisis rolled in, banking was still the most heavily regulated industry in the country.
Ken Rogoff puts it well when he says that in the run-up to this emergency there was de facto, rather than de jure, financial liberalisation. In the past decade, innovation has overwhelmed the regulatory apparatus. Regulation did fail to keep pace, and it is true that key officials like Alan Greenspan rationalised their inactivity in pro-market terms. They were wrong. But did opponents of conservatism press for new regulation of non-bank mortgage origination and mortgage securitisation--the innovations that really did the damage? Just the opposite. Republican attempts to subject Fannie Mae and Freddie Mac (the essential quasi-public enablers of these changes) to tighter regulation were defeated by Democrats. They agreed with Greenspan: let that lending flow. Voices like that of Ed Gramlich, pointing to the dangers of the subprime explosion, were few and far between.
Conservatives did not create this disaster by pushing too far. They and their surrogates just happened to be standing there when the hurricane came in. Yes, they should have built the levies up when they had a chance to, and they failed--in one crucial instance, in the US, because Democrats got in their way. But it is wrong to say, as Gideon does, that they deliberately dismantled the levies. Regulatory failure in the face of bewilderingly rapid innovation is not the same thing as "deregulation". And it is not a distinctively conservative trait.
The third point--the questionable one--concerns the nature of the coming backlash. Conservatism overreached, Gideon says, and now the liberals (US) and social democrats (Europe) will get a turn at the controls, and overreach in their turn. To repeat, Gideon is right about the rhetoric. That pendulum has already swung right back--taking McCain with it (as Gideon points out). But what about the policy pendulum? That is a very different thing. Especially in the US, swings in policy are usually very much smaller than you would expect, if all you did was listen to politicians.
Whatever happens, financial regulation will get a complete overhaul. As the details of this are worked out, however, the same difficult trade-offs that confound policymakers of every stripe will reassert themselves. There is no simple alternative paradigm--"re-regulation"--waiting to be taken down off the shelf. In other areas of policy, we will just have to see how much difference having a post-emergency market-sceptical Democratic administration in place is going to make.
In one respect--health care reform--I hope it makes a huge difference. But I don't know whether the crisis advances or retards the prospect of real reform in that area. It could go either way. (See Robert Reischauer's comment on National Journal's new Health Experts blog.)
As for the rest, don't take the rhetoric at face value.
Good and interesting points. But why did regulation fail to keep up with breakneck financial "innovation"? The financial sector buys bipartisan influence in Washington, and one assumes that laissez-faire dogma is the trump card in any arguments used to push back against regulation. Fannie and Freddie were famously connected, but politicians must have also bought their righteous spiel about aiding homeownership as they failed to rein in the GSEs excesses.
And one measure of how bad things are is that now it's hard to say which is worse, lax regulation or over-regulation.
It's not too much or too little regulation so much as the wrong regulation. We have so much seemingly arbitrary regulation that decision makers tend to focus on it instead of on their jobs.
Enron, to use the famous example, was founded to game the system. When they ran into financial trouble they kept on trying to game the system.
I think good regulation would be more along the lines of "if you sink the ship, you go down with it." I've always admired the submarine hatch approach. The last man down the hatch closes it and stands under it. If he closes it wrong he'll be the first to know.
Coincidentally, the NYT has an article about Greenspan's love of complex derivatives:
http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?_r=1&hp&oref=slogin
I think, although there are good observations here, they somewhat miss the point. The point is not that one party has been in the ascendant for the last 30 years, it is that one ideology has been ascendant. For instance, contra Clive, I'd argue that Bill Clinton understood and supported deregulation and free market ideology very well. The fact of Democratic acquiescence, or active support, of the prevailing ideas does not obviate the essential observation that ideas tend to prevail up until the point of overreach and obvious failure.
For the SECOND time in my life, the Banking system in this country is a MESS. I'm old enough to REMEMBER when Ronald Regan blew up the savings & Loan business with his deregulation. Now we have the SAME CRIMINALS invading Wall Street.
Of Course, the Republicans CAN'T TAKE RESPONSIBILITY for what they have done.
So we have the totally LAME EXCUSE that "The Market" caused
the problem. Complete and TOTAL BULLSHIT. This
has been planned and executed.
Just WHO do you think will be buying up forclosed
real estate for pennies on the dollar? The SAME
PEOPLE who CAUSED the Problem. Wake Up. Read
"The Shock Doctrine - The Rise of Disaster Capitalism".
I'd take issue with this. I think it is too easy to confuse the influence of conservatism with the de jure conservative party - the republicans. The truth of America of the last 30 years is that liberalism as a national political governing idea has been pushed way to the margins, confined to about 4 senators and 40 house members. The rest of the body politic, Republican and Democrat have worked within the conservative ideological framework, arguing on finer points but accepting the ethos. What has changed now is that liberalism is on a more equal footing with conservatism on the battleground of ideas and increasing numbers of elected Democrats will now defect from the conservative consensus to liberalism, although they may call it something else. Ironically, with so many moderates retiring or being defeated the GOP is set to get more conservative in the short term. We will know that the political culture has really changed when nominal republicans actually behave like liberals in large numbers (a reversal of today)
As to responsibility, others have written much better on this. What stands out for me are the career of Phil Gramm and the legislation he touched. And Greenspan endorsing Bush's tax cut for 'fear' that America was in danger of running too large a surplus. These were moments of conservative ideological bankruptcy.
Brian, if the government really is in the hands of Evil People who want to cause as much chaos and confusion as possible, that is an argument for reducing the scope of government intervention, not increasing it.
"Conservatism" (as defended by Mr. Crook) did not overreach - it simply came to its inevitable conclusion.
The middle class has been bled dry, without even the illusion of a valuable home or a fat 401(k) account to encourage the consumer spending that maintains employment, for which the real wages have declined during this era of Reagan / Thatcher ideology.
But the conservatives did have the foresight to tighten up considerably the bankruptcy law in 2005 to ensure that the unfortunate could not walk away from the wreckage.
It was not so much a set of ideas, as it was a rejection of ideas that had been conceived for the common good of all, and not just the few.
Only one quibble I feel the need to express...
This continuing Meme that Democrats killed the re-regulation of Freddie and Fannie--now without the dates of this attempt--is illogical.
The attempt that is often cited for re-regulation was in 2003-5, which was also the time when Republicans, if I remember correctly, had majorities in both houses and controlled the White House. Thus, even if all Democrats had voted against such measures--down to the last one--if the Republicans had really wanted tighter regulations--then they could have gotten them.
They didn't, however, pass these measures, which means that the Republicans didn't really want them as a majority.. and in any case--blaming the minority party for things not getting passed is really not all that credible.
If Mr. Crook, had phrased it as "well, no-one, neither Democrats or Republicans had the will to reregulate Fredie and Fannie back when they could have--back in 2004--before the majority of bad debt was taken on--then I'd be a lot more sympathetic... but that's not what was said...
Clive,
First off, Thatcher's England and Reagan's America - two different countries, two different situations. Both countries lurched right-ward but America was far less socialized than GB; and for the record, de-regulation began under Carter and it was Carter who de-reged the airlines; Reagan couldn't have done it himself and in truth, conservatives just took credit for deregulation without doing the hard work to make it a reality.
Reagan's economic philosophy was tax-cuts, spending increases in defense and hostility to regulation. The first two things (in concert with the complete unwillingness to cut spending) led to massive budget deficits and the third to the S&L crisis.
Fast-forward to the reign of Bush II and we have the same agenda on crack. Now, we have two economic life-blood draining wars, massive budget deficits, a completely out of control defense budget, a collapsing financial sector and a president who's MIA. And so, Clive, you claim that Republicans just happened to be standing there when this shit-storm came down on their heads. BS, Clive and I think you know it but you're too proud to admit that conservatism is a turkey that rivals communism in the extent its been discredited. It failed, it's dead and it should be buried.
OK, maybe Democrats have taken money from the financial industry and done them some favors. Given the current manner in which elections are operated, if they had not they wouldn't have held many of their offices. But, let's not forget that the Republicans are the party of the idea that government should not govern. We shouldn't be surprised that the government regulators laid down on the job when these people are in charge.
This column is nonsense. Since Clive is sensitive to criticism, this post may not be published. Nonetheless, there are fundamentals at work here.
If you've been saving your money in the good times --or at least paying down debt --when bad times hit, say, you get laid off --you have much better chance of getting through it without utter crisis.
Consider, however, a country where its (primarily conservative Republican leaders,in recent times) are OFFENDED by the notion of paying down the national debt. Not only were they unwilling to employ the Clinton budget surpluses in that fashion, they cut taxes by MORE than the budget surplus. Then they declared two wars, created a ridiculous prescription drug benefit as a payoff to the big pharmaceuticals and as a naked election ploy. They doubled the national debt in 8 years.
Are we clear on the high points? By the way, does that sound more like an ant or a grasshopper. As a life-long small "c" conservative, I thought we were supposed to be like the ants.
But not this crowd.
Leaving aside the influence on the populace at large exerted by such reckless borrowing engineered by their "leaders", this certainly did not leave much in the kitty to deal with hard times. And this does NOT even begin to discuss the willfull disregard for current accounts imbalances that prompted Warren Buffet to write "Squanderville" over a decade ago.
In some ways, many aspects of the current crisis are arcane. In other ways, the situation was inevitable --and it is NOT an "act of God" with which the GOP "conservatives" just happened to be burdened.
The GOP "conservatives" and their cheerleaders, such as Clive, have willfully assumed the role of that detested figure in Victorian mythology --the "wastrel patriarch." They have wantonly squandered our children's patrimony.
They ignored Micawber's Law, to the universal misery of our nation. No real conservative would do that. But these people are right wing radicals dressed up in conservative clothing. They are not centrists, and they have made no efforts whatever to preserve what many generations of our ancestors sacrificed to build.
No wonder all they do is try to find someone else to blame.
Micawber's Law:
Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Amusing Take on Fallows' "Why we Worry"
http://www.delawareliberal.net/2008/10/08/i-for-one-welcome-our-chinese-banker-overlords/
The math is wrong --we owe the Chinese around $5,000 for every man woman, and child in the country, not $6,000. But funny.
What do you think? Perhaps this was a policy goof due to the use of ideology instead of thinking? Or is it a case of "just happened to be standing there when the hurricane came in", as Clive puts it?
Clive,
You appear to be editing comments without notice or informing your readers.
What do you and your testicles have to hide?
Clive,
I'm surprised you felt the need to edit my original comment, which praised you for being able to reach an unanimous opinion from your readers, regardless of background, education and politics.
That opinion being
I think you should be proud of this skill in these partisan times.
It also appears that you should be proud of the impressive size of your testicles.
Salute!
Fake Fred,
Please write something less puerile next time you use my name.
Clive is arguably the most literate blogger on this site. His blog isn't boring, just relatively infrequently updated.
Fred,
You seem obsessed with the idea that you are the only Fred in existence.
You might be in for a surprise.
Don't I have the right to be a Fred and to express myself without being called a fake.
Perhaps if you post with your surname as well, then there's no confusing us.
but I wince at a fellow Fred treating me this way.
There is only one Fred, and I am he. All other so-called Freds, please bugger off.
"I'm not sure even Reagan and Thatcher had a "fervent faith in the market", but I would not accuse Bill Clinton, George Bush (1 and 2), Tony Blair or Gordon Brown of such a thing. And has the role of government been transformed by three decades of this fervent belief?"
This is one sick joke. So Mr. Crook is just tossing out his opinion? He has a narrow sense of the past 30 years.
Speaking as an American, the party of Reagan and Bush Jr. most certainly had "a fervent faith in the market." Mr. Crook should listen closer to campaign rhetoric. The Republicans' first response to our financial problems is "Democrats will raise taxes. No taxes! Ever!" For them, government is a monster that must be slayed. At the same time, they see D.C. as "theirs." They want power, and they want to destroy the source of that power at the same time. For the past 7 years (at least), we've seen the results of that twisted logic.
The DLC wing of the Democratic Party, with Clinton as its mascot, has largely bought into the delusion that The Market is a sentient, benevolent being from outer space. Government must be shrunk, its only useful functions being the military and Social Security (although it would be dandy to privatize that, too). Glass-Steagall was repealed in 1999, and Clinton allowed it to happen with nary a peep.
Mr. Crook, privatization is "uncontroversial" because what was once an extremist, fringe idea--that our buddy The Market should hold sway over everything--has become centrist. You're chugging the Kool-Aid harder than anyone when you try to act as if conservative dogma isn't dogma.
I agree with the poster above: you're easily the worst writer at "The Atlantic." Megan Mccardle also buys this libertarian hooey fantasy about limitless economic freedom. But she's nowhere near as tedious and faux-polite as you are.
This is troubling.
It's all too easy to blame an ideology, but the simplistic approach we hear and read in the popular press, and in some of the posts above, makes it highly likely that we will draw the wrong lessons and put in place the wrong safeguards.
A close examination reveals that what turned a normal economic downturn into a global free fall was both a lack of regulation and the wrong regulation.
For years Fannie Mae and Freddie Mac, two government-sponsored entities, were pushed for by Congress to "help" people get loans and buy houses that many would not otherwise have been able to afford. Heavy lobbying and large campaign contributions forestalled almost all efforts to enact meaningful regulation.
Years of low rates and liberal underwriting caused more homeowners to be more highly leveraged than ever before. And with Fannie Mae and Freddie Mac buying up and securitizing low-rate, marginal-credit loans, we experienced a boom in sub-prime lending unlike any we've seen before.
This drove real estate prices to new levels, and with more buyers just barely able to afford their loans, when the housing market turned, it turned down sharply, generating high rates of delinquencies and bankruptcies. As a result, the price of mortgage-backed securities fell, and with prices falling and securities more complex than ever, some securities buyers withdrew from the market.
None of this, however, would have been enough to generate the free-fall we've seen in markets for all types of securities around the globe.
It took, instead, another regulatory failure, this one put in place after Enron: The mark to market rule, which was imposed without adequately understanding the devastating consequences if securities prices across the board ever dropped rapidly and kept falling day after day.
For years, with stable or rising asset values, mark to market wasn't a problem. But when prices for mortgage-backed securities fell sharply, large, well-run financial institutions were forced to come up with hundreds of millions--billions, in some cases--in additional collateral over night. This pushed prices down further and drove some institutions that had been healthy and stable weeks earlier into a precipitous decline in a matter of days.
The nature of our interconnected financial system caused many banks and brokers at home and abroad to retreat to the sidelines rather than step in and buy even at depressed prices. This was understandable after seeing healthy Wall Street firms close their doors. No one was willing to take the normal risks, or even extraordinary risks, when they could no longer judge whether the firm on the other side of the transaction would be around tomorrow.
And the effects continued to grow, as trading was brought to a near-standstill in other types of securities, which drove the need for even greater government intervention in the United States and around the globe.
Does this represent a fatal indictment of free markets? No, not unless we're foolish enough to let fear trample reason and cause us to abandon what we learned long ago.
Is it the result of too little regulation? In some cases. Or too much? In others, yes.
Is this the time to declare victory for one ideology over another and make major, long-term changes without careful analysis? No, not again. Please, not again.
I think Northern Observer and ScottB have it about right.
This shouldn't be discussed in terms of political party, but political ideology.
After Reagan, the ideology of our politics took a large rightward lurch - it's the Overton Window effect - and the Democrats, had to adopt much of the conservative ideology in order to remain viable.
Clinton, the only Democratic President since Reagan, was certainly no Liberal in anything but social policy, and even then he was pretty lukewarm about it.
The constant conservative drumbeat over the past 25 years has been "let the markets decide and regulate themselves". This has proven to be a disastrous policy.
And the most infuriating thing about what is happening now is that the conservative solution is to socialize the damage it has caused.
And as someone else pointed out, the argument at this point shouldn't be too much vs. too little regulation, but smart and sensible vs. stupid and damaging regulation.
But I fear that will be too much for the pinheads in Washington to grasp.
I would offer two responses to the critiques of my good friend, Lee Wright, to the original commentary. First, suggest that Lee’s response to Clive’s use of “discredited” confuses this word in a political and an intellectual sense. The two are not necessarily the same. I take it that Clive meant the former, whereas Lee's response deals with the latter.
I doubt that there has ever been complete intellectual consensus about the relative importance of various factors in the Great Depression of the US, or how much headway the US government made against it before the US entry into WWII switched priorities. Nonetheless, from a political and popular perspective, the Republican Party stood “discredited” for three decades in the middle of the 20th century.
The second point I would offer is that “lessons of history” are inherently slippery. From this biologist’s perspective, history is an uneasy marriage of two disciplines. One is a particular application anthropology or forensic science, which can use various tools of modern science to examine a falsifiable hypothesis: did person or agent X really do deed Y on date Z? The second part is essentially the art of the story teller: “bringing history alive”.
The problem with even the first part is that there is always the larger question of “what might of happened were things done differently?” This is inherently more speculative, and more in the realm of the story teller. A associated problem is that evidence of the “lessons of history” is inherently interpreted through a subjective filter. If one starts with an a priori perspective that maximum personal autonomy, minimum regulatory intervention, and ascendancy of property rights are inherent goods, then this will obviously affect how one interprets the lessons of history.
Interesting discussion. An interesting point (missing) I feel is important:
Predatory lending practices really underminded the legitimate use of securitization in the subprime market. Had conservatives truly been interested in smart regulation, they should have fought that fight, and they didn't (and democrats failed here too).
State legislators were begging Washington to give them more latitude to crack down on irresponsible loans with fine print fees and the like. And they got pushed back hard. This is an area where conservatives, at least in this administration, clung too stubbornly to the idea of "no regulation" and did a poor job of protecting consumer's rights. Think about this: The OCC oversees over 1,700 federally chartered banks. Out of the 496 enforcement actions against those banks, between 2001 and 2006, only one involved subprime mortgage lending. One.
Now, of course, its a lot easier for national banks to deal with one set of federal rules than a variety of state directives, but then again individual states have been far more effective at identifying problems quickly, and addressing them. But if the federal government refuses to give the States the power to regulate, while at the same time refusing or failing to enforce regulations already on the books, then what the hell is the point?