July 16, 2008
Arnold Kling
Over at the Creative Capitalism site, Larry gets to the nub of the Freddie-Fannie issue.
What went wrong? The illusion that the companies were doing virtuous work made it impossible to build a political case for serious regulation. When there were social failures the companies always blamed their need to perform for the shareholders. When there were business failures it was always the result of their social obligations. Government budget discipline was not appropriate because it was always emphasized that they were "private companies.” But market discipline was nearly nonexistent given the general perception -- now validated -- that their debt was government backed. Little wonder with gains privatized and losses socialized that the enterprises have gambled their way into financial catastrophe.
It's one of the best blog posts you'll ever see. Read the whole thing.
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The illusion that the companies were doing virtuous work made it impossible to build a political case for serious regulation.
Ah, this is a rich sentence. Because not only is it impossible to seriously regulate them, it's impossible to not unseriously regulate them! This goes back to at least Jack Kemp in Bush Sr.'s HUD who enunciated the vision of home owenership and sought to privatize some public housing projects by selling units to tenants. It could not happen without lender participation. But then witness Congress through the 90s wanting to make credit available all the way down the ladder but doing nothing substantive to effect that. Lay out the vision and a threat. Unserious regulation indeed.
When you stray into the concept of stakeholders, lots of people show up with their stakes. That's the big problem I have with creative capitalism.
Yes - great stuff.
The problem, as so often, is a failure to examine the incentives generated by a proposal.
Creative Capitalism is embarrassing nonsense - quite clearly a retrograde step: a de-differentiation; a reduction in complexity; a reassertion of politics over the economy; a merger of functions which will inevitably serve to limit societal efficiency.
