Thursday, March 27, 2008

Second Thoughts - A Libertarian Response

"Populate the territory uniformly, extend the same rights everywhere, spread abundance and life all over. In this way the state will become simultaneously as strong and as well governed as possible," - Rousseau, The Social Contract, Bk.III, Chpt.XIII

Rousseau's classic statement of communitarianism might seem an overly strong way to begin a response to Garbo's posting, which, on its face, seems moderate in its advocacy that Americans should not prostrate themselves before the pin maker. Like Lang, I agree that the repeal of Glass-Steagal during the Clinton administration, leading to the fall of the barrier between commercial and investment divisions in financial firms, was problematic. The reason, however, is not only because these firms could now engage in high-risk bets with commercial mortgage backed securities, but also because individual home owners were unresponsive and ignorant to their own financial situations. As a result, individuals were financing property they could not afford and the financial firms were packaging and swapping these bad properties while making them look like attractive investments. These two factors - irresponsible investment by firms and individuals over-extending themselves, have primarily led to the current crisis.

The problem with Garbo's post is that he quickly moves the assignment of responsibility to both parties only to the investors. Though claiming he is attacking the idea that money should come before society, his target is not that notion generally, but rather the leaders of financial firms who share only half the responsibility. For example, he asserts that advocating greater personal responsibility will not do; rather the key is a significant amount of new regulatory legislation. However, regulatory legislation is usually not imposed on individual consumers, such as home owners, but rather on the financial firms that lend to them. Lang is asserting that the way to rectify the problem is to deal with the financial firms party to the current crisis, not by imposing or increasing prudence on the part of the individual home/property owners. A closer look at his language illustrates this focus:
“The leaders in the banking world in the United States have not only been forgetful and neglectful of their responsibility to the public but they have forgotten their own best interests, and many of them are reaping now in the distress that confronts them the legitimate results of their own folly and short-sightedness.”

Though this statement by Representative Henry Steagall (D-AL) is nearly 75 years old, it applies no less today than it did during the Great Depression. The Glass-Steagall Act which bears his name along with that of Senator Carter Glass (D-VA) should never have been repealed. It was a short-sighted plan motivated by unmitigated greed and the desire for “greater efficiency.” Call me crazy, but I don't think he is referring to individual home owners when he condemns unmitigated greed and the desire for 'greater efficiency'. This is why I bring in the quote from the Social Contract - Garbo isn't arguing against money dictating terms to society, he's arguing against the rich dictating terms against the poor (and hence for a shift towards communitarianism). Once we reach this point - the argument becomes something more akin to classic liberalism (e.g. libertarianism) versus modern liberalism, an debate that has been hashed and rehashed in far greater detail and with far more eloquence than I can do here.

The problem with Garbo's argument is that, at best, it only singles out half of the reason for the predicament and as such doesn't necessarily address the greater issue (certainly in terms of population) of Americans procuring more than they can afford. If Garbo really wants to deal with the issue, then this other half requires addressing (though I will grant a little bit of ground in terms of the interaction effects between CEO's of financial firms and the idolization effect they have on everyday Americans, e.g. because middle-class Americans idolize the wealth of top CEO's, going after those top CEO's and eliminating their prostration might have second-order effects on reducing the prostration of the majority of the population).

Where then does that leave us? How should we go about facilitating a more prudent individual? One could argue that crisis itself right now is its own best future medicine - that overly zealous homeowners who purchased a home with no equity have suffered pain and won't engage in the same behavior again. But that doesn't mean it won't happen in the future when they either forget or are offered an enticing bill of goods. I'm interested to see what ideas you guys have on that question.

1 comment:

Garbo said...

If this were an issue of personal responsibility for the homeowners, I would agree, but it is not. Mortgage speculation, like other speculative crashes before it, exploited the hopes and dreams of potential homeowners. At most, we can chastise them for failing to heed the adage, "If it's too good to be true, it probably is." No down payment on a mortgage is too good to be true and you or I would likely recognize it as such. But the vast majority of America is not as perceptive, intelligent, or educated as we are.

However, one assertion you make, that I only single out half the reason for this predicament, is correct. I do. The other half is the failure of the government to provide, as it once did, low interest loans for first time home buyers. It is the failure of the government to assist homeowners and prevent them from losing their homes thanks to over-leveraged debt held by irresponsible investment banks.

If individuals have any sort of responsibility it is to one another, be they borrowers or bankers. The role of government is to facilitate and regulate this interaction and to prevent, or otherwise mitigate, negative consequences due to negligence, incompetence or unforeseen events.

Ultimately, government's responsibility is to "We the People" whereas corporations, banks, etc. is to their shareholders. Robert Reich made much the same argument in his book Supercapitalism. Government has an interest, or should have an interest, in assisting us achieve our dreams, be they a home, a college education, or what have you. A corporation does not, except as it affects their bottom line and therefore, their shareholders.

When you assert, Ebl, that this crisis may perhaps be its own medicine, you imply that the market somehow could be self-correcting, but it is not. The interests of the two parties of the exchange, the homeowner (or former homeowner) and the credit/mortgage/banking firm, diverge. Were they to converge, this crash would not have occurred in the first place. Because they diverge, government must step in.