Cato and the Financial Crisis
A libertarian friend recommended as “great” this missive from Cato President Ed Crane making the case that if only we’d listened to the libertarians none of this financial crisis business would have happened. The analysis is pretty damn weak if you ask me. Crane writes:
As for the subprime crisis, it was not just Peter Wallison sounding the alarm. In 1997 Cato published a Policy Analysis by Vern McKinley entitled “The Mounting Case for Privatizing Fannie Mae and Freddie Mac.” Vern wrote: “Because of their quasi-government status, there is a market perception that Fannie Mae and Freddie Mac mortgage-backed securities and debt carry and implicit federal guarantee against default. Hence, the GSEs expose the federal taxpayer to an ever-increasing potential contingent liability that could ultimately cost tens of billions of dollars to rectify.”
I think that analysis is perfectly correct, but the fact of the matter remains that it has almost nothing to do with our present situation. The implicit government guarantee to Fannie and Freddie was a bad idea in my view, but it had nothing in particular to do with the creation of the financial crisis, and the upshot of the crisis ultimately was that even institutions that hadn’t been given such guarantees wound up getting bailed out.
But more to the point, when the best your organization can claim in terms of prescience is that you published something in 1997 then you know you have a problem. Clearly, the McKinley pieces doesn’t have much of anything to say that’s relevant to the specifics of the problems that have unfolded in 2007 and 2008. That’s not McKinley’s fault, it’s a reflection of the fact that he was writing in 1997, before the stock market crash and the subsequent growth of the housing bubble. 1997 was too early to be prescient. Meanwhile, Cato does have a section on its website dedicated to papers on the subject of “Financial Crises and the Global Financial System.” They published no papers whatsoever between September 2004 and May 2008. And the September 2004 paper was about Iraq. 2004 also saw a paper about the Dominican Republic. 2003 witnessed another paper about Iraq and an Anna Schwarz paper on “The IMF’s Dubious Proposal for a Universal Bankruptcy Law for Sovereign Debtors”. But as the stage was being set for the current crisis, absolutely nothing.
Similarly, on housing markets they published absolutely nothing between 2004 and 2008 — precisely the years during which the bubble was growing and changes in policy might have made a difference.
In January of 2005, though, Cato’s Alan Reynolds did publish some sneering nonsense deriding those who believed there was a housing bubble:
The start of each year is prime time for economic pessimists, who try to persuade us terrible things are about to happen. A perennial favorite is the “housing bubble” about to burst, with a supposedly devastating impact on household wealth. [...] A July 2, 2002, Wall Street Journal editorial on this topic worried that “homebuyers are resorting to greater levels of mortgage debt.” Contrary to such anxieties about homeowners being over-leveraged, their equity exceeds 56 percent of the value of homes and that ratio has not declined. Mortgage payments often replaced rental payments as homeownership increased, but that was not an added burden. [...] House prices did not just “bubble” for no reason.
I don’t know what conclusions about “libertarians” should really be drawn from any of this, but it’s clear enough that Crane’s institution was mostly indifferent to the problem as it mounted, and occasionally intervened to try to shout down people who were calling attention to the issues.
52 Responses to “Cato and the Financial Crisis”
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November 29th, 2008 at 12:56 pm
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November 29th, 2008 at 1:00 pm
Libertarians: stopped clocks that amazingly manage to be ten minutes slow three times a day.
November 29th, 2008 at 1:00 pm
As far as I can tell, there are two strains of “libertarians”. One is the Alan Greenspan-Ayn-Rand-true- believers, but puleeze, anyone who didn’t get over that sophomoric drivel as, well, sophomores on college can be dismissed easily enough.
The other are non-religious, Limbaugh style ditto-heads who buy into most of the Republican party sloganeering (”voter fraud!!” “Drill baby drill!!!” “Bomb Iran!!!”), but not on social issues (often referred to as “Republicans who smoke pot”).
I don’t kmow why anyone would take either strain seriously.
November 29th, 2008 at 1:08 pm
As far as I can tell
Your ability to tell can be measured in nanometers. How about you actually learn something about current policy divisions among libertarians before cutting and pasting something you found in a Kos journal comment section.
November 29th, 2008 at 1:41 pm
How about you actually learn something about current policy divisions among libertarians…
Good suggestion. I’ll get right to it after I finish my study of Heteroousianism vs. Homoiousianism in the 4th-Century Byzantine Empire.
November 29th, 2008 at 1:45 pm
You will want to move away from the milquetoast ‘city’ libertarianism at Cato and look to the radical ‘country’ libertarianism at the Mises Institute to find good analysis of the financial crisis.
Their argument is the traditional Mises-Hayek point that the federal reserve is the source of most (if not all) boom-bust cycles.
On Austrian Macroeconomist (at Auburn U) has outlined the theory very clearly in the following powerpoint: http://www.auburn.edu/~garriro/cbm.ppt
Once you understand the general explanation, its application to the current dilemma will be pretty obvious.
November 29th, 2008 at 1:49 pm
Libertarians and “free-market” conservatives will continue to cling bitterly to Fannie and Freddie. Otherwise, they would be forced to admit that their philosophy of unregulated buchaneer capitalism leads to Ponzi schemes, speculative bubbles and, ultimately, economic collapse.
November 29th, 2008 at 1:53 pm
Don’t waste your time with the “country” libertarians, either.
Paul Krugman had this to say about the Austrian boom-bust cycle theory:
“A few weeks ago, a journalist devoted a substantial part of a profile of yours truly to my failure to pay due attention to the “Austrian theory” of the business cycle—a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire.”
November 29th, 2008 at 1:58 pm
If they didn’t have Fanny/Freddie it would be something else. They’d blame some regulation or piece of the tax code. The weakness of their argument in this case really should embarrass them.
November 29th, 2008 at 1:58 pm
Regardless of any of the policy merits of libertarianism – and as far as I can tell, those are rather slim – it has no political relevance whatsoever. Americans are not libertarians. Maybe compared to Scandinavians, but really, we’re just not. Bush didn’t win the ‘04 campaign on privatizing Social Security, but on expanding, if with little efficacy, Medicare benefits to include prescription drugs, a muscular (to put an unfairly positive spin on it) foreign policy that Cato never really disagreed with anyway, and social conservatism.
Even if libertarian values are widely attractive, they’re just values. Libertarianism is unable to address the concerns of the vast majority of citizens on matters that actually impact their lives, and libertarian values, popularly if improperly understood (there are pro-life libertarians, it turns out), are really out-of-place in the modern Republican Party, the one major political party that has ever really spoken the language of libertarians.
Until libertarians show even the slightest interest in adapting to these realities, color me skeptical.
November 29th, 2008 at 2:07 pm
Good suggestion. I’ll get right to it after I finish my study of Heteroousianism vs. Homoiousianism in the 4th-Century Byzantine Empire.
Indeed it would be a good suggestion if they post in question was about the Council of Nicaea.
November 29th, 2008 at 2:35 pm
Nes, the commenter was pointing out that studying policy nuances between different types of libertarians is about as useful to the average person, and as relevant to the current economic situation, as studying Heteroousianism vs. Homoiousianism in the 4th-Century Byzantine Empire. Libertarianism is dead for the foreseeable future, and very few people are still interested in it, except to make fun of it.
November 29th, 2008 at 2:43 pm
Every piece I’ve seen out of Cato has been doggedly apologetic to the Republicans in the framing.
November 29th, 2008 at 2:55 pm
Nes, the commenter was pointing out that studying policy nuances between different types of libertarians is about as useful to the average person, and as relevant to the current economic situation, as studying Heteroousianism vs. Homoiousianism in the 4th-Century Byzantine Empire. Libertarianism is dead for the foreseeable future, and very few people are still interested in it, except to make fun of it.
Which had nothing do with my original comment. This post is about libertarianism. The original commenter I was responding to made a moronic critique. My response was to have an iota of knowledge about something before posting, Which apparently that makes me some kind obscurant.
November 29th, 2008 at 3:25 pm
Libertarians my ass. First off, and seemingly off topic perhaps, is that there can be only one position for Libertarians in regard to credit and banking. No Federal Reserve. One institution given enormous power is the antithesis of the libertarian ideal. That institution given the power, real or imagined, to control interest rates is an abomination against the very idea of a free market.
Cato isn’t shrine of Libertarian thought. It’s a bunch of people from the very best suburbs, who often couldn’t get dates in High School, who have made a fetish out of a world that can never exist.
I’m no Libertarian but at least I can respect the real ones who shout from street corners ‘eliminate the Fed’. Not the elitist boot lickers working in the Beltway.
November 29th, 2008 at 4:26 pm
Another one of Matt’s pointless, sneering anti-libertarian posts.
This clown is so low on the totem pole in punditry that the only people lower than him are libertarians.
So he has to exercise his ego by constantly dumping on them – because if he dumped on anybody else, his ass would be out the door and he’d be on the unemployment line.
I’ve never been a Cata Institute supporter but frankly these posts are embarrassing. Cato Institute has far more influence than Yglesias does, at least among Republicans. And they’ve been around a lot longer. Matt complains they haven’t published anything on the crisis since 1997 – where was he in 1997? In high school?
Embarrassingly stupid.
November 29th, 2008 at 5:14 pm
The commenter who derided libertarians as all falling into two categorical groups of idiots has clearly not been paying attention to the libertarians in the blogosphere with actual intellectual influence like Tyler Cowen, Bryan Caplan, Arnold Kling, and Megan McArdle – just to name a few. These are people who often take flak from libertarians for not being radical enough, and at the same time take flak from leftists for being too supposedly indifferent to the plight of the poor. Their commentary is typically a lot more insightful and analytical to the old retreaded “the Fed is evil” or “government is always wrong” shibboleths which most “libertarians” on the internet like to spout.
I suppose you could argue that these people don’t count as libertarians since they aren’t anything like the lunatics on lewrockwell.com or the Paultards who flood every message board on the internet. But they identify as libertarians, and certainly most leftists would call their beliefs libertarian. The fact is, libertarianism can certainly be a reasonable and intellectual ideology. It has its kooks, but would you judge conservatism by Free Republic or leftism by The Daily Kos?
November 29th, 2008 at 5:21 pm
Doug Henwood, leftist economist, 1992:
But since this was even 5 years before the ancient era of 1997, and involves no Libertarians, and doesn’t outline exactly how a crisis might arise and in what method in which year, why pay attention to anything said back then, and by a leftie anyway, when only right wing Libertarians are ever interesting?
November 29th, 2008 at 6:16 pm
Libertarians are wrong. Fannie and Freddie should never have been partly private. They should have been government entities all along.
November 29th, 2008 at 11:42 pm
I’ll get right to it after I finish my study of Heteroousianism vs. Homoiousianism in the 4th-Century Byzantine Empire.
It was actually Homoousianism vs. Homioousianism.
The whole thing was very controversial because no one was willing to budge one iota.
November 30th, 2008 at 10:01 am
As a Libertarian – at least I always land right in the middle of their little test group – Its really been very interesting to read all the comments from all the different directions here. Most of them seem to be fairly ignorant of what a Libertarian is, or choose to focus instead on attacking those who appear more ‘liberal’ or ‘conservative.’
Libertarians are NOT just angry Republicans. True Libertarians should despise everything the GOP has become, because they are Fascist, and they actively work to legislate personal freedoms away based on their own perverse faiths. The GOP believes in big government as long as it enriches themselves, and that was one of the biggest reasons that Adam Smith talked about open markets in ‘Wealth of Nations.’
Currently, Libertarians would find more to get along with in the DNC, because the Democrats seem more interested in a competitive market, and in my lifetime, have been the group that has been more willing to espouse fiscal responsibility. They also are far more Libertarian on social issues suc as civil unions. They are still going to run into problems along with big government.
I too, dislike big government, but I as a Libertarian accept that we have to have a referee, and rules for a true even playing field to practice our ‘Libertarian ideals’. So did Adam smith in the wealth of Nations. I also accept that there are times that government must intervene simply because one ideological group has run so far off in one direction, a correction must be made. That is where we are now. Trust me, nothing would give me more pleasure than to watch GM and Golden Sachs go down, as they should. Yet the people who will pay that price the most will be the person on the ground. The crooks will never get slapped, unless they are forced to take bailout money and then get pounded by regulation.
Finally, I stand on the fence about the Fed. In practice I don;t like it. In reality, I know that for growth to occur over the long haul economically, we have to have stable money supply, and fairly stable interest rates, so people can gauge risk. The fear, as always, and as has happened under the last 30 years of GOP ideology – is that this power will instead support cronyism, and leave the rest of us in the dust.
Ignore the angry Republicans claiming to be Libertarians. They aren’t and we all know it. They are just scared to be associated with their poor voting choices, and mad that their party lied to them.
November 30th, 2008 at 10:14 am
This is all part of the right’s effort to hang the entire financial crisis around the neck of Fannie/Freddie and/or the CRA. Fannie and Freddie had flaws but they didn’t have much to do with the housing bubble or the wider financial collapse. The housing bubble occurred between 2002 and 2006. By late 2006 it was already starting to deflate. Fannie and Freddie were until 2006 precluded by law from purchasing securitized subprime or Alt A (the next most risky mortgage category) loans. Neither could they purchase securitized Jumbo loans. Hence their involvement in this whole mess only came at the very end of the cycle and even then they only accounted for a small fraction of the iffy security buying most of which was still being done by private institutions. Furthermore F/F perform an essential function in the mainstream US housing market in providing capital when the private sector flees as it alway does in a downturn. Without F/F domestic mortgage lending would be completely frozen, it was one of the two reasons the govt had to nationalize them.
November 30th, 2008 at 10:24 am
I’ll add one more comment about libertarianism. It’s a totally fatuous idea in the context of a nation of 300 million with a combined federal/state budget of $4.5 trillion, which is several times larger than the govt spending of any other sovereign state in the world be it social democratic, communist or conservative in outlook. It’s essentially at one with the Flat Earth Society in its relevance to the problems that surround America in 2008. Hence, “Libertarianism” has come to revolve around a number of marginal issues like access to guns or total fantasies like shutting down Social Security. In reality it provides cover for conservatives and Republicans who are appalled at the incompetence and profligacy of their own party but can’t bring themselves to vote for the real alternative which is at least going to deliver realism and competence.
November 30th, 2008 at 10:49 am
Ottovbvs gets it right at 23. There really are no respectable public libertarian intellectuals for this reason. They might have some decent analysis of an issue from time to time (like Tyler Cowen), but the foundation of their philosophy simply doesn’t provide any meaningful assistance in developing marginal policy recommendations in our society.
November 30th, 2008 at 6:41 pm
Sure, keep pretending that laissez-faire is dead. That will get you through the day when Obama starts scaling back, on “pragmatic” grounds, all the Progressive liberal socialist schemes you had planned out. LOL
November 30th, 2008 at 7:04 pm
mpowell:
Excuse me? None of the writers I named indulge in this kooky crap about abolishing the Fed or Social Security. Libertarianism is founded in the classical liberalism of people like John Stuart Mill, Frederic Bastiat, and Adam Smith – Friedman and Hayek were influential but came along later. It just happens that liberalism has branched out a lot. Now on the one hand we have left liberals who emphasize the social justice and civil liberty aspects of Mill’s and Bastiat’s thinking, at the expense of actual effective policy; we have right-wing conservatives who emphasize the efficacy of markets and the failures of government without considering the importance of the rule of law and pragmatic policymaking; we have Austrians who blame the Fed and every other government agency under the sun for every problem imaginable without realizing that equality of opportunity and market failures are important issues that only the government can address; and finally we have the lonely few who don’t fall into any of these categories – people I think Will Wilkinson might call liberaltarians.
Most intellectual libertarians fall into the liberaltarian category. We believe government intervention in the economy is merited as long as it is focused, its scope targeted, and it serves a greater purpose in shoring up the institutions markets and individuals need to exercise their freedom of choice. The Austrians, who dominate the public idea of what libertarianism is, reject the idea that government can have any positive role to play in enhancing individual liberty; the left liberals reject the idea that markets can have much of a positive role to play in enhancing individual liberty; right wingers don’t even really believe in liberty anymore, as far as I can tell, though their original intellectuals like William Buckley were probably somewhere between liberaltarianism and Austrian libertarianism.
To tar libertarian thinkers with the same brush on the basis of some nonsense you’ve read on lewrockwell.com or the crap Paultards spew is the same as tarring left liberals with the rhetoric of Ralph Nader or Cynthia McKinney, or blaming conservatives for the rhetoric of Chuck Baldwin. Ron Paul and Sarah Palin may have captured the imagination of Austrian libertarians and paleoconservatives, but they don’t necessarily reflect the intellectual basis of either school of thinking. To say libertarianism has no intellectual relevance because of Ron Paul’s insane musings on the Fed is to say William Buckley shouldn’t count as an intellectual because of Sarah Palin’s ignorance. You don’t have to like libertarianism, but to ignore its intellectual moorings is the height of folly.
November 30th, 2008 at 7:47 pm
This is the first time I have ever read an TP article. Is this type of drivel the norm here?
First, the author admits:
Then he goes on to cite when this prescient analysis took place: 1997. The author admits to Cato’s prescience and correct analysis.
But, then he attempts to build a case on the grounds that Cato was too prescient because they predicted the outcome 11 years before the actual financial crisis.
Too early to be prescient? Now that is just brilliant stuff right there.
November 30th, 2008 at 8:43 pm
The geniuses at Cato came out with a paper recommended that the CRA be abolished a few years ago. Their argument was that the proliferation of really innovative and dynamic “mortgage products” in low-mod neighborhoods by the private sector made the CRA unnecessary. Uh, yeah, so much for that “innovation” and “dynamism,” eh?
November 30th, 2008 at 9:32 pm
Of course in a society that expects quick fixes to everything and, in the face of all possible evidence otherwise, thinks it is possible for The Right People to obtain political power, a philosophy that when honestly pursued indicts the very foundation of the modern State is going to come off as “irrelevant”. That doesn’t mean it’s wrong.
The Catoites are mostly useful idiots for selective deregulation, since anything out of them that doesn’t fit into the prevailing corporatism is just ignored. The Mises types are closer to the mark, they just stop short of where their analysis actually points because it’d sound anti-capitalist — I’d argue it is, and should be.
November 30th, 2008 at 11:12 pm
Weren’t Fannie/Freddie already nominally private at the time? Didn’t, as Matt says, every banklike institution (save Lehmann) that failed end up being bailed out? The whole reason GSE debt was implicitly guaranteed was that everybody knew the Fed/Treasury wouldn’t let it fail, regardless of its de jure status. No law can imbue the government with a credible commitment to let the s*** hit the fan; and this is why banks need to be regulated. The real scandal is why the GSE’s were so poorly supervised.
December 1st, 2008 at 4:50 pm
Perhaps the gurus at Cato should try subscribing to The Economist, that lack-luster UK periodical that only a dilettante would take seriously. They had been noting the growth of the housing bubble in the US and EU for years, but didn’t pretend to know what the pop would look like.
December 9th, 2008 at 6:38 pm
October was the worst month in the last 21 years of the Standard
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