“Socialized Risk, with Still Highly Leveraged Survivors”
I do not agree with everything Austrian Economics preaches — but I believe they are dead right when it comes to the way to handle insolvent banks.
This week’s Barron’s has a short interview with Kevin Duffy and Bill Laggner of Bearing Asset Management.
I really like Kevin’s quote on the bank rescues:
“Any healthy system needs a way to correct error and remove waste. Nature has extinction, the economy has loss, bankruptcy, liquidation. Interfering in this process lengthens feedback loops. Error and waste are allowed to accumulate, and you ultimately get a massive collapse.
Capitalism is primarily attacked by two groups: utopians who wish to impose a more “compassionate” system, and political capitalists who want to enjoy the fruits of success without bearing the pain of failure. They use the coercion of the state to gain privileges, at the expense of everyone else.
As a country we’ve become less tolerant of economic failure. The result has been a series of interventions, such as meddling in the credit markets, promoting homeownership and creating a variety of safety nets for investors. Each crisis leads to an even greater crisis. The solution is always greater doses of intervention. So the system becomes increasingly unstable. The interventionists never see the bust coming, then blame it on “capitalism.”
-Kevin Duffy, Bearing Asset Management.
Good stuff . . .
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Source:
Shorting the Economic Recovery
ROBIN GOLDWYN BLUMENTHAL
Barron’s DECEMBER 28, 2009
http://online.barrons.com/article/SB126167812677704659.html
December 27th, 2009 at 11:16 am
That was a must read article.Sometimes Barron’s is still good for something.I read it going,”Yep,aha,spot on,right”etc….The only thing is,there have been several articles/thing’s I thought would have brought us pain,not yet.I still can’t believe we haven’t heard peep one from the lib’s on the high cost of oil{$75 bbl}in Dec.where’s the outrage?Where’s the call’s for investigation into price rigging?Oh,wait.Yeah that’s right ole king George is no longer in office.Funny how the priorities of the common man go right out the window when the so called”voice of the working man”get’s in office.What a crock.The means always revert.Hold on into year end,could we have some fire work’s to close out the decade?Low vix,holiday skeleton crew,stay tuned…..
December 27th, 2009 at 11:54 am
You can take the boy out of the city but you cant take the city out of the boy.
December 27th, 2009 at 12:26 pm
Prices peaked at $4.114 a gallon, $147 for crude. Why such outrage at $2.xx per gallon for gasoline and $75 for crude? The pain has been much worse. Why should anyone, conservative or liberal be outraged and call for price rigging?
December 27th, 2009 at 12:35 pm
Kevin is spot on when we look to Nature for solutions; I know because it became my life’s work. More importantly, I think he could have expanded his view on the corrosion of Capitalism by the ability to snow our legislatures with an estimated 68 to 1 ratio of lobbyists fashioning their tailored loopholes in every Bill you can name. What we need is PIRGs that explode every loophole with a cost / benefit ROI and give up names of likely beneficiaries and value extracted from the system. DR on MM has begun to do this but it flitters by the screen; it needs to be run up the flagpole and an adjunct to every piece of legislation. Dogfood for lunch in the Capitol cafeteria.
December 27th, 2009 at 12:36 pm
I have a problem with the way this is going…
“coercion of the state to gain privileges, at the expense of everyone else.”
Those privileges they gained were more often than not exemptions from common sense regulation. Anti-trust, leverage ratios, SEC oversight, Glass-Stegall etc.
Where the Austrians believe the government is the problem, reading this blog (and attention to details/real data) reveals that the government has been asleep for the past decade if not longer!
“The solution is always greater doses of intervention.”
Or how about a simple return to the status quo of 1933-2000?
December 27th, 2009 at 12:41 pm
The hour long Vanity Fair panel seen on Bloomberg, “Covering The Crisis”, with authors Lewis, Ferguson, Sorkin and others had some good quotes on this.
December 27th, 2009 at 1:16 pm
The “Utopians” are the ones who believe that a completely unregulated market will lead to economic nirvana. Even the Austrians recognized that in some circumstances the market lost its efficiency . As I understand it their analysis did not really extend to financial markets – this was a later extension. An excellent discussion of this in John Cassidy’s “How Markets Fail”.
December 27th, 2009 at 1:22 pm
Two factors dominate: (a) payoffs of politicians by monied interests, and (b) the perceptions of the voters on the day of the next election.
The long term? Fuggetaboudit.
December 27th, 2009 at 1:41 pm
“Any healthy system needs a way to correct error and remove waste. Nature has extinction, the economy has loss, bankruptcy, liquidation. Interfering in this process lengthens feedback loops. Error and waste are allowed to accumulate, and you ultimately get a massive collapse.”
I certainly agree with these premises but I believe the conclusion flawed: interfering does not cause a massive collapse – that is due to an unhealthy system – interfering only slows the rate of collapse.
Therefore, interfering in this process lengthens feedback loops, leading to long periods of sub-standard growth interspersed with recession, i.e., The Slow Depression.
December 27th, 2009 at 2:14 pm
This reads like Ayn Rand writing footnotes for Minsky.
This part is accurate: “Any healthy system needs a way to correct error and remove waste. Nature has extinction, the economy has loss, bankruptcy, liquidation. Interfering in this process lengthens feedback loops.”
From that point onward, I don’t see a sound argument for the implied Gramm-like conclusion that capitalism is grand and will self-correct if only we don’t interfere.
Seems we have tried that tact before and didn’t much like it. Capitalism is surely better than any other system, but perfect and self-regulating it is not.
December 27th, 2009 at 3:07 pm
[...] Socialized Risk, with Still Highly Leveraged Survivors Too Big To Fail! Many free market supporters still believe that CEOs, board members and other assorted MBA scum deserve their compensation. [...]
December 27th, 2009 at 3:51 pm
@ DL: (b) is effectively worthless as an agent of “real change” (see last 3 elections for proof).
December 27th, 2009 at 4:53 pm
I believe Kevin/Austrians is dead right on his estimation on how markets fundamentaly works! I believe that he/Austrians is dead wrong on how the world in reality works! … you see there can never be a state that dos not interfere with the market to some extent! Can you picture a world where the state dosnt have to fund an army, or try to protect theire citizens from drugs with police and enforce the rule of law, create highways etc. ? … thought not… Can we stop pretending now ?
December 27th, 2009 at 6:56 pm
Very feeble stuff, if you ask me. Failure has been generated by the innovation and aggressiveness of the banking sector. Then, since they control the regulatory machinery, they bail themselves out. The “interventionists” are the authors of the crisis, none different. Admittedly they don’t see it coming, but they ARE are the capitalists.
“As a country we’ve become less tolerant of economic failure. The result has been a series of interventions, such as meddling in the credit markets, promoting homeownership and creating a variety of safety nets for investors. Each crisis leads to an even greater crisis. The solution is always greater doses of intervention. So the system becomes increasingly unstable. The interventionists never see the bust coming, then blame it on “capitalism.””
December 27th, 2009 at 7:29 pm
I think the term ‘political capitalists’ aptly describes the scenario we have morphed into. It seems to me that all participants have garnered that mantle. I would also like to know where the Austrian’ model was ever in place. While I agree with some of the principles of the school I know of no economic system on earth that ‘practices’ the Austrian doctrine. Where is this Austrian model? Which country best exhibits it either now or in the past?
December 27th, 2009 at 8:04 pm
What’s a credit market? Question from 150 million (more or less) US citizens.
December 28th, 2009 at 2:27 pm
The market has only one way to regulate – failure – but this option has been removed by decades of safety nets and bailouts. To believe bureaucrats are capable of performing this function, you have to believe they have vision and are beyond political influence. In other words, you have to believe in Santa Claus and the Tooth Fairy at the same time.
January 4th, 2010 at 11:12 pm
[...] hat tip to Barry Ritholtz “Any healthy system needs a way to correct error and remove waste. Nature has extinction, the economy has loss, bankruptcy, liquidation. Interfering in this process lengthens feedback loops. Error and waste are allowed to accumulate, and you ultimately get a massive collapse. [...]