“When You’re in the Red, Listen to Fred”

December 2, 2008



“This bailout will get out of control. It will get out of control and we’ll be lucky to live through it.”

(Guest post by Greg Forster)

Fred Thompson on nonstop bailouts: “If you work in New York in a tall building making millions of dollars every year, it’s called ‘leverage.’ If you’re livin’ anywhere else, it’s called ‘living above your means.'”

Jim Geraghty quips: “When you’re in the red, listen to Fred.”

New Evidence Against the Bailout

October 22, 2008

(Guest post by Greg Forster)

As the evidence piles up, I’m moving closer to abandoning my studied neutrality on the bailout and joining Jay and Matt in opposing it. I still lack the expertise to evaluate the claims that there’s a credit panic, that markets behave irrationally during a panic, that panics turn into crashes, and that it is possible for government to prevent the crash by acting as a sort of substitute rational investor during a panic. But whether or not government intervention can counteract a panic, it’s looking more and more like that isn’t what’s happening.

Today’s datum? GM is buying Chrysler partly so that it will be considered “too big to fail.” (HT Jonah Goldberg)

Since I first saw this in The Corner, I’ve been meaning to post it, but haven’t gotten around to it. Glad I waited – now I can also direct you to America’s MVC (most valuable columnist), Holman Jenkins, whose Wall Street Journal column this morning discusses the case.

Vote Milton in 2008

October 14, 2008

(Guest post by Greg Forster)

In a recent issue, the Weekly Standard‘s Matthew Continetti vents his anger at the House Republicans who killed the first bailout bill. I was about to quit reading after the first paragraph or so – because, really, why bother? – when this line struck me: “It was the day when Lou Dobbs replaced Milton Friedman as the face of economic conservatism.”

Excuse me? Milton Friedman didn’t even approve of the existence of the Fed. Does Continetti think he would approve of having the government buy $700 billion in financial assets? Would Milton Friedman also support having government buy up people’s mortgages and “renegotiate” the terms, or any other gimmick the GOP happens to dream up in its quest for votes?

It is just barely possible that what Continetti meant, but failed to actually say, was that Friedman would have opposed the bailout in a responsible, intellectually defensible manner, while the House Republicans didn’t. But the whole tone and tenor of Continetti’s article suggest otherwise. I’m afraid it looks a lot like Continetti simply identifies respectable and responsible economic conservatism with support for the bailout, and of course Milton Friedman is the respectable and responsible economic conservative par excellence, and Continetti failed to think through the implications. I wish he were the only bailout defender who took this attitude.

The whole thing reminded me of a classic William F. Buckley column entitled “Quick! Get Milton Friedman on the Line!” and published on Oct. 22, 1987, right after the Black Monday market crash. The entire column consists of a transcript of Buckley’s phone call to Friedman after the crash. I’ve emphasized a few lines that might be of heightened interest in light of current events:

How are you, Milton?

We’re fine, how are you?

I was wondering whether you could do me a favor. I would like nine hundred words for National Review on the market breakdown. We would need it by Thursday, noon.


Why not?

I have never written an economic analysis tailored to the market, and I’m not going to start doing that now.


Because the behavior of the market doesn’t correlate in any significant way with the behavior of the economy. It’s a mistake to imply that it does, and that would be inferred if I wrote about it.

Well, why don’t you write precisely on that theme? And it wouldn’t be cheating, would it, if you were to suggest what the investor might expect from the market, given the condition of the economy?

Yes, it would – I would be in the business of vetting the market, and I just told you, I’m not going to do that. I make my own decisions about the market, but not for public instruction. I sold all my stocks during the summer.

You did!

I did. And I’m going back into the market tomorrow.

Later, Buckley remarks that “the talk is of another 1929 depression,” to which Milton replies, “nonsense.”

Well, do you subscribe to the proposition that there are safeguards built into the system that would prevent a depression on a 1929 scale?

In 1954, I delivered a lecture in Sweden under the title, “Why the American Economy is Depression-Proof.” I have seen no reason since then, and see none now, to change that conclusion.

But your position all along has been that even the Great Depression was avoidable, correct? Even without the Federal Deposit Insurance Corp., and the SEC, and Social Security, et cetera?

Yes. The economic downturn from August 1929 to the end of 1930 was more severe than during the first year of most recessions, but if an upturn had come shortly after, the episode would have been classified as a garden-variety recession. It was converted into the Great Depression by the collapse of the financial system in successive waves. In 1931, 1932 and 1933. The stock market played no significant role in this collapse. The argument that the 1929 market crash produced the 1931 to 1933 economic contraction is a prime example of post hoc, ergo procter hoc.

You’re saying that it could all have been avoided?

Yes. The financial collapse of 1931 to 1933 need not have occurred and would have been avoided if the Fed had never been established, or if it had behaved differently. The Fed’s inept performance led to changes in the financial system that make a similar financial collapse highly unlikely.

Well, that’s good news, isn’t it?

Yes, that’s good news.

I still don’t see why you won’t write nine hundred words on just what you’ve said for National Review.

You’ve got nine hundred words in what I’ve just said.

Good point. Thanks a lot, Milton, and good night.

Good night, Bill.

The column appears in Buckley’s Happy Days Were Here Again.

As the election approaches, the Friedman Foundation’s choice of “Vote Milton in 2008” as the theme for this year’s Friedman Day feels more and more appropriate.

Coming Tomorrow: Did Milton Friedman oppose financing school choice through tax credits? Archeologists have uncovered startling new evidence! Tune in for the text of a newly discovered letter in which Milton lays out his position.

David Warren Bails Out on the Bailout

October 13, 2008

(Guest post by Greg Forster)

On this page I’ve cited comments by Canadian columnist David Warren as providing potential support for backers of the bailout. I don’t think, however, Warren had explicitly taken a position. Well, now he has, and it turns out he’s against. I figured out of fairness I should take note of it. I think Jay will particularly like the way he puts this:

Were it not for the panic, very little would be lost. The things that we produce by our labour we may continue to produce, so far as they are needed; and the things we need may continue to be produced, in exchange. Money itself, so long as it is taken at face value, may continue to be the convenient mode of exchange. Neither now, nor in 1929, nor in any of the other times of stock plunge and bank failure, has anything much been lost, until, to use Franklin Delano Roosevelt’s phrase, “fear itself” became the enemy of the people.

For in practical terms, the stocks on Wall Street are not worth nothing. Formidable agencies of production lie behind each of them. When their heads have cooled, investors may sort out which are over-valued, which under-valued by comparison, and what needs writing off. The more I try to think it through, the clearer it seems to me that every “rescue plan” is counter-productive. The sorting-out process is seriously confused when the government blunders in.

Indeed, the consensus of the economists I have read is that the Great Depression was largely an artifact of government intervention, reacting to a meltdown by freezing it into place. For politicians and bureaucracies characteristically mistake money for goods, words for things, pictures for reality.

Warren has actually been on fire for the past couple weeks; Mark Steyn has recirculated this thoughtful column on the “two solitudes” in U.S. politics, and with Canada having its own election underway, Warren’s relentless attacks on Conservative PM Stephen Harper (“Twice I have tried to unload the contents of a column over the head of Stephen Harper, whose betrayal of conservative causes I have been inclined to take personally. The other candidates do not annoy me nearly as much, since I have never been tempted to like, admire, or support any one of them.”) culminated in this paean to the (now apparently defunct) “returned ballot” rule, which once allowed a Canadian to show up at the polling place and formally register that there was no candidate for whom he would care to vote.

O’Reilly Goes Bananas on Barney

October 3, 2008

(Guest Post by Matthew Ladner)

Ok- so I don’t like Bill O’Reilly, don’t watch his show, etc.

I also think that he should have made a more substantive case against Frank. Anybody who buys stock based on what some Congressman says on CNBC, after all, is asking for trouble, especially if it is Barney Frank.

Having said that, Frank’s story he tries to get out about doing something about the Freddies as soon as he became chairman is simply revisionist spin.

Partnership Considers Casino Bailout

October 2, 2008



(Guest Post by Matthew Ladner)


Las Vegas (AP) Casino companies have entered into talks with the Ladner and Loftis LLP regarding a possible recapitalization of select Las Vegas Resorts.


Unable to resist economic gravity as in previous economic downturns, Las Vegas casinos have been laying off employees. “Las Vegas casinos are a great American institution,” noted James Loftis “the government got us into this mess, and the free market is going to have to get us out.”


“Vegas casinos face a short-term liquidity crunch. We will provide needed financial assistance,” noted Matthew Ladner. “We may even MAKE money on this deal!”


The precise assets to be purchased remain under negotiation, but are likely to include many hours at the tables, cigars, drinks out by the waterfall at the Wynn, multiple bets on college football games, and an umbrella drink or three by the pool.


L&L partners wouldn’t comment on ongoing negotiations, but rumors say that the bailout weekend may occur on the weekend of October 18th. The L&L partnership are raising funds from potential equity partners, or better yet, taxpayer funding.


“If we are going to subsidize real estate speculation, why not blackjack? It’s much more fun,” Ladner stated.


UPDATE: L&L officials confirmed the securing of a line credit from the newly formed Strategery Capital Management, LLC. An L&L official anonymously commented “Laissez Les Bon Temps Roulez!”

Legends of the Fall

September 30, 2008

(Guest Post by Matthew Ladner)

If I live to be 120 years old, I won’t live to see a statement so brazenly and knowingly mistaken as the one uttered by Congressman Barney Frank (D-MA) regarding the current financial crisis: “The private sector got us into this mess. The government has to get us out of it.”


Say the statement out loud. Swish the sour taste in your mouth. This statement is the precise opposite of the truth. As chairman of the House Financial Services committee, Frank knows better.


It was in fact the public sector that got us into the subprime mess: specifically, government sponsored entities Fannie Mae and Freddie Mac. These “Government Sponsored Entities” engaged in social engineering in the housing market by buying up reckless mortgages. Perversely, lenders now had no incentive to consider the credit worthiness of borrowers, as they could quickly off-load even absurd mortgages to the GSE’s.


On September 30th, 1999 the New York Times reported on Congressional efforts to expand subprime lending. “Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain phenomenal growth in profits,” the Times reported.


“Fannie Mae has expanded home ownership for millions of families in the 1990s by reducing down payment requirements,” Franklin Raines, former Clinton administration official and Fannie Mae chairman told the Times. “Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”


Raines made this statement as a justification for Fannie Mae easing the credit requirements on loans purchased from lenders. In other words, Fannie blew even harder into the housing bubble. “By expanding the types of loans it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than stellar credit ratings,” the New York Times reported.


See video on unsuccessful efforts to rein in Freddie and Fannie from 2004-2005 here:



Sadly in all of this, the housing market social engineers were unable to suspend the law of unintended consequences. Bartenders became would be real estate moguls, and the lenders played along collecting fees secure in the knowledge that when it all went south, they wouldn’t be left holding the bag. Speculative bubbles thrive on someone making a quick buck, drawing others into trying to do the same. Freddie and Fannie fueled the bonfire of stupidity.


The ultimate blame lies not with the lenders, but rather with those who created the perverse incentives.


Sadly, similar economic myths have been promoted in the past, and still afflict us to this day. As a university student, I was fed the story of how the Great Depression proved the ultimate failure of free-markets, and how the administration of Franklin Roosevelt heroically saved the nation from crisis.


This version of history is also very much at odds with the truth. Research by Milton Friedman and others has firmly established that the Stock Market Crash of 1929 played only a limited role in creating and sustaining the Great Depression. Rather, a series of policy errors by Congress, the Hoover Administration (creating a global trade war), the Federal Reserve (tightening monetary policy during a contraction) and the Roosevelt Administration (too many errors to list) created a prolonged downturn.


The United States had suffered plenty of stock market crashes, and economic downturns. What stands out about the Great Depression is not that it happened, but rather that it lasted so long due to a series of tragic missteps.


This too provides a lesson for today: the main thing we should fear are not bank failures or stock market declines, but rather the rushed and foolish actions of politicians. The only thing we have to fear is not fear itself, but rather fear and reckless government mistakes.


Congressman Frank, who defended Freddie and Fannie from attempt to rein them in after scandals emerged, was even so brazen as to dismissively put this crisis “back to Ronald Reagan, when at his inauguration he said, ‘Government is not the answer to our problems; government is the problem.’”


Sorry Congressman: Reagan got it exactly right and you have it precisely wrong.

Speaking of Standards for Debate . . .

September 30, 2008

(Guest post by Greg Forster)

Since I’m on the subject of the lack of decent standards for public debate in America (see below), could supporters of the bailout please observe a moritorium on the following practices?

1. Attributing to opponents of the bailout, without citation, the position that a general economic crash or depression would be “no big deal,” or not as bad as the bailout. As far as I can see, the most common argument against the bailout seems to be that no general economic crash will occur. You may disagree; you may even have difficulty taking that position seriously. But to say that they’re cool with destroying the American economy is really a pretty obvious straw man. (Except, of course, in those rare cases where you actually do catch somebody saying that a depression would be no big deal, as here. But attributing that view to opponents of the bailout generally seems to me to be clearly false.)

2. Calling opponents of the bailout “irresponsible,” as several people did in The Corner last night. Of course, the position that a new Great Depression would be no big deal would indeed be irresponsible – if opponents of the bailout held it. But they don’t. As I understand it, they think financial markets will take a sizeable hit, as a natural result of bad investment decisions made by the major Wall Street firms under prompting from two decades of really bad housing policy in Washington, and then life will go back to normal. They further think (again, as I understand it) that the bad decisions made during the housing boom are going to have economic consequences regardless of what we do, and it’s better for those consequences to fall quickly on those who deserve them than to spread them out over all of society and have them take a long time to clear. (And that’s to say nothing of the opportunity the bailout bill offers for the authors of the old bad housing policies to enact new bad housing policies as part of the bailout.)

Let me be very clear that I have no opinion on the merits of the bailout itself, and I’m glad that it’s not my job to have one. It seems to me – and I’m no finance expert, so I welcome correction if I have this wrong – that the argument for the bailout goes roughly as follows:

1. We are in a financial panic.

2. During a financial panic, markets don’t price assets rationally in the short term (this is what I think is meant when people talk about assets being basically sound but having a “liquidity problem”).

3. If nothing is done to correct this irrationality, panics escalate into general economic crashes.

4. During a panic, the Treasury Department (or some other government entity) is able to price assets more rationally than the maket in the short term, and thus it can avert a general crash by buying the assets and then selling them off after the panic has subsided and markets are rational again.

Now, all of these are, at bottom, claims about empirical facts. And I lack the factual knowledge to say whether any of them is true or false. People whose opinion I respect are falling on both sides of the fence. And I have no pressing need to sort through all their arguments to figure it all out. So I’m content not to have an opinion.

But if I did have to choose, I’d start by looking at which side is treating the other side more fairly. It’s a pretty good rule of thumb (though not infallible) that the people who are in fact right are going to be more confident they have truth on their side, and you can tell who are really confident they have truth on their side by looking at who’s afraid of a fair exchange of ideas.

What Credit Crunch?

September 25, 2008

If there really were a credit crunch requiring a massive government bailout (even via an insurance scheme), it shouldn’t be the case that people could currently obtain mortgages, auto loans , and consumer loans at reasonable rates.  If credit were scarce, interest rates for these loans should be really high and/or impossible to get.  Neither is the case, so the claims of a crunch are false.

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