Doom's Day Has Come

by Eric Martin

Nouriel Roubini speaks, you listen:

It is now clear that this is the worst financial crisis since the Great Depression and the worst economic crisis in the last 60 years. While we are already in a severe and protracted U-shaped recession (the deluded hope of a short and shallow V-shaped contraction has evaporated), there is now a rising risk that this crisis will turn into an uglier, multiyear, L-shaped, Japanese-style stag-deflation (a deadly combination of stagnation, recession and deflation).

With its aggressive monetary easing and large fiscal stimulus putting it ahead, the U.S. has done more [than the EuroZone]. Except for two elements, both key to avoiding a near-depression, which are still missing: a cleanup of the banking system that may require a proper triage between solvent and insolvent banks and the nationalization of many banks, even some of the largest ones; and a more aggressive, across-the-board reduction of the unsustainable debt burden of millions of insolvent households (i.e., a principal reduction of the face value of the mortgages, not just mortgage payments relief). [...]

This severe economic and financial crisis is now also leading to a severe backlash against financial globalization, free trade and the free-market economic model.

To paraphrase Churchill, capitalist market economies open to trade and financial flows may be the worst economic regime--apart from the alternatives. However, while this crisis does not imply the end of market-economy capitalism, it has shown the failure of a particular model of capitalism. Namely, the laissez-faire, unregulated (or aggressively deregulated), Wild West model of free market capitalism with lack of prudential regulation, supervision of financial markets and proper provision of public goods by governments.

There is the failure of ideas--such as the "efficient market hypothesis," which deluded its believers about the absence of market failures such as asset bubbles; the "rational expectations" paradigm that clashes with the insights of behavioral economics and finance; and the "self-regulation of markets and institutions" that clashes with the classical agency problems in corporate governance--that are themselves exacerbated in financial companies by the greater degree of asymmetric information. For example, how can a chief executive or a board monitor the risk taking of thousands of separate profit and loss accounts? Then there are the distortions of compensation paid to bankers and traders.

This crisis also shows the failure of ideas such as the one that securitization will reduce systemic risk rather than actually increase it. That risk can be properly priced when the opacity and lack of transparency of financial firms and new instruments leads to unpriceable uncertainty rather than priceable risk.

It is clear that the Anglo-Saxon model of supervision and regulation of the financial system has failed. It relied on several factors: self-regulation that, in effect, meant no regulation; market discipline that does not exist when there is euphoria and irrational exuberance; and internal risk-management models that fail because, as a former chief executive of Citigroup put it, when the music is playing, you've got to stand up and dance.

Furthermore, the self-regulation approach created rating agencies that had massive conflicts of interest and a supervisory system dependent on principles rather than rules. In effect, this light-touch regulation became regulation of the softest touch.

Thus, all the pillars of the 2004 Basel II banking accord have already failed even before being implemented. Since the pendulum had swung too much in the direction of self-regulation and the principles-based approach, we now need more binding rules on liquidity, capital, leverage, transparency, compensation and so on.

But the design of the new system should be robust enough to counter three types of problems with rules. A tendency toward "regulatory arbitrage" should be kept in mind, as bankers can find creative ways to bypass rules faster than regulators can improve them. Then there is "jurisdictional arbitrage," as financial activity may move to more lax jurisdictions. And, finally, "regulatory capture," as regulators and supervisors are often captured--via revolving doors and other mechanisms--by the financial industry. So the new rules will have to be incentive-compatible, i.e., robust enough to overcome these regulatory failures. [emphasis added]

But seriously, isn't it about time we started heeding the advice of the people that have been right about the major economic devlopments of the past decade or so rather than, say, the Larry Kudlows and Donald Luskinsof the econo-world?  Unfortunately, there's a price to pay for being prescient when you prophesy bad news, or tough times, or - gasp - the irrefutable notion that bubbles eventually pop. 

The reward for such insight is induction into the Order of the Shrill or the tarring of monikers like "Dr. Doom."  But really, it's just about describing reality at a time when the prevailing groupthink is hopelessly pollyannish and resentful of any voice that seeks to tamp the irrational exuberance of the day.

Comments

[tgirsch]

Great stuff. Roubini's one of the best.

[bob mcmanus]

Roubini is ok, but he is still just trying here to promote a more efficient neoliberal oligarchy. As long as there is the massive maldistribution, that fictitious capital in the hands of the top 1 percent will seek returns that are socially destructive.

A better regulated finance that still serves capital instead of the 90% that is labour is really a corporatism, precursor to you-know-what.

Lassez Faire is not really just about regulation, but about the belief that market-determined outcomes are efficient. That is what Roubini and so many moderate economists can't accept, that gov't must distribute the returns from productivity.

[bigTom]

As much as I liked the post, I fear Roubini worship may go too far. Getting one big thing right does not a track record make. He supposedly miss predicted the crash several times before, was it simply a matter of timing, or could his current fame be caused by the stopped watch effect? Still, the quoted stuff sounds pretty good, I just think a little bit of caution is advised. IMHO, no-one really fully understands the present circumstances.

[GoodOleBoy]

The remarkable part of where we are is not Roubini's foresight but the lack of it among all of our trusted government policymakers and our highly paid financial and corporate executives. Roubini's accuracy in predicting this crisis says absolutely nothing about what he has to say now about our future.

Most Americans over fifty have long recognized behaviors in our society that are important contributors to the crisis, including many who are big profiters from those behaviors. So we know many of the behavioral changes needed to get us back where we need to be as a nation of free people. And we don't need Roubini.

It is inconceivable to me how anyone can think that more government involvement in markets can lead to better decisions than would occur otherwise. Every government intrusion also results in a reduction of our individual freedom. We often have threads where it is popular to discuss what it means to be a real American or a patriot. It's a real American and a patriot who will stand up to support and defend the freedoms all humans are born with and which our founders secured in our Constitution.

[ThatLeftTurnInABQ]

It's a real American and a patriot who will stand up to support and defend the freedoms all humans are born with and which our founders secured in our Constitution.

Don't despair, GOB, help is on the way.

Either that, or it's darkest just before it goes completely black. I'm not quite sure which, actually.

[Gary Farber]

"So we know many of the behavioral changes needed to get us back where we need to be as a nation of free people."

I'm really impressed that you're able to speak for "most Americans over fifty."

"It is inconceivable to me how anyone can think that more government involvement in markets can lead to better decisions than would occur otherwise."

Thus not so much with the speaking for "most Americans over fifty."

And lumping all possible government actions into the catch-all of "government involvement in markets" is wildly generalizing. Endless sorts of "government involvement" would be bad. Other sorts, such as the kind of regulating so that markets are kept honest and transparent, as in the origional creation of the SEC, are and would not be bad. It pays to be specific. As usual. Your sort of complete generalization, on the other hand, which would implicitly call for eliminating the SEC, FDIC, FDA, and all other government "involvement" in "the market," not so much.

[gwangung]

This...

The remarkable part of where we are is not Roubini's foresight but the lack of it among all of our trusted government policymakers and our highly paid financial and corporate executives.

...does not go with this...

It is inconceivable to me how anyone can think that more government involvement in markets can lead to better decisions than would occur otherwise.

It's inconceivable to ME that you could leap from statement one to statement two, since number one pretty much implies a lack of the correct governmental involvement in the first place. It pretty much cries out for more governmental involvement.

And, son...y'all don't speak for me.

[Lewis Carroll]

Yes, we should get rid of *government interference* in the market:

http://www.conservativenannystate.org/

[GoodOleBoy]

The first leads directly to the second. The government initiated the process that led us here by setting interest rates to promote easy credit, then interpreting the great american dream to mean the government will help everyone to buy a house, regardless of means. Why would we want the government to have greater influence and control over our daily lives?

[Gary Farber]

"Why would we want the government to have greater influence and control over our daily lives?"

Why would we want to talk in ideological generalities, as if pure ideology were the answer to all questions?

[KCinDC]

GOB, accepting for the sake of argument that the mortgage defaults are the fault of the government rather than, for example, the lenders willing to lie about borrowers' incomes and cut other corners, as I understand it the mortgage defaults alone wouldn't have caused this sort of massive economic meltdown if their power to do damage hadn't been hugely magnified by the bundling into mortgage-backed securities and the credit default swaps and the false assurances of safety of these securities given by the rating agencies. All of those problems call for more, not less, government regulation to ensure the transparency and fairness of the market.

[Gary Farber]

"Why would we want the government to have greater influence and control over our daily lives?"

Ask Teddy Roosevelt.

[...] The prime need today is to face the fact that we are now in the midst of a great economic evolution.

[...]

Our purpose is not to impugn the courts, but to emancipate them from a position where they stand in the way of social justice; and to emancipate the people, in an orderly way, front the iniquity of enforced submission to a doctrine which would turn Constitutional provisions which were intended to favor social justice and advancement into prohibitions against such justice and advancement.

[...]

I am well aware that every upholder of privilege, every hired agent or beneficiary of the special interests, including many well-meaning parlor reformers, will denounce all this as "Socialism" or "anarchy"--the same terms they used in the past in denouncing the movements to control the railways and to control public utilities. As a matter of fact, the propositions I make constitute neither anarchy nor Socialism, but, on the contrary, a corrective to Socialism and an antidote to anarchy.

SOCIAL AND INDUSTRIAL JUSTICE TO THE WAGE-WORKERS

I especially challenge the attention of the people to the need of dealing in far-reaching fashion with our human resources, and therefore our labor power. In a century and a quarter as a nation the American people have subdued and settled the vast reaches of a continent; ahead lies the greater task of building upon this foundation, by themselves, for themselves, and with themselves, an American common wealth which in its social and economic structure shall be four square with democracy.

[...]

n the last twenty years an increasing percentage of our people have come to depend on industry for their livelihood, so that today the wage-workers in industry rank in importance side by side with the tillers of the soil. As a people we cannot afford to let any group of citizens or any individual citizen live or labor under conditions which are injurious to the common welfare. Industry, therefore, must submit to such public regulation as will make it a means of life and health, not of death or inefficiency. We must protect the crushable elements at the base of our present industrial structure.

The first charge on the industrial statesmanship of the day is to prevent human waste. The dead weight of orphanage and depleted craftsmanship, of crippled workers and workers suffering from trade diseases, of casual labor, of insecure old age, and of household depletion due to industrial conditions are, like our depleted soils, our gashed mountain-sides and flooded river bottoms, so many strains upon the National structure, draining the reserve strength of all industries and showing beyond all peradventure the public element and public concern in industrial health.

Ultimately we desire to use the Government to aid, as far as can safely be done, in helping the industrial tool-users to become in part tool-owners, just as our farmers now are. Ultimately the Government may have to join more efficiently than at present in strengthening the hands of the workingmen who already stand at a high level, industrially and socially, and who are able by joint action to serve themselves. But the most pressing and immediate need is to deal with the cases of those who are on the level, and who are not only in need themselves, but, because of their need, tend to jeopardize the welfare of those who are better off. We hold that under no industrial order, in no commonwealth, in no trade, and in no establishment should industry be carried on under conditions inimical to the social welfare. The abnormal, ruthless, spendthrift industry of establishment tends to drag down all to the level of the least considerate.

Here the sovereign responsibility of the people as a whole should be placed beyond all quibble and dispute.

The public needs have been well summarized as follows:

1.We hold that the public has a right to complete knowledge of the facts of work.

2.On the basis of these facts and with the recent discoveries of physicians and neurologists, engineers and economists, the public call formulate minimum occupational standards below which, demonstrably, work can be prosecuted only at a human deficit.

3.In the third place, we hold that all industrial conditions which fall below such standards should come within the scope of governmental action and control in the same way that subnormal sanitary conditions are subject to public regulation and for the same reason--because they threaten the general welfare.

To the first end, we hold that the constituted authorities should be empowered to require all employers to file with them for public purposes such wage scales and other data as the public element in industry demands. The movement for honest weights and measures has its counterpart in industry. All tallies, scales and check systems should be open to public inspection and inspection of committees of the workers concerned. All deaths, injuries, and diseases due to industrial operation should be reported to public authorities.

To the second end, we hold that minimum wage commissions should be established in the Nation and in each State to inquire into wages paid in various industries and to determine the standard which the public ought to sanction as a minimum; and we believe that, as a present installment of what we hope for in the future, there should be at once established in the Nation and its several States minimum standards for the wages of women, taking the present Massachusetts law as a basis from which to start and on which to improve. We pledge the Federal Government to an investigation of industries along the lines pursued by the Bureau of Alines with the view to establishing standards of sanitation and safety; we call for the standardization of mine and factory inspection by interstate agreement or the establishment of a Federal standard. We stand for the passage of legislation in the Nation and in all States providing standards of compensation for industrial accidents and death, and for diseases clearly due to the nature of conditions of industry, and we stand for the adoption by law of a fair standard of compensation for casualties resulting fatally which shall clearly fix the minimum compensation in all cases.

In the third place, certain industrial conditions fall clearly below the levels which the public today sanction.

We stand for a living wage. Wages are subnormal if they fail to provide a living for those who devote their time and energy to industrial occupations. The monetary equivalent of a living wage varies according to local conditions, but must include enough to secure the elements of a normal standard of living--a standard high enough to make morality possible, to provide for education and recreation, to care for immature members of the family, to maintain the family during periods of sickness, and to permit of reasonable saving for old age.

Hours are excessive if they fail to afford the worker sufficient time to recuperate and return to his work thoroughly refreshed. We hold that the night labor of women and children is abnormal and should be prohibited; we hold that the employment of women over forty-eight hours per week is abnormal and should be prohibited. We hold that the seven day working week is abnormal, and we hold that one day of rest in seven should be provided in law. We hold that the continuous industries, operating twenty-four hours out of twenty-four, are abnormal, and where, because of public necessity or of technical reasons (such as molten metal), the twenty-four hours must be divided into two shifts of twelve hours or three shifts of eight, they should by law be divided into three of eight.

Safety conditions are abnormal when, through unguarded machinery, poisons, electrical voltage, or otherwise, the workers are subjected to unnecessary hazards of life and limb; and all such occupations should come under governmental regulation and control.

Home life is abnormal when tenement manufacture is carried on in the household. It is a serious menace to health, education, and childhood, and should therefore be entirely prohibited. Temporary construction camps are abnormal homes and should be subjected to governmental sanitary regulation.

The premature employment of children is abnormal and should be prohibited; so also the employment of women in manufacturing, commerce, or other trades where work compels standing constantly; and also any employment of women in such trades for a period of at least eight weeks at time of childbirth.

Our aim should be to secure conditions which will tend everywhere towards regular industry, and will do away with the necessity for rush periods, followed by out-of-work seasons, which put so severe a strain on wage-workers.

It is abnormal for any industry to throw back upon the community the human wreckage due to its wear and tear, and the hazzards of sickness, accident, invalidism, involuntary unemployment, and old age should be provided for through insurance. This should be made a charge in whole or in part upon the industries the employer, the employee, and perhaps the people at large, to contribute severally in some degree. Wherever such standards are not met by given establishments, by given industries, are unprovided for by a legislature, or are balked by unenlightened courts, the workers are in jeopardy, the progressive employer is penalized, and the community pays a heavy cost in lessened efficiency and in misery. What Germany has done in the way of old age pensions or insurance should be studied by us, and the system adapted to our uses, with whatever modifications are rendered necessary by our different ways of life and habits of thought.

Workingwomen have the same need to combine for protection that workingmen have; the ballot is as necessary for one class as for the other; we do not believe that with the two sexes there is identity of function; but we do believe that there should be equality of right; and therefore we favor woman suffrage. In those conservative States where there is genuine doubt how the women stand on this matter I suggest that it be referred to a vote of the women, so that they may themselves make the decision. Surely if women could vote, they would strengthen the hands of those who are endeavoring to deal in efficient fashion with evils such as the white slave traffic; evils which can in part be dealt with Nationally, but which in large part can be reached only by determined local action, such as insisting on the widespread publication of the names of the owners, the landlords, of houses used for immoral purposes.

No people are more vitally interested than workingmen and workingwomen in questions affecting the public health. The pure food law must be strengthened and efficiently enforced. In the National Government one department should be intrusted with all the agencies relating to the public health, from the enforcement of the pure food law to the administration of quarantine. This department, through its special health service, would co-operate intelligently with the various State and municipal bodies established for the same end. There would be no discrimination against or for any one set of therapeutic methods, against or for any one school of medicine or system of healing; the aim would be merely to secure under one administrative body efficient sanitary regulation in the interest of the people as a whole.

[...]

The present conditions of business cannot be accepted as satisfactory. There are too many who do not prosper enough, and of the few who prosper greatly there are certainly some whose prosperity does not mean well for the country. Rational Progressives, no matter how radical, are well aware that nothing the Government can do will make some men prosper, and we heartily approve the prosperity, no matter how great, of any man, if it comes as an incident to rendering service to the community; but we wish to shape conditions so that a greater number of the small men who are decent, industrious and energetic shall be able to succeed, and so that the big man who is dishonest shall not be allowed to succeed at all.

Our aim is to control business, not to strangle it--and, above all, not to continue a policy of make-believe strangle toward big concerns that do evil, and constant menace toward both big and little concerns that do well. Our aim is to promote prosperity, and then see to its proper division. We do not believe that any good comes to any one by a policy which means destruction of prosperity; for in such cases it is not possible to divide it because of the very obvious fact that there is nothing to divide. We wish to control big business so as to secure among other things good wages for the wage-workers and reasonable prices for the consumers. Wherever in any business the prosperity of the business man is obtained by lowering the wages of his workmen and charging an excessive price to the consumers we wish to interfere and stop such practices. We will not submit to that kind of prosperity any more than we will submit to prosperity obtained by swindling investors or getting unfair advantages over business rivals. But it is obvious that unless the business is prosperous the wage-workers employed therein will be badly paid and the consumers badly served. Therefore not merely as a matter of justice to the business man, but from the standpoint of the self-interest of the wage-worker and the consumer we desire that business shall prosper; but it should be so supervised as to make prosperity also take the shape of good wages to the wage-worker and reasonable prices to the consumer, while investors and business rivals are insured just treatment, and the farmer, the man who tills the toil, is protected as sediously as the wage worker himself.

[...]

The only effective way in which to regulate the trusts is through the exercise of the collective power of our people as a whole through the Governmental agencies established by the Constitution for this very purpose. Grave injustice is done by the Congress when it fails to give the National Government complete power in this matter; and still graver injustice by the federal courts when they endeavor in any way to pare down the right of the people collectively to act in this matter as they deem wise; such conduct does itself tend to cause the creation of a twilight zone in which neither the Nation nor the States have power.

[...]

This commission should deal with all the abuses of the trusts--all the abuses such as those developed by the Government suit against the Standard Oil and Tobacco Trusts--as the Inter-State Commerce Commission now deals with rebates. It should have complete power to make the capitalization absolutely honest and put a stop to all stock watering. Such supervision over the issuance of corporate securities would put a stop to exploitation of the people by dishonest capitalists desiring to declare dividends on watered securities, and would open this kind of industrial property to ownership by the people at large. It should have free access to the books of each corporation and power to find out exactly how it treats its employees, its rivals, and the general public. It should have power to compel the unsparing publicity of all the acts of any corporation which goes wrong. The regulation should be primarily under the administrative branch of the Government, and not by lawsuit. It should prohibit and effectually punish monopoly achieved through wrong, and also actual wrongs done by industrial corporations which are not monopolies, such as the artificial raising of prices, the artificial restriction on productivity, the elimination of competition by unfair or predatory practices, and the like; leaving industrial organizations free within the limits of fair and honest dealing to promote through the inherent efficiency of organization the power of the United States as a competitive nation among nations, and the greater abundance at home that will come to our people from that power wisely exercised.

[...]

We are against crooked business, big or little. We are in favor of honest business, big or little. We propose to penalize conduct and not size. But all very big business, even though honestly conducted, is fraught with such potentiality of menace that there should be thoroughgoing governmental control over it, so that its efficiency in promoting prosperity at home and increasing the power of the Nation in international commerce may be maintained, and at the same time fair play insured to the wage-workers, the small business competitors, the investors, and the general public. Wherever it is practicable we propose to preserve competition; but where under modern conditions competition has been eliminated and cannot be successfully restored, then the Government must step in and itself supply the needed control on behalf of the people as a whole.

Wacky, wacky, stuff from Teddy Roosevelt, eh?

[Omega Centauri]

Government isn't the solution, government is the problem.

They got a lot og mileage out of that one. But, none of the proponents think about the slippery slope. Once you accept it, then rather than trying to reform the problems of government, you simply emasculate its power of control. Then what magically happens reminds me of a line I heard from a Swiss general "Every country is occupied by an army. The only question is whose army?". Well in terms of domestic government, it is the most viscious elements of society that will rise up and fill the power vacuum. Thats not a bad description of what a lack of regulation did to the financial sector.

[Tony P.]

KC,

Maybe we should try it GOB's way. Get the government out of private business deals altogether. If I decide to stop paying my mortgage, which a hundred separate investors own a piece of, let them get together and come in person to evict me from my house. Or, let them gang up on the banker who sold them my mortgage as a safe investment, and take his house. These are private transactions. Why should government be involved?

I know, I know: GOB will yelp that he's all for government enforcing contracts; he merely opposes government "interference" in private business. I would agree with him up to a point: I want government (which, let's remember, is us) to have a say as to what kinds of contracts it will enforce. To GOB, such regulation might seem like a slippery slope. But if he thinks the power of the state should stand ready to enforce any damn contract he makes in pursuit of his own interest, while remaining powerless to tell him "No, you can't make that contract", he has an inflated sense of his own entitlement.

--TP

[russell]

Every government intrusion also results in a reduction of our individual freedom.

For the "every" part of this to be true, you will need to include a lot of antisocial and criminal behavior under the umbrella of "individual freedom".

[gwangung]

The first leads directly to the second.

Wrong.

The government initiated the process that led us here by setting interest rates to promote easy credit, then interpreting the great american dream to mean the government will help everyone to buy a house, regardless of means.

I especially do not want you speaking for me when you reason as sloppily as this. This is sophistry; initiating A process can lead to many different end-situations. None of those situations are inevitable; you cannot treat them as inevitable.

[Phil]

For the "every" part of this to be true, you will need to include a lot of antisocial and criminal behavior under the umbrella of "individual freedom".

russell wins, lock thread.

[John Thullen]

"individual freedom"

I suspect anti-government types like Phil Gramm are now secretly relieved the gummint doesn't allow we freedom-lovers our fully automatic weapons.

It's just not fair.

[stonetools]

Wonder if GOB is against the FHA and VA mortgages? The thirty year, fixed rate mortgages that most conservatives love now didn't exist before those programs. While we are getting government out of the market, we could get rid of the FDIC which insures GOB's accounts and all those stifling laws that prevent banks from speculating with GOB's deposits. Get rid of that obviously unnecessary SEC while you are at it, and then you might as well lose the Federal Reserve Bank. And to get really deep into libertarian lala land here, why not just get rid of government-backed money altogether, and let people just issue their own scrip.
We will be right back to that yeoman subsistence freehold economy that libertarians pine for.

[Phil]

I wonder if GOB is opposed to states, cities and municipalities giving property tax breaks to corporations to locate within their borders? Since he claimed over here that Fannie Mae was exempt from taxes and that that was an unfair advantage.

Of course, his claim turned out to be wrong, but what's a little accuracy when you're making an ideological point?

[John Spragge]

Pop quiz: in what G8 nation have none of the banks failed, has no massive government intervention to save the banks proven necessary, and the housing price decline stayed at 12%, as opposed to a quarter in the United States?

For bonus points, how did this fortunate country achieve such as remarkable feat, and how could the American financial regulators learn from it?

[cw]

John Spragge - Canada. They did this by regulating the banks more than we do, making them keep their leverage way below ours.

The bigger question is, could the American regulators learn from it? That's tougher. It's hard to get a man to understand something when his salary depends on his not understanding it. Quick - who said that?

Full disclosure - I own a house in Canada and have a bank account there, for which I am thankful.

[GoodOleBoy]

Russell,

I'll respond to your comment, respectfully, because your comments usually reflect a measure of balanced consideration not always present in the comments of several others. I doubt I'm as extreme as frequently accused here but I am ideological and what that means to me is that there are some principles that I believe in and those generally involve processes associated with pursuing my choices in life while living in a society that permits and protects the right to the same choices for others. Here, the preoccupation with numbers and statistics fairly reflects a focus on results and results are not, from my point of view, justifications for abridging my freedom. I try to avoid personal attacks toward individuals posting here and try only to present a personal view that might be radically different from theirs. I'm constantly pressed for numbers, which obviously are important when one is focused on results, but much less relevant when the focus is on process.

Now to your comment on my statement about every government intrusion. First, I don't believe in 'no government'. The principle that I believe in is less is better and more will generally intrude where intrusion is unnecessary. Protection for people against crimes and anti-social behavior that prevents the exercise of personal liberties is a valid function of government (and that protection is a valid limitation of freedom). Also, just because I have a less is better, more is worse, view of government does not mean a total rejection of government involvement in the economy. I also believe in constitutional government and that our constitution places limits on government and makes distinctions between functions appropriate to the different levels of government. Amending our constitution is a big deal, of course, so those who want significant changes in how we govern frequently adopt an incremental approach to accomplish their objectives with the knowledge that few elected or appointed government officials pay much attention to constitutional responsibilities assumed under oath. . When people like me object, we are ideologues (not to mention mean and vile human beings).

[Eric Martin]

As much as I liked the post, I fear Roubini worship may go too far. Getting one big thing right does not a track record make.

Um, Nouriel Roubini has gotten a hell of a lot more than "one" thing right.

And no, worship is bad no matter who is on the receiving end. But he's certainly someone who merits listening to, and his arguments deserve consideration.

Much moreso than Luskin or Kudlow.

[John Spragge]

cw - Upton Sinclair.

If I could propose one solution to the problems you face: phase out the tax deductibility of mortgage interest. That one program distorts your policies by discriminating in favour of home-owners and thus giving politicians an incentive to make home ownership available to everyone; it distorts the incentives in your economy, and worst of all, it rewards borrowing and spending while punishing saving.

As for whether your regulators would accept our solutions, I don't know. Canada had the good fortune, in the 1990s, to have a finance minister (Paul Martin) with both common sense and a spine. Without him, we almost certainly would have suffered as much or more than the United States.

[GoodOleBoy]

I support John Spragge's suggestion. We should also eliminate the $500,000 exclusion provision for gain on the sale of a personal residence. This could be replaced with a provision that allows an exclusion to reflect whatever increase could be attributed to a broadly based inflation index so a seller is not taxed for government caused inflation.

[ThirdGorchBro]

De-lurking to respond to GoodOleBoy's 12:13 PM comment. GOB, I used to believe exactly as you do wrt government involvement in the economy, and still hold to that ideal as an ideal.

What I have come to (slowly and grudgingly) understand over the last 8 years is that the current incarnation of the Republican Party is unwilling to give these principles that it claims to hold so dear the force of law. The actual effect of Republican governance was to rig the system in favor of large corporations over small businesses and individuals, not to provide a level playing field. Additionally, the government has abridged our freedoms in any number of ways that are appalling to me as a conservative, during the War on Drugs and the War on Terror.

What I have come to understand is that there are currently two parties of Big Government. One of those parties, the Democrats, will (hopefully) provide some of the protections of Big Government to me as an individual. The other party, the Republicans, will use all the powers of government for corporate welfare, but none of them for me. That is why I voted Democratic in 2006 and 2008, for the first times in my life.

I am not happy about the possibility of bank nationalizations, but it's better than just endlessly shoveling taxpayer money at the banks while holding no-one accountable (privatize the profits, socialize the risk, that is the essence of Republican Big Government). Maybe someday one of the two political parties will actually stand for a smaller, less intrusive government that legislates a level playing field while protecting our basic rights, then lets us be to succeed or fail on our own merits. I would happily vote for that party. But no such political party exists. In the mean time, I'll have to settle for Big Government that at least partially looks out for me and you.

[GoodOleBoy]

ThirdGorchBro,

I read your comment three times and I cannot find a point with which to disagree.

[Phil]

You know, I'm a big fan of personal freedom and all, but I can't get behind a philosophy that says results don't matter as long as all the rules were followed along the way. That's the kind of thinking that, say, gets innocent people thrown in jail. (Or worse, a la Scalia's "actual innocence is no bar to a sentence of execution properly arrived at" or whatever his precise phrasing was.)

At the very least, it indicates that the rules as wrong and need to be changed.

[GoodOleBoy]

Phil,

I think I do understand your philosophical point, but I'm uncertain why you think your example supports it. Our legal system is based on process, not results. In fact, we call it due process. I can't support this with statistics (there I go again) but I dare say we have more guilty going free (by magnitudes) than innocents erroneously convicted. A really results oriented criminal justice system example could be selected from nations governed by dictators where actions is quick and decisive and is a great deterrent to crime. Such societies frequently experience low crime rates but not much justice. I suspect that Justice Scalia's view is that the innocents wrongly convicted is an unavoidable price we pay for the due process we enjoy.

[now_what]

I suspect that Justice Scalia's view is that the innocents wrongly convicted is an unavoidable price we pay for the due process we enjoy.

Wrongly convicting someone is not the issue. Wrongly killing someone is.

Scalia is saying, "Yes, we know from the DNA evidence that beyond a shadow of a doubt he is innocent. Kill him anyway."

That is absolutely unf*ckingacceptable. That is murder.

[Phil]

I suspect that Justice Scalia's view is that the innocents wrongly convicted is an unavoidable price we pay for the due process we enjoy.

There is a way you can actually look up what he said, and the context in which it occurred, and his elaboration on it in other venues, too, you know. And he said exactly what now_what says above: That as long as a death sentence is properly arrived at, actual innocence is irrelevant. You don't have a problem with that?

And what's this "we" business, anyway? You don't pay any price at all when someone is erroneously convicted. Unless you live in a state where they're fortunate enough to receive compensation from the state if they're ever released. Which I don't think you do.

[Gary Farber]

"Here, the preoccupation with numbers and statistics fairly reflects a focus on results and results are not, from my point of view, justifications"

I believe you believe this!

"...for abridging my freedom."

Yet you also seem to be indifferent to the freedom of people who lack your circumstances, specifically you seem indifferent to one out of the Four Freedoms. I'll give you a pass that you're okay on Freedom of Expression (though I don't know that), and that you're okay on Freedom of Religion (though I don't know that), and I'll give you a pass that, in the FDR sense, you support Freedom From Fear (though I don't know that), but you seem quite indifferent and uncaring about people's Freedom From Want.

Freedom of people not in your circumstances to starve, to do without medical care, and to do without shelter, those you seem willing to support, because your own freedom not to care and some imaginary freedom not to be taxed, seem to be your primary concerns.

Do tell me if I'm getting any of this wrong.

"The principle that I believe in is less is better and more will generally intrude where intrusion is unnecessary."

This is unhelpful, because who doesn't believe this? (And please don't point to imaginary people; you'll have to find someone who actually says they don't believe it, if you want us to believe many people don't agree.)

"I read your comment three times and I cannot find a point with which to disagree."

Does that mean you voted Democratic (however much holding your nose) in 2006 and 2008, and will in 2010, or are you just giving lip service, and still voting for Republicans who lie to you and won't give you what they say they stand for?

"I can't support this with statistics (there I go again) but I dare say we have more guilty going free (by magnitudes) than innocents erroneously convicted."

See, facts should actually matter. Not imaginary facts, but actual facts. Not being interested in whether your analysis is supported by actual facts or not should bother you, but apparently doesn't, at least not to the point of bothering to spend a few minutes looking up actual facts.

Facts:

There have been 232 post-conviction DNA exonerations in the United States.

• The first DNA exoneration took place in 1989. Exonerations have been won in 33 states; since 2000, there have been 167 exonerations.

• 17 of the 232 people exonerated through DNA served time on death row.

• The average length of time served by exonerees is 12 years. The total number of years served is approximately 2,894.

[...]

Since 1989, there have been tens of thousands of cases where prime suspects were identified and pursued—until DNA testing (prior to conviction) proved that they were wrongly accused.

• In more than 25 percent of cases in a National Institute of Justice study, suspects were excluded once DNA testing was conducted during the criminal investigation (the study, conducted in 1995, included 10,060 cases where testing was performed by FBI labs).

• About half of the people exonerated through DNA testing have been financially compensated. 25 states, the federal government, and the District of Columbia have passed laws to compensate people who were wrongfully incarcerated. Awards under these statutes vary from state to state.

• 33 percent of cases closed by the Innocence Project were closed because of lost or missing evidence.

Leading Causes of Wrongful Convictions
These DNA exoneration cases have provided irrefutable proof that wrongful convictions are not isolated or rare events, but arise from systemic defects that can be precisely identified and addressed. For more than 15 years, the Innocence Project has worked to pinpoint these trends.

Eyewitness misidentification testimony was a factor in 77 percent of post-conviction DNA exoneration cases in the U.S., making it the leading cause of these wrongful convictions. Of that 77 percent, about 40 percent of cases where race is known involved cross-racial eyewitness identification. Studies have shown that people are less able to recognize faces of a different race than their own. These suggested reforms are embraced by leading criminal justice organizations and have been adopted in the states of New Jersey and North Carolina, large cities like Minneapolis and Seattle, and many smaller jurisdictions.

Limited, unreliable or fraudulent forensic science has played a role in 65 percent of wrongful convictions.
In over half of DNA exonerations, the misapplication of forensic disciplines—such as blood type testing, hair analysis, fingerprint analysis, bite mark analysis, and more—has played a role in convicting the innocent. In some cases, forensic scientists and prosecutors presented fraudulent, exaggerated, or otherwise tainted evidence to the judge or jury which led to the wrongful conviction. Three cases have even involved erroneous testimony about DNA test results.

False confessions and incriminating statements lead to wrongful convictions in 25 percent of cases. More than 500 jurisdictions now record interrogations to prevent false confessions.

False confessions are another leading cause of wrongful convictions. Twenty-five percent of cases involve a false confession or incriminating statement made by the defendant. In 35 percent of those cases, the defendant was 18 years old or younger and/or developmentally disabled.

[...]

Snitches contributed to wrongful convictions in 15 percent of cases.

This is what we know. It should be obvious that we can extrapolate with some confidence to the general number of arrests and plea-bargained convictions that similar percentages of innocence obtain, given that the same methodologies are used throughout the criminal justice system.

Death row inmates have been given trials of vastly more exacting care as regards every aspect of evidence, witnesses, and so on, than all other murder trials, let alone trials for other felonies, let alone that only a tiny proportion of convictions in the U.S. come from trials at all, but almost entirely from plea bargains. Obviously, the percentage of innocence amongst the rest of convictions is far higher than the already known to be significant number of people proven via DNA to be innocent who were on death row? (And, again, obviously, the number of people who are innocent, but without DNA evidence to prove it, has to be vastly larger than those few lucky enough to have DNA evidence found.)

[GoodOleBoy]

I do have a problem with that, if that is what Scalia said. But I have an even greater problem with absence of action by a pardoning authority knowing the facts you describe.

[cleek]

You don't pay any price at all when someone is erroneously convicted.

unless you are, or happen to know, that person.

[Tony P.]

GoodOleBoy,

At least one reason why "the pardoning authority" might choose to let a factually-innocent man be put to death is political cowardice. Cowardice is a particular reaction to fear. Fear of what? What is it that "the pardoning authority" might fear?

I suggest this answer, which I invite you to criticize: "the pardoning authority" generally fears the accusation of being "soft on crime" -- an accusation more likely to come from the right than from the left.

Forgive me if I presume too much, but I gather that, however else you might characterize your political philosophy, "leftie" is not what you'd call yourself. Maybe you don't consider yourself a "rightie", either. But if you take the onus off a Justice with a lifetime sinecure, and place it on a "pardoning authority" beholden to a constituency that includes a fair proportion of wingnuts, I have to wonder how deep your disagreement with Scalia's revolting position actually is.

--TP

[Gary Farber]

One of Scalia's observations on the death penalty:

[...] Scalia cited the New Testament to claim that government “derives its moral authority from God ... to execute wrath, including even wrath by the sword, which is unmistakably a reference to the death penalty.” He then made the following remarkable declaration:

“Indeed, it seems to me that the more Christian a country is, the less likely it is to regard the death penalty as immoral. Abolition has taken its firmest hold in post-Christian Europe and has least support in the church-going United States. I attribute that to the fact that for the believing Christian, death is no big deal.”

Scalia went on to attribute any Christian opposition to the death penalty—including that of the Pope—to the “handiwork of Napoleon, Hegel and Freud.”

“The post-Freudian secularist,” he remarked, “is most inclined to think that people are what their history and circumstances have made them, and there is little sense in assigning blame.” With these words the high court judge indicated his own view that crime is not to be explained as a phenomenon with social roots, but rather as the expression of the evil character of individuals.

Scalia continued: “You want to have a fair death penalty? You kill; you die. That’s fair. You wouldn’t have any of these problems about, you know, you kill a white person, you kill a black person. You want to make it fair? You kill; you die.”

“Does [the death penalty] constitute cruel and unusual punishment?” Scalia asked. “The answer is no. It does not, even if you don’t allow mitigating evidence in. I mean, my Court made up that requirement.... I don’t think my Court is authorized to say, oh, it would be a good idea to have every jury be able to consider mitigating evidence and grant mercy. And, oh, it would be a good idea not to have mandatory death penalties...”

Scalia not only reiterated his support for the death penalty, but called on any judge who found the practice immoral to resign. “In my view,” he said, “the choice for the judge who believes the death penalty to be immoral is resignation rather than simply ignoring duly enacted constitutional laws and sabotaging the death penalty.”

With characteristic cynicism, Scalia quipped, “I am happy to have reached that conclusion [that the death penalty is not immoral] because I like my job and would rather not resign.”

[Phil]

But I have an even greater problem with absence of action by a pardoning authority knowing the facts you describe.

Ha ha! Don't you live in Texas? Gee, who have the pardoning authorities been there for the last couple of decades?

[GoodOleBoy]

Utopia is not a promise of a free society. Gary, you've done a lot of work and I trust your presentation of the facts. They show that a lot of progress has been made and that there is plenty of room for more.

[Gary Farber]

"Utopia is not a promise of a free society."

I don't understand what that means. "A free society is not a promise of Utopia," that, I'd understand the meaning of. But the reverse?

I'd really like to know if you have any response to Teddy Roosevelt, GOB. I realize my excerpts were a bit long, but they're worth reading.

[GoodOleBoy]

Gary,

The excerpts were a tad long but I did read it. A little radical for my tastes. TR had a lot of ideas, many very good, and many have been implemented in one form or another. I suppose i'm more troubled by his ideas about how to approach things than by what he wants to accomplish. Most of the outcomes he is trying to get to I think are good. It's the same old problem of means and ends, and I just cannot get to an acceptance of Teddy's not caring much about the Constitution or the independence of the courts.

One thing he thought was inherently troublesome and with which I concur is corporate bigness. They had their trustbusters and we have our current examples in banking and autos. And, as he pointed out, these large institutions don't have to be inordinately evil in order for very bad things to happen.

[russell]

GOB -

Thanks for the thoughtful reply. Here's where I'm coming from.

First, when people talk about "nationalizing the banks", we are talking about the federal government stepping in to manage the reorganization of banks that are fundamentally insolvent. The alternative is financial panic, where the scale of the panic depends on the size of the bank.

Maybe it would be better to just let the banks flame out with no intervention, but the conventional wisdom, for what it's worth, is that it's a good idea to step in.

The feds are, in fact, proving to be quite reluctant to take this step, and seem to be willing if not eager to anything they can to avoid taking that step. At some point soon, their only remaining choices may be step in or watch the financial industry flame out, in which case I imagine they will step in.

To your broader point about government intervention:

I hear where you're coming from. I'm not really on the same page, but I understand the virtue of the principles you're advocating. By which I mean, I understand why they are good.

I think if you look at the history of government regulation in the US, you'll find that the government has very, very rarely been proactive in taking on a regulatory role. In the majority of cases, they have done so in response to concrete, real-world problems which did not afford other practical solutions.

I think you'll also find that much of the regulatory apparatus of the government rose in the context of an industrial and post-industrial economy.

I make this point quite often in talking with folks who have a "libertarian" outlook, so I hope you'll forgive me if I repeat myself.

Once upon a time most folks grew their own food, built their own homes, made their own clothes. Government regulation was really not needed. People generally lived lives centered on the particular community they lived in, they knew the folks they were buying and selling with, and they weren't buying and selling all that much to begin with.

And this wasn't that long ago. I recently paid a visit to an old mill in Butler county PA, where my wife's grandfather used to take grain for milling. He grew the grain, carted it to the mill himself, waited for it to be milled into flour, gave some to the miller in payment, and took the rest home.

My father, in fact, grew up this way by and large. Most of what his family ate, they raised. Much of what they wore, my grandmother made. Most of the rest they bartered for. It was primarily a non-cash economy.

Almost nobody lives that way now.

We have building codes, food inspections, rules for manufacturing pharmaceuticals, rules about what stuff you can put in the recycling bin, by-laws about how close to the property line your house can be. There are very specific rules about how many rat hairs and fly eggs can be in an ounce of peanut butter. There is scarcely any aspect of daily life that isn't addressed by some law or rule.

All of this is, in fact, in some way an intrusion upon all of our personal freedoms. And running all of this bureaucratic costs money, which we have to pay out of our hard-earned income.

What a freaking PITA.

Somewhat remarkably, all of this also makes the modern economy possible. I would never buy a home, a car, or a meal from anyone I didn't know, personally, unless there were very strict rules in place in the form of building codes, manufacturing standards, and public health rules. Likewise for almost any other manufactured product or privately provided service.

So there is an upside.

In this particular country, I find that most rules and regulations are more constructive than not, and support a robust and broadly based economy that would otherwise not be possible. YMMV.

The regulatory state, with all of the petty, infuriating BS that comes along with it, is the way 300 million people, with wildly different backgrounds, values, and interests, live together in one big country and one complex economy, without totally being at each other's throats.

Yes, it's an argument from results. I'm kind of a results-oriented guy.

And as far as I can tell, I'm still pretty free. Standing in line at the RMV is a pain, but I've also participated in activities that, in other places, would have landed my behind in jail or six feet under, and I'm still here to tell the tale.

There's no significant freedom that I value that I don't possess. I can live with the bureaucratic BS, it just doesn't bug me all that much.

[Gary Farber]

Just to add to what Russell said, GOB, since it's incredibly rare that I don't agree with Russell 100%, the fact that we believe what he said, doesn't mean in the least that either of us, or most anyone else who agrees with what Russell said, doesn't believe in the Constitution, or doesn't believe in freedom.

We just don't believe that either freedom or the Constitution prevents we the people, via our chosen democratically elected government, from helping people in need so that they are, too, are free to make choices in life.

Once you've accepted the right of the people, via government, to tax, and engage in what Thomas Jefferson called "internal improvements," there's no line of principle crossed here: we're just quibbling over matters of degree as to how much and how government should or shouldn't help.

It's not at all a matter of not believing in freedom, or the Constitution.

(Nor is it a matter of any of us being more patriotic, or more of a "real American" than the others.)

[Phil]

And to add to what Gary and russell said, in the words of someone you may respect, "The Sabbath was made for man, not man for the Sabbath."

If the Constitution and our processes are resulting in bad or unjust outcomes, they need to be changed, and if not changed, ignored.

[Anarch]

Gary: I am seriously irked that you posted that Scalia quote. I knew he'd said something like that, but I was rather hoping I'd never find out exactly what. Thanks for ruining my -- as it turns out, blessed -- ignorance.