The Myth that Laissez Faire Is Responsible for Our Present Crisis

[Skull Pilot]

The Myth that Laissez Faire Is Responsible for Our Present Crisis - George Reisman - Mises Institute

The utter absurdity of statements claiming that the present political-economic environment of the United States in some sense represents laissez-faire capitalism becomes as glaringly obvious as anything can be when one keeps in mind the extremely limited role of government under laissez-faire and then considers the following facts about the present-day United States:

1. Government spending in the United States currently equals more than forty percent of national income, i.e., the sum of all wages and salaries and profits and interest earned in the country. This is without counting any of the massive off-budget spending such as that on account of the government enterprises Fannie Mae and Freddie Mac. Nor does it count any of the recent spending on assorted "bailouts." What this means is that substantially more than forty dollars of every one hundred dollars of output are appropriated by the government against the will of the individual citizens who produce that output. The money and the goods involved are turned over to the government only because the individual citizens wish to stay out of jail. Their freedom to dispose of their own incomes and output is thus violated on a colossal scale. In contrast, under laissez-faire capitalism, government spending would be on such a modest scale that a mere revenue tariff might be sufficient to support it. The corporate and individual income taxes, inheritance and capital gains taxes, and social security and Medicare taxes would not exist.

2. There are presently fifteen federal cabinet departments, nine of which exist for the very purpose of respectively interfering with housing, transportation, healthcare, education, energy, mining, agriculture, labor, and commerce, and virtually all of which nowadays routinely ride roughshod over one or more important aspects of the economic freedom of the individual. Under laissez-faire capitalism, eleven of the fifteen cabinet departments would cease to exist and only the departments of justice, defense, state, and treasury would remain. Within those departments, moreover, further reductions would be made, such as the abolition of the IRS in the Treasury Department and the Antitrust Division in the Department of Justice.

3. The economic interference of today's cabinet departments is reinforced and amplified by more than one hundred federal agencies and commissions, the most well known of which include, besides the IRS, the FRB and FDIC, the FBI and CIA, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, and NASA. Under laissez-faire capitalism, all such agencies and commissions would be done away with, with the exception of the FBI, which would be reduced to the legitimate functions of counterespionage and combating crimes against person or property that take place across state lines.


4. To complete this catalog of government interference and its trampling of any vestige of laissez faire, as of the end of 2007, the last full year for which data are available, the Federal Register contained fully seventy-three thousand pages of detailed government regulations. This is an increase of more than ten thousand pages since 1978, the very years during which our system, according to one of The New York Times articles quoted above, has been "tilted in favor of business deregulation and against new rules." Under laissez-faire capitalism, there would be no Federal Register. The activities of the remaining government departments and their subdivisions would be controlled exclusively by duly enacted legislation, not the rule-making of unelected government officials.

5. And, of course, to all of this must be added the further massive apparatus of laws, departments, agencies, and regulations at the state and local level. Under laissez-faire capitalism, these too for the most part would be completely abolished and what remained would reflect the same kind of radical reductions in the size and scope of government activity as those carried out on the federal level.

What this brief account has shown is that the politico-economic system of the United States today is so far removed from laissez-faire capitalism that it is closer to the system of a police state. The ability of the media to ignore all of the massive government interference that exists today and to characterize our present economic system as one of laissez faire and economic freedom marks it as, if not profoundly dishonest, then as nothing less than delusional.



Government Intervention Actually Responsible for the Crisis

Beyond all this is the further fact that the actual responsibility for our financial crisis lies precisely with massive government intervention, above all the intervention of the Federal Reserve System in attempting to create capital out of thin air, in the belief that the mere creation of money and its being made available in the loan market is a substitute for capital created by producing and saving. This is a policy it has pursued since its founding, but with exceptional vigor since 2001, in its efforts to overcome the collapse of the stock market bubble whose creation it had previously inspired.

The Federal Reserve and other portions of the government pursue the policy of money and credit creation in everything they do that encourages and protects private banks in the attempt to cheat reality by making it appear that one can keep one's money and lend it out too, both at the same time. This duplicity occurs when individuals or business firms deposit cash in banks, which they can continue to use to make purchases and pay bills by means of writing checks rather than using currency. To the extent that the banks are then enabled and encouraged to lend out the funds that have been deposited in this way (usually by the creation of new and additional checking deposits rather than the lending of currency), they are engaged in the creation of new and additional money. The depositors continue to have their money and borrowers now have the bulk of the funds deposited. In recent years, the Federal Reserve has so encouraged this process, that checking deposits have been created equal to fifty times the actual cash reserves of the banks, a situation more than ripe for implosion.

All of this new and additional money entering the loan market is fundamentally fictitious capital, in that it does not represent new and additional capital goods in the economic system, but rather a mere transfer of parts of the existing supply of capital goods into different hands, for use in different, less efficient, and often flagrantly wasteful ways. The present housing crisis is perhaps the most glaring example of this in all of history.


What you all call laissez faire seems to be nothing of the sort

I would urge you to read the entire article

 

[editec]

of COURSE it's a myth.

We don't have a Laissez Faire economy.

Deregulating the banks didn't give us a Laissez Faire economy.

It merely gave the banking class the right (again!) to GAMBLE with our money.

The existence of that insiders's banking class (which owns the FED, hence controls the amount of money in circulation) is the numero uno example of just exactly how CONTROLLED our economy really is.

If you want to see a truly laissez faire economy, try Somalia.

Only when a state is in anarchy can such a mythical beast exist.

We have literally the WORST of both worlds.

We have socialism for the wealthy and capitalism for the workers.

 

[Toro]

The problem with this argument is that in theory, companies in a laissez-faire economy would exhibit discipline such that they would not risk themselves. This is what Milton Friedman argued and this is what Alan Greenspan said he assumed would also happen in his mea culpa at the Senate hearings.

This poses a problem for the free market theologians. If companies were to discipline themselves in a laissez-faire environment, why would they not in the present environment?

Or a better question is what would companies do if they had less regulation? We know the answer. In 2004, the SEC allowed the five big brokers and a few other banks with investment divisions to increase the amount of debt they carried from ~12x-15x to 30x-40x equity. And to full bore they did. Why? To maximize profits and, more importantly, to maximize revenues. See, investment bankers are paid based on the amount of revenues they generate. The more revenues, the higher the bonus. And the more debt, the higher the revenues.

This is important because what caused the collapse of the housing and credit bubbles was too much debt. Allowing banks to lever up to insane levels wiped out Wall Street as we know it today. If banks had been levered up, say 10x, then the damage would have been far more limited. Of course, economic growth would have been slower but it is unlikely we would be staring into the abyss as we are today.

There is no doubt that the Fed is probably the prime instigator in this, but it is not the only instigator. Another factor that causes bubbles is new technology. In this case, the new technology was the structured financial products by Wall Street.

This debacle is a failure of both the government and the market. Ideologues such as the dogmatic Austrians should be dismissed because, like all ideologues, they work backwards from their assumptions that their philosophy reveals all that is True, then look backwards to cherry-pick information corroborating their pre-set thesis. Psychologists call this "confirmation bias." The free market ideologues are no different in this sense than dogmatic Marxists. It is a common trait of any ideologue and is eschewed by the empiricist.

The market creates the most wealth for the most people most of the time. It does not create all the wealth for all the people all of the time. Ideologues who say otherwise should be ignored for they are framing their argument based on dogma, not empiricism.

 

[dilloduck]

The problem with this argument is that in theory, companies in a laissez-faire economy would exhibit discipline such that they would not risk themselves. This is what Milton Friedman argued and this is what Alan Greenspan said he assumed would also happen in his mea culpa at the Senate hearings.

This poses a problem for the free market theologians. If companies were to discipline themselves in a laissez-faire environment, why would they not in the present environment?

Or a better question is what would companies do if they had less regulation? We know the answer. In 2004, the SEC allowed the five big brokers and a few other banks with investment divisions to increase the amount of debt they carried from ~12x-15x to 30x-40x equity. And to full bore they did. Why? To maximize profits and, more importantly, to maximize revenues. See, investment bankers are paid based on the amount of revenues they generate. The more revenues, the higher the bonus. And the more debt, the higher the revenues.

This is important because what caused the collapse of the housing and credit bubbles was too much debt. Allowing banks to lever up to insane levels wiped out Wall Street as we know it today. If banks had been levered up, say 10x, then the damage would have been far more limited. Of course, economic growth would have been slower but it is unlikely we would be staring into the abyss as we are today.

There is no doubt that the Fed is probably the prime instigator in this, but it is not the only instigator. Another factor that causes bubbles is new technology. In this case, the new technology was the structured financial products by Wall Street.

This debacle is a failure of both the government and the market. Ideologues such as the dogmatic Austrians should be dismissed because, like all ideologues, they work backwards from their assumptions that their philosophy reveals all that is True, then look backwards to cherry-pick information corroborating their pre-set thesis. Psychologists call this "confirmation bias." The free market ideologues are no different in this sense than dogmatic Marxists. It is a common trait of any ideologue and is eschewed by the empiricist.

The market creates the most wealth for the most people most of the time. It does not create all the wealth for all the people all of the time. Ideologues who say otherwise should be ignored for they are framing their argument based on dogma, not empiricism.

In other words economic science failed to factor in humans ?

 

[Skull Pilot]

regulation or self regulation may not be as important as the fed and Greenspan keeping interest rates negative.

Usually when credit flows, sooner or later interest has to rise because there is less money to lend rising interest rates would have gone a long way to stopping the bubble. but artificially low rates just fed the frenzy. When you can get a loan at a negative interest rate what do you do?

 

[editec]

Anyone searching for the ONE CULPRIT to pin disaster on is sort of missing the point, folks.

This is another tragedy of the commons made possble by deregulation of banking laws that would have prevented it: the bad policy decision to make money too cheap; bad risk assessment by the bonds rating agencies; and the sheer greed of organizationas originating those loans who knew when those dubious loans left their portfolios, they were off the hook no matter what happened to them.

Would having a laisse fair economy have prevented this?

If there'd been a laisssez fair economy, there wouldn't have been a FED, nor banks, nor a mortgage industry to begin with.

 

[sparky]

more blame game?

well at least it's not the usual partisan pot shots, dwelling more on market concept

hey, i don't care what kind of system one lives within, if it doesn't serve the populance a fair chance at properity, it sucks....