Enablers and the American Mindset

A fellow president recently asked me, “Which is worse: An man who commits evil acts or a good man who does nothing?”

My initial thought was to remind the gentleman than “evil” is a perception, however I quickly removed such a jackass response from my mind and began to focus on the question (though note I still wrote it in this blog…). I would just like to list a few thoughts since I don’t have much time to write. Hopefully you, the reader, will consider these and use them to examine your own life a bit. Here they are:

1.) A “good man who does nothing” is for all intensive purposes an enabler. By standing by the good man permits “evil” to occur and promotes future acts to be committed. Henceforth the other points assume that the good man stops being an enabler.
2.) Our country is full of these men (myself included).
3.) In order for the good man to combat evil, he must pick and choose is battles wisely.
4.) The most important battle is the one which directly effects the good man, in other words the one which effects him the most “closest to home.”
5.) The second most important battle is the one which effects the masses, i.e.- checking the government and business to prevent manipulation, loss of civil liberties, etc.
6.) That being said, what action needs to be taken to snuff out the evil act? (Violence? [I would hope not], Discussion?, Confrontation?, Slick Behind the Back Maneuvers?)
7.) If the good man attempts to stop an evil act and fails, what should he do?
8.) Once successfully stopping evil, what does the good man do next?

The question itself is very abstract and is highly dependant on who the good man is and what his view on society is and what his role is within that society. Typically Americans adopt the philosophy that the government should stay out of their business, that is until the shit hits the fan, and then the majority of Americans start screaming for help. It many ways the example provided by Mr. Jefferson is a useful microcosm for the American mindset: “I do as little as possible and don’t try to stop me, but if things get bad you [US government] better be there to help.” In other words, the average American is a young child learning to ride a bike without training wheels. Whenever things get bad and they fall, they want the training wheels back on and their father by their side. This simply means that we are a nation of enablers and thus we are facing our current economic woes. Many within the government and business knew that the current practices of risky lending, deregulation, and low oversight was leading to a slippery-slope. However they let the good times roll and those who were concerned felt they could do nothing and by not uniting enabled the condition to worsen. Thus here we are.

There is no easy solution. But to fix the problem we must first reconstruct the American mindset that has been programmed to enable. We must reteach the American public that this is our country. We have given our representatives the power to enact legislation and it is their job to pass legislation that benefits the majority, not the minority (ie- business and the wealthy). If they were doing this we wouldn’t be facing many of the issues we are now such as NAFTA, economic woes, bailouts, a broken social security system, bad health care, and war. Case in point: If we really had power as voters, the first bailout would have failed in Congress and never passed (as it was evident that the majority of Americans were against it).

If you ask me who is worse between an enabler and an evil man, I say the enabler. However if you ask me who is smarter, I say the evil man. For too long we have been enablers, its time to start fighting back, and whether you like him or not the election of Barack Obama was a warning shot to Washington that citizen won’t take their shit for much longer. It is up to Obama to keep the pubic involved; otherwise we will slip further into the abyss of enabling.

The Real Answer to Our Economic Problems: Abandoning Free Market Capitalism

Note: Before you, my beloved reader, continue I just want to preface this short essay with some background information. Many readers will notice the above title is eerily similar to Mr. Jefferson's recent post. This was of course intended. Readers should know that Mr. Jefferson and I have a long history of verbal sparing on economic issues and it is only in that spirit and with a smile on my face that I wrote what you are about to read. So please, do not think any ill-will is meant by this post. It is just another chapter in the battle Mr. Jefferson and I have been gleefully waging against each other since 2006.

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This IS a failure of unregulated markets.

I couldn't have said it better myself. In fact, the very notion that our once powerful economy is "failing" is nothing new to the more liberal sort of this country as we've been saying it for as long as The Left as been alive and (barely) kicking. However this is not a time to point fingers and say "I told you so." People are loosing their retirement funds, houses, jobs, and untold amounts of wealth, something needs to be done. But what's to blame? I'll tell you: Credit Default Swaps (CDS) and a partial free market system.

CDS:

Credit Default Swap is a bastard child of JPMorgan, used in the mid-90s to solve a growing problem they were facing which could threaten to hold back their profits.

The problem: JPMorgan had loaned billions of dollars to governments and corporations, but due to federal law had to keep enough capital reserved in case the loan went bad. This meant that there were large sums of money which JPMorgan couldn't give out for loans because the government was "unfairly" forcing them to protect their investments.

The answer: JPMorgan started using the credit default swap. A CDS is when a bank or lending institution finds a third party to take responsibility for a bad debt (paying it if it goes bad) in exchange for small regular payments, just like insurance premiums. By doing this the extra money on their books reserved for covering bad investments can now be used to issue more loans.

Yet, how did this effect the economy?

By 2008 the value of CDS grew to $62 trillion with Lehman Brothers having $700 billion in CDS and AIG possessing $14 billion worth of CDS that they had loaned to banks, insurance companies, and God knows what else. When investments like these went bad the third parties (just like a credit card company) came calling for their money, and when groups like AIG couldn't pay (due to a lack of extra funds in reserve) they defaulted. Causing what happened next, which has been in the paper for the last two-months.

The problem with CDS was that they WERE NOT regulated by the government and no mechanism was in place to help determine their value.

CDS were used to promote investments in dangerous foreign markets, protect against company failure (like Enron), and most importantly to back mortgages. Lenders, like sharks, would let families take out mortgages they knew the family couldn't pay and would then offload the debt onto a third party via CDS. However once people started defaulting on their mortgages, the lenders started to default on their payment to the third party, which like a domino effect cause a crash as it was quickly discovered that no one (not even the third party) could pay or absorb the loss. When no one absorbed the loss AIG crashed and when AIG started to crash investors began to pull money out of every major lender and investment bank, causing the same effect as a snowball rolling down a hill.

Free Market Problem:

Free market capitalism caused this problem. While my colleague is correct in pointing out that the Feds got involved by lowering interests rates, he is wrong by placing blame on the government for labeling Fannie and Freddie as a GSE. The real problem was the unregulated CDS market, which grew and grew until lenders were caught in their own greed and the bubble truly did burst. While this example alone should show many why we don't need full-blown free market capitalism, I will offer another more powerful one to solidify the argument: the Rational Actor (RA).

Free market capitalism such as the version proposed by Mises, and the game theory which studies all brands of free market jargon, relies on the Rational Actor to ensure the system works properly. Let me explain:

"As this malinvestment is discovered markets; left unhampered by government interference; will naturally correct and be able to separate good investments from malinvestments." -- Ludwig von Mises

That sounds all well and good but Mises and his allies are relying on the players within the market to be Rational Actors. To be an RA means to be well informed about the state/aspects of the market and to act accordingly in the best interests of yourself and everyone else. As such the ideal RA would think: "This seems to be a bad investment. I'm going to ignore it so that I may invest in this safer endeavor."

Great, but free market believers make two mistakes:

1.) They assume the actor is well-informed and/or not withholding information.

A common mistake is to assume the actor knows everything about market economics so they can make sound decisions. This is impossible, especially as the market has gotten more bloated with technical jargon and complex schema. In addition, they also assume that other actors within the market (like a bank, stockbroker, or investment firm) are not withholding information from others to gain an upper hand. This means (for a simple example) that even though a stockbroker knows investing in a certain company would be bad for their client, they might recommend it anyways just so they can get a commission, be dammed if it puts their client at risk.

2.) They assume the rational actor is in fact rational.

Imagine two cars driving towards each other playing a game of chicken. One actor knows that he is either going to swerve and save his life or stay the course, make the other guy swerve, and be the hero. Rationality would dictate these thoughts in both actors. But what if one actor rips off his steering-wheel and chucks it over the side giggling to himself? Even though he is being irrational the other actor thinks he is still being rational and undoubtedly the chances of the cars colliding increases. This is what happened with mortgages. Families went in to banks looking for loans to buy a house, but instead of being an RA in seeing that a family couldn't afford certain mortgagees, the banks threw their steering-wheels out the window, irrationality loaning the family large amounts of money they could never pay back.

Now apply this to the whole market. If we had a free market system we would be relying on rational behavior by the actors within the system, something which I have just shown is not always the case. Actors within the economy or not well-informed, they withhold information to gain the advantage, and will irrationally act in order to increase their own gains. These three faults of the RA alone prove that a free market system is not the answer. A regulated one is.

If the market was more regulated the CDS market would never have swelled to the size it did or even took place to being with, actors would be fined for withholding information, and institutions would be more closely watched to ensure they do what's best for both parties, not just themselves.

Regulate It:

My fellow citizens, if you want more of the same economic worries push for a fully free market system that relies on "rational actors," we already saw were a partial system got us. However if you want to level the playing field, support a regulated market. It won't stifle competition or invention (a common claim by Republicans), all it will do is ensure that everyone is forced to play by the rules which in turn will ensure that everyone makes money and those companies that should fail will fail, something I'm sure free market believers will love.