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Jack Kerkorian

What disturbs me is the easiness with which everibody (from the Bernanke-Paulson duo down) has accepted that, since the risks of a 30s depression style are perceived as high, then you are allowed to throw every idea or economic concept you had, overboard.
I am afraid that even if I agree with Becker: people did not vote to eliminate private enterprise etc, we could agree that as the first storms show in the sky, nobody seems to doubt and all happily agree: lets be socialists for a while. Then we will come back to our senses. Now its not the time to play dangerous ideological games of excesive libertarianism, seems to be the underlying message.
What until a year ago was considered reasonable: Chapter 7 or 11 for the economic failure, is now thought as kind of anarcolibertarianism.
But all this has already been done, if not in the U.S., in other countries. And is a very dangerous path. It starts with “reasonable” cases (the banks), then goes to the insurance companies, then the iconic companies or even industries , the sovereignity enterprises and….
I havent seen yet a clear explanation of what would happen if two or three big banks, investment or commercial, go down.
Who says that the whole building will come down with them? What could be better than purge the landscape of mistaken shareholders and bad managers? Wouldn’t it be a magnificent lesson for the future?
Facts teach better than words. And the moral hazard is there, happily convinced that the next time excessive risk is incurred, there will be a Government Agency there, to the rescue.
Jack Kerkorian


What does John Q. Public want Economically? A job that allows him to get up in the morning and go to. A job that allows him to pay his bills, mortgage, car payment, and put some of it away for college for his kids and his eventual retirement. A job that he can go to without fear that he may be pinked slipped at any moment and it all comes crashing down around his head. Is that too much to ask? Not really, but it does require a certain degree of stability in the Economy. Something sorely lacking in the new deregulated free-market economy that has come to symbolize a modern money economy.

Suprised John Q. Public simply wants a stable regulated Economy? Where he know where he stands from day to day.

Michael Brophy

it would be a serious mistake if the analysis of financial and other markets that becomes dominant in Washington gives insufficient weight to the enormous contributions of business competition in raising human welfare.

Bottom line. The head of Bear Stearns and Lehman probably don't feel particulary rescued nor most shareholders of CITI. If these rescues are so outlandishly valuable why are the bank stocks in the tank? One of our current banking regulations per a commenter at Volokh Conspiracy recently was that a bank could loan more on the value of mortgage CDOs, which is a 'security,' than the bank could on mortgages it held, and probably knew more about.


Here's a wild idea. Maybe instead of trying to figure out how much damage the reputation of free markets will take we should try to defend it. As we sit back idly the left is successfully spinning the current crisis into a failure of capitalism. It makes me sick. Most of the public either doesn't know, or doesn't realize the significance of the fact that Fannie Mae and Freddy Mac were GSEs. Why? Because those who should be standing up for free markets have allowed the left to take this story and spin in as they please. Fiscal conservatives need a prominent figure to faithfully represent our side of this story!

Brit Conner

I thought it was by now well known that the financial crisis was spawned by bad regulation, not deregulation. Politicians ordered banks to issue loans to low income and minority parties, with effective quotas to meet. Banks resisted until the Boston Fed ordered them to throw out their underwriting standards, else face charges of discrimination against poor and minorities at their next bank exam. Instead of credit history, job history, and income-to-payment ratios, banks were to consider such applicants qualified as long as they attended a class on money management. And then, to make sure the cash flowed liberally, the politicians ordered Fannie and Freddie to buy only subprime mortgages until subprimes reached 50% of their holdings, then continue buying, insuring, and reselling to the repackagers of mortgage securities. Once the flow began, banks were only too happy to write bad loans, accept a quick buck, and pass them along to the "greater fool".

The one last backstop in this process - the credit rating agencies - failed to provide the needed red flags on the securities. Apparently if there had never been a failure, they didn't feel the need to consider one.

None of this is a failure of deregulation, but it does show the need for better regulation than we had. And more to the point, it does not show the need to move to socialism to rid the world of capitalism's weaknesses.


Becker: ... if the analysis of financial and other markets that becomes dominant in Washington gives insufficient weight to the enormous contributions of business competition in raising human welfare.My hope is that the current financial crisis will be the end of free markets in the same way that the US declaration of independence was the end of governments.When it came to governments, eventually people figured out that you can't just let the guys at the top do whatever they want on the grounds that if they're at the top they must deserve to do whatever they want. Hopefully, people will figure out that, when it comes to corporations, you also can't just let the guys at the top do whatever they want.So, how to control the guys at the top? It's a tough problem requiring a variety of approaches but I'll mention one of Warren Buffet's suggestions (regarding the auto industry): require the top management to invest most of their net worth in the company that they are managing.I'd offer the exception that top management who were willing to work for normal salaries (say, $100,000 per year) could be exempt from the requirement. But top management who claim that they are so important to the company that they deserve multi-million dollar salaries should be willing to put all but $100,000 or so of there assets where their mouths are.They should also be required to keep their assets in the company for a year after they leave and then after that they could withdraw their assets at a rate of, say, 10% per year.


Note to knee-jerk Republicans: Fannie and Freddie didn't cause this crisis. Your oh-so-precious free market did this, all by itself.

Fannie and Freddie did NOT originate subprime in any capacity from 02 onwards.. because they were strictly forbidden due to their turn-of-the-decade accounting scandal. PRIVATE enterprise (New Century, as well as all the rest listed over at ml-implode.com) did the origination.. organizations that weren't regulated. Keep lying, though - following Karl Rove's principles, if you lie long enough, it'll become fact!

Financial institutions have NOT contributed to risk management. Rather, as Taleb describes, they increase risk through their self-congratulatory belief that they have sufficiently modeled the risk.. when they haven't done anything of the sort.

Professor Posner, it's highly egregious that you suggest that regulations would be "discouraging." Greenspan and Bernanke had simply to execute the regulations they are tasked with enforcing - nothing more, nothing less - and we would NOT be in this crisis.

Stop drinking the koolaid. This is a crisis of gratuitous idealism rather than pragmatism. Regulations were simply avoided.. all you need to do is implement the regulations ALREADY ON THE BOOKS and we're fine moving forward.


Brit., So we should do away with the Redlining Laws and policies intended to create Economic Justice? Sounds good too me. I'm free, white, protestant, twenty one and financially stable. But, this all seems to run against the grain of the Preamble to the Constitution.


Sir, I greatly admire the point you made at the very end of your concluding paragraph.

I also agree that there is great merit to the ideal of greater 'transparency' in the marketplace. (I cannot intelligently comment on the reserve requirement.) However, I would refine that ideal by specifying that what the market needs is also simplicity. To rescue my point from the jaws of vague mindlessness, I proffer the example of John McCain's campaign promise---however genuine it may have been---to make Mortgage contracts short enough to fit on a single sheet of paper and simple enough to be understood by someone illiterate in legalese.

A gentleman from the Atlanta Fed once told me that the numerous 'disclosure' requirements contracts must now meet contribute to their confusing nature, by forcing the lender to restate certain ideas multiple times. I do not happen to have the depth of knowledge about said policies to know whether that assertion is accurate, but the implication is truly frightening. It is with this understanding that I make my own point that transparency must equal simplicity.


Unfortunately, the radical libertarians have now left us exposed to the radical egalitarians. The latter will not let economic nature take its course and will need to be coercive to achieve their goals in the political arena. Neither the liberals nor the conservatives seem to remember the aaancient Greek advice of moderation in all things. Maybe a nice, smooth, protracted period of peace and stability would be too boring.


Happy Birthday Professor Becker!!!

John Papola

Oh, come on people. The idea that this crisis emerged out of the "free market" or as a result of some anarcho-capitalism/libertarianism is just ridiculous and utterly ignorant of what underpins our financial system: monetary policy.

This entire crisis was the result of an inflationary run up in commodity prices for both homes and food and fuel. It was this bubble that incentivized loosened standards as the risks of foreclosure on an artificially appreciating asset (homes) appeared low. It was monetary inflation and currency devaluing the lead the way on Oil prices skyrocketing (just check the price of oil against gold, it was flat).

What drove this inflation? Why, the Federal Reserve's insane multi-trillion-dollar dumping of money into our financial system in order to maintain a 1% Federal Funds rate from 2001 through 2004, that's what. The central bank is the only real creator of inflation through credit expansions. The deflationary pressures of globalization masked this massive inflation from consumer goods, but not the commodities.

This is precisely what happened during the fake boom of the 1920s which was masked by industrial efficiency only to later bust at the end of that decade.

I'm fairly convinced (though we'll never know for sure) that those risk-hiding credit default swaps and collateralized debt obligations would not have created this housing bubble on their own. And the government's pro-home ownership policies DID help stoke the fire. No Bubble, no bust.

It's shocking and sad to see so many intelligent people rant and rave about "deregulation" or "wild free markets" in utter blindness to the totally undemocratic, unaccountable central planning of our monetary authority.

There's nothing libertarian about a central state monopolist and it's ability to print money out of thin air then dole it out to the politically connected banks and government contractors. There's nothing free or fair about the average person seeing their wages and savings depreciated as that fresh new money spreads throughout the economy, pushing up prices with fake demand.

Alan Greenspan once wrote powerfully and passionately about the merits of a gold standard as a means to preserve liberty and check state power. He has betrayed his own former beliefs and our country.

Sorry but the Becker-Posner team really blew it on this one.

...but what the hell do I know?


Well what do you know, John Papola has posted the most accurate and thoughtful blog in the last year. Too bad he couldn't convince the idiots in Washington six or seven years ago. But don't feel badly, John. They are too stupid, self centered and arrogant to understand anyway.

John Papola


Thanks for the compliment! What a treat.

The politicians aren't stupid really. They are acting in their own self interest just as everyone does. They just lack competition because theirs is the only organization backed by the legal use of force. Think about it. Each of these busts centralizes power in the hands of The State and it's agents. They truly believe that they are better at deciding what is "good" for us than we are for ourselves. It's classic central planning autocratic mindset. Everyone believes they are doing "the right thing". Remember that.

The State inflates the economy with fake demand through the printing of money and doling to cronies... it then attempts to counter than through the enforcement of higher minimum wages and empowering of labor unions, which then clearly shrinks the work force as companies choose to hire fewer people or become priced out of the market. The companies that remain are the politically connected firms that funnel millions into the politician's campaign coffers (Look at US auto to see this cycle play out in real time). That drives more power to the State.

The people who fall out of the legitimate workforce become wards of the State through welfare, unemployment insurance and other federal "aid". Private civil charity is destroyed by the transfer of funds away from individual discretion via taxation. There's even more power for The State. Since these people can no longer afford healthcare, that emboldens the call for "universal insurance"... more power for the central planners.

This isn't about political stupidity. It's about recognizing self interest. Our constitution was built with check and balances on self-interest, but the ludicrous expansion of The State throughout our lives lacks these simple rules.

Why else would we continue to have ethanol mandates and farm subsidies when any and every sane, intelligent person KNOWS FOR A FACT that they hurt the poor here and starve and destabilize the poor abroad.

It all comes back to Frederic Bastiat and his marvelous quote:

"The State is the great fiction, through which everyone endeavors to live at the expense of everyone else."

Protectionism only protects the power of the one true monopoly. The State. ;)



Ok. I will drop "stupid" and keep self-centered and arrogant. Having recently read "A theory of Justice" by John Rawls and written a paper on "universal Health care", I must say that both are manifestations of your explanation. While the paper title is stiff and a little arcane, I should have used "Rawls and Rationing: Bringing the two together."

I am also cooking up an explanation of what might partially explain the need for greed in our current culture.Probably wrong but plausible.

John Papola


Don't get me wrong, many if not most of the pols are clearly ignorant.

As for greed, I would suggest you reconsider the theme. I believe that any celebration of greed or appearance of celebration ultimately works against the libertarian message. We are not pro-greed. We simply acknowledge self-interest as an inherent and powerful part of human nature and promote freedom and competition as the most positive and productive way to harness that nature for the greatest good.

When you appear to celebrate greed, you empower the ignorant forces of coercion via populist rhetoric. You give them a tool with which they can bludgeon liberty in the name of protecting
"the little guy" by marginalizing the free market as being pro-big business.

As we all know, there is no greater enemy of free market competition than a big corporate incumbent.


John Papola

Mr. Becker? Judge Posner? Thoughts on the role of central bank credit expansion? Care to weigh in?


Pragmatism is all well and good but I think it reflects a set of deeper capabilities.
I believe an excellent leader needs both empathy, to understand how those with other frameworks perceive the situation, and enough logical power to reconcile their views with one or more other frameworks.
To look at it in a technical way, politics is sort of like an optimization problem where each group's approval is weighted according to its influence and various outcomes hold positive or negative worth to them. Action would then occur when enough groups saw the outcome as positive to reach a set limit (say, 60 senators).
This outlook takes my point to a bit of an extreme, but the point still holds true. Any leader who cannot put aside their beliefs long enough to understand those of others will prevail only through luck, not skill.


We need to get back to workmanship - a job done good enough with decent and fair judgement (opportunity for both liberal and conservative).


Prof. Becker said: Incomes of many fund managers and private equity leaders rose enormously, but it is difficult to prevent that from happening again without introducing controls over their salaries, stock options, and bonuses.

The salaries of management in publicly traded corporations are admittedly getting out of hand, and there is likely some funny business going in some cases.

However, the manner in which private equity and hedge fund managers are paid is quite different. Such managers have much better incentives to maximize profits for their limited partners, plus they also have significant "skin in the game." They also have much less managerial slack to maximize their own utility at the expense of their "shareholders" when compared to publicly traded corporations. Finally, they are investing institutional and rich people's money--we have no reason to suspect that these very able investors being hosed by PE & hedge fund managers.


Consider these two facts: 1. In the 19th century, when we had a mostly free economic system, downturns were mild and lasted a very short period of time. 2. In the 20th and 21st centuries, when we had a mixed economy, downturns were severe and protracted, with the worst and longest depression coincident with the greatest degree of government control over all aspects of the private sector.

Pretend for a second that you are a scientist. What hypothesis might you form from these facts?

Silly me. I forgot what "analytical framework or theory" the advocates of statism like to use to interpret facts.


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