Monday, October 20, 2008

The End of Libertarianism?

Slate published this piece yesterday by Jacob Weisberg on The End of Libertarianism, proclaiming that the financial crises proves libertarianism to be a failed ideology.

The worst thing you can say about libertarians is that they are intellectually immature, frozen in the worldview many of them absorbed from reading Ayn Rand novels in high school. Like other ideologues, libertarians react to the world's failing to conform to their model by asking where the world went wrong. Their heroic view of capitalism makes it difficult for them to accept that markets can be irrational, misunderstand risk, and misallocate resources or that financial systems without vigorous government oversight and the capacity for pragmatic intervention constitute a recipe for disaster. They are bankrupt, and this time, there will be no bailout.

Brink Lindsey of the Cato Institute responds here:

In an article for Slate (another version appears in Newsweek) entitled “The End of Libertarianism,” Jacob Weisberg mocks libertarians and other free-market supporters for arguing that interventionist government policies contributed to the financial crisis. In italicized exasperation he cries, “Haven’t you people done enough harm already?” According to Weisberg, it’s already clear that, when it comes to what caused the meltdown, “any competent forensic work has to put the libertarian theory of self-regulating financial markets at the scene of the crime.” Consequently, he argues, libertarians in general have now been utterly discredited. “They are bankrupt,” he concludes, “and this time, there will be no bailout.”

In firing this broadside, Weisberg poses as the pragmatic, empirically minded anti-ideologue. In fact, he is engaging in the lowest and most intellectually trivial form of ideological hack work.

As every good hack does, he bulls ahead with completely unjustified certainty. We’ve just experienced a global disruption of financial markets on a scale not seen in seven decades. And we’re still in the middle of it: the ultimate extent, severity, and consequences of this crisis remain unknown. Yet Weisberg can already sum up the story in a single sentence: the libertarians did it!

But consider the fact that it wasn’t until Milton Friedman and Anna Schwartz’s Monetary History of the United States – published in 1963, three decades after the event – that our contemporary understanding of the causes of the Great Depression began to take shape. That understanding has been further refined by contributions from, among others, Ben Bernanke and Barry Eichengreen during the 1980s and ’90s.

So serious people will be debating what triggered the current crisis for a long time to come. I’ve been reading voraciously in recent weeks, trying to get some handle on what’s going on, and I can tell you that there is nothing like a consensus among scholars yet – and certainly not a consensus in favor of some simple, monocausal explanation.

With regard to government interventionism as a cause of the crisis, Charles Calomiris and Peter Wallison have marshalled strong evidence that Fannie and Freddie played a major role in inflating the real estate bubble. Despite the fact that these two gentlemen have forgotten more about financial markets than Weisberg will ever know, Weisberg dismisses their analysis as not only wrong, but risible.

Here’s what I think, at least at this point. I think the whole system failed. Without a doubt, private actors succumbed to bubble psychology and perverse incentives, and their risk-taking grew increasingly reckless. Yet Weisberg’s simplistic morality tale that good prudent liberals were foiled by go-go free-marketeers doesn’t come close to mapping reality accurately. When exactly did Democrats try to arrest and reverse the steady relaxation of lending standards? When did they try to rein in the GSEs? Meanwhile, European banks are being battered by this crisis as well. Does anybody really think that European financial regulators are closet libertarians?

Far be it from Weisberg, though, to let such inconvenient questions get in the way of his cheap ideological point-scoring. Indeed, he isn’t content just to blame libertarianism for the financial crisis. He goes so far as to claim that libertarianism as a whole has now been decisively repudiated. Wow, talk about contagion! Because of what some people said about financial regulation, we no longer have to pay any attention to what other people say about trade, health care, energy, taxes, federal spending, etc. Here Weisberg further burnishes his hack credentials by demonstrating his facility with the wild, unsubstantiated smear.

As Lyndsey says, I think the intellectually honest are still trying to come to grasps with what exactly is happening in the financial sector. There's not a libertarian out there who refuses to admit that market actors played a key roll in precipitating this crisis, but the real questions are about what incentives these market actors were responding to. Blaming the entire crisis on free markets and deregulation doesn't reflect the complex realities of the financial world, where the Federal Reserve, a government entity, controls the money supply and manipulates interest rates, where the SEC enacts incredably complicated financial regulations, and where Congress passes law after law after law specifically designed to impact the market. And even for the intellectually honest leftist, the easy out of blaming deregulation doesn't provide the answer of what regulation is good regulation.

Also interesting is Weisberg's attempt- like Naomi Klein in her latest rant- to play the role of moderate, painting libertarian ideologues as equally misty eyed as their Marxist counterparts and equating the academic scholarship of a group like the Cato Institute with the political prose of some college kid wearing a Che Guevara tee-shirt. It is a rather clever political tactic, but it does has the downside of not actually addressing your intellectual opponents arguments.

I would argue once again that at it's most basic, the role of libertarian intellectuals in the field of public policy is that of the skeptic. If party A says we need X regulation, than prove it. If public interest group B says we need Y regulation, than prove it. The Jacob Weisberg's of the world would rather just dispense with that intellectual form of oversight and proceed directly to the oversight that comes from the benevolent hand of government. More regulation is good regulation, regardless of what such regulations actually say.

Isn't it more than just a bit ironic that those who accuse libertarians of living in an idealogical fantasy world are themselves immersed in a world that's just as utopian as the one where libertarians have their heads in the clouds?


Anonymous rose said...

"Their heroic view of capitalism makes it difficult for them to accept that markets can be irrational, misunderstand risk, and misallocate resources or that financial systems without vigorous government oversight and the capacity for pragmatic intervention constitute a recipe for disaster."

hahahha lets talk about misunderstanding risk and misallocating resources.

misallocating resources is providing building and selling homes to people who can't afford them. you need to look no further than the CRA and ACORN's law suits to realize that resources for FORCIBLY misallocated by the government, not free markets.

misunderstanding risk: there's a tiny bit of truth here. lenders became of the belief that home prices would never again fall and therefore the collateral behind the loan mimimized risk. this was a false notion but: in a libertarian state with out the fed manipulating interest rates and without the government providing artificial demand for homes you would've never had the housing bubble or bust.

I'm very happy you've opened your eyes to what Obama really is. I don't care if you don't like McCain as long as you hate Obama. that's whats important.

11:18 AM  

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