I think there’s a perceptual or cognitive block, that simply makes it hard for many people to see government activity in the foreground of the story, as an actor which actively and (often) arbitrarily changes outcomes. It reminds of the recent Brian Greene programs on cosmology on PBS. In one, he compares the treatment of space, through most of scientific history, as simply being the unadorned theater stage, upon which the truly interesting things actually happen. It’s only later that Einstein (using Riemann’s math) described space as having positive, unambiguous characteristics. After Einstein brought space itself into the foreground, you could make statements about particular things that space did do, and other particular things that space did not do.
Another example: at a gathering of friends with children, my wife and I were observing a small boy (3-ish) who kept biting the other children. When it came to tears, parents would come in and intervene, and scold him. Later, we watched the same parents — who were baffled at the boy’s biting — laugh and giggle as the father playfully bit his son. Apparently, nobody had ever brought the father’s behavior into the foreground, for their scrutiny, as a possible influence on the son’s problem. Sometimes, the obvious does stare people in the face. I think that the way we describe the role and actions of government, in the press and schools, goes a long way to explain this cognitive block. Libertarianism is nothing like common sense; not nearly.
I was reminded of this as I read the following 2008 piece by Roger Lowenstein in the New York Times, where he documents the regulatory regime that was built by the state in the years leading up to the Great Recession. Check this out:
Until the 1970s, its business grew slowly. But several trends coalesced to speed it up. The first was the collapse of Penn Central in 1970 — a shattering event that the credit agencies failed to foresee. It so unnerved investors that they began to pay more attention to credit risk.
Government responded. The Securities and Exchange Commission, faced with the question of how to measure the capital of broker-dealers, decided to penalize brokers for holding bonds that were less than investment-grade (the term applies to Moody’s 10 top grades). This prompted a question: investment grade according to whom? The S.E.C. opted to create a new category of officially designated rating agencies, and grandfathered the big three — S.&P., Moody’s and Fitch. In effect, the government outsourced its regulatory function to three for-profit companies.
Here we have a great example of corporatism at its finest. None of our readers will find anything surprising about this, but what is the reaction of the NYT author to this textbook example of corporatism?
This leaves an awkward question, with respect to insanely complex structured securities: What can they rely on?
To be fair, this is a far better question than most other commentators have come up with. There is, for example, no condemnation of a non-existent laissez-faire capitalism. There is no demagoguery. The words “free market” do not appear in the text. Lowenstein’s question is a sincere one, which makes it all the more frustrating. The entire collapse of the financial sector occurred within a regulatory regime built up – piece by piece – by the social democratic state.
Rather than questioning the entire premise of a state-run regulatory regime, Lowenstein seems to be asking what government can do to make financial markets more accountable for their instabilities. Many libertarian economists have moved beyond this limited framework to put forth ideas about better regulatory regimes. They argue that regulation can be better and that instability in financial markets can be better quelled by adopting a framework that peacefully eliminates the role of the state in financial markets.
Two of these economists blog here at Notes On Liberty. Feel free to start digging into their ideas. In the mean time, I guess we’ll just have to keep reading the musings of smart people who are afraid or incapable of thinking more critically about the role of the state in the lives of individuals.