Friedman, In The Study, With The Manifesto Of Laissez-Faire Capitalism

The New York Times had a great article about how the President and his philosophy of the "ownership society" inflated the housing bubble and caused the historic collapse in the market. And I guess this is true to an extent, and the article doesn't presume that encouraging homeownership is solely responsible. But the article only skirts around the edges of why this was dangerous.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they headed toward insolvency.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”

The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis.

The focus on Fannie and Freddie is kind of ridiculous, as I've gone over on this blog time and again. They were a symptom and not a cause, entering the toxic market well after it had gotten out of control. What the article described, but not boldly enough, is that Bush's crusade for homeownership, a POLITICAL strategy designed to win the hearts of minorities and low-income Americans who could realize their dreams, was achieved through a crusade for deregulation, an IDEOLOGICAL strategy designed to allow financial executives the most leeway possible to conduct their sophisticated Ponzi schemes. Bush and his advisors would never interfere with the inflation of the bubble, because it won them a rhetorical victory, and they laughed off suggestions that the crash would be extremely dangerous. So they allowed lenders to come up with instruments that basically pushed the global economic system to the brink of collapse.

While much of this is the same old story of politics over policy - Bush could go around and say "Owning your own home is the greatest gift of all" and feign obliviousness to the chicanery used to get people into these homes - I don't want to divorce the ideology from the politics. The President was always a laissez-faire capitalist and a free market fundamentalist, using government to encourage homeownership, in this case, but essentially eliminating the rules that would create any barriers to making that a reality. And that was by design.

The president’s first chairman of the Securities and Exchange Commission promised a “kinder, gentler” agency. The second was pushed out amid industry complaints that he was too aggressive. Under its current leader, the agency failed to police the catastrophic decisions that toppled the investment bank Bear Stearns and contributed to the current crisis, according to a recent inspector general’s report.

As for Mr. Bush’s banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.

The administration won that fight at the Supreme Court. But Roy Cooper, North Carolina’s attorney general, said, “They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.”

While it's important that the President tells the whole country that you can own a home no matter how much money you make, it's far more important that he create conditions where lenders can actually give those kinds of mortgages out. The lenders were of course responding to demand for mortgage-backed securities and derivatives and threw away lending standards so they could print up more and more of them. Barry Ritholtz gets this right - the problem was that Bush was an avowed deregulator.

That Bush had as a goal increased home ownership is, quite bluntly, irrelevant. It is a worthy goal, and certainly one that could be achieved without forcing the collapse of the financial system.

Indeed, as the chart at right shows (source: NYT), home ownership has increased every year since 1994. Funny, from that year and for each of the next 10 years, there was no collapse. You have to ask yourself why. No, the 1997 Tax Break, did not, as the NYT implied yesterday, Help Cause Housing Bubble. Home ownership was rising years before that went into effect.

What Bush did differently than prior Presidents was that he genuinely believed that regulations proscribing bad corporate behavior were unnecessary. It was that ruinous belief system, one he shared with other key players, that led to the crisis [...]

Increasing home ownership in America is a legitimate political goal. Waiving down-payments requirements, dropping lending standards, allowing predatory lenders to flourish — that is what is the underlying cause of boom bust and collapse.

You're seeing this similar dynamic now in the revelations that Chris Cox sought to dismantle the SEC while he was the chairman of it, allowing traders free reign and hewing to the anti-regulation mantra of the Bush Administration. This mania was not limited to the housing sector (check out the Consumer Products Safety Commission, for another example). If you want to go all the way back, the culprit is Milton Friedman.

For half a century, Chicago’s hands-off principles have permeated financial thinking and shaped global markets, earning the university 10 Nobel Memorial Prizes in Economic Sciences starting in 1969, more than double the four each won by Columbia University, Harvard University, Princeton University and the University of California, Berkeley.

Chicago’s laissez-faire imprint underpins everything from U.S. President Ronald Reagan’s 1981 tax cuts and the fall of communism that decade to quantitative investment strategies.

In 1972, Friedman helped persuade U.S. Treasury Secretary George Shultz, former dean of Chicago’s business school, to approve the first financial futures contracts in foreign currencies.

Such derivatives grew more complex after Chicago economists created the mathematical formulas to price them, helping spawn a $683 trillion market that’s proved to be a root of today’s financial system breakdown.

On Dec. 16, the U.S. Federal Reserve cut its target lending rate to as low as zero for the first time and said it will buy mortgage- backed securities [...]

Joseph Stiglitz, who won one of Columbia’s economics Nobels, says the approach of Friedman and his followers helped cause today’s turmoil.

“The Chicago School bears the blame for providing a seeming intellectual foundation for the idea that markets are self- adjusting and the best role for government is to do nothing,” says Stiglitz, 65, who received his Nobel in 2001.

University of Texas economist James Galbraith says Friedman’s ideology has run its course. He says hands-off policies were convenient for American capitalists after World War II as they vied with government-favored labor unions at home and Soviet expansion overseas.

“The inability of Friedman’s successors to say anything useful about what’s happening in financial markets today means their influence is finished,” he says.

Instead, Galbraith, 56, says policy-makers are rediscovering the ideas of his father, Harvard professor John Kenneth Galbraith, and economist John Maynard Keynes of the University of Cambridge.

Keynes, who died in 1946, argued that governments should spend to combat the unemployment that free markets tolerate. Galbraith, who died in 2006, rejected mathematical models and technical analyses as divorced from reality.

The Chicago Boys brought us to this moment of crisis. Their radical theories have ruined the global economic system. I don't know whether having a former University of Chicago professor (whose economic advisors come from that school as well) as the President-elect is a good thing, in that he's been close enough to that heart of darkness to see its flaws, or a bad thing, in that he still holds the vestiges of their theories of deregulation. If Obama is a pragmatist, as he claims to be, he will recognize that Friedmanism must be totally repudiated, buried, locked up and forgotten.

Arnold's Freedom To Choose

This week, Naomi Klein bravely stepped into the lion's den this week and addressed the University of Chicago, protesting their bid to name an economic research center after Milton Friedman. It was a bravura speech where she made the argument that the current financial crisis is the final repudiation of Friedman's twisted theories of unregulated capitalism.

More than that, what we are seeing with the crash on Wall Street, I believe, should be for Friedmanism what the fall of the Berlin Wall was for authoritarian communism: an indictment of ideology. It cannot simply be written off as corruption or greed, because what we have been living, since Reagan, is a policy of liberating the forces of greed to discard the idea of the government as regulator, of protecting citizens and consumers from the detrimental impact of greed, ideas that, of course, gained great currency after the market crash of 1929, but that really what we have been living is a liberation movement, indeed the most successful liberation movement of our time, which is the movement by capital to liberate itself from all constraints on its accumulation.

So, as we say that this ideology is failing, I beg to differ. I actually believe it has been enormously successful, enormously successful, just not on the terms that we learn about in University of Chicago textbooks, that I don’t think the project actually has been the development of the world and the elimination of poverty. I think this has been a class war waged by the rich against the poor, and I think that they won. And I think the poor are fighting back. This should be an indictment of an ideology. Ideas have consequences.

Now, people are enormously loyal to Milton Friedman, for a variety of reasons and from a variety of sectors. You know, in my cynical moments, I say Milton Friedman had a knack for thinking profitable thoughts. He did. His thoughts were enormously profitable. And he was rewarded. His work was rewarded. I don’t mean personally greedy. I mean that his work was supported at the university, at think tanks, in the production of a ten-part documentary series called Freedom to Choose, sponsored by FedEx and Pepsi; that the corporate world has been good to Milton Friedman, because his ideas were good for them.

But he also was clearly a tremendously inspiring teacher, and he had a gift, like all great teachers do, to help his students fall in love with the material. But he also had a gift that many ideologues have, many staunch ideologues have—and I would even use the word “fundamentalists” have—which is the ability to help people fall in love with a perfect imagined system, a system that seems perfect, utopian, in the classroom, in the basement workshop, when all the numbers work out. And he was, of course, a brilliant mathematician, which made that all the more seductive, which made those models all the more seductive, this perfect, elegant, all-encompassing system, the dream of the perfect utopian market.

Klein mentions the Free To Choose series, and later on she highlights something I forgot - the man who introduced one of those series on PBS:



"Being free to choose means being free to make your own decisions. Free to live your own life, pursue your own goals, chase your own rainbow without the government breathing down your neck or standing on your shoes. For me it meant coming to America, because I came from a socialistic country where the government controls the economy."

That was Arnold Schwarzenegger in 1990, spouting free market fundamentalism in a corporate-sponsored documentary which mainstreamed ideas that today have brought us to the brink of economic failure. It's important to know what altar at which Schwarzenegger worships. It's important to know how he was, for a long time, the glitzy front man for Friedmanism, the showy snake oil salesman that got Joe Six-Pack to think that corporate behemoths eliminating rules for themselves was in the best interests of the common man. Arnold believes that these ideas, about "free enterprise and free people," are immutable, hard science, and incapable of being wrong.

Except we are now at a moment when, as governor, Schwarzenegger is bearing the brunt of the worst effects of unbridled capitalism. His state is caught up in the credit market freeze, with no money to pay the bills. He is begging the state's citizens to buy bonds and bail the government out, an approach taken so clumsily that he got Wall Street shaken at the precise time when he has to go into the market to borrow money. The state's public infrastructure is crumbling on his watch and even that won't be enough to make up the revenue shortfall.

Now a lot of people would let Schwarzenegger off the hook for this. The national economy went bad, and the financial markets failed as a result of the housing bubble bursting, and surely the governor of California can't be held responsible for that. Except he is such a devotee of Friedmanism, and in fact one of its key pitchmen, that of course he can be seen as guilty. And as the current cesspool of deregulation, where market forces run wild and greed becomes virtue, gets a reckoning due to the carnage it has caused, so too must the man who introduced Free To Choose all those years ago. He was wrong then, and he's doubly wrong now. To quote Naomi Klein:

Ideas have consequences. And when you leave the safety of academia and start actually issuing policy prescriptions, which was Milton Friedman’s other life—he wasn’t just an academic. He was a popular writer. He met with world leaders around the world—China, Chile, everywhere, the United States. His memoirs are a “who’s who.” So, when you leave that safety and you start issuing policy prescriptions, when you start advising heads of state, you no longer have the luxury of only being judged on how you think your ideas will affect the world. You begin having to contend with how they actually affect the world, even when that reality contradicts all of your utopian theories. So, to quote Friedman’s great intellectual nemesis, John Kenneth Galbraith, “Milton Friedman’s misfortune is that his policies have been tried.”

It's the ideological blinders that caused this crisis that must be taken off if we're ever going to get out. Schwarzenegger is somehow seen as the "good cop" Republican in the mix of California, wanting ever so to do the right thing. But the one area of jurisdiction, the one part of this crisis where the California governor could have had a hand in stopping the bleeding, when he could have imposed regulations to help stop predatory lending and rein in the runaway mortgage market in one of the biggest bubble states in the country, Arnold not only decided not to then, but has continued to do so.

I guess the banks and the lenders need to be free to choose.