In his recent columns on the 2008 financial crisis, the economist and political philosopher Anthony de Jasay discusses a number of topics including the uninformed, sensational and self-fulfilling reporting of the mainstream media about the current economic climate, the non-trivial contribution of government regulation to the financial crisis, and the consequentialist thinking about the economy that is at the root of calls for government intervention.
Most, if not all, government policies involve economics. This fact alone explains the prominent place economics has in news reporting and the intense politicization of the science of economics. But this not does necessarily make the general public and politicians more informed about economics: “Complex questions of biochemistry are usually discussed by biochemists and those in civil engineering by civil engineers…Media men need not know much, but they know that good news is no news,” writes de Jasay. And, as has been documented by the economist Bryan Caplan, rationally irrational voters hold systematically biased beliefs about economics, whose views are again reflected by the politicians they elect for office.
De Jasay further writes:
It is barely thinkable, to put it mildly, that either the discount rate, or the sum of probability-weighted future profits, or their time pattern between fat and lean years, or all three together, should change sufficiently in less than a year to cut the value of all European companies by a half. Can we all be out of our minds?
Maybe we are, as the elasticity of expectations is greater than 1, fueled by a climate of media and politics-induced panic, which produces public policy responses that produce more panic and uncertainty, leading to even greater elasticity, etc.
One of the saddest and most depressing aspects of the 2007-2008 financial breakdowns is that panic was generated without sufficient objective grounds for it and without the intention to do so. The American mortgage default problem caused a loss to the lenders, mostly banks, estimated at just under 1 trillion dollars. This was in major part also zero-sum, for there was no destruction of real wealth and no loss of current production of goods and services; the mortgaged homes were still standing and were lived in by the original borrowers or could be rented out if foreclosed. The trillion-dollar loss was really a redistribution of existing wealth, painful but not catastrophic, nor really large in relation to a 14 trillion dollar American economy. – Trials and Tribulations of a Hybrid System
Is it possible that the panic mode was not so much induced by the state of the economy but was triggered by the redistribution of existing wealth that followed the meltdown of the housing and financial markets? The politics surrounding the government bailout plans (“too big to fail”), seem to indicate this was a contributing factor. There is an urgent need for some insightful public choice analysis of the financial meltdown and the government’s response.
De Jasay reviews a number of the factors that contributed to the financial crisis such as low interests rates (although de Jasay does not single out the Fed), the pressure to issues mortgages to households that could not afford them, Basel II and mark-to-market-accounting regulations, saying about the latter two:
The interaction of the two rules generated a vicious circle that reinforced itself with every turn. The whole scenario illustrates the potential of hybrid systems, such as the actual set of liberal elements mixed with dirigiste ones, for making a moderately bad initial disequilibrium into something very much worse…In a “pure” liberal system, durable success and profit maximization depend on gaining and retaining the confidence of depositors and other creditors. In a “pure” dirigiste system, it is not the customers that must be satisfied, but the regulators. In any hybrid system between the two, it may not be possible to satisfy either the customers or the regulators.
In his column Trudging Down the Third Way, de Jasay ultimately lays the blame at the crass consequentialist thinking that is dominating public debate about the financial crisis. Instead of respecting contract and property, “the economy” is perceived as a tool that needs to be manipulated to produce specific political goals such as economic growth and redistribution of income. It should not be a surprise, then, that a (perceived) crisis in the economy produces panic in politicians. The renewed calls for more regulation is often accompanied with statements that laissez faire capitalism has failed. How the heavily regulated economies of contemporary Western countries can be perceived as anything else than mixed economies ruled by pressure group interests and economic populism remains a mystery.