IP is one form of government enforced monopoly. A great deal of government regulation of the private sector serves the same purpose. (Medical licensing boards? Hairdresser licenses?) Try entering into the investment banking business and see how far you get...A nice post discusses the story - pretty well understood among economists - of how regulations that emerged during the "progressive" era supposedly to protect consumers and average people served instead the interests of large would-be monopolists.

All of which is apropos of the current financial bailout. I am naturally skeptical about government intervention in the market. It is a fact that some of the current crisis has been caused by government intervention in mortgage markets through implicit guarantees for the big GSE's. What sort of policy is it to create a private entity, give them implicit guarantees, then turn them loose to drive their competition out of business, and fatten their own purses? I am doubtful that in the absence of government intervention the banking sector would collapse, although there would be some short-term pain while it restructured itself. And while I'm happy that the stock-holders in insolvent financial institutions aren't being rescued, I don't see why the bond-holders should get off scott free. Still an argument can be made that the government needs to fix what it broke.

The current planned bailouts, however, seem to be government at its worst. The people who get bailed out are those who have the monopoly power. A few small fry are left to go bankrupt, while the really big ones get government guarantees. They also get fewer competitors, and the promise of regulation to keep competitors out in the future. The large players that are bailed out also are the ones that face the greatest moral hazard: they have the ability and the incentive to structure portfolios that promise high returns in exchange for a small probability of failure exactly when the government can be counted on to bail them out.

The obvious question is: given that the problem is inability of individual mortgage holders to pay their mortgages or sell into a falling housing market - why not bail them out? If tax money is going to be spent to mitigate private losses, why not mitigate the private losses of the small-fry? Individual mortgage holders have debt structures that are quite transparent. Nor do they have the ability to structure portfolios that promise great returns in exchange for a small probability of failure so great it demands government intervention. So of all the people involved the individual mortgage holders seem to face the least moral hazard.

Why not start, in fact, by reverting the current bankruptcy law to its state before the prior reform? The change in the bankruptcy law - to make it easier for creditors to collect after bankrutpcy - seems to have been a give away to lenders plain and simple. That is, it was a massive change in the structure of existing debt. It seems to be the lender equivalent of retroactive copyright extension. One can imagine a combination of a change in the bankruptcy law to strengthen the negotiating hand of individual mortgage holders, combined with a requirement for government assumption of bad mortgage debt that the bad loans be renegotiated with borrowers.

Sadly, nothing like this will happen, and the real message is clear: When the politically connected buddies of high government officials are threatened, the government steps in and bails them out. It's enough to make a right-wing economist become a left-winger, or perhaps just an anarcho-capitalist.

I think you are wrong in your assumption about moral hazard. One part of what drove the bubble is all those people who bought a house believing that house/apartment prices can never go down. If you validate that belief, then every person will be right to purchase a house with such expectation causing another bubble to form.

I don't entirely agree with this, although it is complicated. The reason that insurance against housing prices going down isn't sold is because no private entity can credibly promise to pay. That is, as far as I can see, simply taking on more risk because you are insured against losses isn't moral hazard, and in fact is exactly the point of offering insurance. The problem with offering insurance - that is moral hazard - is that providing insurance may cause people to fail to undertake reasonable efforts to mitigate risk. I don't see what an individual homeowner can do to mitigate the risk of housing prices going down - no individual homeowner really can expect to have any effect on the overall price of houses. I do see what large financial companies can do: they can not create complicated opaque derivative portfolios that lead to "systemic" failure when housing prices fall. By insuring them we encourage them not to mitigate risk of systemic failure.

Leaving aside the fact that government programs never do what there are supposed to do, with an ideal government, and the inability of the private sector to commit to making the large transfer payments required to provide insurance against large social risks, it seems to me you could make a case for the government providing insurance to individual homeowners against falls in the price of homes. And even ex post making up for the missing market by providing the insurance people would have like to have purchased had it been available. I don't see the case for bailing out firms that are large relative to the market, and took advantage of their monopoly power to force a government bailout. Although bailing out individual homeowners would probably rescue the firms as well. Perhaps the right policy is to forgive the debt to mortgage holders, but not compensate the firms that hold the mortgages.

Further elaboration: roughly speaking we can think of three kinds of things that we might like to insure against: idiosyncratic risks (auto, health, fire, life insurance, etc.), aggregate risks (the economy as a whole falls) and sectoral risks (an industry declines; the price of houses relative to stocks and bonds falls).

Idiosyncratic insurance isn't unproblematic - health insurance having a huge adverse selection problem in that people who know they have poor health want high coverage, and those with little risk want low coverage, and insurance companies want to skim the cream of good risks. But the basic "pay premiums into a pool and compensate the losers" model is viable when adverse selection is not too severe.

Aggregate risk is uninsurable because there is nobody to provide insurance.

Sectoral risk can't be insured by a premium pool - basically the winners have to compensate the losers, and ex post they will do everything they can to avoid paying off. But it doesn't pose a moral hazard problem for the most part, it is an enforcement problem. We can't insure individual homeowners against a decline in the price of their house; nor individual stock holders for a decline in their stock value, but mutual insurance between the two groups is possible in principle. The idea is when house prices decline, stock-holders pay house owners, and in exchange for house owners paying stock-holders when stock prices fall. To the extent that house owners and stock-holders cannot individually effect the overall price of houses and stocks, there is no issue of moral hazard. (But see the previous comment about large financial firms.)

The reason that we don't see mutual insurance contracts - one sector against another - is that the contracts are not credible. In a sense all the derivative stuff was an effort to run such a market - providing insurance for mortgage backed securities against a fall in housing prices. But as we can see when the entire house market falls, the insurers simply plan to default.

This is an extremely complex topic. We have a myriad of issues that weigh in on this. My pet comment of course, many of out exorbitantly paid corporate executives have proven to be incompetent. Too bad they get to walk away with all the money while the lowly taxpayers get screwed. But then my comment is nothing new nor does it help us understand what went wrong.

The US "capitalistic" system is growth growth growth. Rationally there are limits to growth. One can only drink so many cokes or buy so many cars. So corporations as they reach a "growth limit" become innovative. Cereal manufactures reduce the size of their products, software manufactures segmented their products into categories such as "basic" and "premium", automobiles are sold with more features etc.

Well, the financial institutions seem to have been playing the same game. For example, give loans to those who could not afford them. A dollar today means that I now have the dollar, so it does not matter if the company goes bankrupt tomorrow - to bad they were suckers to be taken advantage of.

What appears to be truly "innovative" is the securitizing of these loans into various so-called "financial instruments" like Collateralized Debt Obligations. In short a ponzi scheme. Once the money stopped flowing in, the house of cards collapsed.

One commentator on CNBC asked the poignant question. Where were the risk managers??? In theory when a mortgage is issued, the bank would be expected to buy default insurance. It appears that the Collateralized Debt Obligations (CDO) were not properly hedged. <-This is speculation on my part, all I know is what I read in the papers. Consequently, as the house of cards began to collapse, it spread to companies such as AIG.

What appalls me, the right wing does not want regulation under the theory that it will discourage "economic growth" and "innovation". Here we had unregulated innovation and economic growth, too bad it was a false economy based on smoke and mirrors that is now collapsing around us.

David:

Question 1: How is IP a "government enforced monopoly"?

Question 2: Doctors compete with each other. You are free to choose any doctor you wish to visit, including those in other countries. How is licensing by an agency (which, incidentally, assures that the doctor knows how to practice medicine) similar to a "monopoly"?

Question 3: You state that "What sort of policy is it to create a private entity, give them implicit guarantees, then turn them loose to drive their competition out of business, and fatten their own purses?" Which private competitors have been "driven out of business" by competition with GSE's? Incidentally, I have purchased five homes, and all of them were financed by private mortgage companies.

Question 4: You state that "Leaving aside the fact that government programs never do what there are supposed to do..." If that is true, why do we have interstate highways and why are endangered species returning after government protection of those species?

The problem I have with your commentary is not the message, which is also my belief. The problem I have is two fold. First, you muddy your message with the very extraneous politicizing that you accuse others of conducting. Second, you recommend letting off the individual who made the loans, when they were as culpable as those lending them the money.

I absolutely loathe the government bailing out private industry. I understand why they did it, but I question whether it is really the best thing for all. In the end, they are bailing out the managers who lent the money in their greed for higher returns, and the individual mortgage holders who went for easy money.

I understand the temptation to excuse individuals because they may know less or be less educated than the people lending the money, or, as I saw on the news the other day, may have been misled by lenders. However, I also have to believe that these people were greedy in their own way and should either have purchased a cheaper house or budgeted differently to be able to pay for their mortgages. I know that some circumstances are beyond an individual's control, but the numbers of lenders and borrowers involved just smells like greed to me. I am unenthused about financing someone's car, clothes or X-box just because they wanted it all rather than properly budgeting.

1. IP provides a limited monopoly over all copies of something: a book, a movie, the method explained in a patent. It is enforced by the government both through criminal law in the case of copyrights, and through civil law in the case of both copyrights and patents. At least among economists, many of whom support strong IP protection, there is nothing controversial about this.

2.Licensing agencies do not create monopolies for doctors. They are a monopoly controlling (and limiting) entry into the profession. As do all monopolies they create artificial (human made) shortage in order to increase prices.

3. Fannie Mae and Freddie Mac operate in the secondary mortgage market, they issue collateralized debt obligations - the things that are traded on securities markets. They do not themselves issue mortgages. Originally Fannie Mae had a monopoly over this market. It is my impression, but I would have to check that it is true, that there was subsequent private competition that was recently squeezed out. Certainly the two together with about 90% of the secondary mortgage market have a...well we can call it duopoly if you like.

4. It would have been fairer to say "rarely" rather than never. Those who were on the interstate highway bridge in Minneapolis that collapsed, those that survived anyway, might not entirely agree with you. I wasn't intending to attack government on every level and every way, although I can see how what I wrote could be read that way. I just wanted to emphasize that simply because an idealized government might bring a benefit by an ideal government program doesn't mean that an actual government would necessarily bring a benefit by a real program.

5. I can think of reasons not to help people who got themselves into trouble over their mortgages: but of all the people involved, the expectation of future help that is created on the part of future home buyers is the least economically significant. Conditional on bailing someone out, the homeowners seem from the perspective of minimizing future economic consequences the best ones to help. Part of what I was proposing (changing the bankruptcy law back again) simply gives back something that was taken away by government fiat.

(1) Patents are not "enforced" through civil law. Plaintiffs (typically the patent holder, sometimes not) file suit in civil court against an alleged infringer. The courts merely adjudicate the facts of the situation to determine whether infringement has occurred and then, the recourse that is in the best interest of the public and the patent holder.

Fact: Approximately 80% of all patent holders who file suit lose, mostly because the court finds fault along the way. Hardly my definition of "enforcement."

Fact: One of the court's decisions is whether it is in the best interests of all parties (society included), when the plaintiff wins, as to whether a cease and desist is desirable or a reasonable royalty. The royalties are rarely huge because they are based on the value of the supposed "improvement" only.

(2) By your definition there is a "shortage" of lawyers (and, for that matter, biologists, physicists, engineers and any other degreed profession). However, the United States has more lawyers than any other country on earth and many of those lawyers are paid less then a typical factory work. Hardly a shortage in one of the most regulated professions, and virtually no control on prices.

On the other hand, do you want to fly on a plane that was designed by degreed engineers or one that was designed by a bunch of people who did self-study in the library and because of the hours they certified they spent in the library, can call themselves an engineer? I know which one I choose.

(3) I am unable to comment on this. To the best of my knowledge, all of my paper (mortgages) has been held by private companies. Whether they had some relationship to Fannie Mae or Freddie Mac is unknown to me.

(4) Glass half empty, glass half full. In general, I think the government has their hands in way too many of our affairs, and they continue to increase their interference. However, we (the actual voting populace of the U.S.) continue to allow this interference. On the flip side, the government (a quite broad term, actually), has done many good things. Do the goods outweigh the negatives? Oh my. That depends on what year you ask the question, if you are asking me. Right now I must admit that it seems to me that the negatives outweigh the positives.

Incidentally, I believe the bridge in Minneapolis was built by the government of the state of Minnesota. At least, they had the responsibility for its maintenance.

(5) Your answer seems like the lesser of evils. If help is to be given, and I am still grinding my teeth over the series of events that seemed to make help necessary, then homeowners were the best to help. Help for the least greedy or those on the bottom of the food chain?

I am unable to comment on the bankruptcy laws because I am unsure of the changes you are talking about. The only change I remember was the one that made it harder to declare bankruptcy and reduced the amount that people could walk away with. I may have been deceived by the scope of the changes. The scenarios that the changes were supposed to prevent included people having multiple homes and cars and using clever means of declaring bankruptcy and still having a lot of assets after the bankruptcy.

1. After adjudicating a civil matter and reaching a decision the court also enforces the decision. How often it finds in favor of the plantiff. We wouldn't conclude that the courts don't enforce laws against murder because 80% of defendants are let go free: perhaps 80% are innocent.

2. The issue is whether government issued credentials are needed in order to enter the profession, not whether someone with education will be more successful. In the case of lawyers, entry is limited, just not very effectively. In the case of professors, anybody can offer classes, educated or not. Similarly anyone can do research in physics, etc. As to the design of an airplane I do not believe there is a certification process enforced by the government for being an airplane designer. There is a process for inspecting airplanes before they are allowed to fly. At one time the government was not involved in the design or inspection of aircraft at all. Even so people chose not to fly on airplanes designed by scatter-brained idiots. You post seems to indicate a belief that certain functions and outcomes cannot be achieved without government intervention. There is not a great deal of evidence to support this.

3-4. We don't seem to be disagreeing.

5. There was a bit more than that. I don't think that homeowners are less greedy (everyone is pretty greedy when it comes down to it). That they are poorer is perhaps relevant. But the central reason is that they have less ability to respond to a bailout by misbehaving.

On the bankruptcy, the actual changes were pretty complicated, and perhaps didn't have that much effect in the end. The were intended to discourage chapter 7 bankruptcy by introducing a means test (not eligible if income above the state median), and added a variety of small hurdles for filers and protections for lenders. There were some changes designed to make it harder to hold on to large quantities of assets as you suggest. Those provisions were not completely retroactive.

David,

You are wasting your valuable time going back and forth here with this poster, whose rantings should be removed IMO. (The Mises blog says "Post an intelligent comment" and the moderator adheres to it. That would exclude his posts.)

To wit:

He tendentiously says patents are not enforced through civil law, but only adjudicated. This is a minor point, really a distinction without a difference in actual fact. Lawyers would be startled to learn that the courts are not involved in law enforcement. As to the 80% number (I haven't seen this and don't know if it's a fact), considering that 100% of patents are illegitimate, it sounds like over enforcement of a government-granted monopoly to me.

The fact that the U.S. has more lawyers than other countries is also irrelevant to the fact that occupational licensure does creates a shortage of workers in the profession licensed. There might well be more lawyers making less money on average in a free market. As for "many" lawyers making less than "typical" factory workers, should we laugh now or wait for the punch line? No facts adduced here, but then the poster operates in a fact-free (and economic theory-free) zone.

His earlier point about Frauddie (Fannie and Freddie) not putting any private competitors out of buinsess is incorrect. They had highly subsidized costs of capital, and there was at least one player in the secondary market that gor out of it because it had a tough time competing.

The bridge in Minnesota was build partially with federal funds and its maintenance budget was funded to a small extent from federal highway taxes.

I can't think of one good thing the government--which gets its resources by theft--has done. If I knock off a little old lady on the street and give her money to a beggar, have I done a good thing? That's what the government does. It's a criminal gang as Rothbard pointed out.

Bill Stepp, I prefer a censorship-free zone even for the most insane comments provided as long as they're not obvious spams. I appreciate a true survey of the debate rather than an heavily edited debate. Best of all, it promotes trust and ensure that this site is authentic.

If you must, provide a moderating system in which people can ignore comments of bad quality.

I agree with Kiba on this. The board is moderated in the sense that we can remove posts and comments if we choose. And while I agree with Bill more often than Lonnie I think it is unfair to describe his posts as "rantings." Disagreement and debate is healthy. To take a specific point: I posted that Fannie Mae/Freddie Mac drove private competitors out of existence. When I went to make a brief check, I didn't find any evidence of that, so Lonnie was quite right to call me on that.

I'd prefer to reserve the removal of posts for things that are genuinely irrelevant (spam...trolls...etc.) As long as posts are polite and reasonably on topic I think we should allow them. Frankly I think the site would be a bit boring if we just sat around agreeing with each other.

David Levine:

(1) I think we are making two different points here, or possibly even three. Let me attempt to separate the points:

- Your point is that when enforcement occurs, it does through by a system set up through the government. I absolutely agree.

- My first point is that very few patents are actually litigated. The numbers vary per year, but approximately 200 of the roughly 3.5 million patents in force in the United States are litigated each year. Of the roughly 175 law suits filed each year, the plaintiffs lose approximately 80%. This number was researched by a presenter in AIPLA's quarterly publication. If anyone on this site is truly interested in the article, I will go look it up and give you the quarter of publication so you can have fun reading the article for yourself. The point of the article was that patent litigation is rarely a winner for the plaintiff, and a potential plaintiff should think twice (or even three times) before filing suit.

- My second point is that actual enforcement of the results of a patent suit can be difficult. Courts in the United States have no enforcement power, and so must rely on cumbersome systems for enforcement. I do not know how many winning plaintiffs fail to get their winnings enforced, if any.

(2) Your original point was that barriers to entry create artificial shortages. Again, I had two points.

- There are barriers to entry in all things. Education is the most typical "barrier" to entry. Regardless of whether there is government certification, that certification most typically being accreditation (I may have misspelled that) of the college or university providing the instruction. An aerospace engineer is "licensed" or "certified" by the government by completing education that meets the requirements of an aerospace engineer. The "artificial" barrier created by education is a practical barrier that is a necessity. All the government does is set the standards of knowledge that a particular practitioner must have (essentially, the education anyone receives, all of which is accredited by someone) to claim they have an associate's degree, bachelor's degree, master's degree, ad infinitum.

- Though there are limited "shortages" in some fields, Americans, unique of virtually any other country on earth, are generally free to choose any field of study they desire, limited only by ability, ambition, time and money. Since anyone is free to choose to be a doctor or lawyer, and since the rewards for being a doctor particularly are well known, the true "barrier" is the lack of ability or ambition to complete 7 years of education and then residency rather than some barrier arbitrarily put into place by the government. At this particular point in time there are so many programs in place to borrow money that even money is not a significant hurdle if you have the ability and ambition to learn to be a doctor.

- As a matter of reasoned thought, if the government did not put standards into place for being called a doctor, dentist, engineer, etc., how do you think the market place would react?

(3) - (4) Yes, we do agree on these points. I have been against big government for a long time. Essentially, the nominally anti-big government position of Republicans is what moved me in that direction. Unfortunately, the Republicans have proven that they can create big government as well or better than Democrats. I wish we had a real three party system.

(5) At last! I generally agree with your points here. You are correct that the people who frequently seem to end up with the short end of the stick are the "end users," the borrowers in this case. Certainly borrowers are so constrained that their opportunity to misbehave are limited. Also, they are generally significantly less knowledgeable of the system than those in the companies from whom they borrow money.

As for the bankruptcy laws, your comments are generally congruent with my limited knowledge. What provisions are beneficial if we revert to the previous system?

Your post is reasoned and intelligent.

Bill:

The 80% number was posted by the AIPLA in its quarterly journal. I would be more than happy to provide you with the date of the publication so you can look it up and read it.

David said that the competition put a company out of business. Your statement is that someone got out of that particular business because they were unable to compete, but did not go out of business. Thank you for supporting my point.

Re attorney/lawyer salary: There are numerous sources for this information. The AIPLA has a biannual survey distributed to all members that shows the salary of all members. The low end runs around $30k per year. Yes, there are attorneys making SUBSTANTIALLY more than that, for a variety of reasons (I assume ability is in there somewhere), but the fact is that there are many attorneys making less than the average hourly wage that a union factory worker makes. According to the AFLCIO, the average wage of a union worker is $41,000 per year, so if there are attorneys making less than that amount, which there are according to the AIPLA, then obviously there is at least one. I could go look in my files and give you the exact number of people who responded to the survey who made less than $41,000, if you are interested.

Government and income from theft: The American people have the ability to abolish taxes. The theft, if it is such, occurs because we allow it.

Unable to think of one good thing government does: Well, I suppose that is a point of subjectivity. Many people think the interstate highways are a good thing. Many people think having murderers and rapists behind bars is a good thing. Perhaps you do not, and that is your right!

I also think you should let Mr. Levine decide what is a waste of time for himself. He seems like an intelligent person and I am sure he knows what he wants to spend his time on.

Kiba and David:

I must admit that there is some irony when a group as collectively for free market and free ideas proposes censorship. Thank you for your comments. I certainly have enjoyed yours!

1. I saw a seminar sometime ago the theme of which was "software patents aren't so bad because nobody really tries to enforce them." The argument that patents can't really be enforced in court has a similar ring to it. It seems to me a weak argument in favor of a patent system that they sre useless. If they don't succeed in givng patent holders monopoly power, what is the point?

2. There is a difference between "natural" barriers to entry such as lack of knowledge or expertise, and man-made barriers that come about by suppressing competition through law or contract. The former we are stuck with, the latter we are not. You might want to check the requirements for board certified medical specialities. It isn't done by setting an expertise barrier, it is done by setting a fixed number of people that can pass.

Lawyers have not been very successful at limiting entry, and many make little money.

3. The argument for reverting the bankruptcy laws is twofold. First, it undoes what should never have been done, which is retroactively rewriting debt contracts in favor of lenders, and second, in the context of the housing market fall, it provides a small amount of "bailout" of mortgage holders by making it easier for them to go bankrupt. I'm also in favor of the provision bitterly opposed by Wall Street to allow bankruptcy judges reset mortgage terms as part of the workout. Robert Shiller has a nice proposal for improving the risk sharing in mortgage markets.

David:

(1) You have indeed asked a very good question. If you buy a gun for your home and never use it, then why did you buy the gun? If you have a military and never use it, then why do you have a military?

The fact is that the vast majority of companies with patents have never litigated them. Why? Well, several people on this site have said the exact reason. Many companies have patents because their competitors do, and if one "pulls the trigger," then the respondent will do the same. Essentially, everyone feels they must have patents because everyone else does.

Beyond that, intellectual property has asset value, and is a measure of the innovation of a company.

Though I have said several times that the amount of litigation compared to the total number of patents is miniscule, companies are still enforcing their patents directly - probably substantially. Companies do not need the government to get in their way to enforce their intellectual property. In fact, the prerequisite to legal action is that the company has already attempted to enforce their intellectual property against the infringing entity.

I would be willing to bet dozens and maybe hundreds of letters are sent to various entities every day asking them to stop infringing someone's intellectual property. Many and perhaps most companies are unaware they are infringing and either stop, or negotiate a license. Most IP issues are resolved without involving the government, which is the cheapest way to resolve these issues. Therein lies the value of intellectual property. The portion that involves the government is relatively miniscule, though important because it sends a message to other would-be plagiarizers.

(2) I bow to your greater knowledge regarding medical review boards. The various certifications I am familiar with, which are either technical or legal, allow virtually unlimited entry, as long as you pass the test. The pass value is fixed in all those fields, to the best of my knowledge.

(3) Regarding rewriting provisions in favor of lenders: That makes me feel queasy, especially if it makes payback by borrowers even more difficult.

Regarding allowing bankruptcy judges to rewrite terms: I think this provision sounds reasonable. I would be for some limits on their ability to rewrite provisions, but they should have some latitude. I think it is in the best interest of society to get people back on their feet, not beat them down even further when they are already down.

I think we are pretty much down to #1. I'll just reiterate: if the government isn't needed for intellectual property then let it get out. If it is needed, however indirectly, then it is in the business of helping to restrict competition. I'll let you have the last word.

David:

Thank you for the last word.

When you phrase it the way you did, I cannot argue with you. I agree that a patent limits competition for the invention claimed in that patent, if there even is any competition. I will stop at that point, because if I introduce new arguments we will be back at the beginning again.

Interesting discussion. I have learned much. Thank you. - Lonnie