Naked Capitalism

Diamond and Kashyap who know a great deal about these markets.

The Corner isn't as a rule very good on economic issues, but this is a thoughtful post.

Mankiw has good links and coverage

Marginal Revolution has some good posts and links

If there is a thoughtful consensus it is: this is a power-grab by Treasury with down the road consequences we'll live to regret. I haven't read anyone, including those in favor of some sort of bailout, who argue that we need something this extreme.

Even if we accept that a massive bailout is needed, it seems easy enough to add minimal protections:

1. give them less money and let them ask for more later if they need it; they can't possibly spend it all at once anyway

2. make them write rules subject to congressional approval for how they are going to spend the money

Insofar as time is an issue, requests for more money or approval of regulations can be made fast-track (like trade agreements) in which Congress agrees in advance to an up-or-down vote.

The fact that there is nothing like this in the proposed regulation seems to me very revealing. Moreover, Congress would probably like nothing better than to wash their hands of the mess so if things go wrong they can blame somebody else, and so they can't be accused of fiddling while Rome burns.

David:

Here is an issue we can both agree on. In an ideal world, the government should have and would have done nothing, and let the market do what it is going to do. I understand the temptation to help, but dang, did they use a cannon when a small caliber pistol would be more effective? Given the track record of our government, you have to wonder how much potential for abuse in this bailout exists? Perhaps more importantly, just WHO is really being bailed out? Homeowners or managers?

Re: your mention of occupational licensure in your previous post, I only recently found out that virtually all businesses are licensed. I assume this is true for most if not all states. Does anyone know of any exceptions? If you have to have a license to open a business, then we really are very far along the road to serfdom, even farther than Hayek knew.

It's a bit odd than a blog devoted to all things having to do with monopoly hasn't yet mentioned one of the most significant monopolies of all, namely the monopoly on the production of money by central banks. It's this monopoly that is the cause of the business cycle, as discussed in the works of Ludwig von Mises, F.A. Hayek and other economists. In a nutshell, when a central bank (like the Fed) pushes the interest rate for loanable funds below that which would prevail in a free market (the natural rate of interest), by lowering the fed-funds rate for example, the economic calculations of entrepreneurs are distorted, inducing some of them to invest in projects that eventually are unprofitable. To put it another way, when the Fed expands the monetary base, the resulting interest rates are inconsistent with the unfettered time preferences of investors as well as their lenders. This causes asset bubbles, including stocks (late 1990s) and new homes and mortgages (2000-2007). It also distorted the calculations of a critical mass of traders at firms such as AIG, Bear Stears, Countrywide Financial, Lehman, Merrill Lynch, and New Century Financial.

The reason that mortgage underwriting standards, to chooses one example, went south is not because of "greed" (I hope never to see that mistunderstood word in a discussion of financial markets again) or, even more absurdly, alleged fraud by lenders (one of Krugman's points), but because of the distorted interest rates people on both sides of the market faced, up and down the structure of production. Mortgage-backed traders, mortgage brokers and underwriters, not to mention homebuilders and their suppliers and lenders, all faced prisoners' dilemmas, by which they had to go down the road to perdition if they wanted their bonuses, and if they wanted to maintain or increase their various market shares. Failure to do do in some cases probably would have led to their dismissal.

One firm that didn't buy into the bubble, at least not all of it, was J.P. Morgan Chase. Jamie Dimon, its CEO, was skeptical, as were other members of his executive team. You can read the story here.

The bottom line is under a free market monetary system (i.e., free banking), the rate of interest (which is determined on the time market, i.e. by the time preferences of savers and consumers) clears the market, which in turn implies that the market for both investible resources (the capital market, including the market for loanable funds) and for labor all clear. Under these conditions market bubbles can't happen, and there is no need for a lender of last resort. I call this Mises' Law.

Unlike Say's Law, which says that if n-1 markets are in equilibrium, then the nth market must be too and is therefore just a mathemathical statement, Mises' Law is an actual economic principle.

Bill:

Re business license: In general, you are correct. There are exceptions, but they are based on the specific location you are in. For example, in my city, county and state an attorney does not need a business license. There are other businesses that do not need a license, but most do. I do not know the history behind business licenses, but they have existed for a long time.

Re central bank: You may be aware that the reason we have a central bank is because of the anarchy we had at the beginning of our country, when we had a variety of systems, including a free market monetary system. However, counterfeiting was rampant, inflation was horrible, market bubbles and collapses were continuous, and there was little trust in anything other than precious metals. Unfortunately, using precious metals as a standard of currency proved limiting in many ways, and our solution was a central banking system.

I seem to see irony in your statements regarding greed. First, you seem strongly opposed to the term, then you state that one of the reasons that various individuals took the actions they did (and I include top level managers and executives in this list), is partially because of their drive for bonuses. These bonuses are often used to buy such necessities as expensive cars, suits, houses, jewelry, etc., which seems to me to be the very definition of greed.

Re J.P. Morgan: You can add United States Bank (USB) to the companies that did not buy into the bubble. The executives of USB were firm in their decisions to maintain their conservative position when banks and investment firms around them were pushing into double digit returns, but their conservatism appears well justified in hindsight.

Your comments are quite complex and some of them I am unable to understand. You have gone past the limits of my knowledge in economics.