Home > Economics - General > The end of neoliberalism?

The end of neoliberalism?

September 8th, 2008

Measured by the dollar amount involved, the nationalisation of the mortgage guarantors Fannie Mae and Freddie Mac, announced today by the Bush Administration, is the largest in history. No less than $5 trillion of assets and obligations have been taken over by the US government in one hit.

Of course, that debt had long been regarded as having an implicit government guarantee and the companies involved were quangos (in the original sense of quasi-NGOs) rather than genuine private firms. Fannie was a government agency privatised in the 1960s, and Freddie was created to provide competiion for Fannie. So even though the US government will now guarantee virtually all new mortgages, this is more an admission of existing reality than a big step towards socialism.

While the quasi-governmental status of Fannie and Freddie was always problematic, this wasn’t the reason for their failure. Rather, they were pushed to accept increasingly bad loans made by the private sector. And when their difficulties became acute, the most satisfactory solution, under normal conditions, would have been to formalise the government guarantee of the existing loan book, then put them into run-off mode, writing no new business. But given the failure of the private sector, that would, mean, in effect, making it impossible for anyone to write a mortgage contract.

The fact that the credit crisis has reached this point marks the failure of the central claim of the neoliberal program, namely that private capital markets, free from intrusive government regulation, can enable individuals and households to handle the risks they face more flexibly and efficiently than a social-democratic welfare state.

In the boom that created this crisis, every part of the financial system (retail banks and mortgage businesses, major Wall Street banks, the financial engineers who designed new securitisation assets, investment funds, ratings agencies and bond insurers) had a major role to play. All have failed miserably, even though most will get to keep the rich rewards they received when things were going well.

Further update As various commentators point out, the failure here is one of actually existing neoliberalism. The “unknown ideal” of a perfect free market system remains pure and unsullied by empirical experience.

More seriously, the significance of the event is not in the marginal change in the status of Fannie and Freddie from quasi-private to quasi-public, but in the abandonment of the pretence that the normal operations of financial markets are capable of cleaning up the mess they have created, even with the liberal helpings of public money that have already been dished out.

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  1. smiths
    September 8th, 2008 at 12:00 | #1

    isnt it both simultaneously john,
    an admission of reality and a substantive step towards state socialism,

    but right on with the main point though,
    privatise the profits and socialise the risks,

    its so warped

  2. mitchell porter
    September 8th, 2008 at 12:39 | #2

    In the world economy centered on the G-7, I’d say there were two aspects to neoliberalism: the move to the Right within the G-7, and the promotion of certain economic policies by institutions dominated by the G-7, such as the IMF.

    For a few years those institutions have been increasingly irrelevant, as new economic powers (BRICs and the Gulf) arise outside the G-7. I call it a neo-mercantile world. At the same time we’re getting economic stagnation and the credit crunch *within* the G-7. I guess I agree with the assessment, but I wonder if it’s not the international dimension which is the more important.

  3. September 8th, 2008 at 13:09 | #3

    Given that a liberal, neo or otherwise, wouldn’t establish Fannie Mae and Freddie Mac in the first place, does this say anything about liberalism?

  4. Spiros
    September 8th, 2008 at 13:13 | #4

    Just like the way the Soviet Union didn’t say anything about communism, because it was never properly applied.

    Et cetera.

  5. observa
    September 8th, 2008 at 13:35 | #5

    Deleted – see previous advice regarding lengthy lifts from other sites.

  6. mindful
    September 8th, 2008 at 14:00 | #6

    the central claim of the neoliberal program, namely that private capital markets, free from intrusive government regulation, can enable individuals and households to handle the risks they face more flexibly and efficiently than a social-democratic welfare state

    Is that the smell of burning straw?

    Neoliberalism as I understand the term is on the same spectrum as social-democratism, but with generally less regulation. I don’t think anyone in that tent wants no regulation at all, or claims to be able to avoid boom/bust cycles.

    By not having a government-sponsored mortgage lender/underwriter, Australia has a more free market than the US, and so far we’ve fared better. If anything this situation seems like an argument for the government being a more active regulator but not a participant.

    “More efficiently and flexibly,” compared to what? I was too young to see it, but I believe the old Australian system of a heavily regulated oligopoly of banks, some state-owned, didn’t do amazingly well at helping people save and invest at a reasonable price.

  7. observa
    September 8th, 2008 at 14:05 | #7

    As if we needed any explanation of the delusional, self-important gobbledegook emanating from central bankers, here’s the Bank for International Settlements waxing lyrical about the whole discipline-

    “The serious disruptions in interbank markets since August 2007 have firmly put the spotlight on central bank operations designed to implement monetary policy. Not only are the operating frameworks the least understood aspect of monetary policy, they also differ considerably across countries. After providing a conceptual roadmap to allow better understanding of the challenges central banks face in implementing monetary policy in times of stress, Claudio Borio and William Nelson of the BIS discuss how central bank responses to the recent financial turmoil have been influenced by the operating frameworks in place. The authors show that the frameworks can have a first-order influence on the size and type of liquidity injections employed and on the need for exceptional measures.”

    Did you all get that? Basically it’s the ‘frameworks’ that noone can understand, yet it’s those same ‘frameworks’ that are so important in central bankers’ deliberations. And we actually pay these people to deliberate? Sheesh!

  8. mindful
    September 8th, 2008 at 14:19 | #8

    observa, I can think of many activities or professions where the most important part is the hardest part to understand.

    re my post 6; I may sound more like an apologist than I mean to. Clearly the whole thing was pretty stupid, but I don’t think it proves much about liberalization vs regulation. It is in the nature of markets to boom and bust, whether they’re regulated or not.

  9. observa
    September 8th, 2008 at 15:04 | #9

    “It is in the nature of markets to boom and bust..”
    Well that’s the bone of contention mindful. How boomy and how busty? Austrian economics reckons it’s all about well intentioned drongos, who always want to believe they know what’s best and all about those ‘frameworks’, not to mention deliberately targetting 2-3% inflation, that make it all so boomy and busty.(assuming of course they’re not fooled by something as obvious as major demographic shifts, dictatorial currency manipulators, etc, etc) Still an Austrian skeptic? Why don’t you read between the lines of this scintillating insight into Glenn Stevens line of thinking, not to mention justification for those Reserve Board salaries -
    As a learned bloke once said, the greatest threat to your wallet is-
    ‘This time it’s different’ followed by ‘We must do something’

  10. September 8th, 2008 at 15:53 | #10

    Is it just me or are Fannie and Freddie the only example of a GSE in a mortgage industry anywhere in the western world?

    If social democracies don’t have them, and even if more free market economies don’t have them, why would they exist in a market like America’s?

  11. jquiggin
    September 8th, 2008 at 15:59 | #11

    They are indeed an anomaly, OSO. But, as I’ve said in the updated post, I don’t think their odd status is centrally relevant. The monolines followed pretty much the same story.

  12. Joseph Clark
    September 8th, 2008 at 16:25 | #12

    Surely the takeover of F&F is more indicative of government failure given that their book was built and priced under an implicit government guarantee.

  13. Ernestine Gross
    September 8th, 2008 at 16:39 | #13

    No improvement as yet in the language department:
    The ‘originators’ of the action in question have named it “conservatorship”.


  14. TerjeP (say tay-a)
    September 8th, 2008 at 18:00 | #14

    JQ – Your logic defies explaination. Socialism fails and you blame liberalism. Will wonders never cease?

  15. jquiggin
    September 8th, 2008 at 19:58 | #15

    #12 and #14 you’re both missing the point here. The rescue of F&F is an indication that attempts to restore normal functioning of the financial system (in part by pushing F&F to take on risky loans from the private sector) have failed, and that the government will now have to act as an explicit guarantor of last resort.

  16. pablo
    September 8th, 2008 at 20:05 | #16

    No 3. “Given that a liberal, neo or otherwise, wouldn’t establish Freddie Mac or Fannie May in the first place, does this say anything about liberalism?”

    The two bodies arose from the ashes of the savings and loan crisis in the US under George Bush senior in 1983. George Herbert was a bit less than a neo-con but in the Australian meaning of liberal I guess the answer Tom is yes.

  17. SJ
    September 8th, 2008 at 20:12 | #17

    pablo Says:

    The two bodies arose from the ashes of the savings and loan crisis in the US under George Bush senior in 1983. George Herbert was a bit less than a neo-con but in the Australian meaning of liberal I guess the answer Tom is yes.

    This just isn’t right. Fannie Mae was created in 1938, in the aftermath of the Depression. It was privatised in 1968. Freddie Mac was created in 1970 to provide competition with Fannie Mae.

  18. September 8th, 2008 at 21:08 | #18

    Pablo, also note that ‘neoconservative’ has a different meaning to ‘neoliberal’.

  19. pablo
    September 8th, 2008 at 21:47 | #19

    SJ Yep, point taken. The S & L’s were also into home mortgages which led to my error. Apologies to George Herbert too.

  20. September 8th, 2008 at 23:54 | #20

    TerjeP (say tay-a) wrote: “Socialism fails and you blame liberalism”

    Socialism has supposedly been dead for decades and yet it is still apparently the cause of all the world’s problems.

    It would be interesting to learn whether socialism also caused the Iraq War, Hurricane Katrina, the 2004 Tsunami, the 9/11 attacks, the Challenger and Columbia disasters, global warming and the last ice age.

  21. Ian Gould
    September 8th, 2008 at 23:55 | #21

    ‘More seriously, the significance of the event is not in the marginal change in the status of Fannie and Freddie from quasi-private to quasi-public, but in the abandonment of the pretence that the normal operations of financial markets are capable of cleaning up the mess they have created, even with the liberal helpings of public money that have already been dished out.” JQ

    Not really, the Federal Reserve is putting up a whole $1 billion in equity and purchasing around $200 billion in mortgage-backed securities on market.

    They’re still essentially treating the issue as one of mismanagement at two very large firms and the classic error of borrowing short and lending long.

    The two companies have commodified and resold around $6 trillion in mortages. The plan is as you say eessnetially to put the Macs in run-off mode with around $600 billion in mortgages expiring each year.

    Assuming a 5% deliquency rate and recovery of 50% of the outstanding amount, annual losses are likely to be around $7.5 billion a year, Those are pretty pessimistic assumptions BTW.

    Apparently the Macs will continue to write soem new business but the really questions, it seems to me is who (if anyone) will take their place as the underwriter of US property values.

    From a purely commercial perspective (such as that of the Fannie and Freddie shareholders) there’s probably some appeal to a good bank/bad bank split with a new freshly capitalised new company continuing to securitise asset (but presumably without even an “implicit” government guarantee).

    I don’t know if that will be politically saleable however.

    However this pans out, it’s probably going to be a lot more difficult (and more expensive) to get a mortgage in the US for the next decade or more.

  22. Jill Rush
    September 9th, 2008 at 00:08 | #22

    There are perfect systems of government – just imperfect people to run them and a number of unintended consequences flowing from the fact that neo liberals are not very good at understanding human behaviour.

    The assumption is that people will always behave in a rational manner to ensure long term viability to maximise long term profits. As the psychological test conducted on children where they are promised more lollies if they wait shows us, when left alone they go for the lollies in front of them almost every time. Many adults are also unable to control impulses for rewards now rather than hope that they come later.

    The F&F saga seems somewhat similar where the advantages in credit given to the two organisations were kept rather than passed on to the borrowers for cheaper housing. The seeds of destruction were sown by those unable to wait and certainly those in charge of the lollies didn’t wish to share them.

    The seven deadly sins including greed and avarice are often at work where if an individual can reap a reward despite its catasrophic effect on the larger system, they will do so. Government is the only organisation powerful enough to mitigate this effect but it is something of a lottery as to whether it can or will.

  23. paul walter
    September 9th, 2008 at 03:16 | #23

    Jill Rush’s comments had me in mind of an earlier post containing a malicious statement by a retreating neolib that neoliberalism and social democracy were the same. After all this time? Why now?
    They are opposites, if not extreme opposites as one would have with fascism and anarchism.
    Neoliberalism is the begining of a swing of the pendulum to Selfish Individualism, as Eagleton decribes it, that finds its extreme expression in the meglomania of fascism; either psychotic Hitlerism or cold (state) Stalinism.
    The tendency for Soc Dem would be to anarchism, but in the libertarian rather than egoist sense that leads from neoliberalism and makes it the basis for such a detestable and cold blooded ideology-a sort of doctrinal companion to the notion of the “Corporate Psychopath”.
    But history and the species are not evolved to that point where people can preserve their individuality through cooperation; eg sublimation of ego.
    Social democracy remains the civil default.

  24. TerjeP
    September 9th, 2008 at 03:30 | #24

    It would be interesting to learn whether socialism also caused the Iraq War, Hurricane Katrina, the 2004 Tsunami, the 9/11 attacks, the Challenger and Columbia disasters, global warming and the last ice age.

    The last ice age was organised by disgruntled neoliberals. Otherwise your pretty close. ;-)

    Firstly the Iraq War. It was largely due to an excessive faith in the efficacy of big government.

    Hurrican Katrina. Like the ice age the actual storm was caused by disgruntled neoliberals but all those houses were built there due to the effective federal insurance subsidy.

    The 2004 Tsunami was an act of God. However God is probably a socialist.

    The 9/11 attacks were orcastrated by would be Islamic socialists who want the world to convert to Islamic socialism under the one true socialist God. See point about 2004 Tsunami.

    And both the Challenger and Columbia disasters would never have happened if NASA didn’t exist. And if NASA (big government agency wasting taxpayers money) isn’t socialism then I don’t know what is.

    Now some may see some of this as a stretch. But then again some might see as a stretch the idea that neoliberalism is at an end because of Fannie and Freddie failing. Which in my book would make about as much sence as watching the Space Shuttle Challenger Disaster and asking if NASA has been engaging in too much neoliberalism.

    In so far as the Fannie and Freddie disaster can be roped home to any political philosophy then I don’t think neoliberalism is the right one.

  25. September 9th, 2008 at 10:07 | #25

    The supreme irony? The Chinese socialist government is now fretting about how much exposure they have to the US capitalist meltdown.

    In mid-2007 China owned around $376 billion of debt issued by U.S. government agencies, principally Fannie and Freddie. Do they now walk away, or follow Uncle Sam down the hole? As one Chinese analyst frets:

    “For China, whether or not you buy the new treasuries, there will be losses: if you buy them, you’re getting deeper in the hole; if you don’t buy, your existing holdings will lose value.”

    Or as Vice-Premier Wang Qishan put it:

    “If we don’t buy U.S. treasuries and ABS, what else we can buy? China just has no way to avoid the risks. Whatever we do, we have to bear the losses.”


    The old dictionary definitions of “Left” and “Right” just don’t seem to be holding up too well for discussion purposes in this Brave New World. Maybe it’s time to dump the corporate stock financial model?

  26. paul walter
    September 9th, 2008 at 10:35 | #26

    God indeed, is “probably a socialist”. Read Sermon on the Mount, Dives and the Rich Man and the Money Chnagers, not to mention giving up your rich clothes and going on the road.

  27. September 9th, 2008 at 11:01 | #27

    God would (IMHO) not be a socialist. He is always careful, in His book, to emphasise that these should all be done on a voluntary basis. Donations and gifts are all meaningless and derive no merit if they are done compulsarily. If you want I can dig out some references.
    Compulsion is the central tenet of any form of socialism. Without compulsion you have liberalism.

  28. Ernestine Gross
    September 9th, 2008 at 11:03 | #28

    1. # 25
    2. ” The “unknown idealâ€? of a perfect free market system remains pure and unsullied by empirical experience.”

    From past posts I take it that the author of #25 agrees with the observation reproduced in 2. above.

    This leaves the theoretical literature on ‘competitive private ownership economies’.

    As I have mentioned in several posts before, since Radner (1972) it is known that theoretical models of ‘competitive private ownership economies’ with financial markets have different properties to that of otherwise identical models. Further, a crucial difference is that the economy is ‘unbounded’ (one loses the box in an Edgworth box diagram. I am referencing the latter for the non-economist readers: http://en.wikipedia.org/wiki/Edgeworth_box). This means something. This gives a clue.

    I’ve also mentioned previously, that in the mid-1970s Oliver Hart provided conditions on an exchange economy version of the model for finding a solution without having a ‘box’ given by endowments.

    If the author of #25 wants to have credibility then I say he should at least provide empirical evidence that the conditions in Hart are fulfilled (easier). In particular
    a) that all ‘investors’ are strictly risk averse
    b) that price expectations are not ‘too divergent’.

    There is no doubt in my mind that the action of the US government regarding Fannie Mae and Freddie Mac, under whatever label, is a response to a type of ‘market failure’(systems failure).

    To the extent that ‘neo-liberals’ refers to those who have ignored the topic of ‘market failure’ and acted on ‘faith’, I agree with JQ’s post.

  29. Joseph Clark
    September 9th, 2008 at 11:03 | #29

    #16 I’m not sure I am missing the point. F&F were both beasts of government. Their demise — if that is what we are seeing — is a failure of government. The US has been running dangerously erratic monetary policy, providing an effective government guarantee of mortgages, and passing madness like the Community Reinvestment Act. The credit markets have simply responded to incentives. To call the result of this meddling market failure requires some very odd logic.

  30. Ernestine Gross
    September 9th, 2008 at 11:07 | #30

    #28. Since the government legislates, it is inevitable that the government is involved in any activity which is legal. The point is, what is the thinking (knowledge?) underlying the legislation.

  31. September 9th, 2008 at 11:15 | #31

    That is a touch counter-intuitive. There is a clear difference between a situation where the government legislates to make a particular activity illegal (or legal by exclusion) and where the government is actually a dealing counterparty, using the public purse to guarantee performance.

  32. September 9th, 2008 at 14:58 | #32

    TerjeP (@ #25) wrote: “(The Iraq war) was largely due to an excessive faith in the efficacy of big government.”

    Clearly you haven’t read “The Shock Doctrine”, have you?

    On page 286, Naomi Klein quotes the speech by Donald Rumsfeld, the architect of the Iraq invasion:

    The topic today is an adversary that poses a threat, a serious threat, to the security of the United States of America. This adversary is one of the world’s last bastions of central planning. It governs by dictating five year plans. From a single capital, it attempts to impose its demands across time zones, continents, across oceans and beyond. With brutal consistency, it stifles free thought and crushes new ideas. It disrupts the defence of the United States and places the lives of men and women in uniform at risk.

    Perhaps this adversary sounds like the former Soviet Union, but that enemy is gone: our foes are far more subtle and implacable today … The adversary’s closer to home. It’s the Pentagon bureaucracy.

    That speech was made on 10 Sep 2001, the day before, as if on cue, the Pentagon was attacked by terrorists who flew a civilian aircraft into the building in which Rumsfeld had delivered that speech, or, so we are told.

    After this Rumsfeld and his fellow neocons oversaw a program that saw the privatisation of many military functions previously the responsibility of Government, so that by the time that Iraq was invaded, much of the responsibility for conducting the war was in the hands of private contractors.

    Whilst there may be some truly sincere neo-liberal purists, and you may be one, TerjeP, it seems to me that most who have espoused the neo-Liberal doctrine in past decades have been fully aware that their claims were garbage.

    I don’t recall being warned, as Hayden, Fraser, Thatcher, Reagan, Hawke, Keating, Unsworth, Greiner, Kennett, Carr, Clinton, Bush, Rumsfeld, Cheney, Beattie, Iemma, Bligh, Costa etc, implemented various planks of what the rest of us thought was the neo-liberal program, that, in fact, socialism had been left intact and that, as a consequence, further economic calamity awaited us.

    Don’t you think, TerjeP, that if the voices of the supposedly pure neo-liberalism that you claim to represent had prevailed all of these decades and told us that it had to be “all or nothing”, that the overwhelming public response would have been “why bother?”.

    However, I doubt if what you are telling us now was said back then, and, if it was, then I certainly never noticed. Instead the public were told, at every step, that all the privatisations, deregulation, reduced taxes on the rich, removal of legislative protetions of workers’ entitlements, reduction on social welfare, cutbacks of government spending on social programs, removal of barriers to foreign investment, etc., etc., would lead to more prosperity overall and more prosperity to all.

    Clearly these promises have not been fulfilled and our societies are still headed towards social, economic and ecological catastrophe that the free market ideologues insisted their policies would prevent. I think most informed people will rightly lay the responsibility for the calamities of recent decades, precisely where it belongs, that is with ‘market forces’.

    Let’s hope that they soon come to understand the truth, that is, that economic neo-liberalism is barely more scientifically based than the religious dogma peddled to ordinary people in previous times in order to get them to accept socially iniquity. It was concocted by a bunch of unconscionable frauds, including Milton Friedman and Friedrich von Hayek, who met in 1947 at Mont Pelerin as described in George Monbiot’s How Did We Get Into This Mess? of 28 August 2007. As Monbiot wrote:

    Their purpose was to develop the ideas and the language which would mask the real intent of the programme – the restoration of the power of the elite – and package it as a proposal for the betterment of humankind.

    And I would have to concede they have done an excellent job. Even many suposedly left-wing intellectuals, who should have known better, were taken in by many of their claims.

  33. Ian Gould
    September 9th, 2008 at 15:35 | #33

    Honestly, when Bush and Cheney are (implicitly) described as socialists, the word has lost all meaning.

    I’d have to say that “neo-liberalism” is quite vague too.

  34. Ian Gould
    September 9th, 2008 at 15:38 | #34

    “#16 I’m not sure I am missing the point. F&F were both beasts of government. Their demise — if that is what we are seeing — is a failure of government.”

    F&F were privatised over 20 years ago. Saying their current problems are “a failure of government” is likely saying my current billing dispute with Sensis is “a failure io government”.

  35. Ian Gould
    September 9th, 2008 at 15:40 | #35

    “…passing madness like the Community Reinvestment Act. ”

    total lending under the CRA was minimal and it has little or nothing to do with the current mortgage crisis but hey I guess some peopl4e need a way to blame everything on those damn lib’rals and uppity “minorities”.

  36. Bingo Bango Boingo
    September 9th, 2008 at 15:43 | #36

    Ian, and when post-privatisation Telstra charged outrageous prices and stifled competition in broadband through it’s copper loop monopoly, did you blame the free market, or did you blame the Howard government from not properly undoing the monopoly previous governments created? Exactly.


  37. Bingo Bango Boingo
    September 9th, 2008 at 15:43 | #37

    Apostrophes are not my friend.


  38. Ian Gould
    September 9th, 2008 at 15:48 | #38

    “Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn’t even apply to most of the loans that are behind it. As the University of Michigan’s Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.

    Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the “tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, “has increased the volume of responsible lending to low- and moderate-income households.” ”


    It’s also noteworthy that the CRA has been law since 1977 so if it caused the sub-prime crisis it did so at a snail-like pace.

  39. Ian Gould
    September 9th, 2008 at 15:54 | #39

    BBB, think people will still be blaming Howard for contemporaneous problems with Telstra 20 years from now?

  40. David
    September 9th, 2008 at 15:55 | #40

    This perfect free market of which you speak sounds a bit like a Platonic Ideal. In my view, the only place for platonism is in pure mathematics, and even then it’s a bit of a stretch.

  41. Bingo Bango Boingo
    September 9th, 2008 at 16:00 | #41

    I will be Ian! If they had put the proper structural separation in place pre-privatisation, we’d all be a lot better off. It is of course much harder to change things now, which is not Rudd’s fault, but Howard’s (or perhaps more accurately, Minchin’s). But this is merely an example. The fact is that privatisation of the GSEs didn’t create a true free market anymore than selling Telstra off did.


  42. Bingo Bango Boingo
    September 9th, 2008 at 16:07 | #42

    And note that I am not arguing the case that this is all one massive government failure. I am simply saying that just because they became private many years ago, does not take government intervention out of the equation. Hence my Telstra example. I suspect we are both occupying the middle ground here, Ian.


  43. Joseph Clark
    September 9th, 2008 at 17:18 | #43

    #33 F&F were never really private because they were always underwritten by the government, it’s as simple as that.

    I’m surprised to see there are still people prepared to apologise for the CRA and pretend that forcing banks to lend could’t possibly have anything to do with a buildup of bad loans. Apart from anything else it sits uncomfortably with the narrative of the credit crisis being caused by greedy banks forcing loans on unsuspecting poor people.

    Even if you can believe that fantasy you still have to account for the incentive effect of the US government providing an guarantee on the majority of residential mortgages. This was an unbelievably stupid policy that led to a very predictable mis-pricing of credit and a nasty mess.

    Given such a clear line of causation it is amazing to see people try to argue that this is a demonstration of large scale market failure and an argument for re-regulation. I guess if you want to believe something bad enough…

  44. September 9th, 2008 at 18:40 | #44

    Add in the simple fact that the Basel I standards (the regulations the banks in the US still follow, as did we until the start of this year) effectively considered all home loans to have the same risk and you get a nasty mess.
    Oh, and that the FDIC ensures that all banks have the same risk for depositors with less than $100K deposited – i.e. none.
    The government has acted well to try to make large parts of the system risk free for everyone except the government. It is just as well that the system there is stable and works really well or you would wonder if all that government intervention is useful. Oh, wait…

  45. Joseph Clark
    September 9th, 2008 at 19:06 | #45


    *high five*

  46. gerard
    September 9th, 2008 at 20:53 | #46

    #33 F&F were never really private because they were always underwritten by the government, it’s as simple as that.

    does an “implicit guarentee” count? for an actual guarantee you have to look for Ginnie Mae, not Fanny and Freddie, I believe. That’s the difference.

  47. gerard
    September 9th, 2008 at 21:12 | #47


    How Ginnie Mae differs from Fannie, Freddie

    Ginnie Mae is a government-owned corporation that guarantees bonds backed by home mortgages that have been guaranteed by a government agency, mainly the Federal Housing Administration and the Veterans Administration.

    Ginnie Mae-insured bonds have always had the explicit backing of the federal government.

    Fannie and Freddie guarantee bonds backed by mortgages that have no government guarantee. Although Fannie and Freddie were set up by the government, they are not owned or explicitly backed by the government. They are publicly traded companies owned by their shareholders.

    However, Fannie and Freddie have become so big and important that everyone assumed that if they ran into trouble, the government would back them up.

    Of course, this assumption turned out to be quite reasonable. But the assumption itself was a function of a ‘free market’ that knew itself to be too big and important to fail, not of the government coming out and making any actual guarentee. Freddy and Fanny securities don’t claim to be backed by the “full faith and credit of the US Government”, unlike Ginnie Mae’s. Consequently Ginnie’s securities are properly regulated, unlike Freddy and Fannie’s, and it is not in the same mess that those companies are in now.

  48. paul walter
    September 9th, 2008 at 21:40 | #48

    No Andrew Reynolds.
    Compulsion is what you get when you have neoliberals overrunning places lke Iraq, to get at their wealth in the name of “restoring fredom”, or defending freedom from “terrorists” objecting to belonging to the billions forced to sponsor our “freedom” through the removal of THEIR freedoms through robbery, militarily by force, or through shonky and often coerced so-called “trade treaties”.
    It is true Westerners certainly DO take advantage of their freedom “rights” to pointedly ignore the plight of 80% of the world’s usually exploited people. But we should not be deceived that the Compulsion that comes from police batons in third world puppet states cannot be traced back to “free” states like the US, France and Britain and their defence and intelligence organs.
    Freedom, in the neo liberal sense, seldom applies to the “Other” and “rights” always are foregrounded against “obligations”,in this curious Nozickian view of life and human nature, as generosity seldom seems to overwhelm ingrained narcisssism, despite all the rhetorical waffle.
    It is true that there are positive and negative freedoms. I just don’t understand why those of he Right are so little interested in the second concept.

  49. Bingo Bango Boingo
    September 9th, 2008 at 23:44 | #49

    paul, are these the neoliberals that are into fiscal deficits and massive expansion of the federal bureaucracy and security apparatus. Those ones? Yeah, not neoliberals. Go get a dictionary for Christ’s sake. Where on earth did this ‘neoliberal’ means ‘neocon’ or ‘Republican’ or ‘war-hawk’ rubbish come from? Oh, yeah, from the fact that sometimes supposed free marketers also start wars. So much for the intellectual nuances of Teh Left. Klein and her incoherent ramblings on this, referenced hilariously by daggett, aren’t helping here.


  50. September 9th, 2008 at 23:58 | #50

    The only reason the “free market” knew they were too big to fail was that … they were too big to fail. The reason they were too big to fail was that they grew to their size and importance because of the government backing of their debt, giving them a huge advantage in issuing debt. They did not need much capital because they were … government backed (and seperately regulated).

  51. SJ
    September 10th, 2008 at 00:10 | #51

    Those ones? Yeah, not neoliberals. Go get a dictionary for Christ’s sake. Where on earth did this ‘neoliberal’ means ‘neocon’ or ‘Republican’ or ‘war-hawk’ rubbish come from? Oh, yeah, from the fact that sometimes supposed free marketers also start wars.

    No true neoliberal fallacy. Self-sealing fallacy.

  52. Bingo Bango Boingo
    September 10th, 2008 at 00:28 | #52

    Yes and the Republican administration indulges in massive fiscal deficits, expansion of the bureaucracy to solve problems and props up a socialised education system. These are all hallmarks of socialist thinking. Therefore, socialism is responsible for the Iraq war. QED. Anyway, if you want to understand how and why neoliberalism is different from neoconservatism/modern Republicanism, go read some Irving Kristol or something. Just don’t read Klein. I did. I’ll never get that afternoon back.


  53. BilB
    September 10th, 2008 at 04:26 | #53

    To the update,

    The only pure free market that I am aware of occured in a large south american shanty town where a cast out community spontaneously created an internal economy completely independently of the base country.

    I believe that “perfect free market system” is only possible in the period after a total restart of a community. Similar to the period after the “big bang” when all energy was in a total free state. But this only lasts for a very short period, in real terms, before alignments and associations begin to form (stars and planets), associations that ultimately confine the free nature of the new market, until it is finally fully restrained and the only free trade then occurs between systems. A kind of after glow.

  54. Ernestine Gross
    September 10th, 2008 at 08:02 | #54

    Re #44 The author talks about ‘incentives’. If, as he suggests, the market (system) failure is due to governments not having provided the appropriate incentives, then I am asking the author to now state, preferably in concise terms, what the incentive structure should have been. Further would the author be prepared to acknowledge the obvious, namely providing ‘incentives’ to achieve particular goals is a form of central control, albeit not by explicit commands but by finding an efficient ‘mechanism’.

  55. September 10th, 2008 at 08:26 | #55

    Comment from the Guardian’s Larry Elliott: Saving Fannie and Freddie was nationalisation pure and simple.

    Elliot makes several good points, finally noting that Obama and Gordon Brown are failing to make the most of this political opportunity. The reason IMHO is that supposedly “leftwing” politicians have now moved so far to the right that they have become subservient to the same corporatist elites.

    Right is the New Left.

  56. Joseph Clark
    September 10th, 2008 at 08:32 | #56

    I think the appropriate incentive is profit. I happily concede your second point.

  57. TerjeP (say tay-a)
    September 10th, 2008 at 08:39 | #57

    Don’t you think, TerjeP, that if the voices of the supposedly pure neo-liberalism that you claim to represent

    Daggett – I have never claimed to represent the voices of pure neo-liberalism.

  58. TerjeP (say tay-a)
    September 10th, 2008 at 08:44 | #58

    Ernestine – John Quiggins heading suggested we might be witnessing the end of neoliberalism. I think he is stretching way too hard. In fact I think neoliberalism is only just getting it’s boots on and its best years are ahead of it. You seem to be suggesting something different which is perhaps that neoliberalism never existed in the first place.

  59. TerjeP (say tay-a)
    September 10th, 2008 at 08:52 | #59

    had prevailed all of these decades and told us that it had to be “all or nothing�, that the overwhelming public response would have been “why bother?�.

    Daggett – the neoliberal project (if you can call it that) has delivered in spades without being complete. The fact that there are corporate failures along the way does not bother me. Capitalism permits failure which is one of it’s key strengths. Birth and death are natural parts of any ecosystem and the existance of death does not mean an ecosystem is unhealthy.

  60. TerjeP (say tay-a)
    September 10th, 2008 at 09:01 | #60

    Ernestine – I advocate limited government. I don’t see this as being in contradiction with your view that there is some theoretical limit to the application of market purity. You don’t seem to profess or advocate a coherently pure alternative to free markets anyway and as such I merely rate you as being a pragmatist who believes in more government than I do. When it comes to specific failures the mathmatical macroeconomic models and constructs don’t prove one way or the other whether the specific failure is due to too much or too little government. I think you imagine too hard that you occupy some intelletual high ground in such matters.

    To put the same point as a question. Where do the macro models say how much government is the right amount?

  61. gerard
    September 10th, 2008 at 09:48 | #61

    my point Andrew was that Fannie Mae and Freddy Mac’s debt was not explicitly backed by the government – that is what makes these companies different from Ginnie Mae, and that’s what makes it technically incorrect to call these companies ‘publically backed’ when you have a genuinely publically backed company to compare them with. And I suppose it’s like arguing about the chicken and the egg as to whether people believed in the implicit backing because the companies were too big for the government to allow them to fail, or whether the companies grew too big to fail because people believed that the government would never allow them to fail.

    of course this raises all sorts of conundrums – if a tree falls in the forest and nobody hears it, does it make a sound? if a private company isn’t publicly backed but everybody believes that the government will rescue it if it fails, it is actually publicly backed?? It seems that the problem is not government backing and regulation per se (as in Ginnie Mae), but rather the moral hazard that goes with an ambiguous situation.

  62. gerard
    September 10th, 2008 at 10:15 | #62

    by the way I think it’s important to bear in mind that ‘neoliberalism’ as such never actually existed in the West… I mean if we take neoliberalism to mean a reduction in the amount of government spending as a proportion of GDP, I don’t think that actually occurred in Reagan’s America or Thatcher’s England for example (although I don’t remember where I saw the graphs, it was a while back). There have been changes (to government’s role in social welfare), but overall they have been quite marginal compared with those changes that were experienced by the countries were neoliberalism was fully implemented.

    It is only parts of the 3rd world (Latin America and Africa) and the post-Soviet countries, under the demands of the ‘Washington Consensus’ at the IMF and World Bank that actually experienced true ‘neoliberalism’. The results there were absolutely devastating, if you look at the indicators. 90s Russia would be the starkest example. The parts of the 3rd world that escaped the ‘Washington Consensus’ – in East Asia – also happen to be the most successful.

  63. smiths
    September 10th, 2008 at 10:47 | #63

    so if i can just get a handle on all this,

    1 – capitalism is good cos it destroys things – except when they are too big to be destroyed,

    2 -fannie & freddie were not backed by the government -
    except fannie & freddie were backed by the government

    3 – it was the government fault they failed and were created in the first place -
    (for creation circumstances see point one and read grapes of wrath and then if in doubt blame government)

    4 – socialism is a bad system -
    liberalism is the best but has never had the perfect conditions it needs to demonstrate this obvious truth

    5 – if technical economic models diverge from the real world, blame the real world and make the models even more technical and abstract

    … clear as mud

  64. tintin
    September 10th, 2008 at 10:50 | #64

    The demise of Fannie and Freddie isn’t the end of Neoliberalism. It’s just the beginning. Not-too-clever government policy and regulation provides rich pickings for those who can game the system. Here’s one example: US bond manager Bill Gross made 1.7 US Billion in one day for his clients following the US Treasury bail out of F&F. See FT article http://www.ft.com/cms/s/0/838d3cb4-7e96-11dd-b1af-000077b07658.html.

    $1.7 billion profit in one day? Seems like a pretty successful private capital market outcome to me. Too bad for the losers (the US taxpayer).

  65. Troll
    September 10th, 2008 at 10:50 | #65

    Troll comment deleted. I’ll do my best to expose the person responsible

  66. gerard
    September 10th, 2008 at 10:53 | #66

    BBB, Hitler did all those things, but I wouldn’t call him a socialist. why not call the Republican administration what it actually is – the merging of State and Corporate power (plus a nice measure of bloodthirsty war-making), or “fascism”.

    By the way I don’t know which Klein book you wasted an afternoon on. I’ll grant that ‘No Logo’ didn’t live up to the hype, but the Shock Doctrine is one of the most eye-opening books I’ve ever read, and I’m guessing you haven’t read it, but you definitely should.

  67. Troll
    September 10th, 2008 at 10:53 | #67

    Troll comment deleted. I’ll do my best to expose the person responsible

  68. Troll
    September 10th, 2008 at 10:55 | #68

    Troll comment deleted. I’ll do my best to expose the person responsible

  69. Bingo Bango Boingo
    September 10th, 2008 at 11:07 | #69

    “I mean if we take neoliberalism to mean a reduction in the amount of government spending as a proportion of GDP…”

    Which we wouldn’t, because that would overlook all sorts of retreats of government and de-regulations especially in countries where simple transfers continue to constitute a decent slab of expenditure. The changes are not simply in social welfare. They include: financial and labor market deregulation on an epic scale, the gradual elimination of trade barriers, inflation targeting, privatisation of state industry.

    “…overall they have been quite marginal compared with those changes that were experienced by the countries were neoliberalism was fully implemented”

    Yes, because in the West a lot of what neoliberalism prescribes was baked in during the 18th and 19th centuries. There is a reason that the term is “neoliberal”. When you talk about neoliberalism in Russia, for example, you are not simply talking about a reduction in government spending as a proportion of GDP. You are talking about some of the foundations of modern Western civilisation like enforceable personal property rights.

    “The parts of the 3rd world that escaped the ‘Washington Consensus’ – in East Asia – also happen to be the most successful.”

    Yes I think China avoided the central tenets of what became the Washington Consensus for quite a while. It didn’t work out too well. China was so bad that just a little neoliberal thinking in the form of the de-collectivisation of the countryside and food supply chains (a profound rejection of socialist thinking) brought massive reductions in human misery. By the way, North Korea is in East Asia. That simple fact makes a mockery of your final sentence. As we all know the neoliberal project also involves an ongoing critique of socialism. In that context your desire to highlight East Asia is bizarre.


  70. Troll
    September 10th, 2008 at 11:09 | #70

    Deleted bogus comment. The person responsible will be permanently banned

  71. Bingo Bango Boingo
    September 10th, 2008 at 11:11 | #71

    gerard, yes it was Shock Doctrine. It was essentially a very long admission that she (a) didn’t know the difference between neoliberalism and neoconservatism (she calls the Cato Institute neocons!) and (b) hadn’t actually read much Milton Friedman.


  72. smiths
    September 10th, 2008 at 11:29 | #72

    bbb, i dont think you’re telling the truth,

    because if you’d read it – and by the way, no-one could read it in one afternoon – you would understand that the assessment you just gave of the content of the book is total rubbish

  73. David
    September 10th, 2008 at 11:35 | #73

    Congratulations, smiths @ 64. You’ve managed to deconsruct capitalism along dialectical materialism lines. I think.

    Anyway, I enjoyed it.

  74. Ernestine Gross
    September 10th, 2008 at 11:37 | #74

    #57 We are still focusing on financial markets. Please define profit in an Edworth-box diagram without a box. (I can’t find it). Empirically, the deleveraging that is going on at present in the ‘global economy’is the outcome of profit motivated financial market operators having followed your advice of making profits while in reality confusing private debt (and public debt in the USA) driven financial asset price bubbles with profit – the outcome is a wealth redistribution rather than an increase of wealth for everybody.

    #59 I specifed the meaning of ‘neo-liberalism’ using standard economic terminology.

    #61 You can’t find an ideological box in which I can be placed and you seem to go out of your way to be honest about it. That is nice but no cliches please about ‘intellectual high ground’ – the so-called sub-prime debacle has one obvious characteristic: people are not strictly risk averse – they borrow until the bubble bursts. So, there is a bit of empirical evidence against the idea of relying on self-regulating financial markets (ie market failure).

    Please consult with experts in macro-models on the meaning of ‘size of a government’ (which government – including corporate governants?)

  75. smiths
    September 10th, 2008 at 11:39 | #75

    from kenneth rogoff in the guardian, can one of the resident know-alls give a simple answer to this question

    The financial sector has produced extraordinary profits, particularly in the Anglophone countries. And, while calculating the size of the financial sector is extremely difficult due to its opaqueness and complexity, official US statistics indicate that financial firms accounted for roughly one-third of American corporate profits in 2006. Multi-million dollar bonuses on Wall Street and in the City of London have become routine, and financial firms have dominated donor lists for all the major political candidates in the 2008 US presidential election.

    Why, then, should ordinary taxpayers foot the bill to bail out the financial industry?

  76. Bingo Bango Boingo
    September 10th, 2008 at 11:41 | #76

    For Christ’s sake, that is not a summary of its contents, that is a summary of some essential failings. As for the time it took, fine. An afternoon was just for rhetorical flourish. Call it a weekend, which I guarantee was enough.


  77. smiths
    September 10th, 2008 at 12:03 | #77

    it seems a shame to me, to talk about a book which covers a 40 year timeframe in great detail, and goes into some of the most offensive and saddening activities of the government/corporate elite at the expense of ordinary people everywhere,

    and at the end say well she got this and that definition wrong,

    i was deeply affected by the conscious pattern of inhumanity and criminality that the book lays out

    and i say again what i have said before here,
    the content of the book makes the semantic games often played here look callous and sickening,

    arguments over petty definitions whilst the people starve and the planet chokes to death,

    as the unnamed aide said to suskind
    That’s not the way the world really works anymore,” he continued. ”We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality – judiciously, as you will – we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors . . . and you, all of you, will be left to just study what we do.”

  78. Bingo Bango Boingo
    September 10th, 2008 at 12:28 | #78

    That’s because you are not on the receiving end of her errors, smiths.


  79. gerard
    September 10th, 2008 at 12:37 | #79

    BBB, I took neoliberalism to involve a reduction of the government expenditure to GDP as a central plank. of course there are other aspects involved. but I remember being quite surprised when looking at a graph of government expenditure to GDP and noticing that it didn’t go down at all under neoliberalism, contrary to what I would have expected. In fact Reagan’s America massively increased the State sector, but this is somehow obscured by the mythology. What was ‘rolled back’ was not the State, but the measures that the State had traditionally undertaken to protect the poor.

    My comparison with the 3rd/2nd world’s experience with neoliberalism and the 1st world’s experience is not about property rights etc. It is the fact that the Washington Consensus demanded that 3rd world countries destroy their state sectors – health and eductation, food and fuel subsidies and industry protections, policies that the 1st world countries have never embraced themselves to anywhere near the same extent (and couldn’t, for one thing the electorates wouldn’t stand for it, and for another they would be economically catastrophic, as they indeed were in Latin America, Africa, Russia and wherever they have been adopted).

    As for my comparison of East Asia and Africa/Latin America, I was obviously not including North Korea in the equation (as you were well aware). But to take South Korea as an example – during the 60s, 70s and 80s the government there was heavily involved in the economy – subsidizing and protecting local export-oriented industries, reforming land ownership, tightly regulating capital markets and undertaking huge investments in education and scientific research (in other words, following the same policies that Japan adopted to great success).

    The same goes for all the Asian Tigers. The one country in East Asia that fully embraced neoliberalism is the Philippines – which is in the worst condition of any country in the region. Walk through the streets of Manilla and compare it with Seoul. The difference is down to the economic policies that those governments adopted. China has learned the lessons of history. Following the Cultural Revolution its economy has become heavily planned and guided by the State, with strong trade and currency protections. Maoist collectivism is not the only alternative to neoliberalism, although the concept that there are more than two options might be a bit much for your brain to grasp. China absolutely did NOT embrace the Washington Consensus policies – unlike Russia, and look where Russia ended up.

    East Asia (primarily South Korea, China and Taiwan) is the ONLY part of the 3rd world that developed economically in the 80s and 90s, precisely because it did not embrace the Washington Consensus policies of allowing their markets to be swamped by imports, giving no assistance to local industries, terminating education and health spending that the African and Latin American countries embraced at enormous human cost. In fact these East Asian countries that developed successfully embraced the exact same Statist policies that allowed the first world to develop. You might not like Klein (although I would be interested in if you could point out any specific errors in the book), so may I suggest you read “Kicking Away the Ladder” by Ha Joon Chang, or “Globalization and its Discontents” by Stiglitz.

  80. smiths
    September 10th, 2008 at 12:44 | #80

    i’d rather be on the receiving end of naomi kleins errors than milton freidman’s

    the difference between reputation and starvation

  81. Bingo Bango Boingo
    September 10th, 2008 at 12:54 | #81

    Yeah, socialist thinking never hurt anyone! Certainly no one has been starved in the name of leftist ideology. Oh wait…


  82. Hal9000
    September 10th, 2008 at 13:04 | #82

    Shorter BBB: no conceivable evidence could falsify my belief in free markets as the acme of human achievement.

    Shorter shorter BBB: I have an irrational belief, but it makes me feel superior to everybody else.

  83. Bingo Bango Boingo
    September 10th, 2008 at 13:10 | #83


    Here are the central tenets of the Washington Consensus, stolen shamelessly from Wikipedia (which relies on the seminal John Williamson paper):

    (1) Fiscal policy discipline;
    (2) Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
    (3) Tax reform – broadening the tax base and adopting moderate marginal tax rates;
    (4) Interest rates that are market determined and positive (but moderate) in real terms;
    (5) Competitive exchange rates;
    (6) Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
    (7) Liberalization of inward foreign direct investment;
    (8) Privatization of state enterprises;
    (9)Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions; and,
    (10) Legal security for property rights.

    It’s a fair reflection of the measured nature of neoliberalism, as distinct from pure libertarianism, isn’t it? And you say China adopted none of this over the course of the Deng and post-Deng reform periods? Good grief. Approximately one billion Chinese would beg to differ. How can you ignore the astonishing FDI increases, the significant tariff reductions and the massive importation of capital goods? And those are just the obvious ones.


  84. September 10th, 2008 at 13:20 | #84

    East Asia developed quickly during that period for a simple reason. The path they were following was already laid out by the developed nations. To go from 10% of the income of a developed nation to 60 or 70% is not difficult if you simply read a few books on open markets. Any errors they made along the way were irrelevant.
    Contrast them with, say, South America who tried to develop by excluding or reducing trade (through import substitution) and did not try to push primary education. The difference is instructive.
    The “Tigers” performance over the last few years is also instructive. Far from the model you seem to be extolling driving them forward to beat the more open models, their way has stalled. Without a model to follow, there is no known path. My contention, borne out (IMHO) by this is simple (perhaps, in EG’s eyes, simplistic) analogy is that where innovation is required free and open markets and the clear price signals they give are the best, if not the only, way to achieve this.
    Trying to use compulsive force (or even strong persuasion) will just shut down innovation.
    On your point about the difference between Manila and Seoul – I would strongly disagree with your reasoning. The difference was the legal system. In the Phillipines Marcos was the law and contracts were generally only enforced if they were to his advantage. He also shut down most trade and stole many projects (have a look at the mining industry there, for example). In South Korea Park took a different line – he was corrupt, but he ensured that contracts (particularly those with foreigners) were enforced. Park also ensured law and order were (generally) maintained.

  85. September 10th, 2008 at 13:24 | #85

    shorter Hal9000,
    Nothing will shake my belief that I understand all markets more deeply than all of the people acting in them put together, so that any way in which a government made up of me alone interferes in those market cannot help but to increase the general welfare, ushering in global peace and love to last for a thousand years.

  86. Bingo Bango Boingo
    September 10th, 2008 at 13:30 | #86

    Shorter Hal9000: *crickets*.

    Shorter shorter Hal9000: .


  87. simmo
    September 10th, 2008 at 13:45 | #87

    A note on Friedman and Hayek
    Both these gentleman have been proven wrong over and over. Krugman systematically disects the intellectual shortcomings of the Austrian school from which Hayek hails (see http://www.slate.com/id/9593). He has also written a devastating critique of Friedman in the New York Review of Books (“Who was Milton Friedman?”http://www.nybooks.com/articles/19857), where he makes the claim that Friedman was “intellectually dishonest” with respect to his role as a public intellectual (as opposed to his role as a professional economist). Jeff Sachs trumps (closet) Austrian adherent Bill Easterly in an argument over the welfare states found in Nordic countries. The simple fact of the matter is that Nordic countries have an extensive welfare state… Hayek believed this would lead to serfdom. It clearly hasn’t. The argument that is often used by conservatives to explain why the welfare state works in Nordic countries is because there is a homogenous culture in those countries (Friedman used this argument in a debate that appeared on Icelandic television – see youtube). This is a flawed argument both intellectually and morally. Intellectually, the argument of both Friedman and Hayek is that the welfare state is never good – homogenous population or not. Morally, it is an admittence that there is significant mistrust of minorities in English speaking countries (as Sachs categorises them) so as to prevent these minorities from attaining very basic standards of living through income redistribution. This is a moral conumdrum, not an economic one.
    From a policy perspective, Friedman’s monetarism has failed miserably. Whilst Keynes keeps on keeping on. Neo-keynesians like stiglitz, sachs and krugman have regained the intellectual advantage. Lets hope the likes of Friedman, Hayek and their ragtag group of conservative followers (whether from the Chicago or Austrian traditions) have finally dissappeared from the economic policy landscape. Intellectually, they have got nothing left.

  88. Ian Gould
    September 10th, 2008 at 13:54 | #88

    Joseph Clarke @ 44:

    ‘I’m surprised to see there are still people prepared to apologise for the CRA and pretend that forcing banks to lend could’t possibly have anything to do with a buildup of bad loans.”

    I’m surprised you’re still willing ot pretend the CRA was a significant contributory to the current problem when the overwhelming majority of non-conforming loans had nothing to do with the CRA.

    I am however unsprised that people right across the political spectrum are determined to seize on the current situation to prove their pre-existing prejudices.

    The underlying problem with the Macs seems to be that they succumbed to pressure to accept lower quality assets as security.

    In this, they were far from alone in the US housing market.

    Market booms and busts are an inherent part of the capitalist economy – the busts are part of the price we pay for the booms and overall higher economic growth, Government policy can to some extent either moderate or exaggerate such booms and busts.

    In the case of the US, high government borrowing and spending contributed to the bubble.

    In virtually any other country, the international debt and currency markets would have cut off or severely restricted the government’s access to further debt a long tiem ago.

    The fact the US was able to keep official interest rates as low as it did for so long and maintain the value of the dollar, is largely attributable to intervention in the market by Asian governments.

    Trying to pick all these complexities apart and say simply “this is Government’s fault”
    or “this is the market’s fault” strikes me as a futile exercise.

    Futile that is on the level of actually advancing our understanding of recent events and identifying policy options ot reduce the risks of a repetition.

    But it seems to work quite nicely at reinforcing pre-existing political prejudices.

  89. gerard
    September 10th, 2008 at 14:05 | #89

    “And you say China adopted none of this over the course of the Deng and post-Deng reform periods?”

    I would hope that you are not in fact so silly as to believe that the alternative to the Washington Consensus is everyone living in Maoist communes. No, of course not. But Deng had a saying – make your way across the river by feeling the stones under your feet. Don’t try and leap across in a single bound, like Russia did, which is what the ‘Washington Consensus’ stands for. And if you actually look at the situation in China, you will see that the State continues to play an enormous role in planning and regulating the economy. It’s a nice list you have, but if you read Stiglitz’s account of his time at the World Bank, and the extreme and fanatical manner that these policies were implemented in practice, you’ll understand what I’m talking about when I use the term. Stiglitz also describes the contrast between the East Asian approach, followed with great success by China, and the types of policies that he was expected to impose as part of ‘Structural Adjustment’.

    There is not one country in the world that has industrialized by following the types of policies that the IMF imposed on Africa and Latin America in the 80s. Latin America’s economic performance during its period of ‘bad’ policies in the 50s and 60s was much better than what happened after it started following the advice of the Chicago Boys. As as Ha Joon Chang very convincingly documents in his book ‘Kicking Away the Ladder’ (which I expect that Andrew Reynolds has read), every single country in the world that has successfully industrialized has done so by following policies that the Washington Consensus proscribes. Including import substitution – which South America used during the 50s and 60s but abandoned during its neoliberal period of the 80s and 90s, which was a period of unambiguously WORSE economic outcomes, if you care to look at the figures (Angus Maddison’s the World Economy a Millennial Perspective).

    Do you grant that there is, in fact, a contrast between the East Asian model of development – which has involved industry protectionism, import substitution, capital controls, land reform and consequent evening of the distribution of income, and public investments in education and research, verses the ‘Washington Consensus’ policies, which (in practice) have involved open slather on imports, abolition of industry protectionism, cutbacks to health, education and any type of social spending that addresses poverty, no land reform whatsoever, and complete currency market deregulation? There is, in fact, a difference. It is the difference between the performance of the Asian Tigers in the 80s and Latin America’s “Lost Decade”. It is one of the few cases in the social sciences where enough experimental data exists to make a very firm, dare I say “scientific” conclusion. Read Ha Joon Chang’s account, if you haven’t yet.

    it is quite absurd to propose that the only difference between South Korea and the Philippines is in their legal system. That may be a factor, but it is ignoring enormous differences in economic policy and the role of the State in the economy which have been absolutely critical, here and everywhere else in economic history. unless you’re saying that we should turn a blind eye to these differences, since they don’t suit your hypothesis.

  90. Ian Gould
    September 10th, 2008 at 14:47 | #90

    “The only reason the “free marketâ€? knew they were too big to fail was that … they were too big to fail. The reason they were too big to fail was that they grew to their size and importance because of the government backing of their debt, giving them a huge advantage in issuing debt.” -BBB

    This problem of moral hazard exists quite independently of any government guarantee – explicit; implicit or assumed – see for example HIH here in Australia.

  91. Bingo Bango Boingo
    September 10th, 2008 at 14:57 | #91

    Ian, that wasn’t me, that was Andrew Reynolds.


  92. Ian Gould
    September 10th, 2008 at 15:27 | #92

    “paul, are these the neoliberals that are into fiscal deficits and massive expansion of the federal bureaucracy and security apparatus. Those ones? Yeah, not neoliberals.”

    This sounds rather like the Trotskyist argument that the Soviet Union wasn’t “real” Communism.

  93. Ian Gould
    September 10th, 2008 at 15:28 | #93

    Re. 91 – sorry BBB.

  94. Bingo Bango Boingo
    September 10th, 2008 at 15:35 | #94


    One of your problems with the Washington Consensus (in practice in the 90s in certain countries anyways) appears to be that it prescribed full-blown neoliberalism over too short a time frame. I am happy to concede that, particularly in places where the fundamental underpinnings of Western civilisation were absent, or where the state was not strong enough or was hopelessly corrupt. This is where the genuine critiques of Shock Therapy ™ have been made.

    It’s interesting that you mention import substitution. Of course, South Korea had that but ditched it. Coincidentially (I’m sure) that reform was contemporaneous with substantial improvements in economic outcomes. The opportunity costs of protectionism were simply not big enough to hold back the benefits of an outward-looking trade-based policies and other domestic reforms.

    On this topic a very very wise man once said: “…East Asian nations did better as soon as import-substitution strategies were dropped. Take Korea, for example. It had import-substitution. Once it ditched that in the 60s, and went for export-oriented policies, it did much better. The heavy industry interventions of the 1970s, which were coupled with renewed import-substitution policies (particularly in relation to capital goods), are now considered expensive and massive failures. The Korean economic miracle is really one of financial deregulation (foreign capital) and product market liberalisation from the mid-80s onwards.”

    and more from another super-genius:

    “Starting from a very low base, from the 1960s onwards the South Koreans progessively adopted trade policies that reflected classic neoliberal thinking. This included: an export-oriented industralisation programme that replaced the failed import-substitution regime, a phased long-term reduction in trade barriers (see my other comment above), tighter monetary and fiscal policies, and massive financial market liberalisation, including the abolition of commercial banking controls and restrictions on foreign capital.

    Notwithstanding these changes, in some areas South Korea remained (and still remains) a seriously non-neoliberal economy. But it is no answer to the proposition: ‘Neoliberal trade reforms helped create wealth in South Korea’ to say: ‘But South Korea is not a perfect neoliberal country’.”

    North Korea still has import substitution policies, by the way.


  95. September 10th, 2008 at 16:30 | #95

    The problem of moral hazard – in the case of HIH probably n agency issue – is independent of government backing. The price of debt issuance, though, is not, nor are the consequences of failure.
    HIH failed as a business but, despite a having a few areas in which it dominated the insurance business the economy did not experience any real issues. Policy holders switched to new insurers and all sailed on quite nicely. Fannie and Freddie are a whole other kettle of fish. They have been distorting markets for years and unwinding all of that will take a while, particularly as the government does not seem to want to let them just fail.
    Personally, given the position they are now in, I would prefer that they just be cleanly liquidated (as I advocated on my blog) rather than continuing as the sort of zombies that caused so much damage in Japan over the last decade or more.

  96. gerard
    September 10th, 2008 at 16:57 | #96

    Let’s leave North Korea out of it – that has nothing to do with this discussion whatsoever and you are just trying to obscure the issue by bringing it up.

    Yes, South Korea had import substitution but “ditched it” – WHEN it’s industries were strong enough to compete in the global market!! That is the critical difference between the ‘developmental state’ strategy and the ‘neoliberal’ strategy – which has never worked anywhere, ever. When a country’s industries are weak and small they need to be protected. Once an industrial base has developed, then they are strong enough to liberalize trade. The key is that this is a gradual process. Great Britain only embraced free-trade when it was the leading industrial power. The US was the world bastion of protectionism until after WW2, when it embraced free trade because there was no competitor that could rival it. It makes a very big difference WHEN you liberalize. you are correct that South Korea, when it had reached a stage of industrialization was able to liberalize to an extent – however if it had never gone through the period of protectionism it would never have industrialized in the first place. One Korean who wrote in detail about this is, as I mentioned, Ha Joon Chang, whose book I hope you find time to read (although judging by your reaction to the Shock Doctrine I don’t think you like reading books that challenge your pre-conceived notions about reality).

    it is a red-herring to contrast ‘import substitution’ with ‘export-oriented’ policies. They are not alternative strategies, they are often, in fact, two sides of the same coin. The Asian countries did both – protecting industries from foreign competition which were in fact the same industries with large markets for export. Industries oriented toward exports cannot develop if, in their infancy, they must compete against fully fledged foreign industries. I find it ridiculous that anyone can call Korea’s economic policies in the 70s “massive failures”; there is nary a country in the world that achieved so much development during that period time. For “massive failure” refer to the long list of 3rd world countries that have adopted IMF policies and the dreadful consequences.

    As for currency/financial controls – South Korea had extremely tight control over capital flight during its period of rapid development. In the 90s it did liberalize these in line with prevailing Washington Consensus wisdom. The result was the economic catastrophe of the Asian Financial crisis in 1997, which was utterly devastating to the South Korean economy. As Stiglitz pointed out in his book – the three Asian countries that did NOT liberalize their capital markets, China, India and Taiwan, were the three Asian countries that were spared the worst of that financial crisis.

  97. gerard
    September 10th, 2008 at 17:07 | #97

    “As for currency/financial controls – South Korea had extremely tight control over capital flight during its period of rapid development.”

    By ‘extremely tight’, I mean they actually had the death penalty for unauthorized transfers of money out of the country!

  98. Ian Gould
    September 10th, 2008 at 17:23 | #98

    “When a country’s industries are weak and small they need to be protected. Once an industrial base has developed, then they are strong enough to liberalize trade. The key is that this is a gradual process. Great Britain only embraced free-trade when it was the leading industrial power.”

    Two points:

    1. Pretty much every protected industry in history has used the “infant industry argument”. The first Australian (as opposed to state) tariff was introduced to the protect the textile, clothing and footware sector and the automotive industry. It was justified on an infant industry basis, 90-odd years later, the most tariff-protected industry sectors in Australia are the TCF and automotive industries.

    I’m not saying infant industry protection is never justified but it’s frequently abused.

    2. Britain adopted free trade (to some extent) at home and demanded it of various weaker countries in Europe and South America. But it used discriminatory tariffs and other measures *such as currency restrictions) to severely limit trade between other European powers and the British colonies and deliver monopoly profits to British firms.

    After all, what was the point of making it illegal for the Indians to manufacture their own cloth if you had to worry about French and German competition?

  99. September 11th, 2008 at 22:03 | #99

    The attempts by the free market fundamentalists to defend their ideology seem astonishingly feeble, once again.

    TerjeP (@ #58, #60), I would have thought that ‘neo-liberal purist’ would have been an accurate label for someone who, as each new catastrophe of what the rest of us regard as the ‘free market’ system unfolds, pleads that the system is, in fact, tainted by the existence of government somewhere in the Universe.

    If it is not, could you tell me what you consider a more appropriate label?

    Also, could you please provide us with a list of what you consider to be ‘free market’ successes of recent decades, and while you are at it, could you also provide a list of ‘free market’ successes of the 1920′s, which, as we all know led to such boundless happiness, prosperity, peace and harmony through the 1930′s and 1940′s?

    Also, you still haven’t told me whether or not you have read any of the “Shock Doctrine”. I would love you to explain to me how the Pentagon socialists managed, against Rumsfeld’s best efforts, to keep socialism intact in the U.S. armed forces long enough for them to be able to cause catastrophe in Iraq (see #33).

    Or do you maintain that, contrary to the impression that his speech of 10 Sep 2001 might have given, Rumsfeld was, himself, in fact, secretly in league with the Pentagon socialists?

  100. Bingo Bango Boingo
    September 12th, 2008 at 00:28 | #100

    “…could you also provide a list of ‘free market’ successes of the 1920’s, which, as we all know led to such boundless happiness, prosperity, peace and harmony through the 1930’s and 1940’s?”

    Don’t forget the 1900s, 1950s, 1960s, 1970s, 1980s, 1990s and 2000s, and of course much of the 19th century (in the obvious places). As you suggest, the existence of “government somewhere in the Universe” does not change the essence of the free market/capitalist system that prevailed during those periods – periods that saw astonishing social and technological advances. A list of all those developments would be pretty long, and I doubt Terje has the time to write it. Perhaps you could ask him to write a list of the successes of non-free societies?


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