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June 30, 2008

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All around cool guy, and former provost of the University of Chicago, Geoffrey Stone (the Edward H. Levi Distinguished Service Professor at the University of Chicago Law School), posted earlier this week proposed that "The next president should create ... [Read More]

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LAK

I'm not Kimball, I assure you. I have no delusions, like so many at my law school, that the outcomes a "free" market produces are any more efficient or optimal that the outcome of more regulated systems. In fact, I'm quite sure they are less optimal than outcomes in which there are rules to the game. Game theory was, in the end, the most useful class I took in thinking about complex systems and games. It taught me that having rules often lead to far more optimal outcomes than games in which it is every man for himself.

Uzair Kayani

Hi LAK,

Did you mean game theory and the law with Professor Baird? Also, did the class track the book? I'm thinking of taking it if it is offered next year.

Kimball Corson

The core problem with capitalism as we understand it, or our market economy as some view it, is not so much the externalities problem as it is the interference in various markets by various levels of government at the aegis of lobbyists seeking special interest legislation or regulation that is not in the national interest, but is designed to aid the income and wealth of a few at the expense of many. Alternatively, those lobbyists also act to block contrary legislation and regulation that serves the national interest, but not those paying them. All very constitutional, right?

Where were the Fed, Congress and all the financial regulators during the housing bubble up when huge fees were being raked in by too many as they did their sales or packaging dance in passing, making damn sure that real risk was shoved along and did not stay with them? Out of the office on paid vacations or more seriously, simply out to lunch?

But now that we have the economic consequences, does it surprise us to see the Fed and Treasury rushing in to protect in effect stockholders' interests in regard to Fannie Mae, Freddie Mac and IndyMac, the SEC precluding shorts on the stock of major brokerage houses with dirty hands, and the U.S. government working on a plan to bail out the shareholders of regional banks. I mean we could use a chapter 10 bankruptcy reorganization model of killing the shareholders, giving haircuts to the debt holders and protecting the creditors. Why is it we have it backward? Are special interests now considered to be in the national interest? As I said, it is all about privatizing gains and socializing losses, all by way of redistributing income and wealth, of course, in favor of those that got and now have, all with governmental assistance coming and going.

Kimball Corson

Is the "older" and "newer" comments formating designed to keep, here, Geof's post closer at hand in the off chance we will stay more on topic. Fat chance, me thinks.

LAK

Uzair,

It was with Doug Baird. He's a fine professor and an even finer man. As far as tracking the book, this was 7 years ago so I don't remember that well, but I do believe it was.

Kimball Corson

We have a huge financial crisis at hand in our country, with tremendous economic, institutional and legal implications and yet this Chicago website is all but silent on the matter here, unlike almost every other media existant. Why? Do we have a hole in the faculty roster of the Law School and/or the Econ Department? Where is Chicago's Paul Krugman? Again and more generally, why?

Kimball Corson

The Fed could have acted earlier as it has now, or even more so now and then both. Alan Greenspan and the Fed knew housing was seriously bubbling up but took no action for reasons I suggest. Here is what the Fed did recently that Greenspan and the Fed could have done earlier.

Recently, the Federal Reserve Board voted unanimously to bar lenders from making higher-priced mortgages without regard to a consumers' ability to repay. As to larger loans, the Fed's new rules also prohibit lenders from relying on income or assets that it does not verify to determine repayment ability, imposing prepayment penalties if the payment can change during the initial four years, and from making a loan without establishing an escrow account for property taxes and homeowners' insurance for first-lien loans. Feeble as it is, this is a start. The Fed has the authority to do much.

This Fed could have done even more then and now, but it didn't. The Fed's earlier history of inaction is certainly not due to ignorance. These men knew very well what was going on, but elected not to stop it.

Why is a question everyone should consider.

I do think now I am too far off topic, so I'll stop here, but some Chicago faculty member(s) should be posting on these issues here. They are important, timely and involve serious legal, moral and economic issues as well. These topics should be Chicago's bailiwick, but we are met with silence.

Kimball Corson

LAK and other commentators on this website seem to have the view that by and large markets don't work. I hear the same view expressed elsewhere too. The issue then is do markets work?

I believe so, most of the time. They work as long as those participating in them do not cheat, behave unfairly or get government to interfere in those markets on their behalf by special legislation or regulations that tamper with the market's results. Unfortunately, there is much to much cheating, unfairness and interference in too many markets in America today.

Before people hastily decide markets don't work, they need to identify the markets they are thinking about and then check to see whether those markets and those closely collateral to them that effect them have been devoid of rules which prevent cheating or unfair competition and/or have been seriously compromised by one or more special interests operating through governmental interference in such market(s). Every market I am aware of that doesn't work well has been so tampered with.

If that is so, little can remedy the result, given the powers that be, except for more and better interference. But understand that is not a failure of the market mechanism itself. The market then becomes the subject of a political struggle, such as health care in America. Everyone seems to want a rigged result and is willing to cheat and be unfair to get it, but they simply cannot agree upon which result is best. Doctors want one thing. Insurance companies, another. And patients something else altogether. None can agree and all cheat and interfere in that market(s) in the ensuing political struggle.The market all but ceases to function as such. We should not in those circumstances blame the market mechanism. Hobbled horses don't run fast.

Kimball Corson

Not only are civil liberties being compromised but income is being seriously redistributed to the rich and this housing mess is not going to be repaired anywhere near as quickly as most hope. We are in trouble in too many quarters. So how badly has income become maldistributed and how long will this housing bust last? We have some suggestive answers.

The housing slump will last for a good while. A study of post-World War II housing busts by the International Monetary Fund found that they typically lasted four years on average and involved a average loss totaling 8% of a year's national output. I suggest the present bust is much worse that others in that time period. Maybe we will have a loss of 14% of a year's output and take five to six years to recover. Indeed, it could be more and last longer.

Emmanuel Saez, an economist at Berkeley, has developed some interesting data on income redistribution in recent times. During the 1990s, the incomes of the richest 1% went up 10% a year in real terms, while those of the other 99% grew at an average annual rate of 2.4%. Then between 2002 and 2006, the richest 1% saw an 11% annual average growth in their real income while everyone else saw his or her real income grow at less than 1%. A truly Republican result. Three-quarters of the gains from the period from 2000 to 2007 went to the top 1% of income recipients. They now receive a larger share of overall income than at any time since the 1920s and it is getting worse.

How about another tax cut for the rich? Were you suckered in and distracted by family values, no marriage for gays, no abortions and a range of other marginalia and foolishness? Hey, many of you voted for Bush. As Obama has succinctly explained it, a vote for McCain for president is essentially a vote for a third term of Bush.

The truth is a whole lot of politicians need to be shown the door and quickly. We cannot afford them. It is not just a question of civil liberties being trampled. Other shenanigans are afoot, too. Congresses approval rate is down to 10% for its inablility to act effectively and timely, making Bush at 29% look like a real sharp performer. Where do we get these guys? How can we do better? These are serious and important questions. So come on folks, Wake up. Chicago seems asleep at the wheel and this is or should be its bailwick.

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