Misguided Views of Libertarian Economics and the Alternative "Regulation" Model


One of the brightest regulars who comments on my blog has a totally distorted view of what Libertarian economics is all about. Unfortunately, I am quite confident that her view is mainstream.

Tin Hat writes …

Here is the core premise behind libertarian economics:

The private business sector will put ethics, morality and public employee good above profits, shareholders, bonuses, golden parachutes and CEO compensation — IF they were completely unfettered from any government imposed rules, laws, and regulations.

And IF the private sector entity failed in its fiduciary duty to the public, Main Street would rise up and kick them out.

That’s Corporatism.

Regulation Model vs. the Libertarian Model

Sorry Tin Hat but that is not what Libertarian economics is all about or stands for at all.

First let’s ponder the “Regulation” Model.

The “Regulation” model assumes Barney Frank (feel free to substitute your least favorite representative) will write responsible legislation and Congress will stop taking bribes for legislation they want.

Here are some examples of what the regulation models has wrought.

  • The regulation model sponsored Fannie Mae and Freddie Mac.
  • The regulation model gave huge tax breaks written by GE for GE
  • The regulation model encourages flight of jobs overseas
  • The regulation model supports corrupt public unions that have bankrupted cities and states
  • The regulation model gave us the Fed and its bubble blowing policies
  • The regulation model gave us thousands of affordable home programs all of which drove up the price of homes
  • The regulation model provides hundreds of billions of dollars of student loans the effect of which is to make those graduating from school now, perpetual debt slaves.
  • The regulation model gave us a healthcare bill we literally “had to pass to find out what was in it” according to Nancy Pelosi. Congress did not write that bill, it was entirely written by a consortium of special interest lobbyists.

I can provide thousands of more examples of what the “regulation” model has given us.

The very best financial regulation will ever do is prevent the last crisis. However, we are not going to have another housing bubble for decades. At worst, and far more likely, new financial regulation is highly likely to sow the seeds of the next crisis.

Regulation sponsoring Moody, Fitch and the S&P did just that. So did thousands of affordable housing programs. So did the Community Reinvestment Act. So did sponsorship of Fannie Mae and Freddie Mac. So did HUD. So did thousands of financial loopholes. And most importantly so did the legislation that created the Fed and FDIC.

The legislation model has been disproved in spades yet otherwise intelligent people keep clamoring for more of it as if we could find, hire, and listen to some “all-knowing” super-regulator that can identify the next crisis in advance and write timely legislation that the likes of Barney Frank would deem wise and pass.

The idea is ludicrous given we cannot even get consensus about what to do after the housing bubble has already burst. Also bear in mind the Fed is supposed to regulate the economy. How well did that work out?

It’s preposterous to believe that Congress can identify and appoint some sort of super-regulator because no such person exists in the first place.

Sure, many people identified the housing bubble in advance. I did, so did other bloggers and so did people like Elizabeth Warren.

What good did it do?

I am quite certain a huge number of bight people can identify the next crisis. Indeed they already have. Some people are calling for hyperinflation, some are calling for deflation, some are calling for stagflation, some think Japan will blow up, and others think peak oil will send oil prices to the moon. Some think printing money is a good idea, others don’t.

Lots of people are going to be right because there are lots of people in every one of those camps, and one of them is guaranteed to happen. When one of them does, many people will say “I told you so”.

So who do you want the Fed to believe?

I don’t want the Fed to act on any of those calls because there should not be a Fed in the first place. The Fed failed as a regulator, again, and again, and again.

Libertarian Economic Model

The Libertarian model does not end all regulation. Indeed the basis of the Libertarian economic model is that we need to protect private property, prevent fraud, protect human rights, and give everyone an equal chance under the law.

Had we done that, and “just” that we would not be in this mess.

In the Libertarian model, Fannie Mae and Freddie mac would not have existed. Nor would there have been a Fed keeping interest rates too low, too long. Without the loose lending model of the Fed, and without banks being able to lend more money than they have, the housing securitization model that blew up would not have happened or if somehow it did, it would have been less problematic by orders of magnitude

In the Libertarian model, there would not have been government sponsorship of the rating agencies Moody’s, Fitch, and the S&P.

In the Libertarian model the construct of “Too big to fail” does not exist. Indeed, allowing failure is one of the tenants of the Libertarian model.

Note that something like Glass-Steagall would work in the context of a Libertarian model because its purpose is to put a firewall to prevent fraud. Pollution laws would still be needed to protect private property. Child labor laws would still be needed to protect human rights. Public safety laws are fine. No one would be allowed to yell “fire” in a movie theater.

If you want to take that model and add some social safety nets, all but strict Libertarians might agree.

Failure of Regulation

All the corporatism, all the bank failures, the credit bubble, the housing bubble, and all the warmongering is a direct result “of” regulation that Libertarian economics has nothing to do with.

Indeed most of those those things could not happen in a Libertarian model. To the extent that any of them could happen, they would not occur to the same magnitude.

Libertarian Solution

The solution is to throw away all legislation except what is needed to protect private property, prevent fraud, protect human rights, and give everyone an equal chance under the law.

That means all tax breaks that favor GE as well as all tax breaks for homes, have to go. Tax code should not favor any group or thing. Drug imports from Canada would be allowed in this model and warmongering would stop. Subsidies to home builders would stop. Subsidies for ethanol would stop. In fact, subsidies for everything would stop.

Government would not be allowed to spend more than it takes in, banks would not be allowed to lend more money than they have ownership of, and the Fed would be abolished.

Instead, those in the regulation camp want to patch a million misguided pieces of legislation that should not even exist, and worst of all they expect Barney Frank to get it right.

One model has been tried and failed a million times. One model has never been tried.

Yet misguided souls want more of the model guaranteed to fail. Quite frankly it is preposterous.

Mike “Mish” Shedlock
Global Economic Analysis