Monday, April 4, 2011

Barney Frank: The Limited Circle in Which He Travels

If I had to choose someone to defend free markets it wouldn't be former Fed Chairman Alan Greenspan, but Congressman Barney Frank has chosen to attack the policy schizophrenic Greenspan for some of his more cogent comments about the dangers of over-regulation. Frank writes in FT today:

Since the passage of the Wall Street Reform and Consumer Protection Act, known as Dodd-Frank, many commentators have suggested ways in which it might be improved. But until last week no one had seriously suggested that we should have done nothing in response to the financial crisis. Yet, writing in these pages, Alan Greenspan suggests that we should not even have tried. By and large, he says, things went well over the long period of deregulation and light-touch oversight, and he argues that the global financial system is now so “unredeemably opaque” that policymakers and legislators cannot hope to address its complexity.

Mr Greenspan is wrong on both counts. His rosy view overlooks a monumental crisis that threatened the foundations of the American economy, led to soaring unemployment, a continuing foreclosure crisis and weakened economies in the US and Europe. It would have been a grave mistake not to address problems of inadequate regulation and lax oversight. Indeed, both his predecessor and successor as chairman of the Federal Reserve called for substantial changes and helped to shape the new rules.
The assertion that regulators can never get “more than a glimpse” of the financial system is self-fulfilling if regulators are not given the mandate or the tools to do so, or if they fail to use the tools they have. Economist Mark Zandi notes that one of the mistakes leading to the crisis was that, despite having authority to set mortgage lending standards, the Fed “just never acted on it. That was a clear policy decision”. When technology can track billions of transactions in real time, a failure to pierce the opaqueness of the system is mostly a question of will, not capacity.
Congressman Frank writes here that no one has seriously suggested that nothing be done as a result of the financial crisis. This is simply factually wrong and suggests the limited circle in which Frank travels. Many economists, particularly those from the Austrian School of Economics, have clearly stated that the financial crisis was caused by government involvement in the economy and that less regulation, not more, would be the wise choice.

Mises Institute president Doug French has written:

Of course the constant carping has been that there just hasn't been enough regulation: that crazy laissez-faire Bush administration dismantled all the financial regulation don't you know. The real fact is, even the average Podunk bank operating as a holding company not only has a state regulator, but the Federal Reserve, the FDIC, or the OTS, or the OCC regulating them. Not to mention all the business licensing and whatnot that's required on the local level....There's been plenty of government regulating, and as regulations grow, the incidences of financial booms and panics grow in step, as Kevin Dowd and Martin Hutchinson chronicle in their wonderful new book Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System. Looking back at financial crises, the authors note "the impacts of rampant speculation, government involvement or poor government responses, misguided monetary polices, ill-designed regulation and misunderstood new financial technology, as well as the oft-repeated failure on the part of policy makers and legislators to draw the appropriate lessons from painful experiences" have been constant themes.

Dowd and Hutchinson put the latest crisis in the context of history. They point out that government intervention and misguided regulations were culprits in all financial meltdowns.
Economist Mark Thornton has written:
The financial panic that has engulfed the planet is considered by politicians, bureaucrats, journalists and mainstream economists to be a problem of regulation. I find myself in the uncomfortable position of having to agree with this gang of opinion makers, but it is not a problem of insufficient regulation, inadequate regulation, unenforced regulation, out-dated regulation, or anything of the kind.

The problem is with regulation itself. With regard to financial markets, government regulates everything. There is the Federal Reserve that regulates the money supply, interest rates and everything else. There is the Treasury with its array of regulatory powers.

There is the Comptroller of the Currency, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and the Federal Home Loan Bank Board. Government has multiple layers of regulators concerning mortgages, financial institutions, and stock markets.

I have taught money and banking and was formerly the Assistant Superintendent of Banking in the state of Alabama and I can not think of a single thing related to this financial crisis that is not regulated.

Government regulation is the problem.
Clearly, Frank needs to move beyond the limited circle he travels.
Frank's statement that:
The assertion that regulators can never get “more than a glimpse” of the financial system is self-fulfilling if regulators are not given the mandate or the tools to do so, or if they fail to use the tools they have.

shows complete ignorance of the impossibility of gaining "more than a glimpse" of the financial system or, indeed to the entire economy. The economist Ludwig von Mises, in fact, warned that socialism would collapse because it would be impossible for a central planner to get more than a glimpse of the economy. Mises' student Nobel Prize laureate Friedrich Hayek wrote:
..."data" from which the economic calculus starts are never for the whole society "given" to a single mind which could work out the implications and can never be so given.

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. 
The view that "more than a glimpse" of the economy can be grasped by a single individual, or single planning group, is a fallacy that has been held by Karl Marx, FDR, Fidel Castro, and now, apparently, Barney Frank.

Frank goes on to re-state this view and adds on a peculiar new oddity that he claims resulted in regulators failure to detect the crisis : 
When technology can track billions of transactions in real time, a failure to pierce the opaqueness of the system is mostly a question of will, not capacity.
Here is Frank again stating that it is possible to understand in detail the complete economy since the data, "billions of transactions in real time"  is there to analyze the situation. He then charges that it is only "a question of will" that failed to uncover the problems in the economy. If we just had the "will" to gather a few more numbers, regulators would have been on to the crisis.

And Frank is correct in when he states that regulators did not see the crisis coming. Federal Chairman Bernanke did not see it coming, nor did top economists at the New York Fed.

Curiously though, plenty of Austrian economists, while understanding that it would be futile to forecast the exact details of a crisis, using Austrian tools clearly saw the crisis coming and took a dramatically opposing view to that of the regulators such as Bernanke and NY Fed economists. Thus, while Frank may think it was a lack of "will" to analyze the incoming data that was behind the failure to see the crisis coming, Frank fails to address that the forecasters, primarily using Austrian business cycle theory, did see the crisis. Economists who had a lot less data before them than Federal Reserve economists!

Thus, one has to question Frank's assertion that there was a problem in the "will" to get the necessary data. Indeed, the real problem appears to be that regulators used economic theories that failed to adequately understand the economy and the crisis in front of them. Most alarmingly it is these failed economic theories that are behind the structure of the new regulations contained in the Dood-Frank Act.


  1. We Austrians are going to have to come to grips with the fact that our opponents have never bothered and will never bother to familiarize themselves with even the basic concepts the Austrian School, much less bother to understand those concepts. Other than a few GMU types, no non-Austrian has the faintest idea what the basis of our analysis is. No matter how many times we explain it. This observation is without exception. The will bend themselves into intellectual pretzels as they invent pathetic excuses why Austrian concepts they do not understand are nevertheless “crank” and “fringe” and which means that they have no duty to grapple with those ideas despite the award to Hayek of the Nobel Prize for those exact concepts.

    My only solution to this is convince average people who heretofore have considered economics to be of the realm of experts that economics is actually as self evident and commonsensical as household and small business economics and that the Keynesians are liars and double-talkers who invariably refuse to engage their intellectual opponents and instead resort to name-calling. Always.

    And, of course, average people these days have a 4 second attention span.

  2. Bob Roddis,

    You are a gentleman and a scholar.