[OPE-L] "Crowding-out effect" (coda)

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Tue Oct 23 2007 - 18:43:12 EDT

I wrote previously:

"hard-core free marketeer Alan Greenspan argues against collaboration between the state and the private sector to create a $75billion-plus investment fund to buy the assets of troubled investment vehicles, because it would prevent market forces from establishing "true clearing prices for asset-backed securities".  His critics might argue the exact opposite, i.e. the justification for such a collaboration is precisely that the true clearing prices are not established, for example through lack of "transparency". It is a debate that can never be resolved, because it is based on axioms which you either accept or reject."

However, Paul Krugman (NYT Oct 22, 2007), a brilliant economist whom I admire though often disagree with, argues that it is not an axiomatic matter, there are economic reasons pro and con, and that you in fact have to agree with Greenspan in this instance, because the superfund is a "really bad economic idea":

"I'd put it like this: Investors aren't putting their money to work because they don't know where the bad debts are. And when investors need clarity, the last thing you want to be doing is pumping out more
smoke... this rescue scheme could be seen as an attempt to hide the bad debts everyone knows are out there, and as a result could delay any return of trust to the markets."

So it's a bit like a doctor who puts a bandaid on a limb with gangrene. Krugman's defence of the wondrous world of market economics is thus essentially that we should be honest about acknowledging our debts. The people who incur the debts, should at least be the people that own up to the debts. If they renege on their debts, they should suffer the consequences. Because if we do not have that, if we fudge the information issue, we don't have any clarity anymore about who owes what to whom anyway, and this erodes investor confidence, and then we are all down the tubes. It's tough talk, particularly given that if debt defaulters suffer their losses, that might also achieve exactly the same result Krugman wants to prevent.

Well Krugman's case is one which I would need to take quite a number of pages to reply to seriously, but all I would note here, is that he proves my point. Namely, it boils all down now to an axiom here, that market actors should be honest about their transactions, honesty being presumably defined here as having due regard for truth, in such a way as it takes others into consideration. 

From careful econometric argument and rational actor models, we have suddenly somersaulted into a bit of good old homebaked moral wisdom. 

I already mentioned the ambiguity about "transparency", and how that could be interpreted in different ways. But what Krugman leaves out of his story is any consideration of how it came to be, that market actors were not honest about their transactions, or how, if they were honest, it could lead to a dishonest result. He evidently badly wants markets to work, but he ought to explain at least why it is, that they are not working. If markets were not working as they should, "true clearing prices" were not established. But if we are not honest about why they were not established in the past, how could they ever be established in the future? 

For his part, Karl Marx commented with sharp intuition that the growth of credit economy pointed beyond capitalism to a new form of economy, a new mode of production, precisely because the welter of mutual debt obligations eroded or dissolved any close relationship between ownership and control, or between private property and personal responsibility. In the end, all that remained were "stakeholders". This did not however automatically lead to socialist cooperation however. It might all go asunder in an orgy of violence, crime and corruption - something which fires liberal anxieties about the future. It is, of course, the same liberals who see no connection at all between America's credit woes and all the bloodletting in the Middle East.


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