implementing the net-liberty-enhancing policies that a real libertarian would favor if he or she were truly a decisive agent

TO BE NOTED: From Marginal Revolution:

"Words of wisdom

From Matt Yglesias:

The question here is what would Adam Posen have done if he had Tim Geithner’s job? And based on Posen’s analysis, I think the only conclusion you can reach is that he’d have done more-or-less the same thing. Talking about a different issue last week, I heard Tyler Cowen forcefully make the point that you have to think of the political constraints as a real policy consideration. Suppose Geithner had asked Congress to appropriate $1 trillion to implement a program of bank nationalization, asset writedowns, and loan guarantees—what would that have accomplished? It certainly wouldn’t have gotten Congress to appropriate $1 trillion to implement a program of bank nationalization, asset writedowns, and loan guarantees. It might have derailed the budget and thrown the political momentum on the Hill to proponents of a neo-Hooverite spending freeze program. It might have caused panic. And it certainly would have undermined the credibility of the inevitable effort by Geithner to do the most he can with the authority he already has.

One thing I like about Bryan Caplan's book is an interpretation which he will probably hate. The truly decisive actors are people directly in the political process. Maybe the "libertarians" who are or have been in politics are not just "sell outs." Rather they are implementing the net-liberty-enhancing policies that a real libertarian would favor if he or she were truly a decisive agent.

Posted by Tyler Cowen"

"assemble general principles that seem to be of practical benefit to assumed goals, and apply them to current events and trends."

From Adam Smith's Lost Legacy:

"Adam Smith On State Expenditures and Interventions

A correspondent asks:

“I'm still puzzled as to where Smith draws the line with regard to government intervention. In Book V, Chapter I, he talks about justice, defence and public works but it seems that he has a wider application for the state in market matters. I'd be very interested to hear your viewpoint on this.

To which I replied:

Yes, it is widely believed, even by some top academic economists, especially on Blogland, that Adam Smith favoured small government, often represented by the phrase, the 'night watchman state', which in fact was coined in the late 19th century by a firebrand socialist.

I have posted this list from my book, Adam Smith: a moral philosopher and his political economy' (2008, pp 247-48, Palgrave Macmillan):

"● The Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’; (WN464)
● Sterling marks on plate and stamps upon linen and woollen cloth (WN138-9)
● Enforcement of contracts by a system of justice; (WN720)
● Wages to be paid in money, not goods;
● Regulations of paper money in banking; (WN437)
● Obligations to build party wars to prevent the spread of fire; (WN324)
● Rights of farmers to send farm produce to the best market (except ‘only in the most urgent necessity’);(WN 539)
● Premiums and other encouragements to advance the linen and woollen industries’; (TMS185)
● ‘Police’, or preservation of the ‘cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances’;
● ensuring the ‘cheapness or plenty [of provisions]’; (LJ6; 331) ( YES )
● patrols by town guards, fire fighters and of other hazardous accidents; (LJ331-2)
● Erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours); (WN723)
● Coinage and the Mint; (WN478; 1724)
● Post office; (WN724)
● Regulation of institutions, such as company structures (joint stock companies; co-partneries, regulated companies); (WN731-58)
● Temporary monopolies, including copyright, patents, of fixed duration; (WN754)
● Education of youth (‘village schools’, curriculum design); (WN758-89)
● Education of people of all ages (tythes or land tax) (WN788);
● Encouragement of ‘the frequency and gaiety of publick diversions’; (WN796)
● The prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population; (WN787-88)
● Encouragement of martial exercises; (WN786)
● Registration of mortgages for land, houses, and boats over two tons; (WN861, 863)
● Government restrictions on interest for borrowing (usury laws) to overcome investor ‘stupidity’; (WN356-7)( INTERESTING )
● Laws against banks issuing low-denomination promissory notes; (WN324)
● Natural liberty may be breached if individuals ‘endanger the security of the whole society’; (WN324)
● Limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’); (WN539)
● Moderate export taxes on wool exports for government revenue; (WN 879)

Jacob Viner concluded, unsurprisingly, that Adam Smith was not a doctrinaire laissez-faire advocate.

[From Viner, J. 1928. ‘Adam Smith and Laissez-faire’, In ‘Adam Smith, 1776-1928: Lectures to Commemorate the Sesquicentennial of the Publication of Wealth Of Nations, p 53, August M. Kelly, Fairfield, NJ; I provided the references to Wealth Of Nations.]

Second Question:

“How exactly does Smith make a distinction between permissible and unacceptable government intervention? I could justify some of this divergence by considering that much of his criticism of government involvement stems from actual experience rather than theoretical reasoning (which, if used, could rule out regulation all together!). What's your take on it?”

Smith, remember, wrote (Book V) of ‘public works and public institutions’ that ‘facilitated commerce’. It was, and I think, remains, an empirical test( YES ), not a theoretical outcome. Markets do not work because of theory, or ‘rational thought’, or who wrote books about it. ( MY POINT )

He didn’t sit down and think great thoughts about gaps in knowledge from his appreciation of the explanations of others and himself of real world events. That is the way of ‘shamans’, priests and inventors of religious explanations, with everything they cannot explain shunted into the mysteries of ‘invisible beings’ or gods.

The pure theory of markets, such as neoclassical economics and general equilibrium as much that it is meritorious, but it is a theory( YES ) not a description of how markets actually work( YES ).

The players in markets are real human beings( YES ), not variables that operate within narrow confines of deterministic mathematics( MY POINT ). Consider how Smith chided some of the Physiocrats (mentioning Dr Quesnay by name) for their apparent insistence that the ‘political body would thrive only under a precise regimen, the exact regimen of perfect liberty and perfect justice’… ‘if a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered’. (WN IV.ix.28: p 674)

The message is clear: start with the history, how things arrived at their present day circumstances and arrangements, and observe how they operate, drawing on lessons of how they worked, more or less, well in the past and what that teaches us selectively about what works and what doesn’t( MY METHOD ), assemble general principles that seem to be of practical benefit( MY METHOD ) to assumed goals, and apply them( YES ) to current events and trends.

Of course, everything depends on the selection and the objectives. Machiavelli, the Italian political practitioner drew on history to show how rulers ruled in the past and selected common aspects that could apply to rulers in his present (1500s), where the objective function was to remain ‘safe’ in power.

Smith’s objective function was how an economy, the State, and the people, could spread opulence from commerce to the nation, especially the poor majority( YES. THIS IS WHY I FOCUS ON THE SOCIAL SAFETY NET AND THE MIDDLE CLASS. ), drawing on how nations remained stable( MY BURKEAN FOCUS ) (justice and the distinction of ranks), became prosperous (the desire of people to ‘better themselves’) given as much freedom to do so (Liberty) without it degenerating into monopoly, restrictive protectionism, and opulence for a minority using their political influence over the State( OUR SYSTEM ), while leaving the poor as they had been left throughout all history as serfs, slaves, and penurious labourers.( ALL STILL TRUE )

Smith believed that a commercial society was the best opportunity for continual growth and the spread of opulence, and showed in his critique of mercantile political economy, as it had operated since the 15th century and was operating up to the Fall of Rome in the 5th century, what changes might be made by the legislature to let commerce do its work as speedily as was practicable in the real world and not in some kind of impossible utopia.( YES )

He was not an ideologue( MY POINT ). His understanding of history demonstrated what was possible among real men as they were( MY VIEW ), not ideal ‘guardians’ of public interest who usually made everything worse than it need be.

Hence, his proposals for ‘public works and public institutions’, which were written in is inimitable style, were apparently quite modest (the incorrect ‘take’ on them by laissez-faire ideologues), though they added to a level of state expenditure that was actually quiet ambitious, with separately argued cases for the items listed by Jacob Viner in 1928 above, which together extended the agenda of appropriate expenditure by a classical liberal state (and even one ran by quite illiberal personnel)."

Smith knew the difference between Politics and Political Theory, and Economics and Political Economy. Sadly, many people today do not.

"but this clearly is a middle class recession because of the credit and foreclosure crisis"

Many times on this blog I've pointed out the fact that if you want smaller government, then you need a thriving and growing middle class that perceives itself to be middle class, and not just one misstep or accident above being truly needy. Otherwise, the middle class will favor large government until the end of time. Often, people try and tell the middle class that the numbers show them to be better off than they think that they are, or people are worse off elsewhere. The answer is something like "F--- Off". In the real world, such arguments are considered justifications for inequality by the better off, or, better yet, rationalizations. As well, I've posted about psychological and social research that people, by that I mean actual human beings, perceive their situation in relation to the situation of others in their society. That's why they say "F--- Off" when economists tell them to accept recessions as a cleansing enema for the economy. The middle class at least agree with the enema part.

With that in mind, from Reuters:

"In recession, poverty strikes middle class

Fri Jan 16, 2009 12:43pm EST

1 of 11Full Size

By Lucia Mutikani

WASHINGTON (Reuters) - Chaun Frost ran up her credit cards when the U.S. economy was booming, and now the single mother is paying a heavy price.

To service her debt and buy food for her two children, she has taken a second job selling pizza on weekends and some week nights, supplementing the $2,200 a month she earns from her job coordinating volunteers at a children's hospital.

"We have been hurt by the current state that the economy is in," said Frost, 32. "I am part of the new working poor( THIS IS WHAT I MEAN )."

About 37.3 million Americans were living in poverty in 2007, or about 12.5 percent of the population, according to the government, which defines poverty as an annual income of $21,203 or less for a family of four.

Figures due out in August will show that rose by about half a percentage point last year, analysts estimate, and more and more people like Frost will slip into poverty this year as the recession takes hold.( FOR SURE )

In many ways, Frost is typical of the many middle class people in the current recession who are falling into poverty. ( YES )

Many of the decisions she made seemed smart at the time( THIS IS IMPORTANT TO UNDERSTAND. WE ALL TAKE SOME RISKS. NOT ALL DECISIONS TO USE CREDIT ARE ASININE BY DEFINITION. ). Some of her many debts were accumulated as student loans. She also makes monthly payments for a big car whose value is now less than the amount she owes on it.

Repayments on the car and insurance bills are almost as much as the $850 rent for the modestly furnished two-bedroom apartment she shares with her 11-year-old son and a 9-year-old daughter in Washington.

In a move she knows could spell trouble for the future, she has slashed her retirement contributions ( WORKING LONGER LEADS TO MORE GOVERNMENT. SORRY CASEY. PEOPLE DON'T FANCY IT WHEN IT'S FORCED. )to $5 per check from $100, partly in response to a drop in the stock market.

And, underneath it all is the economic downturn, which has exacerbated her problems and shattered her financial self-confidence( THIS IS THE REAL PROBLEM. HOW REAL PEOPLE REACT AS INDIVIDUAL HUMAN AGENTS. ).

"Had I known that things would turn out this bad, I would have done things differently( THAT'S MY WHOLE LIFE LOVE )," Frost said.

UNEMPLOYMENT FUELING POVERTY

The worst financial crisis since the Great Depression of the 1930s, ignited by the collapse of the U.S. housing market, has sent the U.S. economy into a downward spiral.( A CALLING RUN ( DEBT-DEFLATIONARY SPIRAL ) FOLLOWED BY A PROACTIVITY RUN. )

Government data shows the unemployment rate jumped to 7.2 percent in December, the highest in nearly 16 years, as companies cut jobs( PROACTIVELY, IN ORDER TO GET AHEAD OF THE CURVE. ) to cope with a shrinking economy.

"My guess is poverty is going to go up from around 12.5 percent now by about half percentage point to 13 percent," said Rebecca Blank, a senior fellow at the Brookings Institution in Washington. "The main driving factor is rising unemployment."

Among those out of work is Shirley, 55, who has been living off a $195 weekly unemployment check since September.

"I never remember things being this bad( THE INCREDIBLE FEAR AND AVERSION TO RISK. )," she said. She declined to give her last name because she is in a legal battle with a bank over disconnected electricity at the apartment building in Washington where she lives.

"This is the longest I have been unemployed," she said.( I'M SURE SHE'S A CANDIDATE FOR WANTING LESS GOVERNMENT. )

With the economy not expected to recover before the second half of 2009 and the jobless rate forecast to top 9 percent by the end of the year, analysts said the number of people living in poverty is set to increase.( VERY BAD NEWS )

"How many more people fall into poverty as this recession continues depends on what policy choices are made( I AGREE 100% )," said Lisa Donner, Executive Director of the Half in Ten Campaign, an organization focusing on poverty in the U.S. capital.

MOVING POVERTY LINE

The Center on Budget and Policy Priorities, a private think tank, estimates that if unemployment reaches 9 percent, 7.5 to 10.3 million more people could fall below the federal poverty line.

The Congressional Budget Office has estimated that government spending on food stamps will rise to $50 billion this year from $39 billion in 2008, another sign that more Americans are struggling.( HURTING MATE )

Around the country, charity groups have reported an increase in the number of people using their services.( THIS IS IMPORTANT AS WELL )

"We have seen an increase of about 10 to 20 percent in people seeking help with groceries. They are from all racial groups, and about four fifths of them earn incomes below the federal poverty line," said food coordinator Jenette Chance of Bread for the City in Washington.

Some experts criticize government poverty measures( IT'S ONLY USE IS THAT IT MAKES GIVING BENEFITS OUT EASIER ), arguing that the methodology was developed in the mid-1960s and has had no major revisions, except to make adjustments for inflation.

Instead, they propose a poverty measure that takes into account variables such as taxes paid and credits received, medical expenses and work-related expenses.( GETTING THIS INFO IS MORE COSTLY AND TIME CONSUMING, AND CONSTANTLY NEEDS ADJUSTING. ERGO, GOVERNMENT HATES IT. )

"The official measure( ALL GOVERNMENT STATS ARE OF VERY LIMITED USE, PRECISELY BECAUSE THEY'RE MAINLY USEFUL FOR GOVERNMENT EASE. ) very much understates the number of people or households having a very tough time," said Ann Chih Lin a public policy and political science professor at the University of Michigan.

The collapse of the U.S. housing market means many middle class people are either living in poverty or are one pay check away from hard times( THIS IS WHAT I'VE BEEN SAYING ), she said.

"Recessions normally hit the people who are the poorest harder, but this clearly is a middle class recession because of the credit and foreclosure crisis( BINGO! )," said Lin.

President-elect Barack Obama is pushing for the swift passage of a spending package to promote economic recovery.

For Frost, anything would be better than the status quo( GOD YES ).

"I guess we all are looking for miracles( WE HAVE TO LOVE. ) and some good leadership for the good of the economy," she said. "When you look at who is in the unemployment benefits line, the food line, it's a lot of people who were middle class( BINGO! )."

(Reporting by Lucia Mutikani; Editing by Eddie Evans)"

If you truly want less government someday, then you are going to have to deal with this problem. In the short term, we need a strong and vibrant social safety net. In the long term, we need to compromise politically to develop a strong and vibrant middle class who feel comfortable forswearing government aid. In lieu of that, just keep braying about government being the problem. We need wankers like you for amusement in times like these.

" Now how do you organise a new French Revolution? "

Bronte Capital and John Hempton also get it:

"Credit Agricole SA is a bank which obsesses me – and on which I have lost some loot.

The problem is that it is a bank with very good bits and very bad bits. And the good bits are excellent (and mostly outside Paris) – and the bad bits are atrocious.

Charlie Munger observed that if you mix turds with raisins you still have turds. Charlie was right and it shows in Credit Agricole SA’s stock price.

The bank is controlled by a bunch of regional mutual banks who – for reasons that are not apparent to me – have never got around to closing the bad bits. Those regional mutuals are in turn controlled by five million voting mutual certificate holders – a reasonable proportion of French households.

The super-bad bit is their investment bank. It’s a mathematical finance type investment bank in the French mould. As has been noticed by more than a few people – the market recently has not been too kind to mathematical finance.

I just want to extract the results – quarterly – for just investment banking business. Please click for detail...

These numbers really deserve looking at. The first observation is that revenue can go very strongly negative at an investment bank. That is nothing that Lehman et al have not discovered before – but the trading revenue was negative for several quarters in a row. You might conclude the traders were not much better as traders than say the average French farmer.

The second thing is that the costs line doesn’t seem to move much. Now when I was young and naïve – say 2006 – I thought the investment banks would have a very rough trot – but that the staff would take a fair bit of it in the hip-pocket. The argument being that the very high salaries were at risk – and you could at least assume that when time got rough for an investment bank the staff would be paid salary without bonus. Capital risks were lower than it would appear because at least variable expense would go close to zero.

Now I read lots of stories about how children are getting less allowance due to the credit crisis. Such stories always seem to wind up high in big-media’s “most read” and “most emailed” lists. And that is only because we – dear readers – are doing it to our own kids.

And if it is good enough for our kids it is surely good enough for our investment banker!

Anyway – it is noted that Wall Street bonuses remain stubbornly high – but this is France with all its equality and fraternity. And they can’t control this crap either.

But with numbers like these – if the investment bank were not owned by the rich French parent (Credit Agricole SA) then it would be bust – and the children (sorry investment bankers) would be out on the street.

But bust is better than it would have been in 1792. In those days – faced with a class as egregiously and hypocritically greedy as investment bankers they would have set up the guillotine in the Place de la Concorde and we would be treated to the public spectacle of mass beheadings.

These days of course it is easier. The French farmers and middle class all have a vote – its their mutual share. Executing a vote may be less grizzly than executing investment bankers – but it might be just as effective (though somewhat less theatrical).

Now how do you organise a new French Revolution?"

Hempton's not far wrong. Now you know why I sound like a certain Whig who's trying to prevent himself from having to write a book about Major Social And Economic Changes wrought by this crisis. Only, in this case, I'm getting more help from my own party than the opposition. This need not happen. It's a remote possibility as of now.

A True Burkean would be thinking about the Pragmatic and Effective Policy Decisions that will allow us to keep our system intact, and yet deal with the crisis before us. Paradoxically, we need more government intervention in the short run to prepare the possibility of less government intervention in the future. We also, and I know I'm sounding Quixotic here, need to root out Fraud, Negligence, Fiduciary Mismanagement, and Collusion, and deal with it strictly and publicly, in order to forestall a collapse in the belief among many voters that this system is worth preserving, and that this presevation will not come at their expense.

Do I agree with everything Burke says? No. I see him as a Whig with a distaste for Radical Change, which often strays very far from its stated goals. So say I. Political Economy and Politics dictate that we deal with this crisis in a way that both appears and is benefitial to all parts of the citizenry. I'm fine with looking towards Keynes for help, but a quick but focused glance towards Burke is seldom, if ever, amiss.

"Some companies are too powerful to fail": That's Our System

John Kay in the FT has interesting post this morning that echoes some of the points that I was using in talking about Yves Smith's post on the US fear of Nationalization:

"Great banks are “too big to fail”. The predictable consequence of governments accepting this argument is a queue of other companies “too big to fail” lining up at the front door of treasuries. Insurers were next. This week, the car manufacturers secured their subsidy."

It is predictable, but also, in some sense, necessary, because politically, it would be very hard for a bailout of just financial services to be accepted by the citizenry of the US.

"The failure of any business has ripple effects on suppliers, employees, distributors and customers. If the business is General Motors such effects are larger. But since GM is many times larger than most companies, the subsidy needed to keep going is correspondingly larger. There is no reason to think that the ripple effects are larger, relative to the size of GM, than the consequences of the failure of a smaller business relative to its size."

That's not the point, but he understands that.

"So the return on the taxpayers’ dollar is not likely to be larger if their largesse goes to a big company. Indeed, since the large company has readier access to a range of alternative funding options, a need for government support is more likely the result of deep-seated competitive weakness than temporary shortage of funds which can so easily cripple a smaller business."

Not exactly. The government is the implicit guarantor for these businesses at all times, and legislation has been passed favoring these businesses over time. It certainly can mean that they are competitively weak, but the system operates for the benefit of the weak and strong large businesses alike. It's a kind of insurance policy.

"That is true of the carmakers, whose problems are of much longer standing than the current downturn. In automobiles as in many industries, economies of scale are technological, the diseconomies of scale human. Human factors in business are generally more influential than technological ones in determining the long run fate of a company."

The automakers have been a major part of this system.

"The memory of a meeting in one of Britain’s largest companies – now no longer so large – is engraved in my memory. We discussed how best to persuade the regulatory authorities of the cost advantages arising from the company’s size. But the room was crowded with people who had nothing substantive to contribute. They were there to defend and advance their political position in the corporate hierarchy. The meeting itself demonstrated that the arguments we were presenting were false. Politics overrode productivity."

But Politics is important. So is Political Economy, which includes this kind of messy exchange between politics and productivity.

"As has been true in Detroit. Arrogant, complacent and only belatedly sensitive to competitive pressures and changing customer needs, the big three have been in relative decline for half a century."

True. That's why they've been lobbying congress throughout this period.

"But there really are economies of scale in political lobbying. The cost of presenting your case is independent of the size of the benefit you seek. The larger the business, the more likely that legislators will see constituency interest or political advantage in being helpful. Big companies have government affairs departments but for small groups the cost of access is prohibitive. Only large companies have access to the sharpest shooters."

That's the system.

"Too big to fail, but big enough to exert political influence. The malign consequences are evident in many areas of public policy. Large media and software companies write intellectual property rules, while the interests of users go unrepresented. Big pharmaceutical and defence companies employ thousands of lobbyists. Consumer interests come a distant second to producer interests in the formulation of trade policy. In the past two decades the financial services industry has become the most powerful and effective lobby of all. The cash contributed to political campaigns has now been repaid many times over from the public purse."

That's because lobbying is an investment.

"But few things corrode business efficiency and effective markets more insidiously than the discovery that it is more profitable to win the favour of politicians than to win the approval of customers. In Italy, and in some other European states, an inefficient large-business sector is parasitic on the vibrant small- and medium-sized enterprises, which are the mainstay of the economy."

That's true.

"The problems are worse in Russia and in many potentially emerging economies. In these countries, the nexus between the political and business elite undermines both democracy and business efficiency."

That's not good to hear.

"The populist trustbusters who framed anti-monopoly legislation more than a century ago feared that the cost and technical advantages of large companies would be more than offset by damage to economic efficiency and pluralist institutions from the political power they might acquire. These early trustbusters were right."

I agree. But the work to be done to dismantle this current system is going to be long and arduous because, again, that is and has been our system, and it seems very resilient and impervious to challenge and change at the moment. We need to plan and prepare for the the long run, and seek small victories that will allow us to get some important things done under the radar, so to speak, and before the system realizes that, this time, it really has a challenge from people who want a smaller and more effective and efficient and representative government. But anyone who says that they're surprised by the government response in this crisis needs to get out a bit more into the real world of Politics and Political Economy.

"In truth, neither party is nor can be a pure expression of ideology in the American electoral system."

Patrick Deneen with an interesting post:

"In truth, neither party is nor can be a pure expression of ideology in the American electoral system. This is actually a good thing - it is a major contributor to the American resistance to ideology - but it can sometimes be ignored or wished away during election season, when ideology becomes more evident (exacerbated by our Primary system) and reified above all in symbolic politics. It has been made worse - much worse - by the contemporary emphasis on policy-making through the Courts (liberal bear a particular responsibility here), that institution through which ideology can be most coherently advanced. Conservatives have themselves in turn concentrated on achieving victories in the Courts, and to do so have increasingly adopted their own forms of ideological reasoning in order to get a hearing within a legal system that only recognizes a such reasoning. Many of our conservatives today speak like Kantians rather than like Burkeans or Chestertonians. Certainly there are ideological tendencies and major policy differences between the parties, but what this most recent election has made possible - and what I hope will occur - is the possibility of at least modestly disassociating conservative commitments from easy identification with the Republican party."

I agree with this. Political Parties are coalitions comprised of:

1) Policies
2) Interest Groups
3) Ideologies
4) Cultural views

There's no one to one correlation between these elements. A conservative could feel comfortable with some of these elements in the GOP, and not others. Also, I don't know enough about Chesterton, but Conservatives now are not Burkeans.

"Many have become lazy, or simply habituated, into thinking that they are the same, but enough evidence can be gathered from recent political history to suggest that conservative ends are alternatively pursued and betrayed by both Parties. Those who maintain a deeper philosophical and theological allegiance to certain conservative beliefs should be wary of this close identification with one party, and even the dangerous ideological belief that one's goals can be achieved through a political program. Frankly, the truth is that the conservative view is likely to be a permanent minority voice in modernity, and thus must maintain the capacity to be poised in opposition, and to work - where possible - with the dominant forces. This means developing the difficult capacity to be somewhat apart, yet avoid complete disengagement."

I would extend this to liberals, moderates, and libertarians. No group should see their allegiance to a political party as anything more than a convenient compromise in order to get certain policies actually implemented.

"Social conservatives should understand that in American politics - and all modern politics, really - they will never have a true "party." Particularly in modernity, a time shaped to repudiate many of the basic commitments of conservatives (indeed, a time that gave rise to the peculiar beast called "conservatism") there will always be a degree of political homelessness. Conservatives should aim to achieve some political ends, but understand that those aims will always be partially or imperfectly reflected in the commitments of all modern parties, and should seek, where possible, to reinforce or extend those commitments where they can be found. There is an odd willfulness on the part of many so-called conservatives to damn every action and word of Obama even as they excuse the actions of Bush. This reflects, in my mind, the sad reality that the Will to Power has deeply infiltrated itself within some thoughtful people who ought rightly to be the greatest opponents of that Nietzschean ambition. "

As I say, this should be extended to libertarians. I disagree about Nietzsche. The Will To Power is a way of being, in my opinion. Strictly speaking, it is not, in his view, an ambition, but an explanation.

As Johnson said:
Dr. Johnson now said, a certain eminent political friend of ours [Burke] was wrong, in his maxim of sticking to a certain set of men on all occasions. "I can see that a man may do right to stick to a party," said he; "that is to say, he is a Whig, or he is a Tory, and he thinks one of those parties upon the whole the best, and that to make it prevail, it must be generally supported, though, in particulars, it may be wrong. He takes its faggot of principles, in which there are fewer rotten sticks than in the other, though some rotten sticks to be sure; and they cannot be well separated. But, to blind one's self to one man, or one set of men (who may be right to-day and wrong to-morrow), without any general preference of system, I must disapprove."
Boswell: Journal of a Tour to the Hebrides

"The most extreme (and probably effective) solution would be a full guarantee of all sorts of bank debt. "

Bronte Capital gives us some interesting insights into Citi and other matters. You need to follow his whole post, so I'm just going to do what every sensible person does and quote the sections that buttress my own arguments:

"Now the problem is that no matter how many times Pandit says that Citigroup is well capitalised nobody will believe him. In answer to the Brad DeLong question – the company told lies about its mortgage book – which compounded the lies about the dodgy CDO product they sold. The lies about the mortgage book totalled $20 billion on say $43 billion of optimistically valued assets – and those lies reduced the value of Citigroup by $200 billion because they removed the trust in Citigroup.

It is one of those ironic things that when financial institutions lied in 2006 the market seemed to believe them. When they tell the truth now, nobody will listen. "

I find this an important point. Right now, we're in an inverse universe from just a year or so ago, where exuberance has become panic, overly positive credit ratings have become overly conservative, etc. Citi, I contend, didn't really need to be bailed out, but, given the current mood, it became inevitable. After all, as I've said, it was implicitly guaranteed.

"The most extreme (and probably effective) solution would be a full guarantee of all sorts of bank debt. The problem of course is that is hugely risky for the taxpayer. My view – and I think the only way in which such a guarantee is viable – would be that if the taxpayer takes the risk they should also get the upside. That is full nationalisation. The advantage of full nationalisation is that since the system is actually solvent (but illiquid) the government will make a profit out of it. That is fine. Take the risk – make a profit – it’s the capitalist way. Incidentally the Sheila Bair approach of confiscation from the equity holders and subordinate debt holders works fine in this scenario. Indeed the sub-debt holders should wear it – but they will still be willing to lend again because they will be lending again to the government. In a full nationalisation I see no reason for Sheila Bair to resign. (Her tenure in that position would not threaten the financial system.)

I suspect that wholesale nationalisation is the cheapest (and most sure) way to end the financial crisis. But it would be difficult to find a Deputy Secretary of the Treasury for Citigroup (and Bank of America, JPM etc). Still as I think the system is eventually solvent if the government nationalised pretty well the whole system as it failed then the government would make a shocking profit. It would not be the first time – Norway made such a profit.

But I am not sure that the American politic is ready for a wholesale nationalisation of the financial system. Indeed they are determined it seems not to control financial institutions. If you are not convinced of that see the Deal Professor’s wonderful piece on who controls AIG."

This was my position. Paradoxically, but I think that it's becoming obviously more clear, this would have been cheaper, safer, and would have led to the government being removed from this ownership sooner. Why not a free market plan? Because the people with the money don't believe in it, and would have melted into thin air at the thought of not having a government intervention. With all do respect to Casey Mulligan and Gary Becker, your theories are purely Economic in this case, not based on Political Economy and Politics.

"Robert Rubin racks his brain about how he would have done things differently. Well one thing he would have done differently is get Citigroup to remove the culture of obfuscation – the culture that allowed it to be perceived as if it were lying even when it was telling the truth. The problem is that even Robert Rubin doesn’t have enough uncashed integrity to save Citigroup. Even Robert Rubin. In a world where Berkshire credit default swaps are going skyward because people do not believe that Warren Buffett has no collateral requirement Robert Rubin’s reputation ain’t going to count for much. "

This is the final point I want to make. This is Political Economy, where even known wizards cannot overcome fear and aversion to risk, and point people towards the fundamentals. People don't behave like models in the real world in normal times, although it's close enough to make the models useful. In times like these, you're better off listening to philosophers and other odd ducks who specialize in the nature of Human Agency.

"But the international-based capital regulations opened loopholes that banks could drive a truck through. "

Arnold Kling also read the paper by Brunnermeier, so read his analysis, which is interesting as always. Here's a comment I really like:

"My opinion continues to be that you cannot prop up until you clean up. The first order or business is to shut down the weakest institutions. Only then should you look around and decide about capital injections and bailouts. We don't need a chief rescuer. We need a head janitor. Think of the financial sector as a bunch of dishes sitting on shelves during an earthquake. Bernanke and Paulson are running around trying to hold the shelves in place. I think we would be better off letting a lot of the dishes fall and then tossing them into the trash. You can understand why my view could be unpopular, and it also could be wrong. But so far, the stock market isn't telling me that Bernanke and Paulson are right."

Now, I understand that, at some point, we have to do this. My rationale for supporting a Swedish Type Plan was for the government to take over these banks, and either kill them, or refit them for private service. I still believe that this plan would have been cleaner in a whole, by now obvious, number of ways.

However, now we are dealing with Bagehot on steroids, as I think Bob McTeer said. In terms of Political Economy, we have a new administration coming in. So, I can see Kling's point as the goal, but I simply think that, in terms of Politics and Political Economy, it's going to continue to be a very messy cleanup. I include the auto makers in this.

Please remember that, for me, we are mainly combating fear and aversion to risk, and so we will have to make concessions to the realities of taking on these powerful forces, and understand that sensible economic and political points might have to be breached in order to get through this. None of this means that we change our basic understandings of economics and politics, which, for any libertarian, means a focus on individual liberty.

"The goal of the TARP was primarily to avert financial meltdown and chaos in the credit markets, not to spur massive increases in bank lending"

James Suroweicki with two good posts:

"Tyler Cowen, I assume, opposes any bailout. But he articulated perhaps the best argument for it a couple weeks ago in The New York Times, when he wrote:

Rebuilding confidence might seem a small matter, but it is not. The truth is this: America is a wonderful and magnanimous nation when it is a winner, but Americans are not used to losing and Americans are not used to panic.

Often we respond to negative events badly, so we need to be especially careful when we are in a losing or risky position.

Very bad events can cause a panic among the citizenry or its leaders, which translates into subsequent bad decisions.

It’s important that policymakers and pundits not fool themselves. Americans are not prepared for G.M. and Ford to go bankrupt. At this point, their failures would be “very bad events,” and they would cause people to panic. If you’re ideologically opposed to the very idea of bailing out private corporations, then opposing this bailout makes sense. But if you’re making a risk-reward calculation, then it doesn’t."

I agree, and consider this an argument based on Politics and Political Economy. It's a good one. Nevertheless, I have articulated conditions for this loan.

Another post:

"Testifying before Congress on Friday, Assistant Treasury Secretary Neel Kashkari, the man in charge of the TARP, said of the $700 billion plan: "It's not a stimulus, it's not an economic growth plan. It's an economic stabilization plan." Unlike Felix Salmon, I think Kashkari's distinction between stabilization and stimulus is actually a useful, and accurate, one. The goal of the TARP was primarily to avert financial meltdown and chaos in the credit markets, not to spur massive increases in bank lending. The hope was, and is, that doing the first would help with the second, but the real problem that had to be dealt with was bolstering the markets' confidence in the health of the country's major financial institutions. (As I've said before, I'm the only person who still thinks that the original TARP plan to buy toxic assets would have helped do this, if it had been done in combination with recapitalization.)

But in arguing that the goal of the TARP is stabilization rather than stimulus, Kashakari actually inadvertently helped explain why it would be reasonable to use TARP funds to bail out G.M., as Democrats advocate. The Bush administration opposes doing so, because, it argues, Congress intended the bill solely "deal with what is an ongoing credit crisis in our financial sector." If the administration thinks that a G.M. bankruptcy would not significantly exacerbate the credit crisis, it's simply not paying attention to what people in the equity and credit markets are saying. In fact, from the point of view of stabilizing the markets and reducing people's risk aversion, giving G.M. and Ford $50 billion is probably the best investment the government could make right now."

So, why don't I support TARP, even as described? Because I believe that a credit stimulus plan would have been a better use of the money and, quite frankly, be a better economic stabilization plan. The Swedish Plan would have been even better, for reasons I've argued elsewhere. So, one can agree that TARP has had some success, and yet still be an awful plan. In the case of the Big 3, I want the conditions earlier enunciated to be met, or no deal. I believe that Suroweicki has a much lower standard of acceptance than I do.

"You can say that rent-seeking is an unfortunately inevitable by-product of having the government do good"

Here's an excellent post by David Boaz on Will's post:

"Rent-seeking, economists call it–using the government to get privileges, such as a grant, a subsidy, a tariff, or a restriction on one’s competition. It’s one of those things we free-marketers rail against all the time, in papers on free trade, corporate welfare, government spending, and virtually every other activity of the modern state. More broadly, we point out, as Will did, that it’s impossible to have nonpolitical allocation of trillions of dollars of taxpayers’ money handed out by government. If you don’t want the powerful to lobby and manipulate in order to get their share of the money, then leave it in the marketplace. If you put it in the hands of politicians, expect political allocation."

I agree with this. My disagreement with David would probably be that I believe it to be inevitable that we will have some of this, as long as people pay taxes, and there is any government at all. That's what I call Political Economy and Politics.

"And it’s not just corporate welfare. All the elements of the liberal interventionist state are both product and generator of rent-seeking. You can say that rent-seeking is an unfortunately inevitable by-product of having the government do good. But to want a $3 trillion federal government with vast regulatory powers that isn’t awash in rent-seeking is, as Milton Friedman wrote, like saying “I would like to have a cat, provided it barked.” Cats meow, and government money flows to those with political power."

Here I agree with David as well. I want a government that is much smaller, although I am not an anarchist or believer in just a military, or some such fantasy. But I think that there needs to be a road map to getting to this smaller state, based on Politics and Political Economy. In other words, a map of the U.S., not Middle Earth, however much we, okay, I, would like to live in The Shire. That's my disagreement. It's practical, not theoretical.