SkepticblogSkepticblog logo banner

top navigation:

The Welfare Queens of Wall Street

by Michael Shermer, Oct 24 2008

Like millions of Americans who invested their retirement accounts in the stock market, I was relieved that the mere suggestion of a governmental bailout of $85 billion for the insurance giant AIG reversed the market arrow up for two days. Relief turned to despair the next two trading sessions, however, until Washington bureaucrats promised another $700 billion for the financial industry in general, leading to another couple of happy trading days and sleep-filled nights. When the plan was scuttled the market crashed again, until it was finally passed, at which point I thought we were headed for greener pastures. Alas, it’s been red-filled days on the iPhone stock ticker ever since. (And all of this market anguish and elation happened before Congress approved the allocation of even a single dollar. That’s the mind of the market for you — it is as much psychology as economics.)

But then it dawned on me: since when is the government in the business of protecting corporations from self-inflicted high-risk losses? The whole point of capitalism is risk taking to make a profit. Low risk taking typically results in slow and steady growth, whereas high risk taking historically produces both high profits and steep losses. By entering the business of risk protection, the government is sending a clear signal to the market: don’t worry about taking big risks with your own and investors’ money; we’ll bail you out. In profits we’re capitalists, in losses we’re socialists.

Welcome to the Welfare Queens of Wall Street. This is corporate welfare, and once the $700 billion are allocated every employee of all the corporations receiving our money will be on the dole. (Don’t believe the caveats that this is a one-time fix for a once-in-a-lifetime catastrophe — precedence is everything in government handouts, and nearly every government program began as an emergency fix.)

The CEOs and COOs of AIG and all the other Wall Street financial giants in receipt of this corporate welfare will be welfare queens. And like the welfare queens during the reform movement of the 1990s, they should all be put on a very public welfare-to-work program in which their salaries (I recommend that they be paid minimum wage to start) are tethered directly to the amount of money paid back — with interest — to the people who earned the money in the first place (us taxpayers). The corporate leaders could be even be featured in a new Fortune 500 list, ranked by how much of our money they have returned.

Contrast the Bernanke/Bush plan with the actions of billionaire investor Warren Buffet, who put his money where the bureaucrat’s mouth is by committing $5 billion of his company’s assets in Goldman Sachs stocks. This investment gave the company’s stock a bump of nearly 20 percent in three days of trading, and boosted investor confidence in the market as a whole. This is different from what the feds did in two important ways.

One, the $5 billion is Buffet’s property and as such he can do whatever he wants with it. Two, we are confident that one of the greatest investors in history is basing his risk assessment on sound fiscal reasoning. Contrast this with Ben Bernanke’s comments to Congress, in which he called the $700 billion “not an expenditure, it is an acquisition of assets.” No it isn’t. You cannot acquire assets with other people’s money that you’ve confiscated without their permission. That’s called theft. When Warren Buffet invested in Goldman Sachs he was doing so in order to make a profit for his company. That’s called investment. It is fully moral because it is his money and his risk. You can voluntarily join Buffet in the risk by purchasing stocks in Goldman Sachs (or any of Buffet’s other corporate holdings), but Warren Buffet will never compel you to contribute to his holdings.

A short lesson in economic civics: the primary job of government is to protect our private property from being plundered by foreign powers and domestic criminals (through the military and the police respectively), to resolve disputes over property (through the courts), and to protect our civil liberties (another form of property) by enforcing the Constitution and Bill of Rights (through legislation). The government does not produce property, so in order to pay for these services (military, police, courts, legislature) it taxes us. According to the Oxford English Dictionary, a tax is “a compulsory contribution to the support of government”. A “compulsory contribution” is an oxymoron. It is compulsory confiscation, and we are all about to have $700 billion confiscated from us. For what? For protection from foreign plunder or domestic crimes against our property? No. For resolving property disputes? No. For defending our Constitutional rights and civil liberties. No. For covering the losses of corporations suffering from taking undue risks? Yes.

So, we are all about to have $700 billion confiscated from us in order to buy homes and mortgages (and the financial instruments tied to them) that are so worthless that even our most stable and endowed financial institutions could not retain their value. At least Bernanke recognizes the risk, as he told Congress: “That does expose the taxpayer to significant risk, there’s no question about it.”

Behavioral economists have demonstrated experimentally and experientially that humans are normally very risk averse. Specifically, the research shows that losses hurt twice as much as gains feel good. That is, in order to get someone to invest their hard-earned money you have to convince them that the potential gains are twice as much as the possible losses.

Why didn’t risk aversion work in the housing industry? Two reasons: short term thinking and reduced risk signals. First, potential home buyers and investors mistakenly assumed that the increasing trend line in housing prices would continue unabated indefinitely. Two, loan officers and their financial institutions intentionally and deceptively reduced the normal risk signals sent to potential customers in hopes that the artificial bubble would not burst. It did, and here we are.

Like everyone else, my emotional brain would love it if the government bailout program drives the market back up and my retirement account recovers. But that’s just greed and short-term thinking on my part. My rational brain knows that such a bailout program sends the wrong risk signals to the market. Why? Because the government is not in the business of risk management because only the people who produce the wealth can properly assess how best to risk it in future investments.

The Buffets of the world can do that. The Bernankes of the world cannot.

83 Responses to “The Welfare Queens of Wall Street”

  1. Rob says:

    While this is a pretty good libertarian rant, I’m not sure if you could say it falls under the auspices of pure skepticism. To decide “Is the 700b bailout good?” involves predicting the behaviour of a complex and chaotic system as well as making value judgements about the wlefare of several groups and the role of the government. Saying that the 700b bailout is bad because it represents a moral hazard is a political viewpoint, based on value judgements of social issues, and not a scientific one.

  2. Phil says:

    Wow. Finally a place to direct my friends and say, “I TOLD YOU SO!” LOL

    Thank you Mr. Shermer.

  3. bigjohn756 says:

    Amen and Hallelujah! Michael, your argument sounds like
    music to my ears. Unfortunately, it makes too much sense to
    mean anything to those readers who are so inundated by their
    dogma that they cannot think. As I am sure you know, there
    are many people who cannot conceive of any lifestyle which
    is not dictated primarily by the government. I am sure that those
    folks are fully aware of how efficient and effective our
    government already is.

  4. Aaron Helton says:

    There’s also the fact that when many of these obscure investment vehicles were created (the ones vested heavily in mortgage backed securities, especially the subprime kind), average investors didn’t understand enough about them to see the risk in them. I’m not trying to let anyone off the hook here, because homework is homework, but lots of people were willing to ignore this cosmic game of hot potato while the returns were good, and many of them didn’t do the research necessary to understand where their money was going.

  5. AndyD says:

    And how many people do you expect will end up in prison as a result of dragging the whole world to the brink of financial disaster (if not over it)? My guess, close to none.

  6. Zytheran says:

    “the primary job of government is to protect our private property from being plundered by foreign powers and domestic criminals”

    Couldn’t it be argued that having foreign powers buy out your companies and obtain a controlling interest when they are vastly undervalued due to an irrational and fear driven market is them same as plundering via war, especially in a competitive market? Wouldn’t it be in the interest of foreign companies to buy out the rights, patents and licenses to certain products currently produced in the USA to obtain a monopoly? Take over the vast agricultural farms, mines and factories?
    In that case is protecting your companies important enough for the bailout?

    (BTW, I’m not sure if you are saying scrap the bailout and cop it on the chin? Can you clarify? I have been saying this, cop it sweet, take the crippling hit and then go on but most of my friends don’t agree. The argument they give is that it is in the greater good to bail them out but I remain unconvinced.)

  7. miller says:

    I don’t know about this. I don’t think the point of the bailout is to protect corporations from their self-inflicted losses. The point is to protect the rest of us. Even if I’ve never invested in housing, I’ll still lose when the entire market goes down.

  8. BillSmithAZ says:

    Excellent post. I’d only pick one nit:

    We the taxpayers are not having $700 billion confiscated from us. America’s public coffers don’t have that kind of booty to plunder. We’ll borrow the money from other nations.

    Eventually, we’ll need to pay that money back. With interest.

    So the $700B that we’re ‘contributing’ only covers the principal. Add in the interest, and we’ll be ‘contributing’ SO much more…

  9. FrankZA says:

    Great article Michael, thoroughly enjoyed it. Although I am not an American, I think it is absurd that the people that orchestrated the ridiculous risk-taking and have made enormous profits from it are not held liable for their actions. They will probably still pay themselves massive bonuses. I would like to see them take more personal responsibility and effectively work for free (they can afford it) until they have paid the tax payers their money back.

  10. Tyler says:

    I didn’t expect to find such a politically themed entry on a skeptical blog, but it’s a welcome surprise. Concerning the bailout, I couldn’t agree more with you, Michael. I look forward to seeing more such entries.

  11. Dmitry says:

    Humans are risk-averse when it comes to gains, but they are risk-seeking when it comes to losses. Accordingly to psychological experiments, most people will prefer a gamble involving a 50 percent probability of losing $100 to a sure loss of $50.

    Buying a house was perceived by many as the best way to protect of their savings from inflation, so it was perceived as avoiding losses with a minimum risk. Another reason is the herd mentality — when you see that so many people buying houses and that early investors have already profited from that then temptation becomes irresistible.

  12. Tokoloshe says:

    >>Specifically, the research shows that losses hurt twice as much as gains feel good.<<

    Could this be due to the fact that for every 50% loss you make you need to make back a 100% before you reach break-even again.

    Good luck to the Americans while they make the transition to a nanny state for the rich and re-inventing slavery for the poor….

  13. Buck Field says:

    Hello Micheal,

    “Warren Buffet will never compel you to contribute to his holdings.” This is true insofar as Buffet hires Congressional lobbyists to take care of this rather than himself.

    The “economic civics lesson” prompts me to recommend you read the debates of the Constitutional Convention, where the risks of democracy were being analyzed relative to popular vote, with the primary role of government was defined as “to protect the majority of the opulent from the majority.” Therefore a system was established to prevent “those who secretly sigh for a more equitable distribution of life’s blessings” from acheiving this through voting – although the appearance of democracy was considered vital to make the system operate.

    Irrational confidence is what believers in Capitalism, Imperialism, Catholocism, Astrology, etc. share with regard to their preferred cognitive framework. I’m concerned your blog post betrays no awareness of this tendency.

    The evidence is to the contrary: e.g.: the extraordinary claim Buffet “produces” wealth.

  14. Alan Hoch says:

    There is a basic fallacy at work here, I believe — namely the idea that this money has been “confiscated”. The money comes from our taxes which in turn is the money we pay in exchange for having a peaceful society that gives us numerous benefits. You can’t get something for nothing. Paying for things like the roads, police, or just a peaceful country where business can be conducted in the first place is a RESPONSIBILITY, not a case of “confiscation.”

    Complain all you want for how the money is being used, but not that it is being taken in the first place.

    As for your line….

    “Because the government is not in the business of risk management because only the people who produce the wealth can properly assess how best to risk it in future investments.”

    ….isn’t this attitude the whole reason for this mess in the first place? The people “producing the wealth” failed so miserably that the rest of us have to step in to prevent another Great Depression. After that how can anyone argue that such individuals should be left to make judgments free of any requirements to larger society? Yes, we need to give investors a proper measure of freedom to make choices, but clearly there have to be basic regulations to help guarantee they stick to some reasonable standard of responsibility. The failures of the old system make this obvious.

  15. James Severin says:

    I thought that the bailout plan wasn’t going to buy up these toxic assets, but buy preferred stock in the banks giving the government say in how banks are going to be run and that was how they were going to protect the tax payer.

  16. Robert DeCaire says:

    I’m sceptical. I have to wonder what will happen to the American economy if the government does not artificially prop up these financial entities. If there is a significant risk of a full-scale economic depression as a result of devaluation of investments due to this widespread high-risk investment fiasco, then the government has a responsibility to protect its citizens.

    I’m a bit concerned that on my first visit to Skepticblog I find something less like a reasoned sceptical position on the economic situation and more like a libertarian rant. Ideology has no place on a sceptic forum.

  17. patrick says:

    Someone should take a skeptical look at the connection between libertarianism and skepticism…Always seem to find them together. I am a skeptic, though I would not consider myself part of the ‘skeptical movement.’ The libertarian streak is a big turn off.

  18. jackd says:

    when many of these obscure investment vehicles were created (the ones vested heavily in mortgage backed securities, especially the subprime kind), average investors didn’t understand enough about them to see the risk in them.

    Average investors had pretty much nothing to do with it. The people gambling on those derivatives were not average investors, they were groups within the investment banks, insurance companies and other financial organizations. These people were paid enormous sums and even larger bonuses to create and trade those instruments. They, and their managers and boards of directors, should have understood the risks. So why didn’t they?

    One reason – my pet theory – is a combination of herd mentality and competitive pressure. If I’m a big financial manager and I see my competitors making huge returns on credit default swaps, I’m going to have a hard time convincing myself (much less my CEO) that even though they are making millions for themselves, hundreds of millions for their firms and billions for their investors, they’re all fools who will soon be out of work.

    Not only that, but if the underlying securities still carry very high risk ratings from Moody’s and S&P, I’ve got to believe that not only are my competitors fools, but so are the rating companies.

    The success of derivatives trading drove demand for securitized loan packages, and that drove demand for more loans to package. Once the system got going, there was pressure down the line to finance more and more mortgages, which led to still more high-risk financing and re-financing. Yes, the lowered federal standards for Fannie and Freddie played a role, but these were cracks in a dam that was overtopped by demand and undermined by the end of rising home values.

  19. wasg says:

    I think there are a couple of other ways the US Government can produce $700b without “confiscating” it from citizens: they can simply print it (with the attendant risk of inflation), or they can borrow it from other countries.

  20. Devil's Advocate says:

    Along with (a) My Favorite Color (b) The Best Rock ‘N Roll Guitarist, and (c) Who’s The Hottest Hollywood Actress?, please add My Personal Politics to the list of topics on which I could care less what a given skeptic’s opinion might be.

    To have an informed opinion requires one be informed. Who among us can say they’ve got the ‘real story’, all the facts, and can speak from authority – as opposed to having picked from among whatever our entertainment industry has decided is the truth of things?

  21. Dr. T says:

    Skepticblog is, as its name clearly states, a blog. It is not a scholarly journal of skepticism. When Michael Schermer writes about government, finance, and politics instead of skepticism, that is no justication for complaint by readers such as Devil’s Advocate. One glance at the headline informed us that this post was not about debunking ID or poltergeists, and we could have skipped it if we wanted to read only about skepticism.

  22. beche-la-mer says:

    @ Devil’s Advocate,

    Why is it not skeptical to be skeptical about the justification for the government’s use of taxpayers money?

    I happen to agree with Michael Shermer that the governments of your country and mine are possibly making a mistake by not allowing Wall Street or the Australian stock market to underwrite their own risks. Our leaders have been telling us for years that market forces are fair and just, that we shouldn’t expect government handouts, that a strong economy is a strong society, and all those other capitalist maxims.

    It’s a simple case of double standards, and I’m skeptical that this “finger in the dyke” type of economic patch will have the desired effect in the long term.

  23. Devil's Advocate says:

    “Why is it not skeptical to be skeptical about the justification for the government’s use of taxpayers money?”

    Because, as I stated, Shermer, me, and you are fooling ourselves if we think we have sufficient info on the whole bailout thing to opine on it with any authority. That congress or the media know or revealed all the necessary facts is ludicrous. Everybody here got their info on the bailout from the media. Pick a media news outlet and you’re picking a particular bias. What remains here is people sharing opinions based on incomplete and sometimes false information.

    I have no problem if others enjoy it. I merely posted my opinion that I don’t care what Shermer, Novella, Plait, et al, think about matters of opinion, particularly when the information available can only be incomplete, rendering the shared opinions incomplete and something quite less than informed.

  24. fatherdaddy says:

    I find it interesting that people complain about a libertarian attitude being presented in a skeptical blog, but, never have I heard anyone complain about a socialist attitude being presented in a skeptical blog. Before you complain “I’m not a socialist!” you need to realize that government interference in our economy is socialistic, so, get over it. I’m quite tired of hearing how my opinion is invalid as being skeptical because you don’t agree with it. How many of you think the government should define what evolution is? Where would we be if government decided it was in our best interest to believe in Jesus? However, many of you believe the government should decide how we should exchange our money.

    Alan Hoch, did you give the IRS a chunk of your paycheck willingly? I’ll let you know they did not even ask me for mine. That is called confiscation no matter how you look at it.

  25. Alan Hoch says:

    Fatherdaddy — Permission is implicit because you live in the United States and benefit from its programs. You have gained something and taxes are your way of paying back. Treating taxes as “confiscation” is just another way of suggesting that one should benefit from one’s society for free — e.g. an excuse to ignore your part of our collective responsibility. Also known as freeloading.

    Talk about welfare queens(kings)!

  26. Timmeh says:

    Hey, skeptics are allowed to have political opinions!

    Being a skeptic doesn’t mean you have to take vow to only talk about boring stuff for which there is only one right answer.

    I’m not a libertarian myself, but it’s certainly possible to be skeptical and libertarian.

    I guess I’m more of a utilitarian. The ideal libertarian world where freedom is maximized (in theory, in practice anarchy doesn’t strike me as a good idea) doesn’t necessarily maximize the value I want to maximize, happiness. But a certain amount of freedom is undeniably an important part of being happy.

    But the problem is human nature. If everyone voluntarily treated everyone else well and respected their rights, libertarianism would be great. Unfortunately, they do not.

  27. Devil's Advocate says:

    Of COURSE skeptics are allowed to have political opinions. We are also allowed to have assholes, but does it further skepticism for us to have to smell them all?

    Everyone with a political opinion thinks he actually holds political fact in hand. Go ahead and try to use skepticism to prove that liberalism, or conservatism, or federalism, or socialism, etc., etc., or this ideology or that ideology is ‘better’ than the others.

    This new blog purports a goal to unite skeptics. Allowing skeptics who apparently believe their expertise in skepticism translates into another field – politics – brings the risk of dividing skeptics… along lines of political opinion.

    How do skeptics react when a purveyor of woo pretends his expertise in one field translates into another, like when a fundy scientist with a degree in mathematics declares evolution is a myth based on his study of the biology?

    Shermer holds zero expertise in politics, just opinions like everyone else.

    There must be 100 million sites devoted to political wrangling. For Dog’s sake, please leave just this one blog devoid of personal politics*!

    *Exception: When woo or unscientific notions impact politics or government, making skepticism relevant.

  28. Damien says:

    “In profits we’re capitalists, in losses we’re socialists.” ~

    Dude, the whole monetary system has been socialist since 1913. One of the ten planks of communism:

    “5. Centralization of credit in the hands of the State, by means of a national bank with state capital and an exclusive monopoly.”

    We call it the Federal Reserve which is a credit/debt system nationally organized by the Federal Reserve act of 1913. All local banks are members of the Fed system, and are regulated by the Federal Deposit Insurance Corporation (FDIC).

    Our capitalism is an illusion.

  29. Patrick says:

    Michael,

    I would think the Libertarian, laissez faire attitude should be in a state of shock not smugness at this point. Haven’t you heard, John Galt is dead! Just goes to show, just because one doesn’t have religion about God, doesn’t mean they don’t have it with respect to other beliefs even if they are the king of skeptics.

  30. J. Gravelle says:

    I can think of no better purveyor of misinformation and il-logic for Mr. Shermer to cast skeptical aspersions upon than the institution of government, with perhaps the exception of the parties who run it.

    The argument in “all those other sites” (with the exception of mine) usually boils down to whether we should drive the bus over the cliff to the left or off the bridge to the right.

    Whether we should re-think the utility of the bus itself is a fine question for skeptics to ponder, and this is a wonderful new forum to do it in…

    -jjg
    DailyScoff.com

  31. Thomas Spillman says:

    As Milton Friedman, one of my favorite
    economists said, “there’s no such thing as
    a free lunch”.

    In a free market, investments increase in
    value and decrease in value, depending upon
    what someone is willing to pay for the
    particular investment.

    I was not adversely affected by the recent
    decline. At my age (78) I avoid risky
    investments. When I was younger I took
    more chances. Now, I’m careful.

    When I was working, back in the 1950’s
    when I tried unsuccessfully to get out of
    Social Security when realized what a bad
    investment it was (and is!), the
    Dow Jones Industrial average was around
    500. Even after the “crash” it still is
    about 9000 now. Not a bad return for my
    money.

    The “why” of all this discussion is, I
    think, an intersting question.

    Perhaps some of our “experts” can answer
    it!

    Regards…

    Tom

  32. Chey says:

    Re mortgages and subprime lenders – we had fair warning. Note the date.

    NY Times Business
    Fannie Mae Eases Credit To Aid Mortgage Lending
    By STEVEN A. HOLMES
    Published: September 30, 1999

    http://tinyurl.com/3jdn9e

    Excellent job, Michael.

  33. Richard Baldwin says:

    To Alan Hoch,
    You are the one commiting a fallacy: I consider it confiscation when the government bails out people that took bad risks that I didn’t. Why should stupidity be rewarded? I think Shermer was right on the mark when he said, “My rational brain knows that such a bailout program sends the wrong risk signals to the market. Why? Because the government is not in the business of risk management because only the people who produce the wealth can properly assess how best to risk it in future investments.”

    In other words, how does this bailout discourage such risk taking in the future? It doesn’t! It only encourages it.

  34. Luis Villalobos says:

    The article fails to capture the core problems – when Freddie and Fannie were purchasing mortgages WITHOUT considering the risk of default, then that incentivized the entire pipeline to issue bad mortgages (and make their fees without any risk). Couple that with Congressional pressure on banks to make loans to low-income people, and you get exactly what happened.

    The problem was compounded by synthetic credit default swaps, where people failed to consider the risks (eg that Lehman would default) and took huge gamble for tiny premiums. A revisiting of Long Term Capital.

  35. Neal Battersby says:

    The missing piece of analysis in your argument is that through the FDIC we taxpayers are already on the hook for virtually all bank deposits. IF bank lending was so bad as to temporarily imperil these deposits; and IF the bailout will improve economic conditions while preventing an even greater loss of taxpayer funds, then there is perhaps some justification for it…in spite of the moral hazard arguments. The waste, graft and corruption inevitably involved in such political deals means, however, that no such justification exists for a bailout of GM or Chrysler, etc.

  36. Randy Dutka says:

    IF it is true that Fannie and Freddie were pushed by the Government to make low quality loans, then the Government is responsible for fixing the problems they caused.
    However, the key result of all of this is:
    Economists, financial analysts, stock brokers and their ilk are the biggest fraudsters of our time. Stop picking on fortune tellers – who only harm a small number of the extremely gullible. These financial frauds have caused way more damage and are extremely well paid for it.

  37. Steve Dooner says:

    The best moment in any of this is when Alan Greenspan admitted that the Ayn Randian haze he has been living in was an entirely faulty world view. The market does not regulate itself by an invisible hand of enlightened self-interest.

    Jared Diamond’s portrait of the Easter Islanders is a more accurate picture of our Wall Street than anything in Wealth of Nations.

    The market must receive counter pressure from government agencies and regulatory commissions if we are to avoid this happening again. The question is how much pressure is needed before it has a retrograde effect on commerce.

  38. Robin Collins says:

    Presumably others have made a stab at challenging the libertarian arguments Michael makes here. In case not (who can read all of those emails!?) let me just pose a couple of those core questions usually tossed at libertarian assumptions.

    Michael, you assume that the system is legitimate as long as it doesn’t allow government to “steal” taxpayers money to bail out… the market. The government is there primarily to enforce laws protecting…. private property, you say.

    I think there are good arguments supporting your point that the state seems to be capitalistic when things are going well, but socialistic when the capitalists are in trouble and needing a bail out via the “public” purse. It is complicated when EVERYONE’s future is embroiled in a market crash, including future jobs, pensions, purchasing power, homes, the entire economy. This isn’t just about bailing out a few capitalists that screwed up. I agree that those being bailed should pay back what they are being “loaned”.

    However, on what basis can it be said that the principle of private property needn’t be challenged as well. We know there is something screwy about that assumption simply because people born in rich countries end up relatively rich and those in poor countries relatively poor. There is no even playing field even if there is some permeability to the membrane. But who says anyone should be able to claim the right to ownership of the earth’s resources?

    An equally convincing (actually a much more convincing) argument can be made that says the earth’s resources belong to no one by any self-evident right. There is no inherent legitimacy in the claim that simply taking something out of the ground makes it yours, including the ground itself which you claim as your own. That is the core principle, however, of market libertarianism. You take it, it’s yours, unless someone else has already claimed it. Claiming and retaining ultimately is established by force, the size of your guns. That’s history, but it doesn’t mean it is ethical or justifiable.

    In that context, what would be wrong with the broader population demanding return of at least a portion of the value of products removed, or demanding that those with accumulated wealth need to pay back their share to the common welfare; or that they need to pay more now that the economy has “gone south”? It seems fair to me to argue that there should be caveats on the use of the public purse. I don’t think that is the same as saying the market is legitimate and should reign forever. Our global community is more and more challenging those long held, but dubious assumptions.

    Robin Collins
    Ottawa
    (“still up north”)

  39. Robin Collins says:

    And one more thing. Since when is Warren Buffet the guy who is “creating the wealth”. Don’t you think that maybe the lads and gals in industry might work a little bit harder that Mr. Buffet who is playing the slots?

    “only the people who produce the wealth” should have the power to take the risks?

    Oh, come on. Having money and investing it is not production of wealth. Wealth is produced by millions of people by doing work, taking stuff out of the ground, manufacturing, using their brains. Investing is only a task with a hugely disproportionate salary.

    R.

  40. ronys says:

    Two points:
    1. As has been mentioned, the relevance of this topic to skepticism isn’t clear.
    2. More important, What alternative does Mr. Shermer propose to the Government bailout? I fully agree with his predictions about the implications of this “one time” (yeah, sure) act, but what other action could have been taken? Or does Mr. Shermer think that another Big Depression is preferable, or that the consequences wouldn’t have been as bad as predicted?

  41. [...] “The Welfare Queens of Wall Street” A good article By Michael Shermer: The Welfare Queens of Wall Street. [...]

  42. Bob Bannon says:

    I’m no lettered Wall Street insider but even a simple country boy like me realizes that you can’t continue to print money and not have to pay it back. Isn’t that what got us into this mess in the first place? Free enterprise, capitalism and moral terpitude indeed!!
    For Pete’s sake – don’t buy investments that you don’t understand!

  43. [...] 29, 2008, 4:18 pm Filed under: Uncategorized I read this great line for the ESkeptic Blog titled The Welfare Queens of Wall Street and Michale Shermer (great libertarian writer) wrote [...]

  44. Sheldon says:

    The part that I never hear discussed is something Greenspan finally admitted. Namely, that the model of Capitalism the U.S. has been laboring under (the one pushed so hard by Conservatives) is “fundamentally flawed.” You don’t need a degree in psychology to know that human GREED will overtake any sense of morality, patriotism, or loyalty, especially when you’re dealing with billions of dollars. These corporate mucky mucks were allowed to operate WITHOUT REGULATION, even though their risk taking was tethered to the very fabric of our economy. And don’t forget, the Conservatives not only let them get away with it, they also cheered them on (partly because it’s the foundation of their belief system, and partly because they all invision themselves in that position of power some day). Libertarians similarly want government to stay out of the game, but theirs is a fantasy of a different sort. They believe that the bell curve will always reform if the market is left to its own. The problem is, human greed and power mongering can only be kept in check by a strong government. Seems to me, the Liberals are the only ones who came out smelling like a rose here. Yes, they naively blocked legislation that could have helped slow the mortgages going to those who were a bad risk, but the cows were already in the pasture by then, kids.

  45. Capitalism is the process by which economic benefit is privatized and economic risk is socialized (i.e. put on our shoulders).

  46. Jim H says:

    Nature always self corrects and the markets will too. Think of a wildfire. Within months new growth has started and animals start returning … the ecosystem has started to regenerate. The markets will do the same, with or without the government bailouts. I only hope the government’s actions do not impede the regeneration. I am certain however that the politicans will take credit for something that was going to regenerate on its own anyway.

  47. Mark Hale says:

    I think a lot of people were concerned that the financial system would melt down if a large institution were allowed to fail, but I don’t think that would be the case. For these institutions that were at risk of failure, there was more than enough bondholder debt to cover any losses to their customers. Remember when WaMu failed? The good assets of the bank were quickly sold to J.P. Morgan. There were no losses to customers or taxpayers. What was so wrong with that? Maybe the bondholders didn’t get paid back in full. That sucks for them, but why should taxpayers be bailing out bondholders?

  48. Whew! So much competing political assertion and idea-mongering in these 40+ messages. Y’all should read Shermer again, at least twice, with reference to the basic concept of skepticism: critical disbelief; challenging the conventional wisdom; severing the statements [in this case, of partisan positions] from a sober inspection of reality. Check this out in your OED or Webster’s. Naming, and name-calling, is not really the intended environment here.
    Thanks for the kickoff, Mike!

    John D, no longer in Missouri

  49. Erik Eklund says:

    “In profits we’re capitalists, in losses we’re socialists.”
    So, the horrible truth dawned on You at last?

    Greetings from Sweden!

  50. Clive van der Spuy says:

    “If you line up all economists end to end you will not reach a conclusion.” Bernard Shaw

    An economy is a chaotic and unpredictable system. Mr Shermer is way too confident. Proper scepticism should make us weary of simple solutions like “just leave it, the market will provide”. We have NO idea how the market actually works. We know it is inherently unstable. We know that in 1929 a similar thing resulted in the US loosing half its economy with untold and desperate hardships to follow. We know that the average person’s savings is caught up in a banking collapse. NOT his risky investments – his SAVINGS.

    So the average person looses all because of OTHER investors’ imprudence? Morally there can surely be no question that Government interference is justified.

    Will it work in practise? Well see for yourself what happened in Iceland where Government was too small to bail its large banking sector. Their entire economy faced immediate and utter ruin but for international help.

    I respect Mr Shermer a great deal but it seems to me he may just be wrong here – both morally and practically.

  51. Gaston Gravel says:

    By definition, Skeptics are not believers.

    99% of the voters are.

    So they vote for authority figures who are believers and DELUSIONAL about their “MISSION” from “god” that entitle them to abuse their authority.

    Authority is more addictive than any drug

    Their ADDICTION push them to make wars, to steel , to lie, to live in castles without any

    guilt or remorse about their “slaves” who give them

    their money as “sacrifices ” to those ” SORCERERS ”

    Be

    If more persons were skeptical, and less gullible, they

  52. kenn pappas says:

    The market’s not bad. It needed to change. Why? Industries are changing rapidly. Who needs a 5000 SF building to harbor office supplies when they can be catalogued and ordered from the net? Why should a company suffer from purchasing a new computer system every two years? How long can people use untrained labor overseas and fool consumers into thinking the quality of the products hasn’t declined? With rapid changes in technology and global markets comes a surge of unpredictability in the markets. However, new markets will develop. For instance, nuclear power plants and uranium enrichment plants are in the process of being built contrary to what the media would indicate. This is not a technology of the future. These plants are being built now, and the U.S. government contracts have already been signed. Forget the scare of burying spent uranium rods in the Yucca mountain. That’s a notion long past. The government has already solved this problem.

    There’s a certain conservation of energy problem that was bound to realize itself in our economy. If everybody could take from the cornucopia, e.g., no interest loans, stocks continually on the rise, eventually, since the cornucopia as the endless source of wealth is merely a myth, the source would run out. We plucked the money tree one too many times.

    It seems more logical that where some people prosper, others decline. Though this can’t be made into an exact science such as the law of conservation of energy is, it would seem that when money is made by some, others lose in similar proportions ?!

    Changes introduced by new technology such as nuclear power and entrepreneurs who find more pragmatic ways to run businesses at lower costs such as Internet sales, laptop-based home busineses, and shared resources, i.e., one medical biller administrating five physicians’ invoices, will bring our economy back.

    The playing field’s muddy right now, but the rain stops eventually, and the ballgame starts up again with new hope that the home team can win.

  53. Anatoly says:

    I think Michael Shermer is quite wrong here.

    Firstly, the bailout is not about “protecting corporations from self-inflicted high-risk losses”. You must have noticed that the share market is depressed across the board. That’s obviously due to investor loss of confidence.

    The banks lost confidence before the investors did. And they stopped lending money to a bank which they thought might be insolvent. That caused the bank to instantly become insolvent, and go under.

    The bailout restores the ability of banks to lend to one another. It’s not a payoff by the government, but an investment, in the same way that I might add capital to a company which I think might prosper, but which – without money – certainly will not.

    In Australia the government _has_ entered the business of risk protection – for deposits in Australian banks – but again, this is to restore confidence – consumer confidence.

    I think you’re wrong about the $700 billion being theft from the people. The government’s assets are acquired through taxation – which is legal, no matter how you don’t like it. The government will be exchanging one asset (cash) for another asset (equity in the banks or other property).

    I’ve not heard that taxes will be raised to fund this $700 billion, so I don’t think you are about to have $700 billion confiscated from you. It’s already government property.

    The value of much real estate, shares in companies and other forms of financial instruments is very much controlled by consensus opinion, not any kind of inherent valuation. Economics teaches that there are boom and bust cycles. We’re entering the “bust” part of the cycle. The government actions are intended to make this bust less severe and shorter than it would otherwise be. It does seem that you have taken a position on a subject you know very little about, and I’m a bit disappointed at this apparent lapse of skepticism. I could change my mind if you’d back up your rant with an argument to authority, such as some qualified economists who have published articles in agreement with your position.

    For example here’s Nobel Prize winner Paul Krugman, who
    “likes the new bailout plan” at http://gothamist.com/2008/10/14/nobel_prize_winner_krugman_says_tre.php

    On 2nd October, another Nobel prize-winning economist Joseph Stiglitz said the measure “although flawed, should be supported now and revisited after the November elections”.

    Just in case the two websites quoted above are partisan nonsense (or worse, lies) I went to The Economist, respected online newspaper and looked for commentary regarding the bailout plan.

    Here, at http://www.economist.com/opinion/displaystory.cfm?story_id=12429544
    on the 16th October, the paper writes:

    “Extreme measures in the defence of liberty
    In the short term defending capitalism means, paradoxically, state intervention. There is a justifiable sense of outrage among voters and business people (and indeed economic liberals) that $2.5 trillion of taxpayers’ money now has to be spent on a highly rewarded industry. But the global bail-out is pragmatic, not ideological.”

    And there you have it – a pragmatic response to the crisis, rather than an ideological intrusion of government into the minimisation of risks in capitalism.

    Although I didn’t set out to demolish your argument Mr Shermer, I think I’ve done so quite adequately. You may find it a no-brainer to beat Creationists in debate, but if you’re going to rant about Economics then you should do your homework first.

  54. Jen says:

    So what are skeptics allowed to talk about? Religion, ghosts, UFOs, alt-med, bigfoot … since I’ve been a part of the community, these topics dominate the discussions and have not changed because the evidence has not changed. My personal observations are that many skeptics (those I expect to be able to consider opposing views) are far too un-skeptical about their own political beliefs/affiliations/ideologies and are frequently dismissive of those that hold other views rather than engaging in a discussion.

    Businesses that make bad decisions should be allowed to fail so that well-run organizations can buy up the failures and run them better. Do we now have to bail out the car companies because they didn’t recognize that the market was changing? Better to allow new, innovative or established well-run companies to fill (and profit from) the void left by the failing companies.

    The politicians have done us no favors in this matter – none of them – and now I’m supposed to put my “faith” in their ability to solve the problem. BTW – ask where the $700 (or is it $830) billion figure comes from … they pulled it out of the air because it was a big enough number to make it appear like they were going to actually do something – that’s politics. What we get next is reactionary regulation so that they can appear to be doing more.

    I appreciate M Shermer’s contribution to skepticism.

    P.S. We understand a great deal about how markets work – even if there are disagreements and competing theories. And Shermer is MORALLY wrong? Maybe he’s just evil.

  55. Jen says:

    “I’ve not heard that taxes will be raised to fund this $700 billion, so I don’t think you are about to have $700 billion confiscated from you. It’s already government property.”

    Have you seen our national debt? Even if you put it on the credit card … you pay for it – plus some. And unless my gov’t has found some novel way to generate a profit, they’ve taken it from me.

  56. skeptigator says:

    To those who argue over the “appropriateness” of this post there are couple of things to bear in mind.

    As stated in the very first post introducing this blog, “[SkepticBlog] is a serious group skeptically-themed science blog”.

    This post is neither scientific nor is it all that “skeptical” as normally understood in the context. “Doubt” != “Skeptic”.

    Having said that, this is Dr. Shermer’s introduction to blogging and I think we can cut Shermer some slack here folks. I think the 50+ comments here have made it pretty clear that Shermer’s opinion is valued in general and he’s certainly entitled to it however the topic is not entirely appropriate. I don’t agree with Shermer and find Libertarianism to be a dangerous political philosophy however I won’t be getting out the pitchfork on this one.

    Attempts to merge politics (a la Libertarianism) and skepticism are counter-productive just like skepticism and religion. At some point a “value” judgment has to be made and this topic is fraught with value judgments that go well beyond what evidence and reason can provide (truly skeptical values for lack of a better term).

  57. Jen says:

    “About SkepticBlog
    SkepticBlog is a collaboration among some of the most recognized names in promoting science, critical thinking, and skepticism. ”

    Skepticism is not only related to science – it speaks to an overall approach of applying critical thought.

  58. Patrick says:

    Jen said

    “My personal observations are that many skeptics (those I expect to be able to consider opposing views) are far too un-skeptical about their own political beliefs/affiliations/ideologies and are frequently dismissive of those that hold other views rather than engaging in a discussion.”

    True, but I hope you apply that wisdom to yourself and Mr Shermer as well. The idea that markets can regulate themselves has now been rejected by its formerly most powerful and ardent supporter Alan Greenspan. Anyone who holds that view now, considering recent events, and considers themself a skeptic should take a very hard look in the mirror. I used to be an Objectivist Libertarian myself. It still shocks me how I could have once held such an amoral and vacuous worldview.

  59. Wayne Kay says:

    Warren Buffet did not purchase the $5 billion in Goldman Sachs shares with his money, but rather with his unitholders’ money. Yes, it is still a gamble and shows all the things you state, but it is not “his money.”

  60. J.F.Soti says:

    To those who question the appropriateness of the topic: this topic is absolutely appropriate for Skeptics!! Economics and politics are soft sciences. They deserve the same rigorous approach as any of the hard sciences. Some critics lack the discipline of skepticism and turn to cynicism mostly because of emotional involvement. They have a problem with Dr. Shermer’s libertarianism and with free markets so they get turned off.

    Real economic laws exist and we see them in action every day. The whole world IS the observable experiment. Countries with freer markets prosper more than those with restrictions. This is historically backed up. When markets are not free they will tend to move to freer markets i.e. goulash communism in Hungary during the cold war. Today’s China uses capitalist principals to function better because socialist principals do not work, or more accurately, do not exist. In a free market economy you get something for something. The more big government gets involved, the more they promise you something for nothing– and that does not add up. This is why this topic belongs here!

    ps: To arrive at Socialism/Communism, anything short of massive social/psychological/economic and political reprogramming would fail, and it has been tried. Socialism/Communism has evolved in nature millions of years ago, in ant colonies. Ants haven’t advanced much ever since — kind of what happens in socialism.

  61. J.F.Soti says:

    Patrick said:

    “The idea that markets can regulate themselves has now been rejected by its formerly most powerful and ardent supporter Alan Greenspan. Anyone who holds that view now, considering recent events, and considers themself a skeptic should take a very hard look in the mirror. I used to be an Objectivist Libertarian myself. It still shocks me how I could have once held such an amoral and vacuous worldview.”

    First, of all the only part of the market that needed to be regulated is the part that the government was involved in: Fanny and Freddy. Having the government involved was the mistake in the first place. Metaphorically, mortgages were on government steroids.

    Secondly, there is no moral component to observing economic laws: they just are. And vacuous? Far from it. You haven’t read anything by Milton Friedman.

    Thirdly, the economy goes through cycles. It’s not the end of the world. However, the alternative, socialism, would be close. Equal misery for all, all the time, except the politicians in government? Sorry, been there done that! THAT is amoral

  62. Patrick says:

    J.F. said:
    “First, of all the only part of the market that needed to be regulated is the part that the government was involved in: Fanny and Freddy. Having the government involved was the mistake in the first place. Metaphorically, mortgages were on government steroids.”

    Well, Mr. Greenspan disagrees with you.

    If you really believe the markets will correct themselves without serious pain and that Gov’t intervention was the entire cause of this then you truly are deluded.

    As far as socialism being evil all I have to do is point to Sweden and many other Western European countries which have a much higher standard of living to prove you wrong. Not technically socialist countries, but far more socialist than the U.S.

    If you look at a democratic government as the collective will then it need not be as nightmarish as you see it. Yeah I know the word collective will probably drive you into a tizzy, but try to get past it. We do live in a society and are interdependent upon one another. Your selfish needs are not necessarily in the best interest of society and therefore even to yours.

    Then you said in another post:
    “To arrive at Socialism/Communism, anything short of massive social/psychological/economic and political reprogramming would fail, and it has been tried. Socialism/Communism has evolved in nature millions of years ago, in ant colonies. Ants haven’t advanced much ever since — kind of what happens in socialism.”

    I don’t know what else to say about that other than it’s about the dumbest thing I’ve read in quite sometime. Partially because it belies a complete misunderstanding of Evolution, but mostly because it makes no sense. If a species doesn’t evolve it’s because it is perfectly suited for its environment or else it will go extinct. Ants hardly seem to be headed towards oblivion anytime soon.

  63. Jen says:

    Patrick said:

    “True, but I hope you apply that wisdom to yourself and Mr Shermer as well. The idea that markets can regulate themselves has now been rejected by its formerly most powerful and ardent supporter Alan Greenspan …” and then something about “…amoral and vacuous worldview.”

    My world is not nearly as black and white as your label of “LIBERTARIAN” implies. I don’t think I said that the market should be without any regulation – and I’m not sure I’ve ever heard Mr. Shermer say that, either. I’m concerned about the degree and the type of regulation – and not just regulation but general interference. I believe that Greenspan’s continual manipulation of the interest rates (not a libertarian concept, I’m sure, and not laissez-faire, either) inflated housing prices and delayed and exacerbated the eventual adjustment. Politicians (of all stripes) want to regulate and manipulate for various reasons and when something goes wrong, they create reactionary legislation that leads to unintended consequences – see Sarbanes Oxley (SOX) which was an over-reaction to Enron and has contributed a great deal to the current mess. Regarding SOX, it’s not like there weren’t rules & regs before – Enron just broke them … they cheated – so now we have even more regs that are making it increasingly difficult for corporations to comply and leading to some crazy accounting policies.

    I enjoy discussing issues with people that don’t agree with me and I’m happy to be convinced by good argument. However, it’s hard to be interested when I am dismissed as a nut by someone who thinks they have cornered the market on truth and morality.

  64. J.F.Soti says:

    Pat said “As far as socialism being evil all I have to do is point to Sweden and many other Western European countries which have a much higher standard of living to prove you wrong. Not technically socialist countries, but far more socialist than the U.S.”

    It’s funny you should mention Sweden, a country that has become so sterile that it has become rude to use words in a job ad such as “hard working,” “ambitious,” “go-getter,” “self-motivated.” If you have an extra car there, your neighbors are either envious or look at you like you committed a crime. As for the standard of living in Western Europe, that is highly subjective and suspect. Do you live there or are you moving there anytime soon?

    I never said socialism was evil, but it is rather naïve. Socialists have good intentions but fall victim to the law of unintended consequences and become an impediment to free markets and progress.

    The mistake you and other regulators have is your “faith” in government to make it all better. Historically, as government becomes entrenched in the economy it ends up lining the pockets of the politicians themselves. They pass a mish-mosh of legislation that becomes as useful as nailing jello to a wall.

    Pat said: “If you really believe the markets will correct themselves without serious pain and that Gov’t intervention was the entire cause of this then you truly are deluded.”

    I never said it would be painless. Embrace the pain. It’s good for you. Learn from it and rebound! And no, government was not the entire cause, but a major factor.

    If you want the government to do something useful it can. Go after the main culprits in Civil Court for lying to and deceiving shareholders. Drag them out in public, humiliate them for being thieves and strip them of their stolen wealth. We know who they are. Will they be brought down? Not if corrupted, entrenched politicians are in power to protect them. The fox is in charge of the hen house.

  65. Clive van der Spuy says:

    J.F.Soti said <<>>
    First. Government is involved in ALL parts of the market to a more or lesser extent in ALL countries everywhere. Health regulations, aircraft manufacturing safety and aviation regulations, pharmaceutical regulations, interest rate determination, import tariffs, restriction on labour movement etc etc etc – the list is almost endless.

    Second. A failure in ANY part of the market can therefor conveniently be blamed on Government. Somehow you will ALWAYS find “Government ” in there somewhere in the mix and voila – the culprit has been found!

    Third. This is a totally wrong headed ex post facto kind of view. A fundamental methodological fallacy. It confuses correlation with causation. Something goes wrong. We investigate and lo and behold there was Government involvement! Government therefor MUST be to blame!

    Fourth. Explain to me again what interference by the Icelandic Government lead to the overnight ruin of their entire economy?

    Final. This argument has the hallmark of fundamentalist ideology everywhere. Joseph Stalin use to have a failed nationalised industry investigated and inevitable would find that there were a few private entrepreneurs undercutting the thing – and thus “clearly” private enterprise is to blame.

    He would then also invoke terms like steal and theft to express his outrage.

  66. Clive van der Spuy says:

    Oops I missed the quote: J.F.Soti said<<>>

    First. Government is involved in ALL parts of the market to a more or lesser extent in ALL countries everywhere. Health regulations, aircraft manufacturing safety and aviation regulations, pharmaceutical regulations, interest rate determination, import tariffs, restriction on labour movement etc etc etc – the list is almost endless.

    Second. A failure in ANY part of the market can therefor conveniently be blamed on Government. Somehow you will ALWAYS find “Government ” in there somewhere in the mix and voila – the culprit has been found!

    Third. This is a totally wrong headed ex post facto kind of view. A fundamental methodological fallacy. It confuses correlation with causation. Something goes wrong. We investigate and lo and behold there was Government involvement! Government therefor MUST be to blame!

    Fourth. Explain to me again what interference by the Icelandic Government lead to the overnight ruin of their entire economy?

    Final. This argument has the hallmark of fundamentalist ideology everywhere. Joseph Stalin use to have a failed nationalised industry investigated and inevitable would find that there were a few private entrepreneurs undercutting the thing – and thus “clearly” private enterprise is to blame.

    He would then also invoke terms like steal and theft to express his outrage.

  67. Clive van der Spuy says:

    OK copy and paste not working J F Soti said that the only part of the market that needed to be regulated is the part that the government was involved in: FAnny and Freddy. Having the government involved was the mistake in the first place.

    Apologies to all.

  68. Clive van der Spuy says:

    J F Soti says: <<>>

    An unobjectionable comment per se. But the problem is we DO NOT KNOW what the economic laws are! If we knew them we would be able to predict changes in the stock exchange and GNP with regular frequency. NOBODY manages to predict these. Note that for every buyer believing a buy is a good bargain, there is a seller believing the opposite. The best fund managers (Buffet, Soros etc) THEMSELVES concede this.

    Libertarian justification is therefor not based on economic LAWS (these are unknown) but on a VALUE system. A value system with the a priori assumption that Government is always bad – by definition. A critique of that value system is necessarily a moral critique. I value more Government. You value less. Neither one of us can be 100% sure what the effect will be in practise of introducing some or other regulation. We might be able to guess with SOME certainty.

    I am pretty certain that had Iceland prohibit their banks from investing in sub-prime script they would have survived – just like all banking systemns the world over survived that were not able to invest in that scheme.

    See the World Economic Forum Global Competitiveness Report. Note that countries like South Africa and Namibia now are regarded as having a sounder banking system than the US.

  69. Clive van der Spuy says:

    Sorry battling with quotes J F Soti said that there is no moral component in economic laws – they just are.

  70. Clive van der Spuy says:

    J F Loti says: “Thirdly, the economy goes through cycles.”

    Unknown and unpredictable “cycles” – a total misnomer in fact. There is a lot of noise in the system and on occasion it leads to loosing the signal altogether – ask the Icelandic people.

    J F also says: “the alternative, socialism, would be [close to the end of the world]

    First. It is NOT an either/or situation. Better regulation is by no means socialism.

    Second. The highly regulated Swedish and Norwegian economies sustain a better distribution of wealth and a higher living standard per capita then does the US economy.

    Third: The world “socialism” has merely become part of the demonic vocabulary employed by ideologues whose real argument really is that *I* want to make more money for *me* and my economic participation in the economy is nobody’s business. Well it is. It affects everybody and in ways that are difficult to predict.

    Thirdly, the economy goes through cycles. It’s not the end of the world. However, the alternative, socialism, would be close.

  71. Clive van der Spuy says:

    Sorry the last comment on previous post was J F Loti’s – man I am battling with this message system!

  72. C A Ketchum says:

    As opposed to those “welfare queens” these Wall Street “queens” actually exist!
    As for the libertatian aspect of Mr. Shermers’ post…it’s a great idea to guide your personal life, it’s a lousy way to run a government.

  73. Tim Morell says:

    To those who might think a skeptic’s take on political matters is a misuse of Skeptic or skepticism in general, I have nothing but praise for Mr. Shermer’s article and choice of topic. I deeply, deeply wish our society’s general credulousness were shaken up more often.

    But we must be also on guard against the prejudice of our own beliefs which may or may not hold up to a true skeptic’s light. Another commentator here already noted the libertarian bent in the original post. It goes deeper than that. There is a fundamental lack of scientific hypothesis and testing here. The fundamental flaw of the original argument goes right to the off the cuff way the purpose of our government was defined without reference to anything other than pure belief.

    A better way to have constructed this might have been to start with the Preamble to the US Constitution: We the People of the United States, In Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution of the United States of America.

    Under that construct, it is entirely appropriate that We the People do something to stop the bleeding. What we do and how we do it are separate questions. But to suggest that We the People have no right to act is simply wrongheaded.

    There is no doubt that we have a huge mess on our hands. One of the lessor known causes of this mess was our government abolishing laws on the books for over 100 years that prohibited bucket shop era betting on whether a stock or bond would go up or down without actually having a protectable interest in that stock or bond. As a result, billions of dollars were “bet” on the mortgage backed securities blowing up. But the bookies–AIG, Bear Stears and others– failed to have money on hand to cover the bets. For over a century that type of market betting was illegal. Deregulation types argued that the private sector, being risk adverse, would self regulate. It didn’t.

    Meanwhile, there is the problem of foreclosures. As of this date, there are several plans to stop the foreclosures, but all of them bring a moralistic attitude that is self defeating. That is, we’re willing to help the poor, struggling homeowner who lives in the foreclosure home, but unwilling to help the greedy, house flipping investor type who tried to get fat off this bubble. The problem is that my house will go down in value if my next door neighbor’s house is foreclosed on regardless of whether the owner lived there or was a flipper.

    But it would be unconstitutional for our government to directly interfere with the contractual right to foreclose. What to do. The only way to handle that would be to take an assignment of the paper owner’s rights. But at what price? I’d recommend some sort of block grant type deal that was deeply discounted as the value of the paper is very low. The government could then adjust the value of the underlying homes and offer deals with affordable interest accordingly.

    To say that Government produces nothing is also a giant belief based supposition that in any other context a good Skeptic would not accept without proof. Consider the production of roads, libraries and electricity as a kick in the shins to the contrary.

    Domestic Tranquility, common defense, general welfare and blessings of liberty are all at risk if we allow our economy to fail. To libertarians who grumble at regulations— I’d say let’s start with traffic. Deregulate the roads… no stop signs, no street lights…

    Tijuana taxi anyone??

    all the best
    tim

  74. Pertti Jarla says:

    I understand mr. Shermer’s libertarian opinions, but in the end he says: “only the people who produce the wealth can properly assess how best to risk it in future investments”. Here he seems to make the assumption that politicians and businesspeople are two totally separate groups. However, politicians usually have past, present and future ties and experience with business. Consider President Bush, for example.
    I think that bailing out companies with taxpayers money is a sign of failure of the government. Ideally it should never happen. It may (or may not) be the right thing to do to put out the fire, but after you make a mistake you must make changes: something in the regulation and control of the economy must be changed to keep this from happening again.

  75. misanthropope says:

    much has been made over the statement “only the people who produce the wealth can properly assess how best to risk it”. but the flap seems to be primarily over an error in wording: author’s point is served if the sentence reads “only the people who OWN the wealth…”

    the only rational way i can see to look at this issue is this: the costs to the taxpayer are absolutely obvious. the benefits to the parties who brought us to this state of affairs are likewise obvious. it is reasonable to say “it is a crisis, we don’t have the luxury of punishing the guilty parties”, but the government is _absolutely_ obliged to make a convincing case that the cure benefits those of us who will be paying for it. the claim has been repeated often enough, but not one shred of evidence or clear reasoning has been advanced.

  76. Double H says:

    I have a good understanding of the Financial Markets and you can trace these problems to really 2 things…9/11 and Enron. As a Libertarian I believe that Government is not at the root of most problems, but BAD Government is. After 9/11 The Fed Lowered Rates to insanely low levels and then obviously left them there way to long, it over-reacted. Credit Became SO cheap it no longer made sense to save money, as your rate of return was significantly less than the rate of Inflation. This caused unprecedented use of Leverage in the financial community in order to seek returns. Lehman Bros. was leveraged at a Ridiculous 20 to 1 ratio for example. Leverage is not a bad thing by itself; this is what allows you to buy a car or a home without having to pay ALL Cash for it. Over-leveraging, however IS a problem as you should have some of your own money at risk when making financial decisions. You should NOT be able to buy a Home or a car without putting SOMETHING down. Many homes and cars were sold the last 10 yrs with NOTHING down. That is a leverage factor of Infinity!!! The crash of ’29 was the result of overleveraging as well that is why we now have a 50% Margin call when you buy stock on Margin. The next problem was the Mark to Market Accounting Problem as a result of Enron and its illegal uses of it. Again a Gov entity over-reacted & didn’t see the problems this new regulation would cause. So, now Securities have to be Mark to Market even when there is NO market!! So how do these overleveraged firms now De-leverage? They have to sell whatever they can or fold into Bankruptcy. As a result of all this FORCED selling all Securities are getting hammered. Anyone who understands investing knows that 1.) it should be looked at as Long Term, and 2.) the WORST time to sell is when the Market is down, which is exactly what mark to market Accounting FORCES you to do and these two things have caused together caused a downward spiral that is now bordering on the ridiculous as there are many firms that are now priced BELOW the value of the Company’s cash holding which means those firms Non-cash assets are now at a negative value. It simply makes no sense, but this is what can happen when there is forced selling because you have more sellers than buyers. The answer is simple we should get rid of Mark to Market accounting that causes forced selling at lest in the short term. If in the long term you want mark to market then you need to at the same time require higher margin requirements of investment firms, but let them de-leverage first. I think in the long run many of these non-sub prime Mortgage backed securities will regain their value along with Real Estate and other Assets, as there is simply a huge amount of American funds parked in cash right now, simply waiting for the market to recover. So when the market recovers it will happen very quickly and dramatically and that’s why Warren Buffet is back in the market…he knows it will happen and doesn’t want to miss it. He doesn’t know when it’ll happen, heck it could be days or years, but it will happen.

    Yes the Bailout is a Government fix, but government caused the problem as it usually does with its typical “unintended” consequences of poor regulation, so it’s only proper that Government fixes the problem by re-capitalizing banks that mark to Market forced to sell even their good assets. Look at it like this, just imagine if that home you bought 3 or 4 yrs ago and is now underwater (you owe more than it’s worth) and the Government forced you to mark to market to the same LTV you had when you purchased the home, and that would cost you thousands or force you to sell in a down market. Smart money says that you hold the property and in 10 yrs you’ll be fine, because selling now “locks-in” the loss.

    Yes sub prime mortgage-backed securities were a bad idea and those who bought them should have lost money, but mark-to-market and artificially low interest rates threw Napalm on what should have been a small fire. It caused securities that should be worth 70-80 cents on the dollar to sell at 10-20 cents on the dollar. So instead of firms just holding the securities to maturity and have 20% losses (or perhaps none!), they were forced to sell and lose 80% or 90%. It shocks me that this issue isn’t being discussed as part of the bailout plan.

  77. JOHN k. says:

    Yes, I read most of the comments and appreciate all the well ment thought contained. My question however is, where did, or will, AIG and all the other recipiants spent these great sums of money? Are there rally so many subprime rate loans out to make up the over trillions of dollars lost, when combining all related losses over the world.
    If AIG still has over 50 trillion dollars of CDS contracts on their books, and who knows how many other banks and institutions still have, and we will have to bail all of them out, and if only 10% should fail, where will we find all that money?

  78. [...] The Welfare Queens of Wall Street [...]

  79. brian m says:

    My only comment is the hope that people do what I did, write to your senators and representative and let them know how you feel. I sent a VERY explicit letter to each of mine telling them what a horrible kick in the sack I feel this was to average working Americans. Not that my one letter will do any good but maybe a thousand, or a few thousand or …..

  80. Am I too late to join the party?

    While I may agree with the overall sentiment, I too must quibble with the claim that “…only the people who produce the wealth can properly assess how best to risk it in future investments.” As other have noted “the people who produce the wealth” contextually seems to refer to investors.

    I certainly agree that those exposed to risk have an incentive to mitigate it, but the link from incentive to ability is only indirect. In just the previous paragraph, Shermer writes, “potential home buyers and investors mistakenly assumed that the increasing trend line in housing prices would continue unabated indefinitely.”

    On the flip side, how can one say that disinterested individuals are necessarily unqualified to assess risk and reward? It’s obvious that regulators and research analysts cannot be wrong 100% of the time.

    Writing something such as, “Everything being equal, a free market operates best when risk is tied to reward,” does not have the same rhetorical punch, but it would be closer to the truth.

  81. OK, then… time has passed and the comments have petered out. And did we all arrive at a concise skeptical viewpoint on the economics involved in the article? Or did it turn out that nobody changed their minds from where they were when they first read the article, because, of course, each reader was quite sure his or her position was arrived at skeptically and required no changes?

    LOL

    Just because a skeptic is interested in politics or economics doesn’t make the subject amenable to skepticism. I point to this long string of grossly diverse opinions as evidence that skeptical addressment of topics that are essentially opinion rather than fact driven is a waste of time.

  82. Linda Rosa says:

    Thank you, Michael. This was a real pleasure to read. I wish more people were speaking out like this about the “bailout.” Many Americans allow their children to learn about the world with a form of discipline called logical consequences. If only government saw the wisdom in using the same system and would allow corporations to suffer the short term pain so we could have a health economy in the long run.