Bear Stearns

I'm no economist, so let me take this step by step to see if I understand.  The recent "credit meltdown" is due primarily to firms extending loans in unreasonably risky ventures.  

And what is meant by "unreasonably risky?"  Well, I assume that in a free market, rational people would judge the kinds of activities that are likely to drive oneself into bankruptcy, for instance, to be "unreasonably risky."  

So, when an investment firm like Bear Stearns makes unwise investments, it will go bankrupt, and such a failure is not only just, but is precisely the sort of signal that is required to indicate a danger zone to the rest of the market, in case any other firms happened to be doing similarly foolish things.  

And finally, the Federal Reserve, which is staffed by a lot of really smart people, will see this and realize that the very last thing they should do is jump in and use tax money to "bail out" a firm that made foolish mistakes, since that will only encourage the foolish risk-takers and punish the reasonable firms, right?

Wrong.

Extremists

While browsing though Wikipedia, I ran across a wonderful quote by the great abolitionist, William Lloyd Garrison:

I am aware that many object to the severity of my language; but is there not cause for severity? I will be as harsh as truth, and as uncompromising as justice. On this subject, I do not wish to think, or to speak, or write, with moderation. No! no! Tell a man whose house is on fire to give a moderate alarm; tell him to moderately rescue his wife from the hands of the ravisher; tell the mother to gradually extricate her babe from the fire into which it has fallen; – but urge me not to use moderation in a cause like the present. I am in earnest – I will not equivocate – I will not excuse – I will not retreat a single inch – AND I WILL BE HEARD. The apathy of the people is enough to make every statue leap from its pedestal, and to hasten the resurrection of the dead.

– William Lloyd Garrison, “To the Public,” from the Inaugural Editorial in the 1 January 1831 The Liberator[1]

This is a nice quote to keep in mind for the next time I hear someone say that the problems of the world are caused by "extremists."  It's true that the Islamic fundamentalists who murder innocent people are "extreme" in their views, but so are the heroes of history - Galileo, Newton, Locke, Jefferson, Adams, Rand.  "Moderation" has come to be understood as a virtue, "extremism" as a danger.  The importance of an idea itself has been supplanted with its measurement; it is not the concept that matters, but its intensity.  

Thus, we have the perverse condition that the justice or injustice of a policy is irrelevant, so long as it's not "extreme."  It doesn't matter if a man is honest or dishonest, as long as he is not "extremely" so.   

Client-9 bites the dust.

Just once I’d like to see a menacing government official brought down on grounds that are essential, rather than because of some personal scandal. Eliot Spitzer, who has devoted his career to crushing Wall Street and extorting gigantic settlements from wealth creators – the man who, perhaps more than any other, has cast businessmen, the heroes and lifeblood of the civilized world, into a permanently defensive role and a guilty-until-proven-innocent status – is now being accused of … hypocrisy. After the prostitution scandal broke, Ken Langone, a former NYSE director who was sued by Spitzer said, “I have never had any doubt about his lack of character and integrity – and he’s proven me correct.”

These are very poor grounds upon which to denounce the man. Sure, there may be some relief and even satisfaction that a menace has lost his fangs, but it is only temporary. The implication is that if only Mr. Spitzer did not have sex with high-class prostitutes, if only he had scrupulously maintained his personal integrity as he pursued his power lusting crusade against so-called “white collar criminals,” he would be unassailable. From this viewpoint, it is not his philosophy that is wrong, but simply his hypocrisy; it is not his assault on free citizens that is wrong, but simply his self-righteous glee.

I’d like to make some comments about Senator Jim Webb’s (D-VA) speech that followed President Bush’s 2007 State of the Union address. Specifically, the senator made a pair of points that I had heard him make before in an NPR interview. These points so blatantly contradict each other, they deserve special attention, particularly since they are evidently part of his planned stump speech.

I don’t have a transcript of the post-SOTU speech, but the gist of the two points that Senator Webb juxtaposed are as follows. First, he notes that the ratio of CEO’s salaries to those of the average person is increasing dramatically. He mentioned a couple of figures that I didn’t write down, but the specific details can be found in an article called "Class Struggle" that he wrote for the Wall Street Journal editorial page:

"[T]he average CEO of a sizeable corporation makes more than $10 million a year, while the minimum wage for workers amounts to about $10,000 a year, and has not been raised in nearly a decade. When I graduated from college in the 1960’s, the average CEO made 20 times what the average worker made. Today, that CEO makes 400 times as much."

Needless to say, the senator implies that this is a bad thing and clearly expects his audience to share his outrage.

Then, on the heels of this observation the senator glowingly invokes a favorite saying from Andrew Jackson, that "you measure the health of a society not at its apex, but at its base." (I obtained this exact quote from the NPR interview. In the post-SOTU, he made essentially the same point, using the same reference to Jackson.)

Why on earth would Senator Webb choose this particular quote to support his first point? In fact, it directly contradicts it.

I don't know the context of this Andrew Jackson quote, but I like it because it points to one of the side benefits of a free, capitalist society: that its poorest and least skilled citizens benefit immeasurably from the achievements of others. Taken literally, Jackson’s quote rings quite true. A society is best gauged not by looking at its kings and ministers, the trappings of which could be either expropriated from the people or propped up superficially by any Potemkin, but by observing the liberty and prosperity of its lowest members, who should be left free to be productive in their own capacity. Indeed, if we look at "the base" of societies around the world, it becomes quite obvious that the standard of living of a poor man is directly proportional to his individual liberty. What matters (or should matter) to a poor man, of course, is how prosperous he is in absolute terms, not how much richer his neighbor is.

But in his first statement, the senator said the exact opposite. In essence, he declares that he is most concerned about the ratio of salaries, the so-called "gap" between rich and poor. If we hold him to this position, it follows that he completely disregards the importance of the absolute standard of living of Americans. It matters not to the senator if even the poorest Americans are wealthier today than in the past, and live like princes compared to average or even "wealthy" citizens of dictatorships. What the senator resents is simply that some Americans earn more than others. If he cared about elevating the poor, Senator Webb would embrace laissez faire capitalism. Instead, he rallies an envious public with a vague indignation that suggests that their interests would be served if only those greedy CEO's were knocked down a peg.

Now, it is hardly unusual to catch Democrats in blatant contradictions. But it is stunning to see an intelligent man not only say it with a straight face, but repeat it from one interview to the next.

And what is really disheartening is to see it swallowed whole by the public.