Quote Of The Day – Laissez-failure

Quote Of The Day – Laissez-failure


“The Federal Reserve has been hobbled by at least two major shortcomings that were primarily responsible for the current and several previous credit crises. Its failure to spot the importance of changing financial markets and its commitment to laisser faire economics were big mistakes and justify a fundamental overhaul of the Fed.”
– Henry Kaufman in an editorial at the Financial Times

The entire article is fairly devastating stuff, and Kaufman details 6 different ways that economic libertarianism failed the Fed. I won’t reprint those here, but this is the conclusion…

By guiding monetary policy in a libertarian direction, the Fed played a central role in creating a financial environment defined by excessive credit growth and unrestrained profit seeking. Major participants came to fear that if they failed to embrace the new world of securitised debt, proxy debt instruments, and quantitative risk analysis, they stood a very good chance of seeing their market shares shrink, top staff defect, and profits dwindle.

And this is what many of us have been saying for quite some time now. Because we aren’t anti-markets, and nobody I’ve heard is suggesting that market driven capitalism isn’t the way to go. But we’re certainly anti-loosely regulated markets because it creates an environment where something really big and bad can happen. And so it did.

In short, it’s better to grow slower on a stronger foundation than grow faster on a weaker foundation. Why this wasn’t obvious to the libertarian economists is beyond me, but perhaps the liberal economic voices will be listened to more closely this time around.

  • Mike A

    “Major participants came to fear ….. they stood a very good chance of seeing their market shares shrink, top staff defect, and profits dwindle.”

    Sounds similar to the fears associated with excessive executive compensation.

  • cynicalone

    Mr. Gardner,
    I know Mr. Kaufman fills your heart with ideological zeal, but you may want to be more careful when choosing citations to back up that ideology.

    Do you know anything about Mr. Kaufman?
    Maybe he is mounting a legal defense?


  • http://www.theglitteringeye.com Dave Schuler

    My concern is less with loose regulation than it is with regulation that promotes the growth of behemoth institutions. That’s what we’ve been doing for the last 30 or 40 years and now our chickens have come home to roost.

    It;’s a more serious problem than I think it’s been credited for. How can small U. S. banks compete with large foreign banks that have monopolies in their home countries? As is the situation in China, for example.

    I support globalization but I think we need a more thoughtful sort of globalization than we’ve had.

  • http://stubbornfacts.us Simon

    I don’t know how seriously we ought to take criticism of laissez-faire economics from someone who can’t even spell it. At any rate, Bert Ely’s analysis here is better (as is James Carr’s, although Carr comes to a dubious conclusion that I find surprising and counterintuitive in light of his analysis).

  • ExiledIndependent

    Dave, good point. Our Constitution was written to protect the citizen from a government growing too large. What the founders didn’t anticipate was the need to protect the citizenry from businesses growing too large.

    And with all due respect to Mr. Kaufman, it wasn’t laissez-faire that caused our problems. There is no laissez-faire. We do not practice an Austrian form of free market capitalism. The recession has been caused in large part by a) governments politicizing the free market, especially regarding housing and b) governments reacting with the wrong solutions to market problems.

  • J. Harden

    The idea that Fed monetary policy for the last 2 decades has been ideologically libertarian is profoundly stupid. In fact, the constant tinkering with the rates to avoid downturns has been Keynsian to the core.

    Good God Justin, this post in embarrassing. I thought you liked Ron Paul enough to actually…you know…listen and learn what he was saying. With all do respect: When are you going to learn to stay within your core competencies…I’ll let you decide what those are, but economic theory might not be one of them. I’ll promise not to comment on anything related to gay marriage if you promise to leave economics alone.

  • http://sidewaysmencken.blogspot michael reynolds

    “Laisser” as opposed to “laissez” is a Britishism. They don’t use it consistently but do so frequently.

    Under British law all French words must be misspelled if possible, and in all cases mispronounced in such a way as to cause maximum pain to Frenchmen within earshot. Hence “BAL-ey” for ballet, “CAF-e” for cafe, and “FILL-itt” for filet.

  • http://www.warning1938alert.ytmnd.com Jimmy the Dhimmi

    Harden is right. in 2001 Greenspan lowered interest rates below 1% during the contraction caused by the dot-com crash and 9/11 at a time when savings in this country were quite low. During economic contractions, the market would naturally set rates high, like in the early 80’s when Volker came in.

    It was a matter of social policy that the Fed lowered interest rates and has kept them at 0% today. The government wants to pump up the economy with consumer spending to keep unemployment low. There is no freakin way the markets would set the price of money at less than 1% during a recession when everyone is broke. This article is all nonsense.

  • kranky kritter

    Nice to see that hindsight is still 20/20. The undefeated record endures.

    For the past decade or more, just about everyone was too busy enjoying easy credit to complain about it. Along with all the so-called libertarians and conservatives who allegedly led this conspiracy, that includes Barney Frank, Chris Dodd, and the myriad democratic special interests who actively pushed for even lower standards to “expand the american dream.”

    Now everyone‘s got the time to complain about all these chickens that came home to roost. It’s gleeful progressives who have so far cornered the market on blaming the other guys. And I’ll cheerfully grant that we need more regulation, and are certain to get it. Will it be mostly good? No comment.

    IMO, the policy pendulum swung fairly far one way, and now it’s going to swing the other way for the while, curing some ills even as it causes others. Still, I could REALLY live without all the “I told you so’s” from folks who seem to think that Sweden and France are paradises with delightful planned economies operating in a fiscally sustainable fashion.

    This economic downturn was due to a conspiracy of all of us to enjoy the benefits of easy credit, and it plainly snowballed to the point where it could not be stopped. Oh well. If anything, this episode proves that people are still idiots. It does not, I repeat NOT suggest that the French are geniuses again.

  • cynicalone

    Henry Kaufman was on the Board of Directors of the now defunct Lehman Brothers where he served as chairman of the Finance and Risk Committee prior to the firm’s bankruptcy.
    On March 19, 2009, Kaufman was named as a defendant in a lawsuit launched by New Jersey governor Jon Corzine on behalf of the state of New Jersey alleging fraud and misrepresentation associated with securities offerings undertaken by Lehman Brothers immediately prior to the firm’s bankruptcy.

    Mr Kaufman, a prominent economist who came to be regarded as a financial oracle, has lost several million dollars through a brokerage account which he held with Bernard L. Madoff Securities for more than five years, he told the Wall Street Journal.

    A financial oracle Indeed!

  • J. Harden

    Greenspan was/is a rather common irony. Many conservatves/libertarians go to Washington D.C. with the understanding that it is a septic tank and after a few years, they think it is a warm bath. Greenspan proclaimed a great respect and adherence to libertarians and was supposedly a ardent admirer of Ayn Rand — but his monetary policy was the nightmarish posterchild for the fiat money system. What is totally misunderstood is that the bubble economy IS the manifestation of inflation. The Great Depression was brought on by an unstainable monetary policy of the 1920’s. I do not understand what is so hard to understand about the concept that one does not get to create money (a function that only the government has, either through printing or borrowing) with corresponding economic ramifications. The ONLY questions is what channel of the economy will the ramifications be manifested — will it be housing, will it be equities, will it be corporate debentures, will it be commodities, will it be labor? Where will the bubble (inflation) land and what will the hangover look like. But here was are again — Change we can believe in…again, but bigger this time.

  • Tillyosu

    “Under British law all French words must be misspelled if possible, and in all cases mispronounced in such a way as to cause maximum pain to Frenchmen within earshot.”

    Hahahaha…very funny…

  • http://stubbornfacts.us Simon

    michael reynolds Says:

    “Laisser” as opposed to “laissez” is a Britishism. They don’t use it consistently but do so frequently.

    Bullshit. I lived there for twenty-three years, Michael, and I never saw it spelled that way. It was always spelled correctly – with a Z – which is why a Google search of UK pages finds only about 7700 uses of “laisser” compared to 84,000 uses of “laissez.”

  • http://sidewaysmencken.blogspot michael reynolds


    Dude, why do you make this so easy for me?

    Google “laisser faire” site:FT.com.

    Then Google “laissez faire” site:FT.com.

    Then come back and tell the class what you found.

  • http://www.donklephant.com Justin Gardner

    Simon, first off, what’s with the cussing? You’re chastise me constantly for not maintaining the standards of the site and then this?

    Also, that last comment you just shot off got caught in the spam filter because it would make a sailor blush. You having a bad day?

    Regardless, you need to seriously dial it back. And that’s not a suggestion.

    J. Harden, listen, lecture me about economics if you want, but we’ll see who’s right and who’s wrong eventually. And I wasn’t a fan of all of Ron Paul’s ideas, especially his economic ones, but I did think the viral nature of his candidacy was compelling and wanted to see it continue for the sake of democracy. We need a third party in the mix and Paul could lead it.

  • http://stubbornfacts.us Simon

    Justin, I apologize and I will disengage.


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