Tuesday, January 29, 2008

How to Resist the Temptation to Scapegoat

It's always tempting to scapegoat some player in a game that is not going the way you want it to, even when the problem lies not with the players but with the game itself.

I am having a friendly debate with a very good friend, an economics and law professor, who insists that we need more regulation, that the government hasn't done enough to prevent those evil bankers and brokers from getting rich off the backs of the poor innocents of middle America.

I argue that, although it may be true that some bankers are rotten and regulators have been sleeping at the wheel, this will always be the case under macroeconomic and regulatory conditions such as we have in the US today.

I maintain that the underlying fault lies not with an individual player's greed or incompetence, although this does play a role; it lies rather with the foolish adaptation of bad rules of the game, rules that are based on the fallacious notions that government can manage a macroeconomy and that monopoly-encouraging intrusions by regulators into the banking industry, among others, are helpful.

While perusing today's Wall Street Journal, I received some help for my side from their daily human-interest column about a Venezuelan banker named Victor Vargas.

Victor Vargas
[Thanks to polobarn.com for the photo.]

If anyone walks and talks like a greedy banker, Vargas is it. This is the kind of fellow my friend loves to hate. Read what Vargas says:

"People write stories about me saying I have a Ferrari, a plane, a yacht. But it's not true. I've got three planes, two yachts, six houses."

Can you imagine Mozilo saying something like this? Vargas is just the kind of man who would get lynched here in the US for saying something like that in times like these.

But several other sentences leapt off the page at me:

"Venezuelan elites have learned to profit amid repeated volatility."

Exactly. People adapt in difficult times.

Some argue that these are the most stable times we have ever lived in. Some believe, as Milton Friedman and I do, that things could be much more stable if government and their appointed economists would get out of the money management business.

The 1970-80s inflationary-stagflationary episode incurred unprecedented capital losses. The extent of the financial market instability of those years has been compared to the Great Depression.

The 1980s and 90s brought us Latin American bank bail-outs, US savings bank failures, and a hedge fund panic. 2000 gave us the Dot.com crash. Today we have the housing bust and the credit crisis, an interrelated double-whammy.

Each time, macroeconomic policy has accommodated us back into the same expansionary credit parameters that brought us all of these episodes in the first place. And today, once again, we're issuing more credit to bail ourselves out of the 2007 housing and market crises--actions that will only serve to create our next bubble, unless the world has finally lost faith in our money managers' capacity to steer the ship.

Just look at the damage to the dollar. According to the AIER, you need $20.78 today to buy one 1913 dollar's worth of goods.

Markets have simply adapted to the fluctuations, and market players have learned to live with the new rules. Volatility has become the norm, in the US as in every country around the world. Look to the most flagrant examples (like Venezuela) to study the underlying phenomenon at work.

More quotes:

" 'Venezuela has developed a special business culture, where the game is played amid high inflation and other distortions,' says Venezuela-born Latin America specialist Gilbert W. Merkx, who directs the Duke University Center for International Studies. 'You can either get very rich or lose a lot of money playing the game, and it always gets more complicated as the distortions get worse.'"

Exactly. People adapt. Just because US inflation is at only 4 percent while Venezuela is at 22, doesn't mean that the players don't adapt, that "a special business culture" doesn't develop. It does.

"Mr. Vargas says his survival strategy is remaining agnostic about politics."

Exactly. Play the field. Don't play politics. Where have we seen that before? How many US companies wait to see which way the political wind is blowing before writing their campaign finance checks?

"In 2002, [Vargas] helped convince other bankers not to join strikes led by businesses that were aimed at ousting Mr. Chavez. As president of the banks' industry association, he helps negotiate banking regulations."

Exactly. Where have we seen that before? How many US banking regulations are put in place through consultation with industry big-wigs? Why fight city hall when you can feather your nest and get so big the government has to bail you out if you bet incorrectly?

" 'A businessman has to deal with his government, no matter how far to the right or left it is,' he says."

Exactly. A businessman is a businessman. He is not an idealogue, or even an idealist, except in his more private moments. A businessman enjoys the challenge. He plays by the rules, no matter what they are. And if the game is rigged, the tough competition will attract some rough characters who don't mind playing by rigged rules because they have a knack for manipulating people and rules to their advantage. At some point the less ferocious will throw down their cards and leave the table, leaving only the hard core participants. "I'm an intuitive guy," says Mr. Vargas.

"Mr. Vargas's high-level government contacts have attracted critics who say he's suddenly become rich as 'Mr. Chavez's banker,'" which he doesn't deny directly, side-stepping the accusation with statements like, "I've been rich all my life!" and that he's only met Chavez twice.

In sum, for the winning players in a rigged game, the motto is "Why beat 'em when you can join 'em, play unfair, and make it really big." That's the strategy that works today, in Venezuela or in the US.

Who is our US Treasury Secretary? Henry Paulson, former CEO of Goldman, Sachs. No personal attacks from me, of course, rather just an observation of the tight relationship between government and big business, even in this "capitalist" country (see links below).

Who is recommending that the Fed go ahead and issue credit galore to save Wall Street, even if it means tanking the dollar--indeed who has rationalized dollar devaluation, through a "non-partisan think-tank," "scientific," "economic" evaluation, into a way to solve our problems? The Peterson Institute, whose chairman is a founding partner in one of the largest hedge funds in the world, Blackstone Group, and who was once a Secretary of Commerce and an Assistant to the President for International Economic Policy. (His partner at Blackstone is a former Yale colleague of George W. Bush. Small world, isn't it.)

Want to influence government policy? Create a think-tank.

What do you say to this, dear Professor?

See this post for the development of my argument that government incapacity to manage the macroeconomy and over-regulation are the causes of our problems. I also describe how this country is a mixed economy, not a purely capitalist one, which may just be affording us not the best of both worlds, but the worst.

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Anonymous dwkunkel said...

Instead of more regulation, we need complete transparency.

5:25 PM  

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