By Wilt Alston View all 5 articles by Wilt Alston Published 08/27/09  
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Case Study: The Savings & Loan (S&L) Crisis Back before I was a fire-breathing anti-statist, I read Paul Zane Pilzer’s exceptional book, "Unlimited Wealth." In it, Pilzer briefly laid out his premise on why the S&L Crisis occurred. (It turns out that Pilzer wrote another complete book on that issue, entitled, "Other People’s Money.") The fact that almost the same situation as caused the S&L crisis led to the financial meltdown circa 2007—2009 should be instructive. Given the fact that many politicians are trying to find a way to blame the free market, and further given that, unfortunately, many ignorant people might believe that load of B.S., I’d say the lesson didn’t get through. A very brief synopsis of the S&L Crisis: Step One—Savings and Loans are allowed to invest other people’s money, but only via a byzantine list of regulations. The money is fully insured by the federal government against loss. Step Two—S&Ls are deregulated and allowed to invest other people’s money in a wider array of investment vehicles. (I use the term "investment vehicle" very, very loosely.) The money is still fully insured against loss by the federal government. Step Three—Because of the cataclysmically poor quality of many of these new investments, the S&L market goes toxic, causing a massive failure, to the tune of 745 S&Ls. This failure led to about $125 billion in direct gubmint payments. Since the gubmint was already "on the hook" due to the deposit insurance thing, there wasn’t nearly the amount of fake debate on Capital Hill as with the GM takeover. (Paraphrasing LL Cool J, "Don’t call it a bailout!") Pilzer’s premise was: If you could invest someone else’s money in any way you wished, and knew that the profit would be yours, but the loss would be someone else’s, wouldn’t you tend to invest with a little less due diligence or in things with a little higher risk? This was a classic moral hazard, but I’d also call it a misplaced incentive. Case Study: The NASA Air Safety Survey Some number of years back, NASA commissioned an independent survey of airline pilots. The goal of the survey was to allow pilots to anonymously report lapses in maintenance that they witnessed. The intent was to highlight any problems before they manifested themselves in planes falling out of the sky, while protecting the identity of those making the reports. According to the Associated Press’s Rita Beamish, "The space agency had interviewed thousands of pilots about safety issues before killing the project at the end of 2004." Not long after the program was killed, The Associated Press got wind of the findings. Further according to Beamish, NASA "rejected a request by [The AP] to review the results, saying that disclosing the information could have a negative effect on airline profits and public confidence in the airlines." So instead of promoting space travel, for whatever that’s worth, NASA was protecting the U.S. airlines from negative press? I feel safe in deducing from NASA’s statement that the study results reflected exactly what those who commissioned it feared: pilots witnessed behavior that, when examined under the rubric of safe operation, was found wanting. Given the opportunity to report on the behaviors without the threat of being identified, the pilots jumped at the chance. Then, NASA buried the results, ostensibly because they "could have a negative effect on airline profits and public confidence in the airlines." Well, duh! If unsafe practices are going unreported, it should affect public confidence in the airlines. How can NASA be legitimately worried about the profits of the airlines? Isn’t (or maybe shouldn’t) NASA’s mandate (be) the safety of air travel? Call me a nitpicker, but I’d classify that as a misplaced incentive. Case Study: The Housing Bubble of 2007 This one has received a ton of recent commentary, both in the mainstream and on sites such as this one. I even wrote on this phenomenon, somewhat peripherally, for the Campaign for Liberty. Simply put, the Housing Bubble of 2007 was a case when the market was overly invested—malinvested, in Austrian Economics lingo—in homes and real estate products. This bubble was a result of an unquestioned belief, by the masses, that "houses always go up in value" combined with an influx of cheap money, i.e., low interest rate loans, injected by the Fed. This injection of cheap money led to overinvestment in the housing sector. From my C4L piece, we find:
Case Study: The Implementation of Mandatory Minimum Sentencing The use of mandatory minimum sentencing, which I’ve mentioned before, particularly for drug offences, has had at least two—but probably not just two—very negative side effects. One, it has increased the number of poor and minority prison inmates. Two, it has deepened the hold of illegal suppliers on the drug culture. Previously I noted:
 I still find it incredibly
ironic for Biden to be part of the newly-installed "change we can
believe in" presidency, since he’s been in Washington for about
a hundred thousand years. (Seriously, if they dig up the area
around Washington this week, in search of political anthropological
relics, I’m sure one of the first bills Biden signed will be found,
fossilized.) Biden’s selection as Vice President was a firm
indication that change was not on the menu in 2008’s Emperor-King-of-America
Sweepstakes.Drug use since mandatory minimum sentencing (MMS) is largely unchanged. Prison populations have grown steeply. If the goal of MMS was to decrease drug usage via a punishment paradigm, I’d say the goal is unmet. (I won’t debate the real goal at this time, but I remain unconvinced that saving the common man from drugs was even in the top ten.) The effects are as expected with any massive boondoggle from the State—failure and unintended consequences. (That’s a veritable statism two-fer! Yahtzee!) The prison-industrial complex gets fat and rich, yet the justifying reasons for the increase in incarceration level remain unchanged. What was it all for again? It’s hard to identify the misplaced incentive when the actual incentive remains obscured, but I’d still say we have one here someplace. Case Study: The FDA and Big Pharma Since I have some previous experience in regulated medical devices, this area is one of my favorites, although again, I use the term "favorite" loosely. One might say I left a career I enjoyed, and for which I was heavily-trained and well-compensated, due simply to getting damned tired of the FDA and the comically large disconnect between what it claimed to do and what actually happened. Conflicts of interest are all too commonplace in the cesspool that nourishes both the FDA and Big Pharma. For a recent and telling example, one only need to read this article posted at Mercola’s website, courtesy of the American Association for Health Freedom, which details the case of pyridoxamine. From the article we find:
Case Study: The TSA and Airport Security Because I travel a lot, I pass through airport security a lot. Because I’m generally going to the same places, for the same purpose, for the same timeframe, I tend to take pretty much the same items, packed in the same bag, in the same way. Despite this uniformity, I have gotten everything from secondary screening on both my bags, to nary a mention on either of my bags. I’ve left my liquids inside, taken them out, left them home, put them in my checked bag, etc. I cannot figure out how to avoid having some person barely skilled enough to protect the buffet at an all-night bowling alley from double-dipping pawing through my crap. Despite all this, I am certain beyond any doubt that if I wanted to take something on board that was harmful, dangerous, or terror-causing, I could do it. Why do I feel this way? I’ll get to that in a minute. On one recent trip when I let my exasperation get the better of me and I said, just under my breath, "This is complete crap", another passenger replied to me, "I’m glad they’re here." That comment is the reason for my inclusion of the non-security of the TSA in this essay. I can only assume that this woman was "glad" because she figured that without the crack TSA screeners, terrorists from someplace would be blowing planes up all over the U.S. With all due respect, I find such a belief right up there with a belief in the Easter Bunny or the Great Pumpkin—cute to a point, but ignorant as hell for a reasonably intelligent adult. I know people who have gotten restricted items through security—on purpose. Hell, I have personally gotten through security without removing any of my liquids on more than one occasion. Both these experiences are small change. In one of my rants from 2008 I noted:
To understand my disgust, one need simply examine airport screening through the eyes of a security expert like Bruce Schneier. According to Schneier, "Airport security is more about CYA than anything else." He states, "Showing ID, taking your shoes off and throwing away your water bottles isn't making us much safer." In another piece Schneier provides this gem: "In short: much of our country's counterterrorism security spending is not designed to protect us from the terrorists, but instead to protect our public officials from criticism when another attack occurs." Bingo. Anyone who thinks a future terrorist is so stupid as to employ exactly the same methodology as was used on 9/11 needs an imagination transplant. Applying such measures does accomplish the real goal—it makes people feel safer about flying, and thereby spending money on it. That, sports fans, is a misplaced incentive to which a "good government" would not react. Conclusion One of the recurring themes in my pieces is the concept of market anarchism, i.e., letting the market decide. For some this could be a difficult concept to accept. We have all been taught from young ages that someone—generally someone who works for the State—must protect us all from, well, someone else. The problem ensues when the State, itself not subject to the give-and-take of the market, uses its monopoly of force to protect those who do not require such protection. A business, a private enterprise, must be subject to the trials and tribulations of bad decisions, lest it stop worrying about providing value and instead seek to attain more of that protection. (Even worse, most attempts to save an industry, e.g., the Newspaper Preservation Act of 1970, just end up helping to kill it.) When the airline industry is "protected" by NASA, when the pharmaceutical industry is "protected" by the FDA, when the banking industry is "protected" by the State (in the guise of Fannie and Freddie), then those industries will necessarily invest in that which enhances their bottom line—the statist protection—not the product for which they charge the consumer, if they don’t just fail first. This is the essence of a misplaced incentive. Poetic injustice that the money the State uses to protect these enterprises comes from the consumer as well. copyright © 2009 Campaign for Liberty |
Also by Wilt Alston:
Do the Economics of Coercion Make Sense? 01/21/10
What Does "Equal Pay for Equal Work" Mean? 02/25/09
What the Heck is "Predatory" Lending? 01/22/09
Is Gun Control Racist? 00/00/00
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