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Against Monopoly

defending the right to innovate

Monopoly corrupts. Absolute monopoly corrupts absolutely.





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Panic

One of the great downsides of monopoly is a mathematical result known as Jensen's inequality that says that a lot of small mistakes aren't as bad as a single big mistake. One of the bad things about monopoly is that a mistake by a monopolist much worse than a bunch of smaller mistakes by competitors. At the moment there is a financial panic. Unfortunately the panic seems most widespread in the biggest entity of all, the U.S. government. As a result they are about to be stampeded into making an enormous mistake. The level of insanity defies the imagination. Rumors fly, each more absurd than the last - and are seized upon and repeated by supposedly responsible Senators and high ranking officials of the executive branch as a rationale for panicked approval of a nonsense plan. Reading the blogs - often quoting supposedly knowledgeable and trustworthy people - we find utter nonsense. If we don't approve the plan right away you won't be able to get money from your ATM. Firms won't be able to meet their payrolls. And on and on and on. To debunk the obvious: Washington Mutual failed Thursday night. Washington Mutual ATM cards (of which I own several) function as usual. Individual bank accounts are federally insured up to $100,000 per bank. The normal process of bank closure does not prevent bank customers from accessing their funds. As to payroll: I do not doubt that some firms of various sizes are going to fail to meet payroll and go bankrupt next week. It is likely that a few of them would have been able to survive if credit was more widely available at the moment, and a small subset of those might be able to survive if the bailout is passed by Monday morning. But most firms do not meet payroll by short-term borrowing; the fact that banks are reluctant to lend to each other does not have much impact on their ability to make short term loans to customers, and so on.

Yes: there can be cascading bank failures and that is a bad thing. But it does not happen instantly, not tomorrow, not next week, not next month. Here is a graph of bank failures during the Great Depression which we supposedly face again if we don't approve this ridiculous plan immediately.

I got this from a publication of the Federal Reserve Board. The point of the graph is simple: the banking system didn't fail all at once during at the beginning of the Great Depression: there was a continuing series of bank failures stretching over years. Meaning that there was plenty of time to think through a policy response. And it bears emphasis: at the beginning of the Great Depression the Federal Reserve did exactly the wrong thing: it failed to provide liquidity to the system and allowed the money supply to contract. It is the documentation of this in the Monetary History of the United States for which Milton Friedman and Anna J. Schwartz are justly famed. At the moment the Federal Reserve has been carefully, and largely quietly, doing exactly what it is supposed to do - namely exactly the opposite of what it did at the beginning of the Great Depression.

Let's be clear: the only casualty of having a sensible and rational debate about how big the problem is and what needs to be done will be the Congressional vacation - and only for members of the relevant committees at that. Maybe if they think this is a $700 billion dollar problem and a possible Great Depression they should consider canceling that? I really can't think of a worse reason for a policy blunder of this magnitude than Congress was eager to take a break.

Come on folks: get a grip.


Comments

In his New York Times "Economic View" column today, Peter L. Bernstein is right to fret about the consequences of the bailout for the problem of moral hazard. However he errs twice. Once he blames "free markets" (can someone find one--I mean a real one, not a phony one?) and claims, preposterously, that risk cannot be underestimated in a planned economy (which Mises proved can't actually exist in practice, except, I guess, for all those Soviet and North Korean planners who mandated risk out of existence and got all their socialist calculations exactly right, HAR!). He also states that the repeal of the Glass-Steagall Act in 1999 helped cause the banking system's problems, which it most assuredly did not do.

Oddly enough, Bill Clinton, who signed the law repealing Glass Steagall, gets it right in this week's Business Week "Facetime" interview with the Money Honey, Maria Bartiromo. She asks if he regrets his decision to sign the "bill essentially rolling back Glass-Steagall and deregulating banking." [If only!!!]

He responds, correctly, that "it wasn't a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure."

[Is there any single industry as heavily regulated as the banking industry? To quote my old monetary theory prof., "I'll wait for an answer. It could be a long afternoon."]

Bill goes on, giving Maria a lesson in economics, "I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill." Precisely.

And David, I disagree with your gradualist defense of changing policies, in your comment at the previous post.

You write:

(I should point out that while I'm in favor of eliminating patents, I'm not in favor of immediately abolishing them...any change of that magnitude needs to be phased in carefully and gradually. Existing ways of doing business are carefully adapted to existing institutions, and brutal abrupt change makes it difficult to adjust to the new rules with predictably disastrous consequences. This not only make everyone worse off in the short run, but also convinces people that the change was a bad idea.)

I would point out that the free market is always going to get blamed for any unpleasant consequences of change, even ones we would support. It goes without saying that it will be blamed for any business cycle, as well as unemployment and other dislocations that accompany one. The current Business Week has an article, "Bloodied But Still Strong," pp. 22-24 (I can't find a link), saying that "Paulson tossed out decades of GOP free-market dogma and pledged hundreds of billions of dollars to rescue the banking system." Yeah, right, the GOP loved the free market, especially when it came time to support the next farm subsidy, and then get behind whatever war the War Party--mainly the Deomcrats in the 20th century--were cooking up.

Let me give another example. If slavery still existed (I mean chattel, not tax, slavery), and you could push a button and eliminate it, even if that meant causing big losses to slave plantation owners and managers, to slave traders, and to the banks that had lent them money, even those for which such loans were a big part of their loan portfolio, would you do it, or would you take the route of compensated emancipation stretching over a number of years, even decades? I'd push that button. I submit we should do that with the Fed.

Here's the quote of the day, from the Wall Street Journal's article

"In Financial Crisis, Metaphors Fly Like Bad Analogies".

It's from the TV news parody "The Daily Show," where John Oliver says "that searching for another way for leaders to mess up the economy is 'like finding a vein on a failure junkie.' "

Ben Bernanke says that "credit is the life blood of the economy."

Best metaphor for the state I've ever seen.

Bill:

Comparing the Fed to slavery; quite the interesting comparison. I like to make a similar comparison with respect to intellectual property. The unauthorized taking of intellectual property is like piracy on the high seas, including the murders and associated violence associated with piracy.

Push a button and end slavery? I guess I'd have to do that. But I guess I don't think that every evil is as evil as slavery.
I agree of course with Stepp about gradualism and button-pushing, even if button-pushing hypos are notoriously problematic b/c they never specify the means of achieve some specified end, and thus sound like magic. But any principled defense of rights, and the concomitant principled critique of state action, recognizes that any ongoing rights violation must stop as soon as possible, period; and that unjust state laws ought to be abolished immediately, not gradually.

A parallel can be seen in the case of the Austrian theory of the business cycle. Once state-induced (via artificially lowered interest rates, inflation of money/credit supply, possible only with a state money system that has commandeered and eviscerated real money, i.e. gold) malinvestment systematically sets in, the liquidating boom that will restore economic health becomes inevitable. It can be delayed by gradualism etc.--but this only extends malinvestments and stimulates more of them, thus making the inevitable correction only more painful and damaging.

"The unauthorized taking of intellectual property is like piracy on the high seas, including the murders and associated violence associated with piracy."

Oh, come on, Lonnie. Surely you can do better than that? That's only one step above "every time you download an mp3, God kills a kitten".

None of Your Beeswax:

I have no idea what downloading mp3's has to do with God killing kittens. That is absurd. I merely stated my opinion. I believe it is a natural right to be able to express opinions in the United States, unless the socialists have taken over completely when I was not looking.

I never suggested that you could not state your opinion. I merely suggested that your opinion was an incorrect and ill-informed one, a position that I maintain, and that your transparent attempts to promote that opinion by hyperbole taken to ludicrous extremes serves no useful purpose whatsoever.
I never suggested that you could not state your opinion. I merely suggested that your opinion was an incorrect and ill-informed one, a position that I maintain, and that your transparent attempts to promote that opinion by hyperbole taken to ludicrous extremes serves no useful purpose whatsoever.

Ah, well now you know how I feel about your opinion.

Incidentally, for a great example of hyperbole I recommend seeing the poster who used the God kills kittens sentence, even if it was supposedly used as an example.

Lonnie, you're not making sense. It is you who made a hyperbolic comparison not unlike one involving dead kittens, and it is you whose opinion is the ill-informed one.

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