The Fly in the Ointment of Conservative Theory

Quote of the Day     “Those of us who have looked to the self-interest of lending institutions to protect shareholder equity, myself included, are in a state of shocked disbelief.”     Alan Greenspan, last week

Henry Waxman asked former Fed chairman Alan Greenspan last week if his conservative ideology pushed him to make decisions about the economy he now regrets. Greenspan said “yes, I’ve found a flaw.” The flaw is astoundingly well summed up in today’s quote of the day. It seems so simple, yet very few of us saw it, and even though the great Warren Buffett DID see it and told us about it, none of us listened. The individuals running our great financial institutions were looking out for themselves, and did not see their interests as aligned with those of their companies. They made deals to create short term wealth and illusory wealth to appear on balance sheets. In return, they received millions of dollars in bonuses. What happened after they cashed their checks was none of their concern.

This is the achilles heal of conservative economic theory. Conservatives, including TB in past times, have always believed that if the top echelon of wealth holders were doing well, it was in their interest to keep a well funded underclass to keep the machine churning out ever more wealth. The middle class would benefit from successful American businesses by buying their stock and getting an ownership interest in the economy they were supporting. Too much regulation by government, often derisively termed “interference”, would simply siphon off corporate profits, leaving less for the middle class to share. So the interference was removed over the course of thirty years or so, bit by bit, piece by piece. Even most Democrats went along with the effort, notably Bill Clinton. 

But we all overlooked the most obvious pitfall. We equated the businesses themselves with the individuals who run them. The businesses, in the end, have failed–GM, AIG, Merrill Lynch, Wachovia, Bear Stearns, and so many more. The men who ran them have not failed. Like DB Cooper, they jumped out of the planes with all the cash and a golden parachute. But DB at least had the courtesy to leave the plane functional when he leapt. These guys destroyed the engines, then jumped.

Someone once famously said those who ignore history are doomed to repeat it. We ignored the lessons our grandparents and great-grandparents learned back in 1929, and now history is repeating itself to a large degree. There is a reason for government regulation. Sure, it slows down business growth to some extent. But it stops many of those individuals who would loot businesses and their shareholders in their tracks. It shines light on their schemes. Just like a football referee, the government is never popular, especially when its presence in the game is obvious. No one likes a game marred by too many holding flags, and its often said there is holding on every play. Similarly, in regulating business, the government will undoubtedly throw too many flags sometimes, and miss other times it should’ve thrown one. But without the refs, the game is just a street fight over a ball. And without government regulation, our economy is just a street fight over control of wealth. It’s time all conservative thinkers admit their flaw in philosophy. 

There is common ground between American liberals and conservatives. That is that most everyone agrees the ultimate goal is to make increased wealth available to all. There is legitimate difference of opinion on how that should be accomplished. Conservatives must first admit, like Greenspan, that all of their assumptions are partially based on a faulty premise. And liberals, poised to have a chance to implement their own ideas, must remain aware that a faulty premise most likely lurks inside their own ideology. Both sides must learn to concede the points on which they have been obviously wrong and use the other side’s ideas to improve the collective action our government must take. I haven’t seen that in many years. I hope the next administration controls its hubris enough to remember this lessen from the dying conservative movement.

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About travellinbaen

I'm a 40 year old lawyer living in Ridgeland, Mississippi. I'm several years and a couple hundred miles removed from most of my old running buddies so I started the blog to provide an outlet for many of the observations and ideas that used to be the subjects of our late night/happy hour/halftime conversations and arguments.
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20 Responses to The Fly in the Ointment of Conservative Theory

  1. smilyj says:

    Sounds like my preaching about finding the middle ground is finally sinking in. Good grasshopper. Now we have to find people who will actually run the government in this fashion. Take the best ideas of one side. Take the best ideas of the other side. Find common ground within the ideas that both sides can live with. Because guess what? Those are the actual beliefs of the average person anyway.

  2. Jessie Lou says:

    I would agree with Smilyj BUT the problem lies with the person holding the power. I am guessing it would take a very strong leader to pick those good ideas from both sides. To me it is a sign of strength, not weakness, to concede to such a thought. It would seem that Power mongers/politicians rarely say someone else has a good idea or it was better than my idea. I’ve always heard that a good leader surrounds himself with other good advisers and listens to different points of view before making a decision. I’m not sure how much we will see of that now or in the future. Perhaps it is because we are average that we see this. Politicians and those in authority are not often referred to as average anything. One thing my dad taught me was when you are wrong people will respect you more if say you were wrong – take the blame and move on. That almost never happens in the government. Most of the time there is too much finger pointing to find the common ground. Perhaps if we are reduced to nothing, as we are close to being, they will be more inclined to do so.

  3. smilyj says:

    Amen sister.

  4. Stone says:

    Got to get away from the quarter to quarter approach to business. Basically need to kill stock options unless the executive is not allowed to exercise them for something like 5 years after they are issued. To easy to take a huge risk to turn a fast profit and then ride off into the sunset.

    Any system must recognize that people act in their own economic interest.

    The liberal flaw is they in general they do not accept this fact. Raise my taxes enough and I will work less and spend less. Neither of those things is good for the economy. If you are liberal you will not like what gets cut when my taxes are raised. Study after study shows that conservatives, per capita, give more to charity. That goes first. Then goes discretionary spending that supports jobs that lower income people need.

    While some regulation is needed, you can not regulate everything. Less is better. Want proof of that ask me about the FAA sometime. Just idiotic regulation to justify a government employee having a job (remember to EVERYONE acts in their OWN economic self interest rule).

    I can move far to the left on some issues. I can accept regulations on executive pay that insures that the executive’s financial interests are in line with the LONG TERM interests of shareholders. I can not accept higher taxes on people with net worths less than 10 million. $250,000 salary with three kids means you are still going to work until you are 70 to feed cloth and educate your children. Please do not push my retirement to 75 by taxing me more. I hate practicing law and my 30+ additional years of practice is depressing enough as it is.

  5. If taxes are implemented per Obama’s plan, they will be where they were during the Clinton years which produced a surplus. I’m not in favor of a surplus, but if a similar margin is in place, it should gradually pay down the debt. At that point, I’ll be calling for a sensible tax decrease, assuming we do not enter another war and are out of the ones we are currently in. It is plainly obvious more money must be raised and the number one reason is the optional, ill advised Iraq War the Republicans wanted. No matter the President, as I have said for months, some taxes are going up.

    As for your, my and most of our retirements, the overboard laissez faire approach to regulation pushed them all back further than any conceivable tax policy. I know I’m down over 40%–money it took me about 6 years to save in the first place.

    I hear the fears of the conservatives, but until the left tries to implement the policies that only the Republicans say they will, I don’t think its the right time to gripe. I think many of their concepts, if done right, will be good for business. Two examples–reducing the health care expenditures will lower premiums paid by business, and reducing low income tax rates will help keep wage growth modest. And there is great evidence that a green energy program will be a major economic boost, to say nothing of reducing the import of the Middle East.

    I’m ready for the new approach. I think the Dems have had their time wandering in the wilderness and now know their old mistakes and have a chance to avoid them. Maybe they will, maybe they won’t. In the meantime, I think it is the Republicans’ turn to wander and think and reinvent themselves.

  6. smilyj says:

    Studies also show (don’t ask me where i saw them but i promise i did) that raising taxes has never increased revenue. Revenue stays the same no matter the taxes. I also believe unemployment was higher during the clinton tax era.(Not sure on that though but I think I saw that somewhere). I find that some moderate democrats have views alot like mine and wish that moderate dems had more of a presence. The fact that they dont leads me to think that liberal dems control the party and is one reason Obama scares me. Bush Is a puppet of the far right. I believe Obama is the same from the left.

  7. Stone says:

    TB you are falling into the same routine that very liberal and very conservative friends of mine always fall into. When I complain about something someone they are supporting is doing and they can not defend the policy action, they simply argue that the other side is worse. I complain that raising my taxes will further delay my retirement and you say look how bad the republicans have screwed up.

    Do not raise taxes on families doing all the right things (working hard, paying taxes, saving for their kids education, saving for their own retirement). If Obama does that I will hate the SOB forever. It is BS. As I type this I am watching Charlie Rose. His guest, Theodore Forstman, just made my exact point. He said “you certainly do not want to raise taxes right now, the top 10% are paying 70% of the taxes. You do not want the producers to stop producing”.

    If you tax me enough I will cash out all the savings, pay off the house and cars, and make sure I am making an amount of money that allows me to pay no taxes at all. At that point, I will stop being an independent, become a democrat, and produce as little as possible the rest of my life.

    Edwards Dad did exactly that.

    Most liberals, you being somewhat of an exception, do not believe that people actually act in their economic self interest and change their behavior in response to market factors. People really do drive less when the cost of gas goes up. 40 years of government dictated CAFE standards did jack. If Obama raises taxes on anyone other than the Ultra rich, millions per year in income, people will work less. If you hate your job, and most of us do, you will not work harder (ie produce) just for the government to take a bigger cut. It may in some cases be subconscious but people really do a cost benefit analysis.

  8. I fall in to no routines when it comes to politics.

    Number two, as I stated, I do not know what will happen if Obama implements his plan. I hear what Republicans SAY will happen, but until I see it, I don’t believe it. The tax increase on those making 250-500 will not be unbearable–3% on the amount over 250K, after deductions. These people also will get a donut hole between 109K and 250K where they will not be paying social security tax. He’s pledged to freeze the yearly increase–that I got EVERY YEAR under Bush. As for criticizing the other side instead of defending Obama’s point, I can only say their way of doing things was bulldozed through for 6 years and they had enough stroke to stop any changes taking place the last two (more filibusters than the Dems used in the prior Congress). It has not worked. To say it has is to ignore the facts.

    The tax allocation seems out of whack until you consider that the wealth in this country is concentrated similarly. The top 1% of wealth holders have roughly 1/3 of all money in the USA. The next 19% have 51%, leaving 16% of the wealth to 80% of the population. The wealth gap between the super rich and everyone else is at its widest in decades and is growing. I would allocate taxes so that the respective income groups pay an equal percentage of their share of the wealth, which is not that far off from where we are now or will be under the Obama plan.

    Of course, Obama may yet lose and all of this will be moop. I’ll probably be so demoralized I’ll quit bitchin about the right wingers and just accept the fascism as a fact of life.

    Finally, as for TB being a liberal, I gladly accept that label for the time being. I believe its best defined these days as “anyone who is not voting Republican” and that’s for damn sure me. I calculated last week the bastards of taken about 1/2 a million bucks directly out of my pocket. I’ll never vote for another one for dog catcher. Funny thing is, my Granddaddy used to say the same thing after living through the last depression. I understand the old man a lot better now.

  9. Stone, I’m still thinking about your comments this morning, which proves their value. I don’t claim this (or any article or argument in politics for that matter) is conclusive, but it is interesting and for me enlightening on our tax rate history in the last century. Makes Obama look like a pretty tame moderate on the issue compared to Carter and LBJ. And Ike. And even Reagan, who eventually got the highest bracket down to 38.5, only 1.1% different than the Obama plan.

    The link is

    http://www.signonsandiego.com/news/business/calbreath/20081026-9999-1b26dean.html

    Excerpts for those who don’t like links:

    Teddy Roosevelt was a vocal proponent of this idea in the early 1900s.

    “I believe in a graduated income tax on big fortunes, and in another tax which is far more easily collected and far more effective: a graduated inheritance tax increasing rapidly with the size of the estate,” he said in 1910.

    –next–

    In times of economic peril, the tax rates were raised – rather than lowered – to ensure that money was more evenly distributed. During the Great Depression, Franklin Roosevelt’s administration boosted the highest tax rate from 63 percent to 79 percent in order to fund his New Deal programs. He pushed it to 94 percent during World War II.

    Roosevelt was matched by Dwight Eisenhower in the 1950s, who, with the aid of a Republican Congress, maintained an income tax rate of more than 90 percent for top earners. It took Lyndon Johnson to lower the upper tax rate to 77 percent. It remained near that level until the second year of Ronald Reagan’s presidency.

    –next–

    But doesn’t a high tax rate strangle economic growth? It’s hard to make that case. During the 1950s, when the upper-income bracket was taxed at its highest peacetime rate in history, the economy grew at a robust 4 percent per year, using inflation-adjusted figures. The 1950s growth rate certainly did not occur because of the high taxes, but the tax rate apparently didn’t impede it.

    Reagan had a different idea. If you lower the tax rate on the moneyed class, he and his economists suggested, they will invest that money in ways that will increase employment and economic growth. Reagan slashed the upper rate to 50 percent in 1982 and 38.5 percent in 1987. It has been in the 30s ever since. And it would stay in the 30s even under Obama’s tax plan, which would restore the upper bracket to the 39.6 percent level of the Bill Clinton era.

    It is hard to argue that those low tax rates helped spur economic growth. Even after the tax cuts, growth averaged 3.3 percent under Reagan and George H.W. Bush, 3.7 percent under Clinton and 2.2 percent under George W. Bush, who slashed the upper tax rate to one of its lowest points since the Roaring ’20s.

    In the meantime, we have made up for our tax cuts by increasing the national debt. We are now the world’s largest debtor nation, owing trillions of dollars to such countries as Saudi Arabia, China and Japan. And we continue to add to our debts with the trillions of dollars spent fighting in Iraq and bailing out Wall Street.

    This could have easily been foreseen.

    “Every dollar spent by the government must be paid for either by taxes or by more borrowing with greater debt,” Eisenhower warned in the 1950s. “The only way to make more tax cuts now is to have bigger and bigger deficits and to borrow more and more money. Either we or our children will have to bear the burden of this debt. This is one kind of chicken that always comes home to roost. An unwise tax cutter, my fellow citizens, is no real friend of the taxpayer.”

  10. Stone says:

    You are missing the point I am making on producing. Close to 50% of the people in this country pay no income tax. That is just plain wrong. Everyone should pay something. The people carrying the bulk of the tax burden are the people that are producing. These people, lets call them “productive people”, are spending money in the economy and this fuels the entire world’s economy. These people are also paying the vast majority of the revenue that pays for everything that the local, state, and federal government(s) do. If you make it so it it is not worth it to produce, I promise you they/we will stop producing. This will suck outrageously for the entire world. Because they (the entire world) are basically relying on 10% of the American public to fuel the worlds economy and pay the bill to do little things like keep the worlds sea lanes open for commerce. Different people will quit at different times. Edward’s dad cashed out in the 1980’s long before he was at a normal retirement age. He figured he did not want to work all those hours as a Dr. simply to pay a large chunk to the government. I am not far from my break point. I have a month long trial coming up in December and I assure you I will be ready to say screw it during that.

    I am paying tens of thousands of dollars in taxes every year. When you add in property taxes, fees, social security (that I will never see when I retire) and sales taxes it means that I working almost half the year to pay the government. I have ZERO interest in paying one red cent more. So I doubt I will find any additional tax increase bearable.

    I suggest the following in tax policy. Say we all need to pay our share so every American will pay some tax. Instead, Obama will drop more people from the tax rolls and further leverage the highest producers. When those people stop producing they will claim it is unpatriotic not to work to pay a huge tax burden. They will be confused in general because they still have not accepted the fact that people actually respond to market forces.

  11. Madd Dawg says:

    TB,
    I have been trying to catch up on all of your blogs and others’ comments since my return from the land of Disney and am almost there. I could talk (write) for days on this particular blog, but will limit my comments to the following points:

    1. Bush is not a conservative as you claim—see Rx coverage for seniors (an idea pushed by the libs for many years) a massive expansion of government costing us hundreds of billions of dollars. That program alone may break us once the baby-boomers start retiring in massive numbers.

    2. Conservatives don’t think that the wealthy will act to look out for the middle class in the interest of the general economy. Where did you get that idea? Conservatives believe that everyone will always act in their own best interest, and those actions, when not interferred with the the government, will result in the rewarding of hard work and ingenuity and the punishment of the lack thereof (financially speaking).

    3. The funds given to the CEO’s of these failed banks, etc. makes everyone sick, but that should not be the subject of more governmental regulation. Expanding on what Stoner said, the stockholders must give the officers of the companies incentive to focus on the long-term growth of the stock and company. To give a new CEO a big signing bonus and an option package which encourages him or her to focus on the short-term is plain stupid, and the companies that did that should suffer along with their stockholders.

    4. The flaw in liberal philosophy, at least a major flaw, is that the government can spend our money better than we can despite the fact that every government entitlement program is a complete and total failure.

    5. No matter how much money comes into governmental coffers, it will be spent as our elected representatives try to get money spent in their own districts in order to get re-elected and governmental departments spend every dime they are allocated in order to get an increased allocation the following year.

    6. Last, but not least, I am sick of everyone blaming the financial meltdown on conservative philosophy instead of the flawed notions of Freddie and Fannie (created to carry out liberal social policy), and copied below my email comments to you from earlier this week:
    _____________________
    “The conservative economic philosophy did not cause this meltdown—governmental interference in the free market did.

    Fannie Mae and Freddie Mac were created by the Fed Gov’t as private entities, but backed by the Fed Gov’t, to buy mortgages from banks thus creating a market for banks to sell mortgages to thus encouraging banks to loan money to more people thereby encouraging home ownership. The banks no longer cared whether or not the loans were paid back as the risk was on Freddie/Fannie, so they loaned money to anyone who could fog a mirror.

    Previous articles politely forwarded to you by me over the last couple of weeks showed that Clinton had Freddie and Fannie lower their standards for the mortgages they would buy which enabled people who were previously not qualified to obtain mortgages to then be able to qualify for them. This policy change caused a huge boom in the housing market which recently burst when the people started defaulting on these mortgages thereby causing Freddie and Fannie to go under.

    The creation of entities such as Freddie and Fannie are not a conservative notion. If they were not there, the Banks would have never loaned money to unqualified people because their own necks would be on the line in the event of a default, and this meltdown would not have occurred.”
    __________________________

  12. Madd Dawg says:

    Here is the 1999 New York Times article that I referenced in number 6 above re: Clinton pushing to lower mortgage standards which are backed by taxpayers:
    ________

    Business

    Fannie Mae Eases Credit To Aid Mortgage Lending

    By STEVEN A. HOLMES

    Published: September 30, 1999

    In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

    The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

    Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

    In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

    ”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

    Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

    In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

    ”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”
    ________

  13. ZEEK says:

    Nice research MD, It’s nice to see someone actually back up their position with facts not hype and innuendo like some people.. uh parties I mean.Regardless, I admittedly am not as educated on this matter as some of you but I am no lightweight so my question is…. While I agree with the concept and practice of “Laissez-Faire” economics, in the case of the bailouts, if we had let these privately owned financial institutions fail, how big of an impact would there have been on John Q. Public and other “innocents” that stood to lose their financial fortune due to greed and bad decisions of few? What else could have been done?This is not rhetorical by the way.

  14. I have asked this before. Why didn’t the conservatives reverse all these bad Clinton laws upon which they blame everything?

    Second, virtually every financial publication and Greenspan, the high priest of conservatism has debunked the Fannie talking point–that’s all it is. It was a small part of the problem. What caused the crash was an unregulated, untracked ponzi scheme amongst the mortgage, banking, investment and insurance industry.

    Third, none of you conservatives addressed the point I raised about Obama’s proposed tax rates as viewed in a historical light. They don’t seem so radical that way.

    Finally, what I can not understand is how people who do have true conservative principles can vote for a Republican any more. They have betrayed all you stand for. You “libertarians” should take a look at who the staff and contributors over at Reason Magazine are voting for–about 1/2 to Bob Barr and 1/2 to Obama. Conservatives should look at The Economist–endorsed Obama. Even Reagan’s son and chief of staff have abandoned ship. Have all these suddenly become Democrats? No, they’ve become anti-Republicans, wanting them punished for their hypocrisy and abandonment of their former core values.

  15. One other thing. It’s obvious our country has a severe debt problem. I assume most conservatives will say the answer to that is to “cut spending.” That sounds great. Where’s a Republican going to do that? McCain says on earmarks–he’s lying. He has no line item veto and can’t do it. Ideologues say entitlements–they’re delusional. Republican politicians don’t have the courage and Dems don’t have the will. TB says a combination of entitlements and the military–that’s too practical, sensible and idealistic for either party. Obama says raise more money taxing the well off and the rich three percent more than they are paying now. To me, that sounds like the most reasonable approach being offered right now, and I am as certain it will not reduce production and growth as others of you are that it will.

  16. JessieLou says:

    Most of the comments above explain why I am currently without a candidate. The question has turned into, who/what is the lesser of two evils.

  17. ZEEK says:

    Amen Sister!!! I do like the idea of taxing the rich more, I have to admit. Not that the rich should be penalized for making money or that it’s their responsibility to bail out everyone, but most “rich” people have advisors and accountants who help them thru loopholes and shelters etc. to pay less taxes percentage-wise than Joe Schmo who only makes 50k a year and pays 20-25% in taxes. Why can’t the guy who makes over 250k a year pay 3-5% more in taxes? Is that really gonna break him? Force him to sell his condo or yacht? Boo-Friggin-Hoo!!! In the long run it would be better for him if the country was out of debt and the economy was in good shape, right?? Can I get a witness???

  18. Madd Dawg says:

    ok Chuck D.

    TB,
    I agree that there was a massive “ponzi scheme amongst the mortgage, banking, investment and insurance industry” which was created mainly to get these bad loans off of the banks’ books. The root of the problem was the bad loans. If those bad loans were never made, then the ponzi scheme (a) probably would not have been created; and (b) even if it were created, would not have created all of those bad loans, so the meltdown would not have occurred.

    I am not a huge fan of what the Reps stand for right now as I am really more a libertarian, but as JL said, I am going for the lesser of two evils—which is certainly McCain.

  19. Stone says:

    Zeek, define rich.

    Use the 250K Obama figure and I think you will find people making less than 400K will spend less on cars, vacations, etc. This will not be good for the overall economy.

  20. Jessie Lou says:

    And while we are at it – let us define the meaning of poor or lower middle class. While I do not think I am poor, I’ve surely got to be in the lower middle class moneywise. I just happen to be a good manager of my funds. Rich for me would be making over 50K per year – I would not know what to do with myself! As it stands I pay extra every week in taxes to avoid having to pay in at the end of the year.

    Rich/poor, upper/lower middle class – all relative terms just like being fat or thin. It all depends on your personal reality.

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