The Bad Market Myth: The notion that deregulation caused the current recession is straight out of Jackie Chan philosophy

Originally Published In:

Fairfield County Weekly (4/30/09) Link

 Communism also hates science

How do we know what causes what? Areas with more crime tend to have more police, but it's probably not the case that doubling the number of cops in Fairfield County would double the amount of crime. We like to think such things have "natural" causes — crimes increase first, then we get more cops to deal with it.

But what about more complicated things? For example, how can we decide what caused our current recession?

The most convincing argument would be a randomized trial, just like the ones used for medical studies. Take half of the population and give them a free market and a limited, libertarian government (providing only a justice system to punish violent acts of force or fraud and to enforce contracts), and give the other half a regulated market and an effectively unlimited, statist government (providing legislation about everything — from security registrations to shareholder communication to toilet size). Then you watch which does better.

You might think this experiment has already been done, numerous times, and that communism/statism has failed repeatedly. But those were not randomized trials and communist/statists have always claimed, after each new failure, that communism wasn't applied correctly. If we had just had this legislation instead of that one, or better enforcement of the regulations, or more popular support, or just a little more time. There's always some excuse.

Indeed, that same reasoning pops up in the discussion of the current economic conditions. Statists like to claim that a single law, the Gramm-Leach-Bliley Act of 1999, removed a portion of the regulations affecting financial companies, and that this deregulation brought about our current economic woes.

What did the Gramm Act actually do? It seemingly repealed a 70-year-old law prohibiting a single institution from being both an investment bank and a commercial bank. But that's not all the bill did. The act would never have passed without an amendment that required government approval of any such mergers by the regulators responsible for the Community Reinvestment Act.

The CRA is the act that forced banks to give more credit at low prices to minority applicants. These are the sub-prime loans that were the catalyst for both the run-up in housing prices and the market's eventual collapse. And this amendment was no accident: When signing the Gramm Act into law, President Clinton explicitly stated that it "established the principles that, as we expand the powers of banks, we will expand the reach of the [Community Reinvestment Act]."

In short, the statist allegation that the Gramm Act caused today's economic malaise because it deregulated financial companies is half true: The act may have been partially responsible, but precisely because it did not deregulate financial companies. Indeed, it made them more politicized than ever. Banks were not companies trying to profit from voluntary exchange with others; they were agents of the government, puppets of the political correctness du jour.

Randomized trials of any reasonable size simply can't happen under a forceful government. Only in a free market, with millions of people interacting with each other, can trillions of possibilities be tried.

Movie star Jackie Chan does not agree. "I'm not sure if it's good to have freedom or not," he recently said. "I'm really confused now. If there is too much freedom, like the way Hong Kong is today, it is very chaotic. Taiwan is also chaotic. I'm gradually beginning to feel that we Chinese need to be controlled."

Do you subscribe to the Jackie Chan philosophy? Are you gradually beginning to feel that we need to be controlled? Then let yourself be controlled. That doesn't give you the right to take away other people's freedom.

The myth that unregulated free markets caused the recession is dead. Is the path to recovery going to come from the people or will it be dictated from on high?

Succinct summary

  You article is the most succinct summary of the current situation I have seen.  All we currently see is carreer politicians engaging in word play and blaming others. 

  Kurt Hauser wrote in 1993, "no matter what the tax rates have been, American tax revenues have remained at about 19.5% of GDP." So, the only thing that matters for revenue is GDP growth(Hauser argued that all tax rates over 20% just cuts productivity to the point where they are a revenue push).  Everyone in both parties is full of crap until they fundamentally cut government spending.

  We still spend a trillion dollars a year maintaining a fictional global empire.  Soon we will be paying a trillion dollars a year to service out debt.  Washington increases the size of the federal government every year because nobody can think of any way to differentiate themselves other than to spend more tax payer money wastefully buying votes.   The highest corporate tax rate in the world does chase companies to other countries.  Huge government spending does take money away from private investment and venture capital.  If HUGE government spending works, spending over five trillion dollars this year(between Washington and the Federal Reserve) should solve all problems.

  Spin on the part of Washington aside, we have not experimented with free market economics in almost 100 years.  Great article.


Sure would be nice to have a federal-free zone...

13 Comments from the Fairfield County Weekly

East Germany - West Germany, North Korea - South Korea are randomized enough. Plus all Soviet Block and Eastern European countries under socialism and afterwords..
Posted by Randomized Trials on 4.28.09 at 14.48
Yes we do need to be controlled. We need laws and rules and regulations to protect society from the acts of the uncontrolled individuals who place self above all else. We need to act with self-discipline within the rule of law ... otherwise we do have chaos - at worst total anarchy with varying scales of chaos/lawlessness inbetween. No one would agree that totalitarianism is good but at the same the opposite end of the spectrum - anarchy is not good either. The fact that some individuals within society fail to consider the needs of others and act without restraint often causing great harm, both small and large scale, means that we have a long way to go before people can be trusted with total freedom. Great freedom brings great responsibility. Are you ready to assume the personal responsibility for all the consequences of your actions if you were free of all restraint to do as you liked. No societal pressure to behave acceptably, no law to tell you don't kill, don't drink and drive, don't speed, don't steal, don't rape, don't molest, respect others? Some few individuals may be ready for that kind of responsibility - but if I look at the world - most are not. So yes I do subscribe to Jackie's philosophy - too much freedom is too much responsibility ... I prefer my society with rules protecting me from those unable to handle the freedoms they do have already without giving them more.
Posted by Self-Discipline on 4.28.09 at 14.55
Self-Discipline -- Don't kill, don't steal, don't rape, and don't molest are all legitimate laws that prevent people from taking the freedom of others. Those aren't the types of laws that this article is talking about.

As he explains above, a libertarian government would include a "justice system to punish violent acts of force or fraud and to enforce contracts."

Posted by PorpoiseMuffins on 4.28.09 at 18.19
PorpoiseMuffins is dead on - and Self-Discipline apparently didn't read the article.
There is no price that can be placed on liberty - commit yourself to slavery if you wish, but don't put those chains on others.
Posted by Andrew S. on 4.28.09 at 18.22
If anyone wants to give up their rights or be told what to do with every aspect of their life, please let me know. I'll gladly tell you where to put your money, where to go to school, how to walk, talk, act and even when to go to the bathroom. If you want to give up your freedoms, hey, thats great , I've always wanted a "slave."
Posted by Jay on 4.28.09 at 19.42
Right again.................

Since 9/11, the federal government has been nibbling away our civil liberties via congressional acts that are supposedly all for our benefit. It's time to wake up.

If you can read this article without shedding a tear, you truly do not know the meaning of liberty.

Thank you Phil for this great article.

Posted by Abe on 4.28.09 at 19.49
Wait one second; the government monitoring your activities (for security) is not taking away Civil Liberties. They are not stopping you from owning something or doing something, monitoring just makes sure that your exercising your civil liberties does not obstruct someone else’s civil liberties. You can have a gun, you can even shoot with it but you cannot shoot a crowd of innocent bystander, you cannot violate their right to walk around without being shot at, you get my drift...
Listen to me, if listening to my conversations is what it takes to catch those conversations that will save my life, I'm all for it. I'm a good citizen and I've got nothing to hide.
Posted by Jay on 4.28.09 at 21.22
To: Phil Maymin
Comment: Would you agree with I said to Abe (above)?
Posted by Jay on 4.28.09 at 22.02
your argument is flawed. at first you're saying 'more police don't cause more crime, doubling the police would not cause double the crime', and then later you try to make an analogy to say 'less regulation does not cause abuse of the
financial system'.... which is NOT an analogous statement.

basically the author's argument appears to be analogous to the notion that crime will go down if we have less police enforcing laws. :-P

you increase police presence in response to crime, just like you should increase regulation of financial institutions which have proven susceptible to abuse and poor business practices which harm our national economy.

its that simple. leave Jackie Chan out of it.

Posted by etchy on 4.29.09 at 1.38
ps - "Communism also hates science" -- what the hell is that supposed to mean? the only people I see hating science lately are the religious conservatives who don't believe in evolution. In that respect Communists are the bastions of scientific freedom. :-P
Posted by etchy on 4.29.09 at 1.42
To: Jay
Comment: No. I agree with Abe. But it sounds from your response that it would take a long time to convince you. Here's a start:


The Taser is a microcosm of all laws making it "easier" to catch criminals, including the body of law known as the Patriot Act. Making it easier for the cops isn't the goal of a civil society. Making it hard for the cops to hurt innocent people is.

Posted by Phil Maymin on 4.29.09 at 6.56
To: Jay
I do, however, agree with every word you wrote in your first comment.


Posted by Phil Maymin on 4.29.09 at 6.57
To: etchy

About the science thing -- I don't know what that has to do with anything, that's an editorial decision, but there is definitely something funny about it that I can't quite explain. :)

About your allegation that my argument is flawed. I am not making an analogy between crimes and police. I am explaining how to make reasoned inference.

You say, "You should increase regulation of financial institutions which have proven susceptible to abuse and poor business practices which harm our national economy."

Which ignores my argument rather than addresses it. Indeed, the point of my article is that financial institutions have proven susceptible to government and politics which harm our national economy.

If you disagree with those facts, for which I have provided supporting evidence, you need either other facts or proof that my facts are wrong.

If you concede the facts, then you must conclude, by the same logic inherent in your quote, that we need to leave government out of it, out of the economy, and out of the financial institutions.

And in terms of the facts, remember the one big fact: we have a central bank. Money is a monopoly of the state. And that monopoly has clearly failed. It has caused this recession.


Posted by Phil Maymin on 4.29.09 at 7.02


Yes!  When Phil writes, "And in terms of the facts, remember the one big fact: we have a central bank. Money is a monopoly of the state. And that monopoly has clearly failed. It has caused this recession" he is summing up the whole problem.  Any abuses in leverage, borrowing, and excess liquidity are directly caused by the federal government, who set all rates on prime loans and print all US currency.  The federal government gave these companies a blank check with 100% backing on businesses 'too big to fail.'  This is why the whole world is trying to blame the US for the financial meltdown.  They fact that the rest of the world has been quite complicit reminds me of what the Democrats are trying to do to the Republicans.  Nobody believes that a liquidity bubble of this size could have been created without the vigorous support of both parties...aka, the Republicrats.