The Ideological Subtext to the Financial Crisis

Yesterday I talked to an old libertarian banker friend. He dislikes the whole idea of a bailout, but reluctantly admits that the economy probably needs it in order to slow and contain the crisis. By his estimate, it would take the economy 20-30 years to sort itself out without the bailout. (Reasoning: it took us 3-4 years to get over the tech-bubble bursting, and those were goods that were only to last 3-4 years. In the present crisis, homes are durable goods, lasting 20-30 years. I'm not entirely sure I buy this argument, as it seems that houses resell better than computers, and people don't necessarily own a house for that long.)

Much more interestingly, he observes that some of the economic weakness originates in way that banks were ideologically forced to make loans to people with bad credit. Community groups (including the ACORN group with which Obama worked) sued banks for not making enough loans to racial minorities.¹ The banks weren't singling out these people; it's just that minorities tend not to have as good credit (doesn't make them bad people). Since banks couldn't have special lower standards only for minorities, they had to lower their standards for all loans. Thus they were forced by "community" groups to make bad loans.

My friend estimates that these loans amount to about a tenth of the current economic crisis.

Of course people with bad credit who get a loan they can't handle end up much worse off when they default on the loan than if they had no loan in the first place. Ironically the real victims of this liberal strategy were these people they were ostensibly helping. This is similar to the students who get into a prestigious college, not because they are qualified, but simply because of institutionalized racial preferences. How does it help them when they have to drop out?

Once again we have an affirmative-action type of plan using heavy-handed tactics to ruin things for everyone, but especially for the people they were supposedly helping. For liberals, the motivation seems to be not so much actually helping people, but feeling like they are helping people.

Notes

1. Hopefully this doesn't sound like a white supremacist argument. Even a stopped clock is right twice a day, and unfortunately liberals seemed to be determined to make them right more often.

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Update (Oct 2): More on the mortgage crisis and the Obama connection here.

The Real Crisis

The economic crisis is all over the news.

A friend notes that worries about the government's bailout of AIG is exaggerated, that the government will likely make money on the deal. Fine. My worry is that the government is so deeply involved in the economy at all. When politics and not economics controls where the money goes, when stupid decisions don't receive their natural retribution, then the economy ends up weaker in the long run. Of course, the problem is the collateral damage of destroyed trust ruining it for everyone else.

The real crisis goes much deeper and some of its roots extend to our founding, but many more to the last half-century of American prosperity, as described in this excellent article by Andrew Bacevich. This is not just a problem originating with the financial elites of this country, but is a problem of from people like you and me, Joe Citizen, living beyond our means and expecting the good times to go on forever.

The heroes and villians of the article will probably surprise you. The usual good guys and bad guys end up playing much different roles when you look at them from the perspective of leading our nation in self-control.

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Also some commentary I ran across from a physicist with a liberal point of view here. He surprisingly opposes government intervention, but I suppose for the unsurprising reason that he thinks the bailout will benefit the rich (only).

I personally don't blame the quants (physicists on Wall Street) for all the evils of the universe (ha ha) so much as their MBA masters, whose exclusively quantitative approach to the world (notably inspired by the success of physics) courts disaster.

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Andrew J. Bacevich, "Appetite for Destruction," The American Conservative (September 08, 2008) 18-24.

Luck Substitutes for Reason

A recent New York Times article illustrates how chance acts as a imitation or placeholder cause in scientific explanation. The article recounts a study that compares the survival of the dinosaurs to that of another reptile group:

But then at the end of the Triassic, for some unknown reason the dinosaurs survived while almost all the crurotarsans did not. “There was a certain amount of luck involved,” Dr. Benton said. “One group got pretty much wiped out and another group soldiered on and took off. The dinosaurs finally got their chance.”

Notice the phrase "for some unknown reason." In other words, "luck" takes the place of an actual explanation for the extinction of one species and the survival of another.

I don't have access to the actual paper on which the Times article is based, but its abstract puts it in scientifically more mellifluous terms:

The results strongly suggest that historical contingency, rather than prolonged competition or general "superiority," was the primary factor in the rise of dinosaurs.

"Historical contingency." It's translation as "luck" is faithful to the thoughts of the researchers. Steve Brusatte explains, "Why did crurotarsans go extinct and not dinosaurs? We don't know the answer to that, but we suspect that it was nothing more than luck, plain and simple." (Bristol University press release)

"Nothing more than luck".

Deeper

How did they come to this conclusion? The Times writes:

“The assumption is that the diversity or range of body forms is more or less proportional to the number of modes of life that they’d occupy,” Dr. Benton said. So the finding shows that the crurotarsans were more diverse in terms of their lifestyle, diet and habitat — they filled more ecological niches and were, if anything, the more successful of the two groups in the late Triassic. “The dinosaurs didn’t find a way to squeeze into the crurotarsans’ role,” he said.

The press release put it thusly:

[C]rurotarsans were more abundant (more individuals, more fossils, more species) than dinosaurs in many Triassic ecosystems, and crurotarsans were in some cases more diverse (greater number of species). Putting all this together, it is very difficult to argue that dinosaurs were ‘superior’ to crurotarsans, or that they were out-competing crurotarsans.

So, in other words, 'We can't explain it with our brute quantitative measure of "superiority," so the only explanation can be "chance".' True enough.

But having to resort to chance only shows the coarseness of scientific measures, and not the actual reality of the situation. It's kind of like failing to catch any fish in a lake with a net with three-inch-wide mesh and then proclaiming the absence of minnows. Chance cannot be a final explanation.

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Henry Fountain, "Dinosaurs Got by With a Little Bit of Luck," New York Times (September 12, 2008).

"Dinosaurs' 'superiority' challenged by their crocodile cousins," Bristol University Press release (11 September 2008).

Stephen L. Brusatte, Michael J. Benton, Marcello Ruta, Graeme T. Lloyd Science, "Superiority, Competition, and Opportunism in the Evolutionary Radiation of Dinosaurs," "" Science 321:5895 (12 September 2008) pp. 1485-1488.

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Maybe I'm running out of steam, or maybe I just had too many distractions this summer.