The end of Neo-Liberalism?

Lance Freeman's picture
The Federal Reserve's bailout (arranged liquidation to some) of Bear Stearns over the weekend seriously calls into question the headlong march toward neoliberalism that has been ascendant for the past few decades. Roughly speaking, neoliberalism called for a retrenchment of the state in favor of deregulated markets. As an ideological force neoliberalism held great sway in trade policy, the overall management of the economy and even at the local level where most planners operate. Municipal level functions like park maintenance and social service provision were often privatized. Affordable housing shifted from being built and owned by government in the form of public housing to one where subsidized affordable housing is now largely owned by the private sector albeit still subsidized by government. Rather than planning cities planners reacted to the whims of real estate developers.

For planners, neoliberalism posed a significant challenge to the discipline's legitimacy. One could argue that the raison d'être for planning is that some type of centralized authority is needed to build livable cities. Neoliberalism would seem to suggest that authority be as small and weak as possible. Planning as a discipline was put on the defensive, more of a necessary evil than a place for grand visions of our future.

Deregulation as occurred in the financial industry was held forth as the answer to our problems. But with the financial markets teetering on the brink of collapse and threatening to take the rest of the economy down with it, the Fed had to step in, whatever the ideological inclinations of the fed chairman or the current administration. Once a government lifeline is thrown to Wall Street the whole philosophical underpinnings of neoliberalism would have to be called into question, even among the most faithful adherents of neoliberalism. The question of government intervention becomes a matter of degree rather than kind. That is, a strong central authority is needed to guide the economy. Left to its own devices the "free market" can run off the rails. Critics of neoliberalism have pointed this out for years. But as long as most of the pain was confined to the more disadvantaged members of the world proponents of neoliberalism could wave the misfortunes off as the forces of creative destruction, etc. With the whole system under strain, that is no longer the case. The notion that reducing government and deregulation is the answer to all our problems seems laughable now.

The recent distress in the financial sector while unfortunate should put the discipline of planning of firmer ground. Planners should not have to be apologetic about the need for intervention in guiding our economy or building better places to live. This may be the one silver lining to the current debacle.
Lance Freeman is an associate professor of Urban Planning at Columbia University.

Comments

Comments

Part of the Free market is failing

Point well taken. However, part of the "free market" is letting the market both do well and fail. With this bailout we now give incentives to private institutions to gamble on the market, knowing if they fail the government will bail them out.

The Fed and Regulation

What of the notion of Too Big To Fail? Of course we naturally abhor the idea of rescuing speculators whose poor decisions have caused the current financial crisis, but in doing nothing, what are the ramifications?

For every action there is an equal and opposite reaction.

Allow the market to "fail" to a certain level. What is this "market" we speak of? Examined closely, we find the market is people, individually and in association.

We make the market and the market should serve our ends. Who is master? Us or the market?

I would also posit the "fact" that there is no "Free Market".

Justification

I understand his fervor for wanting to justify more planning. The logic being: If we "need" more government intervention in the financial markets, we will all accept that we'll need more intervention in the land market in the future. I don't know about the political whims of people and it may happen, but I think it's a mistake.

We didn't need the Fed to Protect JP Morgan on a $2/share purchase of Bear Stearns. Let them fold or someone buy them. The fact they are trading well above this price indicates to investors that the management believes there is more value than $2/share. We don't need BSC for the survival of the banking system. Perhaps the larger issue that few understand is most of these problems are liquidity issues created by securities that don't have to be sold. They are creating cash flow, but are illiquid right now. The issue: FASB directs them to be marked to market so it's an artificial credit crunch created by an accounting rule. Yet, it hasn't stopped the Lou Dobbs' of the world or this guy from jumping all over the current situation in crying foul and calling for more regulation and protection of the little guy.

I blame the Fed for succumbing to pressure, Bernanke is terrible. Opening up the discount window to nonmember banks, temporarily, may have been the only good thing they have done. If you don't let people and companies live with their decisions, everything they do will be consequence-free, thus justifying ridiculous actions.

Regulation

Not only Lou Dobbs. George W. Bush has also called for more regulation of the financial industry to prevent crises like these - which means that those who are against regulation are way out on the fringe.

"We didn't need the Fed to Protect JP Morgan on a $2/share purchase of Bear Stearns. Let them fold or someone buy them."

Without this protection, they probably would not have found a buyer and would have folded, and this could have led to a massive collapse of the financial system.

Charles Siegel

Not The Best Example

One may want to pause in using the federal reserve (our financial sector's central authority) as an example of centraliztion as a good thing to justify further centralization in other areas to see how all of this shakes out. It also doesn't hurt to look at the recent history of the fed (and further back for that matter) to see that the further centralization may not only be undesireable, it often makes things even worse that they would have been. The current liquidity crisis is a case in point - the housing asset bubble was directly the fault of the fed holding down interest rates at negative levels for far to long after 9/11. In effect, the fed's actions directly caused the mess we are in today. Now, in order to bail out the banking industry, the fed is actually crushing the value of the dollar (just look at the exchange rates) and pushing up inflation (and they might just be causing a commidity bubble to boot). Plus, they just transferred the risk of Bear Stearns' mortgage backed security portfolio onto US taxpayers. The outcome of their solutions might just throw us back to a 1970's style "stagflation" scenario (which the fed policy also had a major role in creating) with the bad decisions of banks shouldered by the average taxapyer. Now, maybe this will happen and maybe it won't (and the fed will actually raise rates which many people have been arguing for, and many other central banks have done), but I'd at least wait to see the outcome before using the fed to justify further centralization in the planning field.

While I'm at it, I'll put in another argument against centralization (using the fed). A central authority in anything becomes susceptable to political lobbying by very powerful forces to protect their special interests... and humans are imperfect beings and susceptable to sway. The fed, in this case and in my opinion, has succumbed to politcal lobbying by the financial industry. They are simply asking for a bailout (whether in the form of lower rates or direct subsidy) for their bad lending decisions. I say F-em, let them and their investors lose money. There are many banks not suffering as much who will be around if a couple of investment banks close-up shop. But, the fed, is to smitten by powerful lobbying from these folks to let that happen. By bailing them out, the fed has basically reinforced their bad decision making and is letting them off the hook for bad decisions (decisions that they will not hesitate to make in the future now that they can rest assured of being bailed out). Greenspan did this a bit as well withn his famous "put". On the overall economy, we would be better served long-term to let this mess hit bottom, be done with it and move on than dragging it out (which will make the inevitable fall that much harder...stagflation and a worthless dollar). Highly centralized systems, such as the fed, are subject to lobbying/politicing by powerful special interests that may act on their behalf instead of making the best decisions for the economy as a whole.

Instead Of The Fed

So what would you substitute for the Fed? Would you go back to the gold standard? To bi-metallism? Or what?

Charles Siegel

Some Options

The Fed is simply supposed to be the lender of last resort for banks. I think it's the Treasury Dept. that determines things like using the gold-standard. I could be wrong in that regard, but the Fed was definitely around when the US was on the gold-standard, so they are not substitutes for one another. Besides the obvious solution of getting rid of the Fed (as the US managed to function perfectly fine without a central bank between 1835 or so and 1915 or so) and going back to the national clearinghouses of yore (which may or may not be possible without a commodity-based currency, don't know), there's the option of tweaking the Fed's mandate to focus solely on price stability (vs, the focus on employment and growth that it is currently charged with). This would actually match the mandates of many of the European Central Banks. But, to be honest Charles, I really haven't further explored all the options and consequenses of replacing the Fed. I was using the actual history of the Fed (in which I forgot to include making the Great Depression the Great Depression versus just another depression, of which, the US has had many), which has been disatrous at times, to show that it might not be the best example to use for further centralization of anything else, much less something as important as planning.

One Thing The Fed Does

is to control the money supply. The way the Fed limits inflation is by limiting the amount of money that the banking system can create.

The gold standard used to put a very strict limit on the money supply, which is why there was no inflation in the long term when we were on the gold standard. The bi-metallists wanted to go on a gold-and-silver standard, which would have expanded the money supply, creating some inflation and benefiting debtors at the expense of creditors. That is the meaning of William Jenning Bryan's famous "cross of gold" speech.

We need some basis for the money supply - gold, silver, the Fed's fiat, or something else.

Charles Siegel

Agreed

Response edited because it was wrong.

New Reponse:

Agreed, we do need something to control the money supply. Tinkering with the Fed's mandates may be one way to get it solely focus on inflation, but that won't change the fact that such a powerful centralized instituion could be swayed by political considerations (which history shows has happened). Either way, simply pointing out the negative, sometimes extremly so, unintended consequences of poor management by the Fed should give one pause when using the Fed as a basis for the further centralization of land use planning.

Also, couldn't Mr. Feeedman have looked back into the history of planning to find instances of centralization gone awry (Robert Moses for one, "urban" renewal perhaps)?

Totally Agree

Ricardo, I couldn't have said it much better myself - see below. Stagflation is a real concern which would be devastating. We have too many people in this country right now that "demand" immediate action on something when it would be best played out in the market over a period of time. Yes, we'll have a mild recession, but it beats the alternative.

If that puts me on the "fringe" of general thinking as Charles says, so be it. I'd rather be logical on the fringe and right from a historical perspective, than popular in the short-term and be the idiot from a historical perspective.

Rather than additional broad sweeping regulation, here is something legislators could do to prevent this from happening again: Have people who sell all financial products have a fiduciary responsibility. So, if they give the kind of mortgage advice they provided in terms of bad, exotic mortgages, they face civil penalties and a career change. Almost all of these problems stem from investors/borrowers not understanding what they are buying. They need to understand the products, but should also be entitled to an advisor who explains it accurately with an explanation of the risks.

Stagflation

I think it was the Fed that controlled stagflation in the 1980s, when it was under Paul Volker. The Fed didn't take its powers too seriously before then, which is why inflation got out of control during the 1970s. In reaction to politician's unwillingness to deal with inflation, monetarism became influential during the 1970s, and so the Fed acted in the 1980s and successfully controlled the inflation half of stagflation.

CP, I ask you the same question: if you want to do away with the Fed, how would you control the money supply? The gold standard, bi-metallism, or what?

Charles Siegel

the Federal Reserve

if you could get the Board of Governors to think long term and not respond to political pressure, it would be ok to have the system. Also, they should stick to their basic policy tools: setting the discount rate, the reserve requirement, and targeting a Feds Funds rate with open market operations. This stuff could be market-determined like all other interest rates, but the idea of having the Fed intervene is to avoid wild swings in the economy which is what you might have if some of these things were left to the market. But, how do you have these people ignore political pressure. Our system is supposed to prevent that, but appears to be doing a poor job.

Another school of thought is that the Fed has very little influence on the economy anymore. The FOMC doesn't even seem to influence long rates anymore demonstrating, in some ways, that investors simply disagree with the Fed on growth and inflation.

But, I object to them getting involved in deals like JP Morgan /Bear Stearns. Did you see that deal was revised to $10/share? They should stick to their broad policy tools if they are to exist at all.

The entire point of this thread, I think, is that the only thing that more centralization gives you is more meddling/micromanagement of whatever it is. The question is whether or not this is a good thing? My answer, obviously, is no.

Michael Lewyn's picture
Blogger

to describe the 70s another way....

The Fed, responding to political pressure, pumped up the economy and generated inflation- just like Greenspan in the last few years. When you debase the currency, and have some bad luck with commodity prices (e.g. oil, wheat) stagflation results. It happened in the 70s, and we're at some risk for it happening now.

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