Current Market Conditions: 15 Jan. 2009

0:00I'm here with Robert Lawson, Professor at Auburn. This is your first year of teaching here, right? Yeah, I just got here this summer. Okay. And you say that your classes are just packed with kids asking a zillion questions about financial markets and things? Well, I'm teaching financial markets, actually. This is the first time I've ever taught it. and you can hardly get through your class material because every day some kid comes in with a new headline about what the Fed's done or what company's gone bankrupt or what bank just failed and it's really more important to talk about that than whatever boring stuff the textbook has. Now you studied, of course, all this in school. Well, sure. What did you go to school? I graduated from Florida State.

0:45Florida State. Jim Courtney. I'm Courtney. And the questions involve economic systems? Well, that's mostly what I do with my research, is the Economic Freedom of the World project. Yeah, sure. And so, but the headlines, of course, are just proclaiming the death of capitalism every day. Yes. Yeah, yeah. So just yesterday I was talking about Brad Delonga, Darren Asimoglou's latest article where he blames the financial crisis on greed. As if, that's like saying gravity makes airplanes crash, I think. Where does this appear? And he just wrote it, posted it somewhere, I found it online. And of course it's also caused by a blind faith in Ayn Rand's vision of free market capitalism or some silliness like this.

1:32As if we had that in the real world anyway. So... Yeah, what do you make of this? Why is it that all these attacks on capitalism presume that we're living in a purely free and the New Market Environment and that, well, now we've now discovered that we need to start regulating things even though the financial markets have been regulated since. Yeah, they're certainly the most highly regulated of all markets in the economy or financial markets. I mean, compared to other markets, like the market for toys, which has some regulations, those pretty people, toys can pretty much do anything they want without any oversight and you can't do anything in financial markets without oversight. So it is a strange situation where people are arguing that financial markets were just unregulated, free-for-all, dog-eat-dog, you know, free market capitalism when, you know, it's not even close to the case.

2:24If you were going to pick a market to start with, to level that kind of claim against, you wouldn't do financial markets. Those are the most tightly regulated of all markets. Yeah. So it's very strange. But, you know, what really happens here is we've got a crisis and there's going to be policy responses. We have a financial crisis. There's going to be policy responses to the crisis in all sides to the grand ideological battle. They want their piece of it. They want to lay claim to it. And you see it from our point of view, too. You see individuals who want to use this crisis as an attack on regulation of markets. And some of those criticisms, I think, have been a little off-base, too. Regulation of markets didn't... not all the regulations out there have caused this problem but the flip side of that is you get people say well it's deregulation that caused it so you know you're seeing a lot of people wanting to use the crisis as a

3:18way to advance you know their long-term agenda we're doing it you know and other people are doing it too well and there's you have to you have to disaggregate the regulations too right and the nature of the regulatory regime and one hand you did have the repeal of Glass-Steagall which has a kind of systematic effect on what's going on here. But on the other hand, aren't there in place right now regulatory bodies that are designed to oversee and prevent the very kinds of things that we've seen happening? Exactly. I mean, on the one hand, we have deregulation. Stiegel is the best example. We have also regulation, increasing regulation like Sarbanes-Oxley and a lot of security stuff. So it's very hard and we only have one financial crisis. And so we've got a lot of explanations, and you're only going to be able to disentangle that stuff by using sound logic.

4:08And what about the fact that we had a national policy to promote home ownership? Of course, yeah, absolutely. Through any means necessary, everybody should own a home. So I think that was the most important single cause probably was the subsidization of home Home ownership through Fannie and Freddie and community reinvestment hacks and everything down to the home mortgage interest deductions. We have a whole system-wide built-in process to encourage people, many people who don't have the means, to buy homes. Couple that with a little bit of Fed expansion or maybe a lot of Fed expansion depending on who you talk to and you've got the fuel to keep the fire going. And how do you reconcile all the hysteria about falling home prices with, as long as I can remember it, there's been a frenzy about the problem of getting poor people homes, you know, overpriced homes.

5:08Well, yeah, poor people are poor. That means they don't have a lot of money. It's the definition of being poor. Right. And people who are poor, by definition, have trouble affording big ticket items like houses. I mean, this is, you know, it seems to be very tautological. So yeah, you're never going to get rid of that problem. It's like getting rid of gravity. You know, there are going to be things that are outside the means of poor people, by definition. But now you have expensive homes that are much cheaper and much more affordable. So why isn't this an occasion to celebrate? To a certain extent, we should celebrate. Of course, most people that are writing those In fact, most headlines are people who already own homes and are looking at their asset value fall. So they're thinking about that. We see the same thing in stock markets, every time the stock price goes down, it makes it more affordable to someone who's buying it. And yet we seem to have a bias in favor of rising stock prices at all times.

5:56Right, rising home prices, rising stock prices, but gasoline must always fall or... Exactly. What does natural law dictate here? Well, it sounds like you have some interest in Austrian themes concerning the business cycle. Have you explored those? Well, I've been more of a microeconomic Austrian, if you can say that, following in the Kirzner entrepreneurship style of Austrian methodological individualism, subjective value, those sorts of things. Honestly, I haven't spent a lot of attention over the years on the trade cycle stuff. My new colleague, Roger Garrison, probably I should go downstairs and talk to him here and there, but it's not been a long-term interest of mine until fairly recently, in part because I'm now teaching finance in financial markets and I'm being forced to sort of read and think a lot more.

6:49Say, have you looked at the Mocklip book on stock markets, did you ever have the occasion to pick that thing up? No, I don't think so. I've got a book by him, but that's not the book. Yeah, yeah, but this is really obscure until last year. I'll make sure you get a copy before we leave. I might have something interesting. He was an interesting guy. In your area of microeconomic studies, probably the thing that you most want to talk to students about, you've done some interesting work on the banning and abolition of products. This is our first time meeting. But your reputation precedes you because you're Well, I have in my hand a 12-inch metal spike with a pointed end. It's not pointed to a very fine point, but if I were to throw this at you, Jeff, you'd lose an eye. This is a dangerous piece of item in my hand, and the objective of this particular piece of steel is to throw it through the air, usually with alcohol in it, and then throw it in the air.

7:55with alcohol involved events like July 4th picnics and try to make put it into a little target and people who are our age or older will know what I'm talking about. It's lawn darts. And they light them on fire? Oh, no, no, no. Oh, okay. Do that. That'd be crazy right there. No, it's just it's enough to get drunk and throw Metal Spikes Through the Air So this is Lawn Darts or Jarts and people that are over our age will know what this is and it used to be great fun. Millions and millions of copies of this game were sold and people would go out in their backyards and play. It's kind of like cornhole or beanbag toss today but that's an easy game. No one gets hurt playing that.

8:42So this is a fun game. People played it in the 70s and 80s. It was very popular. I must say, it feels good. I mean, you do want to throw it. It is a little bit dangerous, I must say. And over the course of this product's availability, three people died. And some 6,000 or 7,000, depending on the numbers, people visited emergency rooms. A lot of people, there were eyes that got lost, just punctured wounds and so forth. I remember when I was a kid, we would throw them straight up into the air and then try to run away from them. It's a game that you can see is quite dangerous, but it was also a lot of fun. In 1988, the Consumer Product Safety Commission banned it.

9:31What I find interesting about it is they didn't ban the product, by the way, so I'm not illegally possessing this. I can't buy it from you? It would be a crime for me to sell this to you. I could give it to you, which is a strange concept. I could buy maybe the box. Yeah, there are some companies that will sell you the pieces. There's a theory out there that you can buy the individual pieces and construct from disaggregated parts. And that's legal. I don't think that's actually legal either. I think it's illegal to sell anything here. But they banned the product, and if I can quote the press release from one of the commissioners, it was a two to one vote. So two people, two human beings, decided that we're not allowed to play this game.

10:17And she says, whatever limited, Anne Graham, whatever limited recreational value lawn darts have is far outweighed by the number of serious injuries and unnecessary deaths. The Consumer Product Safety Commission is making a judgment call that this product, as fun as it is, whatever recreational value it may have, it's just outweighed by the fact that it's dangerous. And I say, who are you to make that decision? Does she have some magic crystal ball where she can look inside my head and determine how much value this thing was to me? Because I remember it was a lot of fun. And that's an Austrian point. I mean, the idea that value is subjective, and I and only I can know what something is valuable to me. Now, I can transmit to you that value through my actions, I can communicate information through prices and my purchasing decisions, but you can't know how much I valued playing lawn charts.

11:09She has no basis for making that judgment. Now, I have a basis for making that judgment about whether it's worth the risks or not, But she cannot know that risk. She cannot make that trade-off for me. It's not a matter of her doing her mathematics wrong. It's a matter of her simply being unable to look inside my head and know how much something is worth. And that's the great problem I have with consumer product bands. I don't dispute the fact that the product is dangerous. In fact, I don't think I'd be playing it around my own children in the backyard. The product is quite dangerous, but so are a lot of other products in my house, in my car, in my steak knives, there are a lot of things that are dangerous. And I judge whether or not the value of using the product is worth whatever danger there is.

11:56The regulation of consumer products seems to be predicated on this idea that these values can be determined by some god-like Consumer Product Safety Commission who can tell what things are worth the risks and what things aren't worth the risk. And I think on methodological Austrian grounds, that's simply, I don't even think it's an Austrian point. That's standard neoclassical economics, I think, even buys that. Yeah, and isn't there also something funny? These bureaucrats don't often anticipate the responses of regular people to their bands and to their attempt to create a safe environment. I mean, oftentimes, I mean, people like dangerous stuff, right? For one thing. I go to the playgrounds often times and I see that they have now new safe playgrounds.

12:42For example, they've eliminated steel, things that you climb on and replace them with plastic tubes. You can look and see the kids are walking on top of the tubes, even surely more dangerous. Of course. Why climb mountains for fun, which is a fairly risky activity. It's routine for me to pick the hardest route to the top of the mountain rather than the easiest route, which is kind of a violation of standard economic theory, I think. We usually pick the lowest cost way to get to an objective, but part of the fun of climbing the mountain is taking the hard route where I have to climb instead of the one where I can just walk to the top of a trail. And it's possibly true that, and you could never quantify this, I suppose, but that after the abolition of Land Arts, there was something even more dangerous that came about that people enjoyed doing recreationally, right? I imagine that's the case.

13:29Another example I have is pool sticks, people used to throw these little diving sticks in and Pools. 20 million of these things sold in the mid-90s. 20 million of them. And the Consumer Product Safety Commission banned this product also. Do you know how many people were hurt? Nine. Not 90, not 900. Nine. And none of them died. They were impaled. The little stick punctured their skin. But nobody died. I think there was one eye injury that was a little bit serious. But other than that, so you have 20 million of these products that People are enjoying. I mean, objectively, you can see them enjoying the products. Subjectively, we can't measure it, but you can see that there's some enjoyment going on, and because of nine accidents out of 20 million of these products sold, they banned it. It's just really quite crazy, and I don't know what people are doing in their pools today.

14:15As if there's nothing else you can throw in a pool to dive for? Precisely. Exactly. Now, have you seen these skateboards? I wish I could remember the name of them, and listeners will laugh that I don't know them. But they're split in the middle. They only have two wheels. Have you seen them? No. They're split in the middle. They have two wheels and you have to balance them. They're not only regular skateboards. They're called... I don't remember. Anyway, I got them one last week because I saw all the kids in the neighborhood riding one. I thought, that's a snap. And I got one and it fell flat on my back immediately and suffered for 10 days as a result. And I thought to myself, it's unbelievable that this product is even in existence. There are professional busybodies out there that will complain to the Consumer Product Safety Commission about products that they simply think might be dangerous and once a complaint is filed the lawyers pursue it and that's why I think this pooled toy, nine injuries,

15:14you can imagine there were hardly any complaints probably, there were a few injuries but it only takes a few complaints sometimes for a product to be banned from the whole country. What drives this? Is it that the public servants are really concerned for our well-being? Honestly, I probably think that's a big part of it. They really do think that they're out there to protect unknowing people. There's a certain arrogance associated with that, that they know better. Again, that quota, that whatever recreational value this may have is simply not worth it. It's a certain arrogance that they know what's better for people, and they can make those cases. What about the tendency of, well, is there any documented case where a product is lobbied for by a competitive, the ban on a product is lobbied for by a competitive company? For example, you know, some other company that's not making lawn darts would get annoyed at the profitability of this particular product and then draw attention to its dangers as

16:22a way of hurting the competition. Not that I've seen, but I wouldn't be surprised, I don't know of any particular instances like that. Not at all surprising, you see that in a lot of other areas of regulation. Now is it the case most often that, I remember a few years ago there was a case of some Christmas The company that manufactured the product had withdrawn it from production before the government did. Yeah, that very often actually happens. In a lot of these cases, the companies themselves realize a mistake, and the ban, the big celebrated ban, in fact, is ex post, and it gives the Consumer Product Safety Commission headlines, and they can claim, look what we did, but in reality, the market process pretty much took care of the problem. That doesn't always work. I mean, the Longe Art ban, in fact, was quite unpopular at the time, in the mid-80s or 1988 when they did it. It was very unpopular.

17:33They had to undergo a big public relations media campaign to convince people to throw their copies out, which is one of the reasons why finding a copy today is so hard, is because a lot of patriotic Americans said, oh, this thing is now banned. It wasn't banned. I mean, you were allowed to possess it. You just couldn't sell it. But they thought it was their duty as American citizens to throw the product in the garbage. So now they're kind of collector items as well. And there are still an underground market of people out there that play the game. They have tournaments and things. So it was in the headlines, you don't remember this? Oh yeah, I do remember this. This was big news, that they're banning this product. So in this case, the commission was in fact well ahead of the market, but for the ban, the product would have been around for a long time, probably still be around. So it was patriotic to throw out your laundry.

18:19Oh yeah, they had bans, that's right, it really did make a big deal. They've got posters, I have examples of posters where they say, this is a dangerous product, we urge you to dispose of it and throw it away. in a way. And most people did. You have to really look hard to find copies. I'm lucky I have two boxes to complete sets. So you have land art parties? Well, I'm afraid to because it is a dangerous product and it's known to be dangerous. If someone got hurt, I'm pretty sure we could have one at the Mises Institute here, but I don't imagine your lawyer would appreciate the liability that you'd be taking. That's This is actually a market process, too. The reason I wouldn't play it is nothing to do with the band, be sure. It's not illegal to play it. But I wouldn't do it because I don't want to take that kind of liability.

19:07Right. And when you say that, too, is a market process, what do you mean? Well, I mean, I think that when people harm each other, that the market historically has always had a process for people to get paid. You can think of it in a Rothbard sense, but even, you know, the common law has always allowed for people to redress harm that's occurred and when it does happen. And so, you know, if you, if I invite you to my house and say, hey, let's get drunk I think tort law is kind of run amok in the United States, but generally speaking, the idea of torts is a perfect, I think I consider it to be part of the I think I consider it to be part of the market process, and it wasn't until just a few hundred years ago that the government took over that process.

20:15Historically, the process of adjudicating or of redressing those kinds of torts was just done by private people in negotiation in what I think looks like a market process. So much of the regulatory activity by the Consumer Therapeutic Safety Commission and the FDA and all these other outfits that regulate what consumers do seems to be premised on the idea that the capitalistic institutions that are marketing these products have no concern for the well-being of the consumer at all, doesn't it? That's exactly what they seem to think. And the idea that people are just captive to advertising campaigns.

21:00And one of the ironies there is that, you know, this is sort of a John Kenneth Galbraith point, that we all just respond to whatever the latest advertising is. And like robots, we march off to Walmart to buy the latest gadgets on television being advertised. The irony is that advertising bans don't work. We've never been shown it really worked. In fact, there was an advertising ban of sorts on lawn darts. They made them take the pictures of children off the copy of the box. In fact, mine has a copy of the child on the box. They made them move them from the toy section into the sporting goods section. And ultimately, they actually moved them out of toy stores completely and only could be sold in sporting goods stores.

21:45and so they were really trying to change the marketing image of the product and it didn't work, it's still getting hit, hurt. But again, if advertising was such a powerful influence, if you take away the advertising, we should stop the behavior, but we don't, you know. And so when you take away the cigarette advertising, people still kept smoking in the large market. There really is no evidence. I don't think there's any evidence from the advertising literature, the academic literature of marketing, that these bans have dramatic effects. Now I think that what you see is you get brand effects. If you advertise a particular product, a brand, people will switch to that brand from another brand, but you don't convince people to smoke cigarettes. You convince them to smoke Marlboro's instead of some other brand, or in this case you convince them to buy this brand instead of the other brand.

22:38There's evidence, a lot of it and that's why businesses spend money on advertising is because they know it is effective in directing consumers to their product but usually not to their product from some other competing product. It doesn't get them into the market, it gets them into their part of the market. In fact, if advertising were as effective as some of these arguments seem to presume, it would be a lot easier to be a business person, wouldn't it? Oh yeah, sure. Advertising is mostly a lagging indicator of what people want. People advertise what people want, not the other way around. Hayek kind of made this point. We didn't want lawn darts before we saw the ad, because they didn't have ads for lawn darts until they had lawn darts.

23:33So it's very circular and it looks like the advertising came along with when we started to buy the product But it was what we really wanted is the advertising was following the reason they're advertising because we want it, right? Right, and you know a little bit of market education out there. We have the product come and get it Here's the price precisely that sort of thing. Yeah What about the reverse effect of bands? I mean, I guess the poster child here in favor of regulation is in fact smoking, right? I mean, there have been massive controls and all available evidence as far as you can trust it suggests that smoking is on the decline. Now, do you attribute that to the controls or just changing culture? I think it's some of both, but I don't dispute the fact that bans cause people to do less of the thing being banned. I mean, fewer people play lawn darts today too. In fact, hardly anyone plays that. Most people have never even heard of the game. And so, a lot of people

24:28People don't smoke marijuana or do cocaine because it's illegal. Bands do work in that narrow sense that they don't reduce to zero, but they do reduce the amount of people. People do that thing. That's not surprising. I mean, when you tell people, in the case of Wandaars, there's criminal penalties if you sell the product. People are probably going to stop selling it or a lot fewer, so it doesn't surprise me. I think it's silly, for example, in the case of the drug war, I think it's silly every I hear someone say that they think if drugs were illegal, fewer people would do drugs because they're no longer forbidden fruit. I don't buy that. I'm pretty sure that if drugs were illegal, more people would do drugs. I think there'd be a lot of other benefits for leaking drugs legal, but that's not one of them.

25:13And the prices would be lower, too. So prices would be lower, safer, less risky, I think more people would probably do them. I think it's a good idea, but I don't think that you can argue that that forbidden fruit argument, I don't think. I just don't think it makes a lot of sense. So yeah, the ban, the various strategies, reducing advertising on cigarettes, the banned public smoking bans, I'm sure they've reduced smoking, but I'm back to my first point. How did they know it was worth it? People smoke because they like to smoke. There's enjoyment there, and a lot of former smokers will even attest to the fact that they miss it. Right. Now, they did it for a reason, because it was too complicated, too expensive to keep smoking with the taxes, or too cumbersome with the rules, or maybe they were motivated by the health benefits of stopping smoking, but they still miss it.

26:05There was value there of smoking, and that's gone now, and again, you're substituting the views of doctors or regulators for the views of individuals about what things are worth the risks. Did you follow this pseudephedrine or band? Do you take this drug called pseudephedrine? I've heard of it. It's very effective. It's called pseudephedrine. It's probably not as effective as phedrine. So under Bush, there was this idea that people were using it to make methamphetamine. And so now, to get it, you have to kind of jump through a number of hoops. That's a drug story. You give it a driver's license and a limit to quantities. It's a big problem because the replacement product doesn't actually work.

26:51Yeah, that's exactly right. This is a great example of the sort of slippery slope. Unintended consequences of the ban on, in this case, methamphetamines. and how that causes us to go down this, well we've got to ban this now or regulate this because people are using that. We had the same thing with baby formula. There are a lot of stores where to buy baby formula you have to, it's kept behind the counter because it's stolen a lot for a couple of reasons. One is baby formula is very high value with low volume and so it's a good thing to steal and there's a black market for baby formula out there. The other reason is they use it to cut cocaine, powder cocaine, so it's a high theft item, so the stores are putting it behind, but again, people wouldn't steal baby formula in normal circumstances, it would be silly.

27:47What other products have come about recently, I mean, this sort of pediment ban has gotten virtually no attention whatsoever, and nor did I see any real evidence that there was any kind of national crisis going on with regard to this. I've tried to look it up. I didn't really see anything other than just assertions that every third person is making money in the basement or something. I think that's basically the case. Any other products that come to mind? Well, it seems like every few days there's a recall or something. Most of the recalls are pretty trivial, at least in the consumer product case. It's not so much the ones we hear about that are the problems, though. It's the ones we don't hear about. The real problem is the unseen, not the seen here.

28:46And that's the tragedy, you know. If you die from some disease and your death certificate says, you know, it'll say the cause of death, it'll say, well, he died from this disease. It doesn't say he died because the FDA prevented a drug company from researching a drug that would have otherwise saved him. They don't write that down. It's an unseen cause of death. But people statistically we know die from those kinds of things. They just write down heart attack. They don't write down what might have saved you. So that's the biggest risk. That's why I like the Londarts thing. I use it as a trivial example with students, but I use it because people really enjoy that game. It's something that's quite tangible. You can say, you know, all that laughter is gone.

29:34It's been just taken away from the world. Now it's been replaced with other laughter, but maybe that laughter wasn't quite as intense as the laughter that we had the first time. That's the kind of thing. It's a trivial and fun example, but it does illustrate the more serious problem of the same logic as being used to regulate our medical products. And these godlike entities at the FDA are deciding what drugs are worth the risks for you and me. On a macro scale, we're always seeing that take place with the regulation of the financial markets. We're going to regulate, so there's no more risk, downside risk to anything. We're going to have a law against, it seems like we have a national policy now that says markets must never be allowed to, there must never be a downturn under any circumstances. Markets Well, it's a fool's errand. The way we're getting rid of risk is by telling people if you lose money, we're going to bail you out, which is not a way to get rid of risk, it's only a way to encourage people to take more risk in the future.

30:43So it looks like we're reducing risk, but in fact we're simply generating more of it. Have your students been receptive to your message? Absolutely. This bailout, for example, is very unpopular. I've yet found a student who really thinks it's a grand idea. They're all sitting there saying, well, we didn't take out some prime loan. Why should we be on the hook for somebody who did this? Or why should we bail out a banker who knowingly lent money to people they knew couldn't pay it back? I think it's a real popular view among young people, and actually just generally people I talk to. I encourage you to go around and ask people, what do you think about the bailout? You're going to get nine no's to every one yes, and the one yes is going to be somebody who's got his hand in it like a banker.

31:31People that have their hand in the cookie jar, they love the idea of a bailout, but normal people, vastly more people, What do you expect to be the consequence? Lots of people are very pessimistic right now. I mean, in light of the policy response. I'm a genetic optimist, actually. It's hard to maintain that in the face of the news. But I'm actually pretty optimistic. I think this goes a lot to my larger research agenda, which is to study the rest of the world. in the United States, they are far worse almost everywhere else and it gives me anyway a lot of perspective. I see.

32:16So I tend to be pretty much an optimist about the United States because it's still got the most free markets, the most, not as free as I'd like, but the most free, the most energetic, most entrepreneurial. It's still a place that is willing to tolerate some degree of failure, not enough here as we're seeing, and put all that together, I think the long term prospects are quite good. I think we're going to pay a price. So far, I can't decide right now. My great worry right now, if I have a worry, is whether or not the new administration is going to fundamentally alter the structure of the American economy. I can handle taxes, a few more regulations, a few things here and there.

33:01We're going to get that. We're going to get more regulations. I'm going to get higher taxes out of the new administration. That's just a given. But that I can tolerate, because that stuff can be undone, maybe. But what I'm really worried about is structural, fundamental structural change to the way in which our markets work. You know, some kind of industrial planning type ideas. You see hints of that out of the Obama administration, at least its rhetoric. Frankly, so far I haven't seen a lot of direct evidence that we're going to move in that direction. So it gives me some reason to be optimistic. You know, we're going to get higher taxes and regulations, but that can be done without fundamentally altering the way in which we go about our lives. It just means we've got to get more money to the government. That's bad, but it's not, you know, completely changing the way in which the world works.

33:52So I think that's what we're going to have happen. There have been a few statements here and there where you really scratch your head and say,

34:28as much as I didn't like Clinton. I'm so pleased that you're at Auburn University and I wish you the best in the teaching for the rest of the semester and I hope that we get a chance to do this again. Thanks. I just want to say that one of the great things about coming to Auburn was that right across the street is the Mises Institute. You can come over and enjoy the speakers you bring in, the students you bring in. It's an asset. We're looking forward to working with you.

34:58The Theory of Money and Credit