Friday, June 13, 2008

Marginalizing Barry Ritholtz

Everyone has their weak points.

While I enjoy and profit from Barry's The Big Picture - today's most popular financial blog - he is horribly off his rocker on one subject.

In a recent post, Market Failure, Mortgage Style, Barry enthusiastically displays his ignorance on the matter.

When discussing free markets versus regulation, one of the basic tenets of laissez-faire economics is that human beings are rational, self-interested actors. This turns out to be a faulty premise. Humans can be illogical, irrational, and overly focused on the short term to the detriment of long-term performance results.

The current housing and credit crises was caused by many factors, but the primary ones have to be the Greenspan Federal Reserve which had abdicated its regulatory responsibility to supervise banks, and a banking industry which forgot what lending standards were for. The securitization process, corrupt ratings agencies, and a lack of Wall Street due diligence are the next level. A false belief that Housing Prices never decline also gets some blame. At the real estate level, Appraisal fraud, buyer foolishness, and financial ignorance also contributed.

The normal operations of the marketplace simply failed to work. Where markets fail to prevent recklessness, irresponsibility and behaviors that inflicts significant damage on the broader economy, some form of limited government preventative regulation is called for.

First of all, "market failure" is a doubly subjective notion.

What precisely is a market? Many would argue that real estate - as it's burdened with property taxes, zoning restrictions, and whatnot is hardly a freely functioning market. Meanwhile, others (e.g. the New York Times and perhaps Barry) don't think there's enough regulation. Such a wide spectrum of opinion precludes talking about the real estate market scientifically.

And what constitutes a "failure"? I scarcely think the incidence of large price fluctuations defines a failure. Nor do I think the existence of fraud, mania, or people getting booted out of their the bank's homes is a viable definition. Heck, if fraud is a sufficient condition then Barry rightfully should be fulminating on government failure - as I pointed out on Barry's blog thread:

So how much time do you want to waste debating a a rickety theoretical assertion?

Here's a snippet from The Market Failure Myth:

The term "market failure" came into frequent use by economists during the 20th century. During the 1930s, economists like Joan Robinson and Abba Lerner succeeded in focusing the attention of their colleagues on imperfections in market prices.[i] Deviations from optimal prices in markets were responsible for failures to direct resources to their most highly valued uses. Thus, markets supposedly fail on efficiency grounds.

By focusing on efficiency in the use of scarce resources and failures in markets to do so, interventionist-minded economists try to show that their concerns are utilitarian and scientific. There is nothing inherently wrong with having such concerns. Ludwig von Mises demonstrated the importance of distinguishing between value-free economic analysis of how to attain ends in and normative discussion of what ends we should attain. It is, however, important to also distinguish between those with genuine concerns of this kind and those who instead only appear to have them.

Make sure you read that whole article.

The fact of the matter is, "market failure" is an intellectual ruse. Historically, it's been a Trojan horse for elites to impose their fashionable notions (fairness, optimality, efficiency, justice, etc.) on the lumpen masses. Or, at least minimally, it's their scam for gainful employment as "policy makers". Just think Greg Mankiw and his Pigou Club Manifesto.

In that case (carbon taxation), the "market failures" are pollution, global warming, congestion, and terrorism. And the "fashionable notions" are Bigger Government, eco-paganism, pacifism,...

Now Barry Ritholtz is most definitely not looking for a government consulting gig, nor is he out to sculpt utopia.

I just think he's a bit of a whiner. Anyone can look back in hindsight and say that X, Y, and Z should have been done. The neat thing about theoretical time travel is that prescriptions don't have any negative side effects!

Now that I have made an argument that Barry's blog post FAILED, I want to point one one more thing:

Whatever label you want to put on today's mortgage/housing market, it certainly isn't failing for this renting, bank-shorting, cash-rich blogger!


Ritholtz said...

You are missing the main point:

The idea that market forces will keep companies from going rogue has not quite worked out that way. The broad economic costs of housing,c redit, subprime, etc. reflect that failure.

Milton Friedman want to abolish the Food and Drug Administration. It was unnecessary, as private companies would avoid taking risks with public health to safeguard their reputations and to avoid damaging class-action lawsuits.

I disagree -- and if you think markets always work, then start eating uninspected, unregulated food!

CaptiousNut said...


Now first of all, I want to say that I *know* you didn't find my blog post through some vain, google email alert on your name.

I *know* that you read my blog religiously!

But you are still quite mistaken. I did not miss your main point - I not only found it, I eviscerated it.

How's this:

The idea that GOVERNMENT FORCES will keep companies from going "rogue" has not quite worked.

In fact, the idea that any entity or system could alter human nature is quite naive.

Also, I would be very comfortable taking my chances with "uninspected, unregulated food."

Inspection and regulation haven't exactly done wonders for medicine and education, now have they?

By the way Barry, great call on Lehman Brothers!

Stay away from the "Big Picture"; your Little Picture insights, like LEH, are better and at least testable.

Taylor Conant said...

C (and Barry, since apparently he's reading and responding),

I was going to type up a big response applauding you (C) and pointing out some of the errors in Barry's logic, but then I realized that I was wasting my time because I've already written three posts on my blog related to the topic of market failure and the existence/lack thereof of a free market which we can criticize and blame for the real life results we live with everyday. I enjoin you both to read and consider, here they are:

Firepower In The War Against Central Bank-Aficionados - In this post I share a clip of an interview of Alan Greenspan from the Daily Show several months back, in which he admits to the distorting and dangerous effects of the Federal Reserve and a fiat currency regime. The take home lesson for this debate (market failure) is that Greenspan admits that central banks/fiat currency DO NOT BELONG in true "free markets." In other words, it's unfair to blame "market outcomes" for ALL the problems in the economy because at least some of these are caused by a fiat currency regime as arbitrarily established by the cartel called the Federal Reserve.

Burying "Market Failures" 6-Feet Under - This is my own take on the "market failure" phenomenon/terminology and I think I do a good job of explaining why the term loses meaning by being used in an objective sense when the failure observed can only be measured subjectively.

Does The Free Market Exist? Can It? - In this post I explore whether or not the free market does and can exist. The corollary to this discussion (market failure) should be obvious... if a free market doesn't exist (or can't), it's unfair to blame the current economic outcomes on a non-existent system. That's called defeating a straw man.

Barry, a rejoinder to your last challenge ("start eating uninspected, unregulated food!")... some of us here in the "free" country, operating in the "free markets" of America, might like to try this, but I do believe it is illegal to market foodstuffs to people without having FDA and other regulatory body-approval first. You win your argument by default, because the necessary conditions (freedom, free markets) by which we might test you do not exist.

Taylor Conant said...

Ahhh dang.

Here's the link to that last post I mentioned:

Does The Free Market Exist? Can It?

Thanks, looking forward to responses to this discussion

Tax Shelter said...

can markets regulate itself? probably not when the stake gets very high. The incentive to cheat and steal etc is just too great when there is millions and/or illions of dollars on the line. in that sense, it is true that marekts fail from time to time.

Taylor Conant said...

tax shelter,

You asked, "can markets regulate itself?" and you opined that "probably not when the stake gets very high. The incentive to cheat and steal etc is just too great when there is millions and/or illions of dollars on the line. in that sense, it is true that marekts fail from time to time."

Define "failure" in the sense that you used it and please explain how this "failure" is objective and not subjective.

Tax Shelter said...

markets fail when they send false price signals. a market is a market, it doesn't matter if it is completely free or not as long as every participants understood the rules going in. everything is subjective, objectivity only exists in the eyes of the beholder.

THD Credit Consulting said...

I did not miss your main point - I not only found it, I eviscerated it.


Taylor Conant said...

Tax Shelter,

Please define a "false price signal." Your inane tautology aside ("a market is a market"), you are defining a market failure as having occurred when a "false price signal" is sent, but this sounds like a highly subjective phenomenon.

Say I own a house, and I think it's worth $500k, but market participants won't consider buying for anything more than $400k. To me, $400k is a "false price signal" and to them $500k is a "false price signal." By your definition, it seems that markets "fail" anytime buyers and sellers disagree, however temporarily, on price. Or perhaps I have misunderstood you, which is why I am asking what you mean by a "false price signal."

By the way, how do you justify your position that a market MUST send out true price signals, otherwise it has failed? It seems you are giving conditions to be met by all markets that some markets (that is, groups of people interacting economically with one another) might not agree with you on. Say three people get together, form a "market" and do not care if "false price signals" are present or not. If they are, has this market failed anyhow, even though the market participants don't care?

I'll wait for your definition of a "false price signal" before continuing, it's too difficult to argue by guesstimation.

Anonymous said...

Uhhh - it seems like neither you nor the folks posting comments that agree with you (and disagree with Barry Ritholtz) know what a "market failure" really is, as defined in the established economics literature.

A monopolized market is a market failure.

A market with asymmetric information is a market failure.

A market with externalities, positive or negative, is a market failure.

A market where either buyers or sellers are not fully informed about all aspects of the product, including quality - generally because such information is not fully and costlessly available to each and every market participant - and must therefore resort to "informed" third-party opinions about such issues, including the opinions of ratings agencies and appraisers, is a market failure.

Learn the terminology before you jump into the debate, okay?

Taylor Conant said...


I just read your absolutely retarded, condescending post and I immediately thought to link you to a few posts I have written on the topic of "market failure" as far as providing an explanation of the phenomenon and categorizing it as a logical fallacy, but then I looked through the comments here and see that I already did that!

Did you not read those links?

Did you read ANYTHING on this post, you little dirtbag? God, I can't stand idiots like you that post crap without even reading what the hell is going on. Your post makes it seem like you didn't even read C's original post, either.


1. define "monopoly"
2. explain why a market must have 'symmetrical' knowledge amongst all participants for it to be a 'success'
3. explain why ANY externality constitutes a failure
4. don't repeat yourself, dolt, as your 4th comment was a repeat, further elaboration on your 2nd.

You are dull.

stumbling leftward said...

What is truly funny, TAYLOR, is how often you end up citing your own authoritative (cough!) blog postings as what is seemingly 'the final word' in the argument at hand.

Few examples could speak better on the topic of the chronic case of intellectual laxity of the American political right-wing than the the group's presupposition of the truth of its own insulated views than a demonstration from one of its own.

Way to represent there, playa...

Taylor Conant said...

stumbling leftward,

You're certainly free to try to refute my "authoritativeness". Are you able to do so?

If not, do you have an argumentative leg to stand on?

I am waiting.