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
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!