The Austrian school, sub-prime, and speaking of centrally-planned economies…

Did you know, for example, that agricultural subsidies are set in five-year plans, here in the US? Those crazy commie Chinese. I mean. Wait…

Meanwhile, Hank “what is this thing called foreign exchange, anyway?” Paulson is pushing ever forward, along with his friends in the George “what is this thing called mature, responsible government, anyway?” Bush administration, with their five-year plan to fix interest rates.

George W. Bush is expected to announce on Thursday a five-year interest rate freeze on some subprime mortgages as part of a deal brokered by Hank Paulson, Treasury secretary, to prevent a tidal wave of home foreclosures.

The five-year freeze – a compromise between regulators, who were pushing for a seven-year freeze, and some lenders, who had argued for a one- or two-year freeze – was in a draft accord circulated on Wednesday, a Treasury official confirmed.

…

Under the plan, mortgage servicers would agree to the five-year rate freeze voluntarily. An industry lobbyist said the freeze would apply to subprime adjustable rate loans taken out between January 2005 and July 2007, with rates scheduled to step up between January 2008 and July 2010.

Although not directly related, I liked this passage, most of all:

Speaking at the Nasdaq stock exchange, Mrs Clinton said the financial sector had to accept its share of responsibility. “Wall Street shifted risk away from the people who knew what was going on and on to the people who didn’t,” she said. “Wall Street helped create the foreclosure crisis, and Wall Street needs to help solve it.’’

I agree – the moreso, had she mentioned her own culpability, being First Lady, and then Senator, for the period in which Greenspan loaded all these cannons with shit, aimed them at fans and then retired to write his goddamn book, I Can Be Pontius Pilate, And So Can You!

Here’s an interesting point of reference:

The Chinese government on Wednesday froze prices that it controls for the rest of the year, in the latest sign of Beijing’s mounting concern over inflation.

…

“All current rules on goods and service prices controlled by the government should be strictly implemented. Any unauthorized price rise is strictly forbidden,” the statement said.

The ministries ordered local governments not to raise prices without the approval of the National Development and Reform Commission, the main planning agency.

The statement urged local governments to raise minimum wages as soon as possible to make up for inflation, which jumped to 6.5 percent in the year to August.

That was mid-September – a little bit before that Secretary Paulson fellow went on his tour of lecturing other countries on how to govern and regulate financial markets.

This would be where the Austrian school (with whom I find I am ever-increasingly sympathetic) comes in. Specifically:

In a mixed economy, government decision makers can use information generated by markets, but as government grows relative to the market sector, market prices contain less information to guide resource allocation, rendering the economic system less efficient. Thus, smaller governments naturally act more efficiently than larger ones.

In addition, government institutions often contain incentives to make decisions that work against the public interest, and because government decision makers have no invisible hand to pull them toward socially desirable policies, the self-correcting aspects of market activity play no role in the public sector. As government grows, the ability of the price system to effectively convey information leading to efficient resource allocation breaks down.

… government intervention leads to more government intervention because all interventions have unintended consequences. A major source of the unintended consequences is the response of affected individuals who try to avoid suffering the negative consequences of the intervention. Thus, taxpayers who face higher taxes look for ways to avoid taxation, and individuals alter their behavior to avoid the negative effects of government regulation. Such responses create three sources of additional intervention.

First, the government might close loopholes to try to force people to behave as originally intended.

Second, because people try to avoid the adverse effects of interventions, an initial intervention will fall short of its goals, creating demands for more intervention to produce the desired effects.

Third, an intervention will produce unintended negative consequences that people may not even realize resulted from the intervention. When these negative side effects show up, demands will arise for more government intervention to remedy them. Because one government intervention creates demands for more intervention, the mixed economy moves increasingly toward government control.

Sing out when any of this becomes familiar. This is a trope to which I return, and ever will return, often: there is (as far as I’m concerned) no such thing as big government vs. small government; there is no substitute for good government. In this instance, only bad governments fix prices; only bad governments push five-year plans onto otherwise operable markets.

UPDATE: from a colleague:

I am naturally cautious of anything with the words

1. “five year plan”
2. “the master plan of”, or
3. “the final solution to”

in the title.

Full disclosure: I don’t like the Economist

… my favourite opinions of the rag itself having been penned over at the eXile (The Economist: The World’s Sleaziest Magazine):

Thanks to the English magazine’s clever rhetorical strategy, calibrating an effective mixture of aristocratic contempt, two-notches-smarter-than-Newsweek diction, and occasional anti-elitist populism to pander to its majority-American readership, readers trust The Economist. They – particularly American readers – trust it because they think it knows more than they do; this is its entire appeal. They even get a sick thrill being talked down to by a dirty old aristocratic prig.

For Americans in particular, accustomed to the lifeless, dumbed-down, least-common-denominator prose in their own media, reading The Economist is its own reward, giving them the sense not only that they’re smarter than the average Time subscriber, but that it even makes them vaguely decadent, in a literary-aristocratic sort of way. They become smarter by osmosis simply by being in the imagined drawing room of The Economist’s wit-slinging editorial offices.

In reality, The Economist is one of the most appallingly wrong and evil – as in responsible-for-millions-of-dead-people evil – organs in the world today.

Nice, eh? It’s actually a very well-put-together critique, focussing on the Economist’s various writings concerning Russia and, more specifically, Putin.

New kick in the nuts! The blog GlobaLab (I can’t stand people being cleverer than me) has a run-through (literally. Like, with a sword) of a story by the Economist, concerning a book about non-profits. Did you catch all that?

From the Economist:

Social entrepreneurship — the application of business principles and practises to solve social problems — is all the rage. The new sort of philanthropist who sees giving as a social investment wants to support social entrepreneurs in the same way that for-profit investors want to back ordinary (anti-social?) entrepreneurs. Judging by the number of courses in social entrepreneurship now taught at leading business schools, many an MBA student would rather work for a non-governmental organisation (NGO) than a traditional company.

Yet even as its popularity soars, sober observers of social entrepreneurship are starting to ask if it lives up to the hype. Where is the social-entrepreneurial equivalent of a for-profit start-up like Google or Microsoft or any other large global business? Where is the evidence of massive social change?

So far, so snotty. Rejoinder!

The Economist once again shows its contempt towards the NGO sector and its lack of understanding of its internal diversity. Kicking off with a series of scathing (and unreferenced) remarks about social enterprises, which seem to reduce the debate to a pathetic comparison between the successes of Google and those of the Grameen Bank (apples and oranges, anyone?), it then sings the praises of the 12 selected nonprofits for their excellent achievements (data, anyone?).

The fact that social enterprises and nonprofits might not actually be one and the same thing, or that being based (as the 12 selected organisations are) in the US as opposed to Bangladesh might offer considerable advantages to – for example – making the most of market forces does not seem to be a relevant piece of information for the illustrious weekly.

Excellent. Where would we be without the Economist to tell us how things are supposed to work?

I’ll leave the last word with the most entertaining: the Russians.

How did The Economist get to such a vile state?

The horrible answer is, it’s always been this vile. If you go back to The Economist’s beginnings in Victorian England, you’ll find, for example, the magazine’s brave stand on the Great Irish Famine, the English-led genocide that left up to two million Irish dead. When a cry went up to stop the famine, The Economist countered, “It is no man’s business to provide for another. If left to the natural law of distribution, those who deserve more would obtain it.”

And speaking of Hitlers, in the mid-1930s, The Economist even found time to praise you-know-who: “Herr Hitler is showing encouraging signs of statesmanship.” Yes, they really did write that.

The first and last example of genuine wit that The Economist ever produced.

The Gulf Common Market

Question: what is it we don’t like about the EU? The Common Agricultural Policy. Suppose, then, that a common market formed, and in that common market the key commodity was not agricultural production but, say, oil.

Six Gulf Arab states, including Saudi Arabia and the United Arab Emirates, will form a common market from the beginning of next year, said Abdul Rahman al-Attiyah, head of the Gulf Cooperation Council.

…

“The common market aims at creating a unified market in which GCC citizens can benefit from valuable economic opportunities in the Gulf,” al-Attiyah said. “The agreement will open the way for intra-Gulf and foreign investment in the region and increase the usage of available resources in the Gulf countries.”

A Common Oil Policy, then? Bear in mind that, among the key problems associated with peak oil, the fact that oil exports are declining even more quickly than oil production is prevalent, and a big contributor to the so-called ‘crunch’ that the rest of us face. A common market in the Middle East is more likely than not to exacerbate that, given that Market members will be top of the list to get the exports of bigger, superfielded Other Members.

There’s also the matter of the common currency, apparently still slated for 2010 (probably later). For the likes of the US, these are developments probably worth watching: even OPEC itself is “only” some 40-odd percent of oil production in the world, but (still, I suspect – although that Brazilian find will bump this around) two-thirds of oil reserves – hardly the entire market, but more than enough to make a serious difference if, say, oil stopped trading in dollars, and/or Arab states stopped pegging their currencies (or, by then, currency) to the dollar. Add that to the US’s loss of favouritism in getting sweetheart deals for oil, and the US has a pretty big problem.