Private Firms as Public Utilities

Thomas Sowell writes,

What President Obama has been pushing for, and moving toward, is more insidious: government control of the economy, while leaving ownership in private hands. That way, politicians get to call the shots but, when their bright ideas lead to disaster, they can always blame those who own businesses in the private sector.

Another advantage of using regulation of private firms is that it allows political leaders to finesse the socialist calculation problem. They do not have to know how to implement their goals, or even to have goals that are implementable. They put that challenge to the private sector.

If the government had to tried to actually run a mortgage relief program along the lines that many economists were proposing back in 2009, it would have never gotten off the ground, because there were so many legal and practical difficulties. And when those programs were to slow to get underway and produced disappointing results, the politicians had the mortgage industry to blame.

31 thoughts on “Private Firms as Public Utilities

  1. Wow, just wow.

    Might be educational to see exactly what the mortgage industry actually did during the time period when they were supposedly doing mortgage relief.

    They had to screw up the program, as a successful relief program would have brought way too much truth out in the open regarding their activities. I knew a man who ran a mortgage brokerage at the time who, after a couple of months, gave up on the mortgage relief program. His reason? “These banks will not cooperate in any way, shape or form. From payoffs to titles, they just ignore you.” I guess Obama told them not to cooperate.

    But ya’ gotta love the chutzpah of people who keep blaming the government for things that happened because the private sector had no scruples and no one watching them.

    You just can’t win with you people.

    • You don’t seem to realize banking and mortgages may be the most regulate of all industries, depending on how you count education and healthcare. There is literally nothing the fault of the market in these industries.

    • I know, I know, the market made Bill Clinton sign the repeal of Glass-Steagull. Provide other examples of what the market did. Spoiler alert, I’m going to give you the places where the government was the motivator.

      • It had nothing to do with Glass Steagall. Why would you write something like that?

        “You don’t seem to realize banking and mortgages may be the most regulate of all industries”

        And you know nothing about what happened to the regulation of the mortgage industry starting in 2002. find a copy of Watters vs Wachovia. Read the FCIC report, especially the part of the violations committed by investment banks(somewhere over half of their mortgages).

        The housing bubble was formed 100% by the investment bank and rating agencies fraud, and the lack of regulation of these banks by many agencies, but mainly due to the Bush Administration taking state regulators out of the game.

        Your ideology will not allow you to accept actual facts.

        That is really sad for you.
        .

        • Hehe, nothing you can offer is hard fot me.

          Because I know it had nothing to do with it. There is no such thing as derelation whatsoever, even though the government is the one doing it. There is no deregulation when they control money and credit, monopolize the ratings agencies, offer the moral hazard of implicit bailouts, etc.

          • Fraud was just invented in 2002. That is a really interesting theory.

            I like how you think you know what I know because you maybe read one report.

          • 100% fraud? No relaxing of standards? No credit expansion? No house prices boom. No adjustable rate mortgages? No recessionary pressures? No interest rate changes? Wow, I never knew knowing more than one thing made me so ignorant. Thanks!

          • Leave me out of this, Andrew’.

            FWIW, I agree with you in this debate. Maybe you’ll want to switch sides now.

          • Thanks for proving my point djf. I eagerly await learning how this discussion demonstrates that my blind devotion to my ideology means I don’t appreciate traditional American values.

          • Don’t take it personally djf, I just think if he is aware I’m comparing him to a conservative who also strawmans it would really hurt his feelings.

      • The biggest reason I don’t see the Housing Bubble the caused by the government is how much the US economy rhymed with Japan’s Stock/Housing Bubbles. (Although it was slower moving in the US.) My memory of 2001 and 2002 was everybody entered the housing and mortgage because it was the only growing market during that recession. As the bubble grew most private rationalized their choices for larger incomes. It was not any one moment it happened but occurred over the post-Dotcom years.

        • “it was the only growing market during that recession.”

          And clearly the government has nothing to do with pushing finance toward housing…

          • Yes, the government led a lot of horses to water, but I don’t strong evidence that the Housing Bubble was caused by a lot businesses and home buyers getting caught up in the bubble.

  2. Unfortunately, Thomas Sowell article is short on specifics of policy and pulled Goodwin’s Law by comparing Obama to Fascism of the past. (26 year old on insurance is mild example here.)

    In thinking about de-regulation, I still find the most effect time was Jimmy Carter & Ronald Reagan era with the Airline, Railroad, Financial and, most importantly, Ma Bell break-up. (I have always wondered if Ronald Reagan won the nomination and election in 1976 if Ma Bell would have been broken up as Judge Bork might have been given the case. By 1982 the case was already too far and Reagan administration was more focused on other things to not go along with Greene’s decisions.)

    Probably the two most interesting, markets for de-regulation and new programs are power and internet services. Any thoughts on how the states should de-regulate power? Living in California the power is huge expense clusterfuck after the 2001 issues…And the only thing it is now doing is making solar rooftops more economical. I think the Texas market is the best in the nation although they don’t allow wind producers to sell excess power out of state. In terms of the internet, it has been a great libertarian economic reality but how do you keep the government out of it while not allowing single internet access companies to own a local market? (And should we continue net neutrality?)

    • “Private ownership with government control” was literally the textbook definition of fascism when I was in high school.

      • But who is Thomas Sowell is writing for? (Yes National Review) Does he want make argument that Kevin Williamson and Jonah Goldberg to agree? Not a problem but are not changing many minds this way. Or does he want convince moderate Obama voters and potential voters against Obama policies? Comparing them to Fascism isn’t going to win change a lot people mind.

        • When your actual subject is fascism, Godwin’s Law does not really hold.

          What is funny is he is actually talking about fascism. When people like Sowell (and me) say “socialism” or “fascism” we mean that and not “you are a meanie pants, elect my preferred candidate!”

          But, because people can’t hear the difference, people like Sowell eventually stop kicking themselves in the head by trying to change minds.

          By the way, in unrelated news to people having their unassailable narrative, have we corroborated the story about how Sterling almost got himself shot in almost identical circumstances a few years ago?

      • We’ve long been on the path toward the German pattern of socialism even as the fascist were adopting their Zwangswirtschaft, “compulsory economy”. The Nazis adopted economic slogans of the New Deal. The only difference is that the New Dealers were stopped from the overt take over. But the creeping regulatory state has been on that path with increasing interventionism. It would be interesting to know how they got all the professors to go along with the sophomoric definition of socialism as only being full state ownership of the means of production. That certainly wasn’t how socialism was viewed prior to 1920.

        “Many advocates of interventionism are bewildered when one tells them that in recommending interventionism they themselves are fostering anti-democratic and dictatorial tendencies and the establishment of totalitarian socialism. They protest that they are sincere believers and opposed to tyranny and socialism. What they aim at is only the improvement of the conditions of the poor. They say that they are driven by considerations of social justice, and favour a fairer distribution of income precisely because they are intent upon preserving capitalism and its political corollary or superstructure, viz., democratic government.

        “What these people fail to realize is that the various measures they suggest are not capable of bringing about the beneficial results aimed at. On the contrary they produce a state of affairs which from the point of view of their advocates is worse than the previous state which they were designed to alter. If the government, faced with this failure of its first intervention, is not prepared to undo its interference with the market and to return to a free economy, it must add to its first measure more and more regulations and restrictions. Proceeding step by step on this way it finally reaches a point in which all economic freedom of individuals has disappeared. Then socialism of the German pattern, the Zwangswirtschaft of the Nazis, emerges.”

        ….
        “There is the Soviet pattern of all-round socialization of all enterprises and their outright bureaucratic management; there is the German pattern of Zwangswirtschaft, towards the complete adoption of which the Anglo-Saxon countries are manifestly tending; there is guild socialism, under the name of corporativism still very popular in some Catholic countries. There are many other varieties.”

        von Mises, Ludwig (1947). Planned Chaos (LvMI)

  3. Oh, I see, banks by keeping mortgages on their books WANTED to go insolvent so bad that they committed fraudil against themselves. And yet the government held none of those responsible accountable. This is fascinating stuff!

    • The people running these firms don’t care if they go insolvent so long as they personally benefit from that course of action. Combine this principle/agent problem with normal greed, wishful thinking, and difficulty of ownership or even managers to understand risk in any large institution and you’ve got a recipe for these sorts of things.

      I worked at an insurer that was short volatility and long MBS in 2007/2008. It’s not rocket science to figure out that the people making those decisions got bonuses year after year in the 2000s picking up pennies in front of a bulldozer, so they did so.

      When it blew up and the firm went under the people that made those decisions simply bailed ship. Most got to keep their compensation accumulated over the years. It didn’t even get in the way of getting another similar job. After all, lots of people made the same mistake at the same time, was some other megacorp really going to hold that against them.

      Shareholders and policy holders got screwed, but not the management actually making the decisions. It’s extremely easy to get that outcome in a “free market”. It’s called a principle/agent problem for a reason.

      • “It’s extremely easy to get that outcome in a “free market”. It’s called a principle/agent problem for a reason.”

        Which is why is extremely rare for it to cause a,global recession.

        • Note that I’m not making an efficient market argument. Quite the opposite. Principal agent problems weren’t invented in 2002 either. One thing that did change is massive in fluxes of credit making taking the other side of the trade irrational if not impossible.

          • We are back to what causes an economy-wide calculation error. And the null hypothesis is of course socialism.

      • Housing was not as valuable as we thought it was. Why?

        Because thousands or tens of thousands of people randomly correlated errors? Possible. Likely?

        Or because a few interventions drove some leveraged errors that had outsized effects such as keeping the costs of capital lower than otherwise for housing because housing is always a great investment (until it is overbought).

        Yes, managers,kept collecting bonuses. But what fueled the continuing profits?

        Again. Google “fed funds rate and mortgage rates.” Look at images for the 2000s period. Maybe they failed to cause a boom and bust, but they were damned sure trying.

    • Oh, I see, banks by keeping mortgages on their books WANTED to go insolvent so bad that they committed fraudent against themselves.

      Reading about the years 2001 – 2006, they did not believe their banks would go insolvent. In reality the US economy had a good 15 year growth increase (with the 2001 Dotcom dip) and only few people connected the dots. Only when the housing prices started falling, did the financial companies start realizing this fall. Most people in 2005, did not believe the US housing market would take such a fall.

  4. Related utility is not quite right, since that implies some natural monopoly, whereas many of these private companies are in competition with others.

    Instead the trend had been provision of redistributive Socialism via outsourcing to the competitive marketplace of mostly private companies that retain some discretion and room for maneuver and disciplining pressure of profits and incentives for efficiency and innovation, while still remaining highly constrained and controlled via regulation and tort law. The government pays the bills and writes the rules – which maybe you could call it’s comparative advantages – while the private sector delivers the goods and services, where companies are more competent (and, of course, preserve the option of shifting blame and responsibility for anything negative).

    I suppose one could make an analogy between the Fed and the banks or primary dealers. Why can’t I get an account at the Fed? Well, dealing with ordinary citizen customers is not what they are good at our want to do.

    Put together this is not quite fascism or the Old New Deal, though, contra a previous commenter, this is one of those rare instances in which it’s not unfair or inaccurate to use the term (see Gottfried’s latest book on the subject). Neither is it necessarily ‘crony capitalism’ though it seems inevitable that such a regime will result in very closer, quasi-incestuous relationships between concentrated industries and government. Compare the Defense Industry, with government as monopsonist and real customer, even if ‘on behalf’ of the people, the indirect clients.

    So the ‘New New Deal’ is an evolutionary refinement and extension of Eisenhower’s old Military Industrial Complex. Maybe “The Government – Private Providers Complex”.

    I think we’ll see most nations continue to converge to that political-economic model in reality (which is what FDR wanted and thought would happen), whatever the variance may be in the official, formal stories of what their governments are supposed to be doing and how they are supposed to work.

  5. This is basically the tobacco model. The left learned from the tobacco litigation and settlement that a lot of money could be made by everyone involved (except the consumer). That was the model for CRA and Obamacare and carbon trading.

  6. And this is supposed to be a bad thing? Aren’t markets what you believe in? So instead of choosing an workable approach, he should choose an unworkable one? About the way if government works, the solution is to make it unworkable?

    • Sure, we don’t really want socialists and fascists to fight it out all over again.

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