The Securitized Housing Investment Trust Has Hit the Fan
By L. Reichard White
October 13, 2008
There are better reasons to avoid economic bailouts than that they haven't been thought out, they will be administered by an incompetent organization, and that they will indebt your kids, your grand kids and the as yet unborn."An open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention." --U.S. Treasury Secretary Henry Paulson, Shanghai Futures Exchange, March 2007
But despite that claim by U.S. Treasury Secretary Paulson just 18 months ago, with his proposal for the $700 billion bailout (at least $810 billion as passed by Congress) of the U.S. financial establishment, he has now instituted the biggest centralized governmental intervention in markets in the history of the world. Could he possibly be right?For more than four years ... civil engineers have been studying the destruction of the World Trade Center towers. ... The report confirms a chilling fact ... After both buildings were burning, many calls to 911 resulted in advice to stay put and wait for rescue. ... Fortunately, this advice was mostly ignored. According to the engineers, use of elevators in the early phase of the evacuation, along with the decision to not stay put, saved roughly 2,500 lives. ...In a connected world, ordinary people often have access to better information than officials do. --Question Authorities: Why it's smart to disobey officials in emergencies, www.wired.com, Issue 13.06 - June 2005
At base, what saved those 2,500 lives was the nonhierarchical communication characteristic of a "connected world." Which is why the internet as-we-know-it was originally funded -- by the U.S. Department of Defense as "ARPANET." Even before Al Gore invented it. The Pentagon experts were particularly worried about a nuclear attack.
What the Pentagon "knew" was that the military's hierarchical "chains of command" could be easily disrupted -- but decentralized communications networks couldn't be. So, paradoxically, one of the most centralized hierarchical structures in the world funded the development of one of the most decentralized non-hierarchical structures in the world.
Why should you care? Because "decentralized" works better.
You probably know about Katrina - - -"Any community that fails to prepare -- with the expectation that the federal government can come to the rescue -- will be tragically wrong," HHS Secretary Mike Leavitt said in a speech April 10. -- U.S. Plan For Flu Pandemic Revealed, Multi-Agency Proposal Awaits Bush's Approval, Ceci Connolly, Washington Post Staff Writer, Sunday, April 16, 2006; A01
But how about Hurricane Rita - - -Three days before landfall, [Hurricane] Rita bloomed into a Category 5 and tracked toward the city. City and Harris County officials told Houstonians to hit the road, even while the population of Galveston Island was still clogging the freeways. The evacuation itself wound up far more dangerous than the storm: 110 people died during the effort, while the eventual Category 4 storm killed nine. --Ike whips up waves as it steams toward Texas, Sep 12 01:12 PM US/Eastern, By JUAN A. LOZANO, Associated Press Writer
It's counterintuitive to most people, but decentralized structures really do work better than the centralized alternatives. The most ubiquitous -- and best -- examples are markets. Especially free markets. Here's one reason:.... there will enter the effects of particular information possessed by every one of the participants in the market process, a sum of facts which in their totality cannot be known to the scientific observer. It is indeed the source of the superiority of the market order, and the reason why, when it is not suppressed by the powers of government, it regularly displaces other types of order, that in the resulting allocation of resources more of the knowledge of particular facts will be utilized which exists only dispersed among uncounted persons.--F. A. Hayek, "The Pretense of Knowledge," New Studies in Philosophy, Politics, Economics, and the History of Ideas, p. 27.
In other words, combined, all the folks participating in markets have more and better usable information than any central controller possibly can. And they're all free to use it in different ways.
Which points to another important reason decentralized works better than centralized. It's called "gamblers ruin" by folks on the non-casino side of the gambling tables. It's a simple concept: If you consistently put all your eggs in one basket, someday you'll drop it and break them all. Centralized structures, almost by instinct, regularly put all the eggs in one basket. The $700 billion Wall Street bailout to be administered by the centralized U.S. Treasury, for example.
Decentralized structures on the other hand, resort to multiple parallel trial and error (and conceptually-guided trial and error) to arrive at multiple solutions. And, by the very nature of decentralization and free association -- and unlike top-down centralized solutions where R&D is often haphazard at best -- the R&D is built-in. And, unlike the bureaucrats involved in centralized plans, the decentralized proponents usually have enough confidence that their own "bacon" is committed and at stake. As in a bacon and eggs breakfast, where the hen is involved, but the pig is committed.
And there's at least another problem with the centralized approach: As one guy put it, "If you give someone a chance to sit on their butt and do nothing, they will." If people believe The Godfather is taking care of things, they don't take care of things themselves. And, if I don't want to wake up with a horse's head in bed with me, I better make sure he approves of anything I do decide to do.
If I perceive "The Government" is taking care of it -- or might take care of it -- or might not approve of what I do to take care of it -- at worst, I can relax awhile. At best, I can forget about it entirely. I egotistically call this "White's Law of Halo Damping." My personal response is damped within the halo of perceived government action."I think the small and medium sized businesses absolutely -- and consumers can [get a loan]. I think before, we weren't risk aversive enough ...It's all the uncertainty out there and I think until we get the [Paulson] package announced, that uncertainty will remain." --Jon Evans, CEO, Atlantic Central Bankers Bank, CNBC, September 25, 2008
...We have to see what type of relief is put forth here. ...we are waiting for that magic bullet that would free up our capital, give us some certainty as to valuation -- what the examiners, regulators expect from our balance sheets. --Damian Kassab, Chairman & CEO, Warren Bank Holding Company, CNBC, September 26, 2008Some traders are suggesting there won't be a bottom until the markets rally on a day when the government does nothing. --Becky Quick, Squawk Box, CNBC, October 10, 2008
So clearly, we should shun centralized plans and "solutions." But it's well to remember that doesn't mean no plans or solutions. Far from it:What those calling themselves planners advocate is not the substitution of planned action for letting things go. It is the substitution of the planners own plan for the plans of his fellowmen. The planner is a potential dictator who wants to deprive all other people of the power to plan and act according to their own plans. He aims at the one thing only: the exclusive absolute preeminence of his own plan." --Ludwig von Mises
That "one thing only" would, in this case, be "the exclusive absolute preeminence" of the "all-eggs-in-one-basket" Paulson Bailout Plan of course - - - to the detriment of normal decentralized free-market forces and all that information, talent, tested variety and personal involvement they would otherwise bring to bear.
So the government doing nothing isn't really doing nothing. Far from it.
An email sent to CNBC suggested calling Paulson's plan the "Securitized Housing Investment Trust." If you don't mind an R-rating, do the acronym.
Proposing centralized plans is often a symptom of sincere ignorance. Decentralized structures, by their nature, are hard to perceive and usually impossible to see or touch. This regularly causes consternation among a wide variety of folks. Imagine someone who doesn't understand "wind" trying to explain a flying kite - - -Writing of the era just before Mikhail Gorbachev came to power, [Arkady] Schevchenko reported that top Kremlin officials "are simply baffled by the American system. It puzzles them how a complex and little-regulated society can maintain such a high level of production, efficiency, and technological innovation. Many are inclined toward the fantastic notion that there must be a secret control center somewhere in the United States. " --Michael Rothschild, Bionomics; Economy as Ecosystem, (New York: Henry Holt and Company, Inc. 1990), p. 257
At that point in history the now defunct U.S.S.R.'s economy was centrally planned by Gosplan. Remember all those five-year plans that, because of failure, became ten-year plans, fifteen-year plans, twenty-year plans? The Soviet oligarchs couldn't conceive of a system that worked better -- even though it was staring them in the face.
So, while you can point to the Pentagon, pointing to the wind that floats that kite is a little harder.
Even worse, the superiority of decentralized "structures" is even harder to recognize than the fact that they exist.
But, speaking of the Pentagon, as it turns out, even decentralized warfare works better than old fashioned centralized warfare too. The summer before last, approximately three thousand decentralized Hezbollah militia men defeated the entire Israeli Army , one of the top-rated state militaries in the world.
It seems, then, that decentralized processes and structures excel everywhere. Internet Explorer is losing market share to FireFox, Windows to Linux, etc.
Yet Mr. Paulson and a bevy of other influential wonks, against the advice of many other influential folks (and the will of the American people) shamelessly pimped the U.S. Congress -- for the second time -- to pass some version of Paulson's massive $700 billion bailout of the U.S. Financial establishment. And, Congress, true to their nature, indulged itself. At our expense.
Despite specious promises of big returns to future taxpayers (read "future governments"), Paulson's plan will be paid-for with taxpayer money, and financed not only by you, but by your kids, grandkids and the yet unborn. It may well lead to Gosplan-like control of the U.S. economy -- with equivalent success. And Paulson's doing it in direct opposition to his own pronouncement, made only 18 months ago -- with a centralized plan that marginalizes, pre-empts, and disrupts the decentralized processes that consistently prove to be superior.
Is there any possible way this could be a good idea?
L. Reichard White specializes in games theory and self-motivation in enterprises with uncertain outcomes. He supported his writing habit for over 30 years by beating casinos at their own games. You can find other dubious results from that obnoxious habit here.
L. Reichard White
lives several houses up from the site of the old Black Horse Tavern, a
birth place of the Whiskey Rebellion -- which explains a lot. He
supported his writing habit for over 30 years by beating casinos at
their own games. Visit his website at NEXIALIST
NEWS, his blogs (Serious
SENSE, UNCOMMON SENSE),
Hierarchy and Leadership? Not In MY Group You Don't! -- a key
chapter from his latest project, "The
HI-JACKING of Civilization" -- which has almost nothing at all to
do with 9-11. You can find links to some of his other articles here.
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