(Photo by: Patti Perret/Hulu) Here’s the whole article I wrote with Phil Magness, published in the Wall Street Journal on February 20 (February 21 print edition.) ‘The 1619 Project’ on Hulu Vindicates Capitalism Its examples of racism are all the result of actions by governments. Hulu’s series “The 1619 Project” blames economic inequality between blacks and whites on “racial capitalism.” But almost every example presented is the result of government policies that, in purpose or effect, discriminated against African Americans. “The 1619 Project” makes an unintentional case for capitalism. The series gives many examples of government interventions that undercut free markets and property rights. Eminent domain, racial red lining of mortgages, and government support and enforcement of union monopolies figure prominently. The final episode opens by telling how the federal government forcibly evicted black residents of Harris Neck, Ga., during World War II to build a military base. The Army gave residents three weeks to relocate before the bulldozers moved in, paying below-market rates through eminent domain. After the war, the government refused to let the former residents return. Violation of property rights is the opposite of capitalism. The series also highlights the noxious role of the Federal Housing Administration in red lining. The FHA discriminated against minority neighborhoods by classifying them as too “hazardous” for lending. The writers could have strengthened their case by citing Richard Rothstein’s 2017 book, “The Color of Law.” Mr. Rothstein quotes the FHA’s statement in the 1930s that “no loans will be given to colored developments.” This policy lasted into the 1970s, leaving a legacy of economic segregation. Capitalism wasn’t the culprit; the government was. Economic historians have long known about discrimination by all-white labor unions. Jimmy Carter’s labor secretary, Ray Marshall, a labor economist, chronicled this discrimination in his academic work. The Wagner Act of 1935 gave white unions privileged bargaining positions under federal law. This government-sanctioned cartelization of labor allowed entire industries to exclude black workers. “The 1619 Project” asserts that labor unions advance the cause of civil rights, though the historical record says otherwise. The series recognizes the discriminatory effects of Franklin D. Roosevelt’s legislative agenda, which depended on the Democratic machines of the Jim Crow South. The narrator states that “the New Deal represented the first affirmative-action policy for white people.” We couldn’t have put it better. These and other government policies caused immense economic harm to African Americans. But they aren’t capitalism. They’re interventions into markets, state-sanctioned theft, and political payoffs to segregationists. The answer to these problems isn’t to place the burden on the market through reparations. It’s to root out bad government policies that continue, sometimes unintentionally, the long legacy of state-sponsored racial discrimination. That would be a worthy 2023 project. Mr. Henderson is a research fellow with Stanford University’s Hoover Institution and editor of The Concise Encyclopedia of Economics. Mr. Magness is director of research at the American Institute for Economic Research and author of “The 1619 Project: A Critique.” (0 COMMENTS)

What does it mean to say something is risky? How would we know? Would a failure confirm the view that a particular activity was risky?Consider two people gambling at roulette. Joe puts $100 on each number from 1 to 35. Jane puts $3500 on number 36. Both have bet $3500, and both bets have negative expected values (assuming a 36-1 payoff on the winning number, and 38 total numbers.)To me, Joe’s bet looks less risky. There’s more than a 90% chance he’ll win $100, although the expected value of the bet is still negative due to the fact that he loses $3500 if number 36, 0 or 00 comes up. Jane has more than a 90% chance of losing all $3500, but will win very big if number 36 comes up. That seems riskier. Now let’s assume that both people make their bets, and the little ball lands on number 36.  Does that improbable outcome mean that Jane’s bet was actually less risky than Joe’s.  I’d say no; she just got lucky. When I speak with people, I often get the impression that they conflate “risky” with “failure”.  That’s not how I interpret the term.  Consider two banks: 1. Silicon Valley Bank (SVB) takes deposits and invests them in Treasury bonds.  It is a fast growing bank. 2. Bank OZK (formerly Ozark) rapidly grows from a small Arkansas bank to a major lender for real estate projects in America’s largest cities. Which bank’s assets seem risker?  Based on this evidence, I would say that Bank OZK was far riskier. Now assume that SVB goes bankrupt, while Bank OZK is doing great.  Does that impact your view as to which bank engaged in a riskier strategy?  Should that fact influence your view as to which bank engaged in a riskier strategy?  If failure is evidence of riskiness, what does that imply about the roulette example discussed above. In 2018, I did a post on Bank OZK, citing it as an example of the sort of risk-taking bank encouraged by the moral hazard in our banking regime.  In retrospect, it looks like SVB would have been a better example.  But is that true?  Was SVB actually a riskier bank?  Or did number 36 come up on the roulette wheel? My failure to spot the bank that actually failed illustrates a problem faced by regulators.  In 2018, I was presumably looking back at the banking crises of the 1980s and 2007-10, and noticing that real estate lending often led to banking distress.  At that time, Treasuries had been in a bull market from almost 4 decades.  We tend to estimate risk based on past performance, especially the recent past.  Regulators are unlikely to spot risk that comes from an area that was not previously a major problem.  (Recall that in 2006, MBS investors were lulled by the fact that the US had never experienced a large nationwide decline in house prices.) In recent years, real estate has done surprising well, as inflation tends to boost the value of hard assets like land and buildings.  On the other hand, inflation reduces the value of T-bonds.  It’s quite possible that, ex ante, SVB’s approach was less risky (perhaps even profit-maximizing!), but these unpredictable macro trends hurt SVB and helped Bank OZK.  (To be clear, I suspect that there were other differences as well, perhaps Bank OZK has superior management.) I don’t believe we’ll ever be able to fix the banking system through regulation.  Regulators will always be like generals fighting the pervious war.  Instead, we need to remove the underlying problems—moral hazard and a lack of diversification.  Trump likes to talk about “Making America Great Again”.  How about “Make America’s banking system more Canada’s”? PS.  David Beckworth has an excellent piece in Barron’s discussing how the rise in interest rates has helped long-term borrowers (including the Treasury) while hurting bondholders.   (0 COMMENTS)

Scott Sumner recently posted on the importance of holding views that are inconvenient to your larger beliefs. I agree – it’s important for good intellectual hygiene to be aware of these things. In his excellent book Governing Least: A New England Libertarianism, Dan Moller makes a similar point, using constitutional law as a framing device: In theory, there ought to be a gap between one’s substantive position on abortion, or capital punishment, or gun control, or flag burning, or campaign spending, and what the Constitution says about these things, which would create the possibility of painful tensions – “I support abortion, but must concede that the Constitution contains no right to abortion”; “I support unlimited campaign spending by corporations, but deny that the Constitution carves out such a right.” The fact that one so rarely encounters partisans of issues tormented by constitutional barriers to their side prevailing indicates that in practice we are reluctant to acknowledge the distinction between substantive values and legal process – a depressing sign of how powerful motivated reasoning is. (A good test of our intellectual honesty is how often we experience this kind of torment.) With only slight exaggeration, I can say that when Obamacare was being challenged in the Supreme Court, knowing someone’s opinion on whether government should be more or less involved in health care predicted their belief about the constitutionality of Obamacare with a 100% success rate. Similarly, if I know someone believes the impact of private gun ownership is negative, I can make money all day long betting on what their view is about the meaning of the Second Amendment. In theory, it should be possible for someone to hold the belief that widespread gun ownership is bad, and should be curtailed by government, but also believe that such action is inconsistent with the Constitution, and therefore the Second Amendment should be repealed in order to permit such laws. In practice, I’ve had fewer encounters with such a person than I have with Bigfoot (if a vivid dream during a bout of sleep paralysis involving Bigfoot in your room counts as an encounter, anyway). What a remarkable coincidence that what the Constitution allows or forbids seems to always perfectly line up with what the advocate wants to permit or ban! But this post isn’t just here for me to make fun of motivated reasoning (or at least not just for that reason). I wanted to talk about a view I hold which is very inconvenient for me but, unfortunately, seems to be true. Much of what I find to be dysfunctional about the news media environment in America is being driven by market incentives. If I had to sum up my reasoning in a single soundbite, it would be something like this. The same incentives that led to the creation of the Discovery Channel’s Shark Week also led to the news media’s Summer of the Shark. The Discovery Channel airs Shark Week because doing so is a proven way to draw ratings. And the mainstream media hypes up rare but sensational events like shark attacks for the same reason – it’s an effective way to fish for ratings (no, I will not apologize for that pun). Media is, at bottom, a business – it makes its money by getting clicks, shares, views, selling subscriptions, and so forth. If there is a conflict between “produce content that provides a well-researched, nuanced, and thoughtful analysis of an important issue” and “produce content designed to get as many views as possible,” most news organizations have every incentive to go for the latter over the former. Like most businesses, success depends on producing something your customers wish to consume. Normally, that’s a great thing! But if most people want insubstantial piffle that flatters their existing political biases and confirms everything they already believe, media organizations that are most effective at providing that will get the most views, the most clicks, the most shares, and the most subscriptions. I don’t like this situation. I am a fan of the market mechanism and incentives, and I also think a free press is important. But I can’t deny that much of the sensationalism, the hype, and the echo chamber creation we see makes sense as a rational response to market incentives. And I don’t have a great solution for this either – as bad as I think things are, I believe attempting to counter it with government control of the news would be even worse. The best I can do is vaguely gesture at the need for a cultural, bottom-up solution where political loyalties are de-emphasized and viewed as less important, but that’s a pretty thin reed. Personally, I’d love to be convinced I’m all wrong about this, because I find this view very inconvenient – but at the same time, I’m aware that the fact that I want to be talked out of this belief probably makes me more susceptible to accepting bad arguments against it. As Richard Feynman once said, “The first principle is that you must not fool yourself, and you are the easiest person to fool.” Still, by all means, try to convince me in the comments I’m wrong.   (0 COMMENTS)

I’ll be discussion leader of a symposium this coming Friday and Saturday on the work of Thomas Sowell. I spent more time than I usually do coming up with discussion questions because Sowell’s writing is so clear, so evidence-based, and so persuasive, that I had trouble injecting controversy. The main controversy I could come up with is over his distinction between the “constrained vision” and the “unconstrained vision.” A very early article by Bryan Caplan helped me put my finger on my difficulties. Other than that, I found virtually everything in his writing straightforward. Here are some of my favorite quotes from Sowell. In his 1980 book Knowledge and Decisions, my favorite of his books, he discusses a famous economics article, “The Economics of a P.O.W. Camp,” written by R.A. Radford, a British economist who had been a prisoner in a P.O.W. camp. (By the way, if recall correctly, this article was on at least 3 of the syllabi we had during my first year of graduate school at UCLA, 1972-72. The article is a masterpiece.) Sowell writes: What is of wider social significance is that those prisoners who performed these services [as middlemen] were both widely utilized and deeply resented. The physical fallacy arose as spontaneously as the actions which demonstrated its falsity. In many of my classes I taught at the Naval Postgraduate School, after teaching Hayek’s “Use of Knowledge in Society,” which was also on at least 3 syllabi in my first year at UCLA, I used a short excerpt on the “Physical Fallacy” that includes the quote above. Here’s another excerpt from the same Sowell book: Like other forms of price controls, usury laws distort the communication of correct facts about credit risks without in any way changing those facts themselves. Here’s Sowell on the misallocation of labor due to conscription: Even in an all-out war, most soldiers do not fight, but perform a variety of auxiliary services, many of which can be performed by civilian employees, since most of these services take place far from the scenes of battle. From the standpoint of the army as an economic decision making unit, it is rational to draft a chemist to sweep floors as long as his cost as a draftee is lower than the cost of hiring a civilian floor sweeper. From the standpoint of the economy as a whole, it is of course a waste of human resources. Again, the use of force is significant not simply because force is unpleasant, but because it distorts the effective knowledge of options. One would take him to be saying that conscription is a bad idea. But an interaction I had indirectly with him (through his assistant at Hoover) in 1980 made me wonder. There are so many good Sowell quotes. I’ll do more later. (0 COMMENTS)

What is the libertarian analysis of the student loan forgiveness policy now being implemented (subject to Supreme Court approval) by the Biden Administration? Before we can offer any such examination, let us consider the following. The government first boosted tuition into the stratosphere by requiring all sorts of silly reports of universities, which necessitated the hiring of all types and varieties of academic bureaucrats. At one time, in the history of higher education, professors greatly outnumbered administrators; not any more. Then, in its largesse, this self-same institution lent money to students so as to be able to pay for the resulting enhanced tuition. Talk about creating the very problem you think you must solve. Now, the proposal is to forgive these resulting student debts. Libertarianism, of course, is the viewpoint that it should be illegal to threaten, or engage in, initiatory violence. With that introduction, we are ready to try to apply this perspective to this issue of the day, student loan forgiveness. One response to this challenge is to ask who is more worthy, on libertarian grounds, of being subsidized? That is, here is a booty seeking (or rent seeking, as the Public Choice theorists mischaracterize the matter) exercise, on behalf of supporters of this viewpoint. The two groups in contention for these benefits are these students who have not repaid their loans, and the general taxpayer, from whom additional taxes will be mulcted, if the program is executed. How shall we determine an answer to that question? It must be on the basis of which group adheres more closely to libertarian principles, of course. Someone has to pay for the forgiveness program; either the lucky students if this goes through, or the average taxpayer, who previously paid these monies, and, if these debts are repaid, will presumably benefit, other things equal, via lower taxes than would otherwise have prevailed. So, which group is more libertarian, and thus deserving of greater wealth? In my view, it is pretty much a tie. It is as if each assembly is worse than the other. On the one hand, the general electorate (apart from ballot box stuffing) is responsible for that senile old coot now occupying the White House. I need not say any more than that. This deviates markedly from libertarianism. What about the young students? According to that old maxim, if a young man in his twenties is not a socialist, he has not heart. If he still supports that malicious doctrine at the ripe old age of 50, he has no brain.  Then, too, through no fault of their own, these young ex students have been brainwashed into wokism, political correctness, virtue signaling, and more, which have been forced down their throats on campus. Probably, if this cohort were the only voters, Bernie Sanders would now be president. On the other hand, these ex students are innocent until proven guilty, and at least so far they are not entirely innocent of rights violations, but more nearly so than the general population. Hence, I call this a draw. There is another way to look at this matter. So far, we have left out of the equation government, which at least for radical libertarians, is nothing better than a vast criminal gang with excellent public relations ability. First, they engage in the robbery of taxation. Then, they lend some of the money compulsorily taken away from the entire population and lend it to college students. Now, the government wants to forgive these loans, turning these loans into outright gifts. So, who is further removed from the freedom philosophy? The evil state or these young people? Here, the case is fare more clear. The U.S. government is one of the most malevolent institutions now operating. They are far worse than any passel of recent college graduates. So, should money leave the hands of the devil, and be transferred to relative innocents? Yes, of course. That’s why they call me Walter Moderate Block. By all means forgive these loans, so that money can pass from the more guilty to those who are less so. It cannot be denied that the government will then have less money with which to perpetuate its wicked deeds. To be sure, they can always, subsequently, increase their tax take, but that is entirely a different matter. And, also, there are limits as to how much blood you can get out of a stone. As Arthur Laffer has shown, raising tax rates cannot always be relied upon to this end. There is a ceiling over which government cannot rise in its rate of intrusiveness. If they now thought is was optimal to raise their rate of theft, presumably they would have already done so. There is a third and even better libertarian way to look at this matter: via private property rights. Who are the rightful owners of the monies now in question? If we had a God’s eye view, we could easily settle this matter. We have no such vision. All we can do is, ineptly, try to put Humpty Dumpty back together again. The benefit of trying to trace from whence this wherewithal came, into whose hands it now rests, would be a full employment bill for accountants and economists. On the other hand, and there is another hand, if the government wants to forgive loans, presumably, it is in the interest of government to do just that. This would be the case for libertarians opposing this give away. However, the government is so inept, that we cannot blithely assume that just because it wants to pursue a policy, it really is in their best interest. That would be the case for favoring loan forgiveness. Sorry to be so unclear as to the final determination of the libertarian; but this really is a complex case. Two more considerations must be mentioned. First, what about those students who have already repaid their loans? By all means, government coffers should be reduced even further in favor of these people, too. Rights violations will thereby be reduced, when the statists have less money (However, those who repaid are not entirely innocent; they rendered money to Caesar, when with the benefit of hindsight, they may not have had to do). Second, why did so many students have such a hard time repaying their debt to the government? Simple, all too many of them majored in grievance studies. This renders them unusually chatty baristas, but they don’t earn enough money to support their misspent college days.   Walter E. Block is Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans and is co-author of the 2015 book Water Capitalism: The Case for Privatizing Oceans, Rivers, Lakes, and Aquifers. New York City, N.Y.: Lexington Books, Rowman and Littlefield (with Peter Lothian Nelson ). (0 COMMENTS)

Indeed, improvements in technology were so important that the one chapter Bryson devotes to something other than a room in the house or a physical area in or around the house is his chapter on the fuse box. Electricity truly revolutionized life. Bryson writes, “The world at night for much of history was a very dark place indeed.” A good candle, he adds, “provides barely a hundredth of the illumination of a single 100-watt lightbulb.” Although Bryson makes a good case for how important lighting was and is, he would have made an even stronger case had he drawn on the pathbreaking work by Yale University economist William D. Nordhaus. In a study done in 1996, Nordhaus found that failure to adjust appropriately for the plummeting cost of light has led economic historians to dramatically understate the growth of real wages over the last 200 years. That one invention, plus many others, led to a burgeoning middle class. This is from David R. Henderson, “Home Economics,” Policy Review, February 1, 2011. It’s my review of Bill Bryson’s excellent book At Home: A Short History of Private Life. For some reason, I’ve been appreciating electricity more lately. When our power came on at about 5:00 p.m. last Friday, we had already rented a motel room. My wife and my visiting daughter stayed there and I went home from the motel to feed the cats. The electricity gave me a lot of energy, so to speak, and I moved around the house, tidying things up and putting lanterns away, as if I had the energy of a 20-year old. There’s probably more to say, but that’s it for now. (0 COMMENTS)

A great deal of attention has focused on the bailout of SVB depositors, but the bigger story is the bailout of other banks. (At least bigger as of today, there are rumors the government may extend the over $250,000 deposit bailout to all banks. You can imagine what I think of that idea.)David Beckworth has a podcast where Steven Kelly discusses how the new Fed loan facility works.  Here’s David: Beckworth: Daniela Gabor, she wrote something in a similar vein. She said, “Forget about SBV liabilities for a second. The real bailout story is the regime change in the Fed’s treatment of collateral. Par value goes against every risk management commandment of the past 30 years. It turbocharges the monetary power of collateral.” Kelly explains the problem by considering a situation where banks paid $90 for bonds with a par value of $100, and then the market value fell from $90 to $80: Kelly: So not only did they say, “Well, we’ll give you the 80 and we’ll calm things down. We’ll replace the 80 that you lost from uninsured depositors being flighty. Nor will we give you 90, which is what you’ve been carrying your books at, so you don’t have to recognize the loss of funding there. We’re going to give you 100, which can solve other problems on your books too.” So that’s super unique. And Daniela’s language is more dramatic than mine and more eloquent than mine, but that’s exactly the point she’s making. The Fed’s treating these bonds as $100 worth of collateral, despite the fact that the banks paid $90 and the market value is only $80.   But I slightly disagree with Kelly’s framing here: Beckworth: So I like the framing you just made, that this is effectively a capital injection, because they’re paying above par. Well, they’re paying par which is above market value, so it’s effectively a capital injection. I also heard someone else put it this way on Twitter, “The Fed is effectively doing unsecured lending.” Is that also another interpretation? Kelly: So it is if you think, okay, you’re getting 90 bucks of collateral for a $100 loan. I mean the Fed’s not totally bound by those values. The Fed’s legal mandate, especially with 13(3), is that it does not expect losses ex ante. There’s really no reason to expect loss if you’re the Fed. You’re talking about treasuries… There’s no reason to expect a loss if you hold this stuff to maturity, which is typically how they think about it, and they have 25 billion from the Treasury, I would argue unnecessarily, but I don’t think the Fed needs to think about this as unsecured. It looks like a loan against underwater collateral, but they’re going to get paid back, which is sort of their floor for secured to satisfaction. He’s probably correct that the Fed won’t end up losing money here.  But it’s not quite correct to imply that holding these depressed bonds to maturity solves the problem.  The Fed is already likely to incur some very large losses from its current holdings of Treasury bonds.  In previous posts, I’ve explained how those losses cannot necessarily be avoided by holding the bonds to maturity. Of course it’s very possible that these bank loans do get repaid, and it’s also very possible that we have a recession and interest rates fall sharply, boosting the value of the Fed’s long-term bond portfolio.  So I’m not predicting big Fed losses from these particular loans.  But there’s no getting around the fact that if you treat $80 bonds as representing $100 worth of collateral, you are giving the banks a gift.  And someone must bear the cost if those loans default. We are adding moral hazard to the system so rapidly it’s making my head spin.  And not just in finance.  Think of the Covid bailouts of many businesses, or the student loan bailouts.  The more safety nets we add, the less incentive people have to be careful. (0 COMMENTS)

Cato Institute economist Alan Reynolds points out, in “Producer Price Inflation Averaged One Percent for Eight Months,” Cato at Liberty, March 21, 2023, that, as the title suggests producer price inflation is very low. So why does inflation measured by the Consumer Price Index look so high? Reynolds explains: Although market rents have been falling since last summer, BLS estimates of rents on old and new leases still keep soaring in CPI monthly reports—at a 9.6 percent annual rate for the past three months! That statistical snafu made inflation in 2021 look lower than it really was, because shelter inflation was largely based on depressed 2020 pandemic rents. Today, the lagged BLS rent estimates have the opposite effect of greatly exaggerating inflation in early 2023 because reported shelter inflation (a third of the CPI) is still largely based on leases from the peak inflation of early 2022. Once we exclude shelter from CPI inflation, the resulting “CPI less shelter” is about like the PPI. CPI‐​less shelter has averaged just 1.1 percent since last June, as shown in my March 14 blog post. This is astounding. Unless Alan has, or I have, overlooked something, this means that inflation is already quite low.   (0 COMMENTS)

It is a cliché, but true, to say that war is an ugly affair. Which does not mean that there are no good moral and economic arguments for defensive wars. The world is not only inhabited by noble savages. But just as international thugs must be dissuaded from waging aggressive wars, soldiers on all sides must be dissuaded from committing gratuitous atrocities. It is clearly a sign of civilization that some of those have come to be be considered war crimes by international conventions and domestic laws since the 19th century. I take “civilization” in this context to mean a general recognition of a minimum respect for each human individual and of rules to that effect. The government of Australia just charged one of its soldiers with war crimes when he was deployed in Afghanistan, and more charges may be coming (“Australia Charges Soldier Deployed to Afghanistan With War Crime,” Wall Street Journal, March 20, 2023): The charge, which carries a maximum sentence of life in prison, follows a 2020 government inquiry that found credible information that Australian special forces were responsible for the unlawful killing of 39 prisoners, farmers and other civilians. The recognition of war crimes also reminds us of an important legal-individualist principle: even a soldier cannot hide behind the collective to commit crimes. During the 1968 My Lai massacre in Vietnam, as many as 500 unarmed civilians including women and children were killed. Rapes were committed too. No Viet Cong combatants were in the area. The very few heroes in this story include Warrant Officer Hugh Thompson and his two men. The Encyclopedia Britannica writes: As the massacre was taking place, Warrant Officer Hugh Thompson was flying a scout helicopter at low altitude above My Lai. Observing wounded civilians, he marked their locations with smoke grenades and radioed for troops on the ground to proceed to those positions to administer medical aid. After refueling, Thompson returned to My Lai only to see that the wounded civilians subsequently had been killed. Spotting a squad of U.S. soldiers converging on more than a dozen women and children, Thompson landed his helicopter between the two groups. Thompson’s door gunner, Lawrence Colburn, and his crew chief, Glenn Andreotta, manned their weapons as Thompson hailed other helicopters to join him in ferrying the civilians to safety. In 1998 Thompson, Colburn, and Andreotta (posthumously) were awarded the Soldier’s Medal for acts of extraordinary bravery not involving contact with the enemy. A few soldiers and officers at My Lai were eventually charged with war crimes , but only Lieut. William Calley, commander of Charlie Company’s 1st Platoon, was found guilty. Many of the others hid behind the collective by claiming that they were following orders. Calley was condemned to life in prison, but was paroled three years later. He tried to defend his actions in a book: John Sack, Lieutenant Calley: His Own Story (Viking Press, 1971). General Paul Selva more recently  declared before a Senate committee: “We take our values to war.” That’s a far cry from what president Donald Trump tweeted before pardoning Army commando Mathew Golsteyn, who had been charged with premeditated murder in Afghanistan. Trump’s tweet of October 12, 2019 read: The case of Major Mathew Golsteyn is now under review at the White House. Mathew is a highly decorated Green Beret who is being tried for killing a Taliban bombmaker. We train our boys to be killing machines, then prosecute them when they kill! Conservative Bill Kristol sensibly replied: No we don’t. And it’s beyond disgusting that an American president would say this about our military. Civilization is fragile. This idea is omnipresent in the work of economist Friedrich Hayek; my third essay on his trilogy Law, Legislation, and Liberty is forthcoming at Econlib.   Photo taken by United States Army photographer Ronald L. Haeberle on March 16, 1968 in the aftermath of the My Lai massacre and showing mostly women and children dead on a road. Haeberle contributed to revealing the massacre. Source: Wikipedia, with the mention: “This file is a work of a U.S. Army soldier or employee, taken or made as part of that person’s official duties. As a work of the U.S. federal government, it is in the public domain in the United States.” (0 COMMENTS)

  These are from a former student and I’ll probably have more of my own. A former student of mine at the University of Rochester’s Graduate School of Management, whom I hadn’t heard from in over 40 years, emailed me on the weekend and gave me permission to quote him. He had read my Hoover Defining Ideas article in which I argued against the bailout of Silicon Valley Bank. Here’s his first email: David, I am a former PhD student of yours at Rochester in the late 1970s. I eventually graduated with a dissertation concerning political risk and multinational firms. After teaching for a while, I moved on to the SEC, then Treasury, and finally ended up at the FDIC, in the TOO BIG TO FAIL group, and retired soon after, frustrated that our group was not making any serious progress in regulating such institutions. I just wanted to confirm that your analysis of the multiple failures concerning the SVB failure is spot on. Additionally, the $250K limit on deposit insurance should promote closer scrutiny of the bank by larger depositors. Eliminating or weakening that protection limit, as was done in this case, would likely result in less private sector scrutiny of bank behavior, not what is needed. Anyway, keep up the good work, Frederick J. Patrick, Ph.D. I taught at the U. of R. from August 1975 to July 1979. I replied to thank him and then he replied with more details: David, Thanks so much for your response. I’m fully retired now and have been for a while, but I still maintain a few contacts at the agencies where I worked. Oddly enough, I was working at the Office of Thrift Supervision as the Director of Credit Policy when Washington Mutual failed in 2008. About a year earlier, I gave a speech at the annual meeting of the federal banking agencies that was titled “There’s a tunnel at the end of this light” that characterized the mortgage market as being fueled by rising house prices, low unemployment, and low interest rates, a rare combination that was unlikely to last. Given the environment, Washington Mutual was engaged in making many NINJA mortgages that required virtually no underwriting (No Income, No Jobs, No Assets), a practice that was tolerated because rising house prices were thought to likely cover any defaulted mortgages. When pushed on this, WaMu said that if it didn’t make these types of loans, it would be out of the mortgage business. A year later it was, indeed, out of the mortgage business, with the largest bank failure in our history. The structure of OTS was such that it unintentionally abetted such practices. There were five regional heads of supervision, the idea being that there was substantial regional variation in lending practices and standards. For example, mortgage default rates were much lower in Minnesota than in New York, perhaps driven by cultural standards. So having regional directors with substantial autonomy made sense. However, it was my understanding that the budget for the regional supervision was based only on the size and vitality of the institutions under its supervision. The regions did better when their institutions did better.  WaMu was huge and growing quickly … Anyway, the lesson learned at Rochester that the incentives that individuals face matter in making business decisions has proved remarkably resilient, be it accounting practices (Paul Healy’s dissertation) or political risk, among others. Please feel free to quote my earlier missive.  And, to address equality issues of my own, my wife and I took the same last name when we married in 1979 – it’s Phillips-Patrick, so I’m legally Frederick Phillips-Patrick.  (And on an entirely different note, after we married, we spent the ’79-’80 school year in London, where I attended the London School of Economics. It turned out that my faculty advisor was Janet Yellen, who was visiting the LSE that year. How ironic!) Again, great to hear from you, Fred   (0 COMMENTS)