The Big Half-Truths

Last weekend a Twitter fight broke out between Charlie Gasparino of Fox Business News and Washington Post columnist and money manager Barry Ritholtz.  This was a continuation of a food fight Ritholtz started in November of last year with his Washington Post op-ed, “The Big Lie Goes Viral.”

Since last fall I’ve been following the back-and-forth between Ritholtz, Paul Krugman and Joe Nocera on the one hand, and Peter Wallison, Robert Barro and John Taylor on the other hand, concerning the true underlying causes of the 2008 financial crisis.  In short, the debate is whether the financial crisis was caused by deregulation of the financial system, creating the conditions for a massive failure of capitalism; or by government intervention in markets causing perverse incentives and pervasive moral hazard.

Ritholtz is very much on the failure-to-regulate side of the argument, because, as he puts it, he follows “data and objective evidence.”  He has plenty of company, and not just on the New York Times editorial page.  Last fall I took a class on the causes and consequences of the Great Recession at my alma mater.  The prof was an engaging economist of the Keynesian persuasion, who detailed all the things Wall Street did wrong to cause the crisis (“market failures”) and decried the failure of the Federal government to quickly cure the recession by a stimulus much-larger than the $800 billion passed early in 2009.  At one point, in the nature of offering a bit of odd-but-interesting trivia, he commented, “You know, some people actually think there is such a thing as government failure.”  (What was your first clue?)

Contrast this with the views of conservative economists Barro, Wallison and Taylor, all of whom identify government as the primary culprit for the crisis.  Peter Wallison, who was a member of the Financial Crisis Inquiry Commission, has been on the record since 2009, recently in December of 2011 in an interview in The Atlantic, that the blame for the financial crisis should be laid pretty much entirely at the feet of Fannie Mae, Freddie Mac and the Community Reinvestment Act of 1992.

What led Wallison to this conclusion?  The data.  “No one who has grasped the significance of these numbers–and there is much more data in my dissent–could believe that Fannie and Freddie were ‘not a major factor.’ … The data and my analysis led me to a conclusion… if it hadn’t been for the government’s housing policy, there would not have been a financial crisis.”

It is a symptom of the collapse in civility that, instead of saying, “Here is where I disagree with their analysis,” Ritholtz et al choose to say, “They are lying.” I find the immediate resort to the word “lie” distasteful.  My understanding of “lie”, as opposed to “mistake”, is ‘a known and deliberate untruth.’  The one thing that seems clear to me about both sides is that they sincerely believe their own arguments.

I suspect both sides are right about the omissions of the other side, but both are blind to the point of absurdity about the defects in their own narratives. We can’t know what the financial crisis would have looked like without Fannie Mae, Freddie Mac and the Community Reinvestment Act, but neither can we ignore the possibility that the crisis could have been avoided had banking and real estate been better regulated.

Observers like Krugman defend to the death – or at least to the point of rude and exaggerated accusation – the idea that capitalism is greedy, self-interested and stupid, while government is benign and never screws up anything important.  On the other hand, the defenders of pure free-market ideology, especially those hewing to the efficient-market religion that has been so thoroughly exposed as nonsense by the successive bubbles of the last several decades, are compelled to place the faults for all economic dislocations at the feet of an incompetent government.

To me, this feels very much like a political debate, not an economic analysis.  In the end, we have not one Big Lie, but two Big Half Truths – incomplete and politically-motivated analyses that fail to persuade.  The defect of the narratives of each side is the desire to blame a caricature of the other side’s policies for the near-collapse of the financial system.

As I’ve stated before in many contexts, the financial crisis of 2008 was not a failure of pure capitalism, red in tooth and claw.  Nor was it solely the result of the excesses of the nanny state. It was a failure of the modern mixed economy, at the intersection of government policy and private interests. Any permanent solution to the defects in our financial system will require both sides to understand the limitations of their own world views.


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