Central bank digital currencies
13 January 2021
Erasmus and Turing
11 January 2021
Brexit and Marxism
3 January 2021
What to do about the Covid financial system bailouts?
22 December 2020
The crypto-technical response to the Covid-19 bailouts
13 December 2020
The libertarian response to the Covid-19 financial turmoil
9 December 2020
The socialist response to the Covid-19 financial turmoil
4 December 2020
On the response of the financial authorities to Covid-19
2 December 2020
The Covid-19 bailouts and the future of the capitalist banking system
26 November 2020
Which programming language is best for economic research: Julia, Matlab, Python or R?
20 August 2020
ARM on AWS for R
15 June 2020
Low vol strategies
8 May 2020
Of Julia and R
8 May 2020
How to manipulate risk forecasts 101
30 April 2020
The five principles of correct riskometer use
27 April 2020
The problem with Backtesting
25 April 2020
The magic of riskometers
24 April 2020
Risk and scientific socialism
23 April 2020
Financial crises and epidemics
19 April 2020
Hayek and Corona
17 April 2020
Hayek et Corona
17 April 2020
Ignoring the Corona analysis
15 April 2020
The coronavirus crisis is no 2008
26 March 2020
Artificial intelligence as a central banker
6 March 2020
Systemic consequences of outsourcing to the cloud
2 December 2019
The dissonance of the short and long term
12 August 2019
Central banks and reputation risk
6 August 2019
The Brexit culture war
5 May 2019
All about BoB — The Bank of England Bot
29 April 2019
My tiny, tiny contribution to Apple's fall in profits
6 January 2019
The 2018 market in a 250 year context
1 January 2019
Short and long-term risk
3 December 2018
Perceived and actual risk
2 December 2018
Cryptocurrencies: Financial stability and fairness
9 November 2018
The October 2018 stock market in a historical context
1 November 2018
The hierarchy of financial policies
12 September 2018
Which numerical computing language is best: Julia, MATLAB, Python or R?
9 July 2018
Cryptocurrencies
26 June 2018
What are risk models good for?
3 June 2018
The McNamara fallacy in financial policymaking
1 June 2018
VIX, CISS and all the political uncertainty
20 May 2018
Here be dragons
30 March 2018
Low risk as a predictor of financial crises
26 March 2018
Cryptocurrencies don't make sense
13 February 2018
Yesterday's mini crash in a historical context
6 February 2018
Artificial intelligence and the stability of markets
15 November 2017
European bank-sovereign doom loop
30 September 2017
Do the new financial regulations favour the largest banks?
27 September 2017
The ECB Systemic Risk Indicator
24 September 2017
Finance is not engineering
22 September 2017
University of Iceland seminar
14 June 2017
Brexit and systemic risk
31 May 2017
Should macroprudential policy target real estate prices?
12 May 2017
Learning from history at LQG
13 April 2017
Is Julia ready for prime time?
12 March 2017
With capital controls gone, Iceland must prioritise investing abroad
12 March 2017
Competing Brexit visions
25 February 2017
Systemic consequences of Brexit
23 February 2017
Why macropru can end up being procyclical
15 December 2016
The fatal flaw in macropru: It ignores political risk
8 December 2016
Why it doesn't make sense to hold bonds
27 June 2016
On the financial market consequences of Brexit
24 June 2016
Cyber risk as systemic risk
10 June 2016
Big Banks' Risk Does Not Compute
24 May 2016
Interview on þjóðbraut on Hringbraut
21 May 2016
Farewell CoCos
26 April 2016
Will Brexit give us the 1950s or Hong Kong?
18 April 2016
Of Brexit and regulations
16 April 2016
IMF and Iceland
12 April 2016
Stability in Iceland
7 April 2016
Everybody right, everybody wrong: Plural rationalities in macroprudential regulation
18 March 2016
Of tail risk
12 March 2016
Models and regulations and the political leadership
26 February 2016
Why do we rely so much on models when we know they can't be trusted?
25 February 2016
Does a true model exist and does it matter?
25 February 2016
The point of central banks
25 January 2016
Volatility, financial crises and Minsky's hypothesis
2 October 2015
Impact of the recent market turmoil on risk measures
28 August 2015
Iceland, Greece and political hectoring
13 August 2015
A proposed research and policy agenda for systemic risk
7 August 2015
Are asset managers systemically important?
5 August 2015
Objective function of macro-prudential regulations
24 July 2015
Risky business: Finding the balance between financial stability and risk
24 July 2015
Regulators could be responsible for next financial crash
21 July 2015
How Iceland is falling behind. On Sprengisandur
12 July 2015
Greece on Sprengisandur
12 July 2015
Why Iceland can now remove capital controls
11 June 2015
Market moves that are supposed to happen every half-decade keep happening
14 May 2015
Capital controls
12 May 2015
What do ES and VaR say about the tails
25 April 2015
Why risk is hard to measure
25 April 2015
Post-Crisis banking regulation: Evolution of economic thinking as it happened on Vox
2 March 2015
The Danish FX event
24 February 2015
On the Swiss FX shock
24 February 2015
Europe's proposed capital markets union
23 February 2015
What the Swiss FX shock says about risk models
18 January 2015
Model risk: Risk measures when models may be wrong
8 June 2014
The new market-risk regulations
28 November 2013
Solvency II: Three principles to respect
21 October 2013
Political challenges of the macroprudential agenda
6 September 2013
Iceland's post-Crisis economy: A myth or a miracle?
21 May 2013
The capital controls in Cyprus and the Icelandic experience
28 March 2013
Towards a more procyclical financial system
6 March 2013
Europe's pre-Eurozone debt crisis: Faroe Islands in the 1990s
11 September 2012
Countercyclical regulation in Solvency II: Merits and flaws
23 June 2012
The Greek crisis: When political desire triumphs economic reality
2 March 2012
Iceland and the IMF: Why the capital controls are entirely wrong
14 November 2011
Iceland: Was the IMF programme successful?
27 October 2011
How not to resolve a banking crisis: Learning from Iceland's mistakes
26 October 2011
Capital, politics and bank weaknesses
27 June 2011
The appropriate use of risk models: Part II
17 June 2011
The appropriate use of risk models: Part I
16 June 2011
Lessons from the Icesave rejection
27 April 2011
A prudential regulatory issue at the heart of Solvency II
31 March 2011
Valuing insurers' liabilities during crises: What EU policymakers should not do
18 March 2011
Risk and crises: How the models failed and are failing
18 February 2011
The saga of Icesave: A new CEPR Policy Insight
26 January 2010
Iceland applies for EU membership, the outcome is uncertain
21 July 2009
Bonus incensed
25 May 2009
Not so fast! There's no reason to regulate everything
25 March 2009
Modelling financial turmoil through endogenous risk
11 March 2009
Financial regulation built on sand: The myth of the riskometer
1 March 2009
Government failures in Iceland: Entranced by banking
9 February 2009
How bad could the crisis get? Lessons from Iceland
12 November 2008
Regulation and financial models: Complexity kills
29 September 2008
Blame the models
8 May 2008

The libertarian response to the Covid-19 financial turmoil

9 December 2020

A libertarian sees the Covid-19 bailout of the financial system as a predictable failure of regulations. Much better to have a laissez-faire economy and never, ever bail private firms out. But does the laissez-faire utopia survive contact with reality?

I maintained in my last post that both the socialists and the libertarians agree that the Covid-19 bailouts signify the failure of the current financial system. They do not agree on the remedies. The libertarian thinks we should not regulate the financial system, leave it be and certainly don’t bail it out.

So, what is a libertarian? They are a broad church, but generally someone who believes the state should exercise as little control over society as possible. Their ideal state is a laissez-faire one (from the French ‘let do’), an economic system in which transactions between private groups of people are absent of any form of economic interventionism such as regulation and subsidies.

The libertarians value negative liberty, as proposed by Isaiah Berlin in his “Two Concepts of Liberty”, freedom from the interference of others. We can do what we want so long as we don’t directly harm others (and just to be clear, it does not mean harm in the sense of microaggressions, safe spaces or critical theories). Said differently, it is freedom from rather than what the socialists would call freedom to.

So what is libertarian not? They are not conservative, not one of those anarcho-capitalists who fully reject the state and they have a different philosophy than the cryptocurrency-blockchain enthusiasts.

A libertarian values freedom and absence from state control. While they do recognise some role for the state, like national defence and the legal system, most will not accept any regulations of private enterprise, and all agree that the government should never ever support private economic enterprises. That distinction is one reason why the libertarians are not conservatives, a point made by their doyen, Hayek.

Even if some people see the cryptocurrency crowd as libertarian, that isn’t true. While there is a lot of overlap in their beliefs, the two groups have different philosophical approaches, and even though they have ended up in the same place with cryptocurrencies, that is coincidental and unlikely to last. I will discuss the distinction between the two in more detail in the next piece.

So back to bailouts. The bailouts of the financial system in 2020 and 2008 and all the others are an anathema to the libertarians. It is an infringement of taxpayers’ freedom to force them to support failed private enterprises. Better to let the banks fail than to bail them out. If that causes a crisis, so be it.

Said differently, even if the refusal to bail out the system might cause a crisis today, it would lead to a more stable and efficient financial system in the long run.

So, does the libertarian vision of a laissez-faire economy survive contact with reality? No, like every other political ideology. Pure political opinions are just that, pure, unsullied by day-to-day concerns. Why the political ideologies always fragment, like in Monty Python’s The People’s Front of Judea sketch.

And, in this particular case, I do not think the absolute libertarian rejection of bailouts works in the real world.

Suppose we lived in the libertarian ideal world where the central banks forswore bailing out the financial system forever. The central bank governor and the Prime Minister went on TV and told us that the government will never use its funds to help private firms in difficulty. Would that be credible?

No, because of democracy.

There are many examples of governments promising to never intervene in the private financial system. Just three examples are Argentina in the early 1990s, the United States in the 1910s and 20s, and Britain in the 19th century. What did their abstinence policy in was a severe financial crisis that came with very large real economic costs, bankruptcies, widespread unemployment and general misery.

I do not know of a single, relatively developed and democratic state with a long history of a financial system that did not bail out its financial system at some point. If you know of a counterexample, by all means, get in touch.

The reason is that every such country has at some point suffered extreme turbulence and even a crisis. Then, the voters demand their politicians do something. And, a politician that refuses, will just end up being forced out and another put in their place, one that is enthusiastic about doing something about the excesses of the financial system. Bailouts are a middle-class good as clearly argued by my LSE colleague and co-author, Jeff Chwieroth in his book The Wealth Effect: How the Great Expectations of the Middle Class Have Changed the Politics of Banking Crises.

The only way the libertarian abstinence policy is actually credible is if it either implemented in a nondemocratic country or one that actually never suffered a financial crisis.

Start with democracy. A nondemocratic country can, of course, ignore the democratic demand for a bailout, but then it’s a country without freedom, and so there’s nothing libertarian about it. By its very definition, a country that is laissez-faire must be a democracy.

But what about the absence of crises? That forswearing interventions will prevent crises from happening in the first place.

Of course not.

The purpose of the financial system is to take risk, often a lot of risk, and with risk comes failure. Some of these failures can be so large as to constitute a financial crisis. The only way to prevent financial crises is to follow the example of Cuba and North Korea and not have a market-based financial system.

The libertarian laissez-faire utopia is only that, utopia. Anybody who argues that a democratic state should never bail out financial institutions is denying reality.

So, what next? Will cryptocurrencies and technology solve the problem, as I discuss in my next piece?


Roadmap

Thanks

Several friends and colleagues have commented on this series. Robert Macrae and Nikola Tchouparov gave me excellent comments that significantly improved the pieces. We don’t always, or even usually, agree, and all opinions are mine alone.

© All rights reserved, Jon Danielsson, 2021