No Atheists in Foxholes - No Libertarians in Financial Crises

Someone this week asked me what I thought of policy-makers who ex ante profess a free-market ideology and acute sensitivity to the dangers of moral hazard from financial bailouts, but who toss that ideology overboard when faced with a financial crisis.  The reference was to Treasury Secretary Henry Paulson’s lobbying this week in support of a rescue for Fannie Mae (FNM) and Freddie Mac (FRE), the two big home mortgage agencies, following on the rescue of Bear Stearns (BSC). My reply was: “They say there are no atheists in foxholes.   Perhaps, then, there are also no libertarians in financial crises.”

There are more egregious cases than Hank Paulson of inconsistencies between ex ante promises by policy-makers not to bail out and ex post bailouts when disaster strikes. (Indeed, some amount of change in position may even be rational for an office-holder, though I would draw the line at false statements.) I reserve my disdain for those who go around lecturing others on the evils of bailouts, only to out-do the officials they criticized when their own turn in the hot-seat comes.  

An example I have in mind concerns the members of the starting team in the Bush Administration who had lectured the Clinton Administration on the evils of its allegedly excessive bailouts of emerging markets in the 1990s, only to engage in worse when they themselves were faced with the Argentine crisis that began in 2001. 

There was no particular reason to rescue the Kirchner government. Argentina in 2003 would have been the perfect place to refrain from rolling over an IMF program, thereby putting a limit on the moral hazard problem. The Clinton Treasury had done this with Russia in August 1998 despite high costs in terms of systemic contagion.   Yet the Bush White House continued to push the IMF to bail out Argentina.  Apparently the failing lay in simple inexperience and lack of awareness that any such choices are always difficult. (See pages 9-11 of my article on Managing Financial Crises, in the Cato Journal, Summer 2007.)   

 The Administration was very much following in the footsteps of the Reagan Administration, which talked tough at first when the international debt crisis hit in 1982 but which then participated in comprehensive IMF-led bailouts of Latin American debtors who had been pursuing far worse macroeconomic policies than the emerging market governments of the 1990s crises.  

Incidentally, before writing this blog post, I checked into the World War II origins of the sentence “There are no atheists in foxholes.” I discovered to my surprise that this expression was intended, and is still considered, as a put-down of atheists, and that their lobby protests its use.  

Of course the proposition is not literally true; indeed some soldiers lose their pre-existing belief in God when confronted with the horror of war.   But let us stipulate that those who suddenly face death more often find religion than lose it.  What strikes me as odd is that the expression is apparently normally interpreted as meaning that people who profess atheism don’t really mean it, and that their true colors come out under pressure. I had, apparently erroneously, thought rather the reverse. (Indeed, Richard Dawkins argues that vast numbers of people who would no more bet on the existence of God than on the existence of the Easter Bunny, nonetheless call themselves “agnostics” rather than atheists, to avoid rocking the boat.)   

I had always taken the expression to mean that mankind’s hunger for religious beliefs comes from a desperate desire for divine intervention – or, failing that, comfort – when confronting death.  Something more along the lines “There are no unsoiled underpants in foxholes.” I am in sympathy with the character in a novel who said “That maxim, ‘There are no atheists in foxholes,’ it’s not an argument against atheism — it’s an argument against foxholes.” 

So what’s my point? Not to argue that governments should intervene always (nor that they should intervene never). The lesson for government officials is that wherever they choose to draw the bailout line – one hopes the line strikes an intelligent balance between the short-run advantages of ameliorating a serious financial crisis and the longer-run disadvantages of moral hazard — they should think through the system ahead of time.  They should take the appropriate regulatory precautions during the boom times, which correspond to the bailouts that will inevitably come during the busts.   

Long ago, the United States worked out the approximate right answer for banks:  there will always be rescue of small depositors ex post when banks run into serious trouble, and so under our system, (i) deposit insurance provides formal guarantees and (ii) banks must pay the price ex ante through reserve requirements, capital requirements, and active regulatory oversight.  What we now need to do is design the analogous sort of system for non-banks.

It should not come as a surprise to high officials that there are such things as financial crises anymore than it should come as a surprise to soldiers that there are such things as bombs. It shouldn’t be necessary to alter one’s fundamental beliefs when crisis strikes, in the absence of truly unforeseeable developments.

Comments

[bbzz24:]

Given the proven hypocricy of all politicians, it should not be surprising that they renege on their promises. What is more surprising is there is no accountability as their successors do not want to be held accountable themselves. This sequence quite strikingly reminds me of mutual pact to protect each other and loot & pillage in succession without recourse. That's the beauty of dual party political system.

2008 Jul 18 05:30 AM

[ferguson:]

bbzz24 is correct. While we would like to believe that the underlying reality is altruistic ("Why can't we all just get along?") the reality is that we live in constant competition for a finite amount of power, space, resources, respect, affection. Its the old story that has been told a million times from Homer, to Shakespeare and T.C. Boyle. The haves will always legislate in favor of themselves and their own perpetuity.

2008 Jul 18 07:39 AM

[Jimmy Lathrop:]

There are no elected officials in foxholes - just taxpayers. The elected officials and financiers are firing the artillery.

2008 Jul 18 07:50 AM

[bearfund:]

There is only one libertarian in Washington, and he hasn't been involved in any of this madness. So of course there are "no libertarians in financial crises" - there aren't any in power, period.

2008 Jul 18 10:24 AM

[CM in MA:]

bearfund has it right. The folks leading the executive branch are Republicans. The folks leading the legislative branch are Democrats. The folks leading the judicial branch are Democans or Republicrats--take your pick. Please don't confuse any of the aforementioned groups with Libertarians. When (or if) the Libertarian Party has a turn at the helm of any of the branches of government then, by all means, fire away!

2008 Jul 18 10:58 AM

[thku4grace:]

One important point to make about the current bail-out proposition of Fannie Mae and Freddie Mac: Six or seven years ago, it was revealed that the GSE's were cooking the books. It wasn't long after that the Bush administration was harping on Congress to reform them. I heard it so many times over these last few years, I concluded that it must have been impractical or virtually impossible, or they probably would have done it by now. Now we know. It was because Fannie Mae and Freddie Mac were lobbying like crazy. Dumping loads of money on Congress. Everyone knows it takes 60 senators to get anything done in Washington. While we approach the next election, voters ought to focus on the trail of money from the GSE's to Congress. Congress needs to pay the price politically for the awful price generations will be paying for years to come.

2008 Jul 18 11:21 AM

[Lester:]

Given that Spitzer was blown out of office for offending the bush administration, when the public comes to recognize who was fighting on their side against the manifest financial evil, Spitzer might just be re-born as the Champion of the People. That ought to grant him lots of political capital for future roles. Who knows, he just might become prosecutor of the current criminals in the White House.

2008 Jul 18 11:52 AM

[Jason Rines...:]

These are all excellent comments. Bearfund netted out it all out and CMinMA just added the detail.

That puts a lot more clarity in a plan I am working on to set up a fund to get bright, fresh motivated guys elected who want to serve but can't run. Many who wish to serve cannot take a year off from work, nor can they have a chance of winning without the special RNC or DNC 'sponsors'.

I have some very interesting aspects of this plan for this fund and when it is done I will pay Seeking Alpha to advertise. Gentlemen, we must continue to use our collective intellect to figure out how to reverse things. Pain itself will be the catalyst of most of the change, I am reffering to damage control and future opportunity in America.

2008 Jul 18 12:33 PM

[GMC:]

So, what we see is that neither party are very different when push comes to shove. I say push them all in the foxhole and cover it up!

2008 Jul 18 01:22 PM

[pumpinstuff:]

As an atheist and a libertarian, I find the title of your article to be offensive. If I were to find myself in the proverbial foxhole, why would you assume that fear would drive me to an irrational belief that a lifetime of rational thought has rejected? While some people might throw away thier professed beliefs rather than hold them close when confronted with difficulties because it is "easier", that doesn't make the easier way right, does it?

2008 Jul 18 02:55 PM

[carey_jim:]

Most sane people aren't libertarians when its comes to things like forced vaccinations and other medical policies that are necessary for public health. Pure libertarianism doesn't exist, in that sense, except among religious fanatics.

The same is true when it comes to various economic and political policies which seem necessary for social health, like government controlled police, fire and military forces instead of privately owned and controlled defense forces. I don't know of any libertarians who advocate the complete abolishment of government in that sense.

Intelligent people argue about whether roads, schools, health insurance, drugs and other things should be controlled by the government but no sane person believes there can be no argument about ANY control, and that he is right about each case and everyone else is wrong about each case.

The real question is whether or not the people in question follow principles or pure expediency where expediency is understood as whatever it takes to gain power and riches.

Sometimes expedient behavior consists in pretending to have principles when you have none. It confuses your enemies.

Libertarians can always change their mind about when government should effectively intervene but if they can't find good reasons for changing their minds, reasons that are consistent with previous reasoning, then they are either incompetent fools or lying rogues.

I think that is the conclusion of the article if fear means fear of losing power and riches.

2008 Jul 18 07:15 PM