The Fallacy of the Fallacy: Post hoc ergo propter hoc

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This comes up often in arguments with deregulationists. They say: just because we made these 5 or 6 major changes in the financial system and then went into the worst economic crisis since the Great Depression, it does not prove that those changes caused the crisis. The more erudite throw the latin phrase from the post title out. The more bombastic will sputter along the lines of:

You connect vaguely related associations (this happened, then later on, this happened!! See!! See!! Rivers cause beaver dams!!) ... and thus you think that "proves" *a* causes *b*.

Correlation is not causation.

But the phrase Post hoc ergo propter hoc is used for a specific reason: to combat a sometimes erroneous confusion of correlation and cause. Why? Because the mind typically looks for sequences of changes to a system and subsequent changes in the behaviour of that system to be linked - because that is the normal course of events.

There is a reason the mind does this. I am a geek. I work on networks of routers and switches and servers and PCs. These all have configurations that can be changed. And when something "goes wrong" - when a system that previously worked suddenly stops working - the very first question everyone asks (after checking for hardware failures and rebooting Windows machines) is: "What changes have been recently made to the system?". And guess what? In a remarkable number of cases it is a recent, intentional change - with unintended consequences - that caused the problem. Frequently it is the most recent change.

So, in the real world, recent changes to a previously working system are always the first suspect when that system breaks. And for very good reason.

That's how it naturally works in the real world, not in the fantasy worlds of deregulationists - in which fantasy world, you let slip the dogs of greed, by destroying the leashes or intentionally making shitty collars, and then disclaim responsibility when the economy gets mauled.

So we went 60 years from the end of the first Great Depression with no huge financial crises.

Then in 1999 deregulationists passed and signed Gramm-Leach-Bliley, which eliminated Depression-era barriers that separated parts of the financial system from each other. A driving force in the passing of this law was to legitimize the creation of CitiGroup - which is currently being dismantled due to the financial crisis and has been to the public trough twice for more than $45 Billion.

In 2000 deregulationists passed and signed another Phil Gramm abomination that enshrined the wholly unregulated status of Credit Default Swaps (CDS) - clearly a form of insurance that should have been regulated as such. Currently, we apparently cannot allow any large organization to fail, because CDS has turned the the financial system and big parts of the economy into a huge booby-trap of explosives massively interconnected by tripwires of unknown and unknowable CDS lines.

These moves were supported and aided by deregulationists in the Clinton administration, inluding Clinton himself. Billary have long been bought and paid for.

The Greenspan Fed lowered it's Fed Funds rate to historic lows and kept it there for a long time. Alan Greenspan was an arch deregulationist and did nothing to rein in abusive lending practices and other questionable activities. He has since pronounced himself "shocked, I tell you, shocked" at the crisis and conceded that his faith that financial entities would guard shareholder value was misplaced.

In 2001, GW Bush appointed rabidly deregulationist "regulators" throughout his administration. They did the following:

They pre-empted state attempts to regulate predatory lending, and did no regulation of their own. Predatoruy lending went on to new highs.

In 2004, the Bush SEC allowed the big 5 Investment Banks to "self-regulate".

In 2004, the Bush SEC allowed the big 5 Investment Banks to increase their leverage of loans to real equity from roughly 10:1 or 12:1 to as high as 40:1.

(Of those big 5 Investment Banks, none are in the same form they were in prior to the crash. FRB/Treasury had to guarantee $39 Billion of dodgy securities to get JPM to tyake over Bear Stearns and just today BAC came back for $20 Billion more from TARP and guarantees of $118 billion in loans and other assets to complete the takeover of Merrill Lynch.)

The Bush SEC did nothing while the 3 NRSROs (Fitch, Moody, S&P) took money from the issuers of toxic securities, and then rated those toxic securities AAA. These very same toxic securities, now much downgraded after the fact, are at the center of our financial crisis.

(The Bush SEC further proved it's deregulatory mettle by not discovering the Madoff ponzi scheme until Madoff confessed, in spite of multiple detailed warnings.)

Only the self-delusionary can claim that these were not hugely significant changes in a system that previously worked and is now self-destructing. Clearly the changes led to or aggravated the breakdown.

The deregulationists can spout all the latin they want. Commonsense shows that they were wrong and are wrong.
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Thomas Jefferson is Always Relevant

Courtesy of Wikiquote:

On Banks, Letter to William C. Rives, 1819:

Certainly no nation ever before abandoned to the avarice and jugglings of private individuals to regulate according to their own interests, the quantum of circulating medium for the nation -- to inflate, by deluges of paper, the nominal prices of property, and then to buy up that property at 1s. in the pound, having first withdrawn the floating medium which might endanger a competition in purchase. Yet this is what has been done, and will be done, unless stayed by the protecting hand of the legislature. The evil has been produced by the error of their sanction of this ruinous machinery of banks; and justice, wisdom, duty, all require that they should interpose and arrest it before the schemes of plunder and spoliation desolate the country.

Letter to John Adams (7 November 1819):

We were laboring under a dropsical fulness of circulating medium. Nearly all of it is now called in by the banks, who have the regulation of the safety-valves of our fortunes, and who condense and explode them at their will. Lands in this State cannot now be sold for a year’s rent; and unless our Legislature have wisdom enough to effect a remedy by a gradual diminution only of the medium, there will be a general revolution of property in this state.

Sounds like Jefferson (and colonial bankers) knew all about property bubbles!


And, one of my all time favorites:

Letter to George Logan (November 12, 1816):

I hope we shall take warning from the example [of England] and crush in it's [sic] birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength and bid defiance to the laws our country.

Deregulation Damned Again

The Madoff scandal is yet another manifestation of the deregulationist foolishness which reached it's peak in the Bush administration, but has been ongoing since Reagan.

The SEC is the case study in this, as it's complete failure - in fact, refusal - to regulate is behind some of the most egregious problems we face. This piece summarizes the longer piece here, describing how the Bush appointees undermined the Agency.

SEC chief Cox is seen here lamenting SEC failure to catch Bernie Madoff with multiple warnings.

Cox was previous seen here and here lamenting that "voluntary self regulation" of large investment banks doesn't work. Oh, quelle surprise!

The guy Bush appointed before Cox presided over SEC approval of the insane idea that, instead of being limited to 12:1 leverage, Investment Banks should be allowed up to 40:1 leverage. Goldman Sachs, then led by the theiving Hank Paulson, now Secretary of Treasury and Kleptocracy, headed the charge requesting that rules change.

We also have the CDS mess - once upon a time, it was possible to let a company fail but now, Credit Default Swaps intertwine everything in a gigantic booby-trap. The totally unregulated nature of CDS was enshrined in law written by worthless fuck Phil Gramm and signed by Clinton, a man so bought and paid for by the financil indistry that he lobbied for and signed Gramm-Leach-Bliley as well, giving us the (recently bailed) Citigroup.

So wat do the deregulationist do, now that they are surrounded by the smouldering ruins of the financial world that they caused?

Some of them act like a 2-year old, standing in a puddle of of his own urine, but pointing at the family dog: "The CRA did it." No amount of facts differentiating between CRA and subprime will dissuade them.

Some use the brilliantly circular logic that the SEC, after being systematically gutted, couldn't catch Madoff, therefore regulation doesn't work; or they blame the GSE for lowering loan standards, ignoring suggestions that to google the phrases "yield spread premium" and "conforming loans" would actually provide factual information about what really went on during the run-up of the bubble.

None of them ever sit back and say, "Oh, we got what we wished for and it turned to shit, so maybe we were wrong". Nope, can't have that. Big business must be allowed to carry on as usual - with the occasional $7 Trillion loan/gift from Treasury and FRB, as needed.

QOTD (sort of)

More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.

- Woody Allen, Side Effects, 1980


This came to mind while reading comments at Calculated Risk. It's getting hard to tell the comments from a survivalist's blog - all talk of where to buy gold or silver, how to raise food, etc.

Why I'm Not in the Stock Market

(Click for larger image - as if that would help)

Cognitive Dissonance, writ large. Anybody who can explain this to me (without resorting to the voodoo nonsense of "Technical Analysis") - please do.