International Law

Robert Nozick Explains Credit Crunch?

Book cover via Amazon

You know that craziness has set in when Robert Nozick's peculiar libertarian theory is being invoked as an explanation for the current credit crunch.

Richard Epstein makes the extraordinary claim in Forbes today:

"Now that yesterday's market nosedive shows the disappointing Congressional bailout has not calmed markets, let the post-mortem begin.

Disasters like this latest financial meltdown don't just happen.

Mistakes this huge require an impoverished political philosophy to grease the skids. Fannie and Freddie didn't design their horrific lending policies by chance.

No, behind this lending fiasco lay the strong collective preference for the "patterned principles" of justice that Robert Nozick attacked so powerfully in his 1974 masterpiece, Anarchy, State, and Utopia."

Read the entire, short, article.

The problem with Epstein's argument is three-fold

First, Nozick's argument for the minimal state has no predictive power with respect to the arrangements for either private or centralized banking. Nozick has a number of interesting counterfactuals about free-riding on public goods, and builds up a social contract from a private property state of nature. But, this exercise is at the highest level of political theory and has very little to say about the role of central banker in nightwatchman state.

Second, Epstein offers no evidence that the subprime class of mortgages with the hight default rate is coincident with those mortgages "selected" by pattern principles. Indeed, much of the evidence shows that the subprime mortgages in default were mortgages obtained by predatory lenders.

Third, had the subprime mortgage industry not been paired up with special investment vehicles, there would not be the divorce between lenders and those who provide the servicing of the loans. This has nothing to do with the minimal state, and indeed might follow from the bundle theory of property rights dear to the libertarian.

Full post as published by Misleading Advertising Law on October 07, 2008 (boomark / email).