Obama to End Bull/Bear Cycle

[corplinx]

The solution: more regulation!

To renew our economy — and to ensure that we are not doomed to repeat a cycle of bubble and bust again and again — we need to address not only the immediate crisis in the housing market; we also need to create a 21st century regulatory framework

http://elections.foxnews.com/2008/03/27/obama-economy-speech-calls-for-tighter-regulations-government-reforms/

This is possibly the most dangerously naive idea I have seen since Ron Paul fell off the radar. Beam me up Mr. Speaker. Bubbles are a natural economic phenomenon. The last regulatory framework the federal government put on business with publicly traded stock (Sarbox) sent companies scrambling to go private while the rest pulled their hair out.

I think he needs to go back to talking about hope and change.

[IchabodPlain]

Here's the full text of the speech:
http://www.nytimes.com/2008/03/27/us/politics/27text-obama.html?_r=1&adxnnl=1&oref=slogin&pagewanted=all&adxnnlx=1206634329-U9Nvfl3W6CJEozTyhg577Q

The word I am looking for is ugh.

[Random]

The solution: more regulation!



http://elections.foxnews.com/2008/03/27/obama-economy-speech-calls-for-tighter-regulations-government-reforms/

This is possibly the most dangerously naive idea I have seen since Ron Paul fell off the radar. Beam me up Mr. Speaker. Bubbles are a natural economic phenomenon. The last regulatory framework the federal government put on business with publicly traded stock (Sarbox) sent companies scrambling to go private while the rest pulled their hair out.

I think he needs to go back to talking about hope and change.
Bubbles may be natural, but so is Syphilis. Just because bubbles happen doesn’t mean that they are a good thing, or that the government should sit around and let nature take its course until they have to step in with a huge taxpayer funded bailout at the end.

[dudalb]

Bubbles may be natural, but so is Syphilis. Just because bubbles happen doesn’t mean that they are a good thing, or that the government should sit around and let nature take its course until they have to step in with a huge taxpayer funded bailout at the end.

Yeah, the Government totally controlling the marketplace sure worked great in the Soviet Union.

[Random]

Yeah, the Government totally controlling the marketplace sure worked great in the Soviet Union.

Free market is sure working great for the housing sector right now.

Why does it have to be a choice between complete state control of the economy and financial anarchy anyway? Is there no middle ground whatsoever?

[corplinx]

Free market is sure working great for the housing sector right now.

Why does it have to be a choice between complete state control of the economy and financial anarchy anyway? Is there no middle ground whatsoever?

What made the housing bubble? People like you and me deciding to pay an inflated price for a new or used home instead of having one built.

Bubbles happen because people make the choice to buy things for more than they are really worth. Remember the tech stock bubble?

Ultimately, regulation to prevent bubbles must deny you the choice to take risk or to pay premium prices.

[Random]

What made the housing bubble? People like you and me deciding to pay an inflated price for a new or used home instead of having one built.

Bubbles happen because people make the choice to buy things for more than they are really worth. Remember the tech stock bubble?

Ultimately, regulation to prevent bubbles must deny you the choice to take risk or to pay premium prices.
The housing market was also fueled by speculators fully expecting to cash out on their homes at some point, and sub-prime loans which enabled millions of Americans to becomes homeowners (briefly).

The thing is, people were saying years ago that this was all going to come crashing down. It was parodied in a Bloom County strip for crying out loud! The housing market crash was predicted, the sub-prime collapse was predicted.

If we knew that this was coming ahead of time, why could no one stop it from getting as bad as it did? I don’t think that is a crazy question.

[Giggywig]

The thing is, people were saying years ago that this was all going to come crashing down. It was parodied in a Bloom County strip for crying out loud! The housing market crash was predicted, the sub-prime collapse was predicted.

If we knew that this was coming ahead of time, why could no one stop it from getting as bad as it did? I don’t think that is a crazy question.

Let's institute the Bloom County rule then: If Bloom County comments on a bubble, the government must step in. In the case of the housing market the would have done what the day after the BC strip came out? Stop people from buying houses they can't afford on their current income? Force people to read the fine print?

[WildCat]

The housing market was also fueled by speculators fully expecting to cash out on their homes at some point, and sub-prime loans which enabled millions of Americans to becomes homeowners (briefly).
I seem to remember that it was the government encouraging sub-prime loans under the pretense that minorities were being shut out of the housing market.

[Random]

Let's institute the Bloom County rule then: If Bloom County comments on a bubble, the government must step in. In the case of the housing market the would have done what the day after the BC strip came out? Stop people from buying houses they can't afford on their current income? Force people to read the fine print?

I would have stepped in with a bit more regulation of ARMs. Perhaps Alan Greenspan could have chosen not to urge Americans to refinance to keep the bubble going. And if we are going to get in the habit of bailing out lenders when they do something stupid, some sort of mandatory government insurance for lending institutions may be in order.

I am not sure of the technical details, but some people seem opposed to the idea of regulation on ideological grounds, not practical ones.

[Francesca R]

What made the housing bubble? People like you and me deciding to pay an inflated price for a new or used home instead of having one built.

Bubbles happen because people make the choice to buy things for more than they are really worth. Remember the tech stock bubble?Not really. Or rather that is not sufficient to produce bubbles. Bubbles happen because of correlated mistakes. Correlated mistakes result from asymmetric information or badly rigged incentives. I think it's possible to regulate against that without ruining anyone's incentive to take risks.

[corplinx]

I would have stepped in with a bit more regulation of ARMs. Perhaps Alan Greenspan could have chosen not to urge Americans to refinance to keep the bubble going. And if we are going to get in the habit of bailing out lenders when they do something stupid, some sort of mandatory government insurance for lending institutions may be in order.

I am not sure of the technical details, but some people seem opposed to the idea of regulation on ideological grounds, not practical ones.

The housing bubble was going on before ARMs and such.

There are really two issues:
The mortage lending problem.
The housing bubble.

When we talk about the housing bubble, what we see is a sector where sales have slumped and prices are correcting. Its becoming a buyer's market. This is bad for home builders but great for Joe Consumer.

There is no reason for the federal government to "fix" the housing bubble.

The S&L industry is a different topic really tangentially related since many of the loans were taken on houses selling at bubble prices.

In any case, none of your solutions would have fixed the housing bubble.

[BPSCG]

Bubbles may be natural, but so is Syphilis. Just because bubbles happen doesn’t mean that they are a good thing, or that the government should sit around and let nature take its course until they have to step in with a huge taxpayer funded bailout at the end.Keep in mind that the government that would be stepping in would be the same government that brought you the the Iraq war you're so fond of, the impending Social Security financial catastrophe, the even-more-impending Medicare financial catastrophe...

[Random]

Keep in mind that the government that would be stepping in would be the same government that brought you the the Iraq war you're so fond of, the impending Social Security financial catastrophe, the even-more-impending Medicare financial catastrophe...

Also the Moon landing, rural electrification, the eradication of smallpox…

[BPSCG]

Also the Moon landing, rural electrification, the eradication of smallpox…Rural electrification was well on its way when Roosevelt strongarmed the electric utilities out of the Tennessee Valley. You can read the details in Amity Shlaes's book, The Forgotten Man. Roosevelt and his advisers - many of them Marxist and fascist sympathizers who were convinced that the great depression was proof that capitalism didn't work - believed that electrical power generation was too important to be left to private industry.

Regarding smallpox: Edward Jenner was English. He was not a U.S. government employee.

[Sefarst]

Not really. Or rather that is not sufficient to produce bubbles. Bubbles happen because of correlated mistakes. Correlated mistakes result from asymmetric information or badly rigged incentives. I think it's possible to regulate against that without ruining anyone's incentive to take risks.
How? We all ready force companies to disclose their finances to shareholders. You're right about correlated mistakes, but I don't think there's much government regulation that can change that. Bubbles occur essentially because people made stupid decisions (such as valuing an internet company's stock not by things like its price-to-earnings ratio or its discounted cash flows but by the number of page hits it gets). The market has a lovely way of self-correcting called economic downturn (not sure if we're all saying "recession" yet).

[kosai]

Keep in mind that the government that would be stepping in would be the same government that brought you the the Iraq war you're so fond of, the impending Social Security financial catastrophe, the even-more-impending Medicare financial catastrophe...

and the internet!

[President Bush]

Nice article:

The next bubble: Priming the markets for tomorrow's big crash (http://www.harpers.org/archive/2008/02/0081908)


Given the current state of our economy, the only thing worse than a new bubble would be its absence.

[Sefarst]

Nice article:

The next bubble: Priming the markets for tomorrow's big crash (http://www.harpers.org/archive/2008/02/0081908)
Everyone criticizes Greenspan for cutting the interest rate and supposedly "feeding the bubble." It's easy to forget the recession and economic problems we went through in 2001-2002 and realize that his reasons for cutting the interest rate were to combat that problem. Right now, The Fed has cut the current interest rate because Bernanke is worried about a recession. Sound familiar? He's feeding the next bubble.

So don't fear the bubbles. Brace for the recessions and be wise with your money.

[President Bush]

Brace for the recessions and be wise with your money.


Stinky's song (http://www.youtube.com/watch?v=vDDynVQMKD8&feature=related)

NSFW

[shemp]

I can't believe no candidate has endorsed my solution: Print lots of money and give it all to me! I'll use it to make strategic purchases that will boost the economy.

[Francesca R]

How? We all ready force companies to disclose their finances to shareholders. You're right about correlated mistakes, but I don't think there's much government regulation that can change that.How is a difficult question. At its simplest the task for government is to backstop the financial payments system (which they do anyway) and on top of this, make it in companies' (shareholders' and executives') self interest to act in ways that are aligned with social welfare, which is in this case referring to solvency and confidence in the financial system. They do the latter too, but it is in this area that there is "always room for improvement".

One off-the-wall idea (http://forums.randi.org/showthread.php?t=93368) I raised ages ago that is relevant to this is to adjust the laws of limited liability. I am not particularly convinced that that is a good idea, but it comes from thinking along the lines of aligning incentives.

One summary of the problem of the recent bubble was various economic agents (i) disguising risk and (ii) offloading it in disguised form. It seems that much of the remedy talk is concerned with restricting (ii) here. But (ii) is, in principle, just fine as long as you can squash (i)

Bubbles occur essentially because people made stupid decisions (such as valuing an internet company's stock not by things like its price-to-earnings ratio or its discounted cash flows but by the number of page hits it gets). The market has a lovely way of self-correcting called economic downturn (not sure if we're all saying "recession" yet).Yes, except that this can shower the losses all over the place and manufacture other losses (due to a confidence crisis) that would not have arisen otherwise.

I hear people object to central bank "bailouts" because these socialise losses. Unfortunately the free market would magnify and socialise a lot more losses if left to its own devices (in modern economies with fractional reserve finance and securitisation, that is)

*wishes more people would post this stuff in the business forum*

[Sefarst]

How is a difficult question. At its simplest the task for government is to backstop the financial payments system (which they do anyway) and on top of this, make it in companies' (shareholders' and executives') self interest to act in ways that are aligned with social welfare, which is in this case referring to solvency and confidence in the financial system. They do the latter too, but it is in this area that there is "always room for improvement".

Companies have an obligation to their shareholders, that's who they're responsible to. If looking out for your shareholders is what you mean by social welfare, then we're agreed. I don't, however, believe that companies have an obligation to boost the public's confidence in the financial system. You might argue that, indirectly, it's in a company's best interest to boost confidence as that might result in more people willing to invest in general which could lead to that company getting more capital, but I'm not sure that's what you're arguing.

One off-the-wall idea (http://forums.randi.org/showthread.php?t=93368) I raised ages ago that is relevant to this is to adjust the laws of limited liability. I am not particularly convinced that that is a good idea, but it comes from thinking along the lines of aligning incentives.

In an ethical or holistic sense, limited liability is not real—it is an imaginary concept. It is possible to offload the risk associated with any action to someone else, or another country, or the environment etc. But it is not really possible to externalise it beyond our effectively closed system of planet earth. It is delusional to imagine that "the pieces" will never have to be "picked up". Therefore limited liability is fundamentally incompatible with a sustainable society.

I don't understand what you mean by "in an ethical or holistic sense, limited liability is not real" because limited liability is just as "real" as the ethics you are citing. What are ethics if not generally agreed upon ideas in society to make that society run smoothly? In the same way, limited liability is a financial and legal concept that makes society run smoothly. You seem to be suggesting that responsibility exists in an objective sense and must always "fall" on somebody. I don't agree with that. Responsibility is only relevant in the specific contexts of human society.

Limited liability is free insurance that gives a company a free pass to take risks it will not have to pay for, and thereby rip (someone) off. Companies—like people—respond to incentives, so that's what they end up doing. Therefore limited liability is axiomatic with excessive risk taking by businesses. Worse, with these excessive risks, the business captures the positive pay-off but someone else (society) wears the negative tails. It systematically disadvantages those external to the company

Now I very much don't agree with this point, but you and I might have different concepts of limited liability (I don't know the laws pertaining to it where you live), but the company does not get a "free pass" and neither do the individuals. Limited liability simply prevents certain members of a company from getting wiped out after a lawsuit.

All people have limited liability to a certain extent. Imagine for a second that I am dirt poor and in some way damage you or your property. However, I am protected from a lawsuit by virtue of the fact that I don't have anything you can take. Every individual is protected from liability up to the extent of his/her assets.

Much of the financial risk associated with a business can be diversified away, same as any other risk. It could also be insured against given the appropriate pooling of claims and availability of derivatives markets. Same as other risks. Limited liability is not necessary for investors to have any hope of risk management.

Again, this seems a little vague to me. I assume you're talking about the limited liability of stockholders here. Are you suggesting that stockholders should be legally liable for the actions of the company?

There is no magic cut-off point at which people will refuse to take a risk. The implication that "if you can lose more than you put in, nobody is going to invest" is simply false. If it were true it would not be possible to explain the popularity of leverage. People will take risks that are sufficiently compensated. Entrepreneurship will not collapse in the absence of limited liability. If the expected return from a business is positive and compensates for the (true) risk, limited liability is not necessary.

You've yet to explain why all people should be legally liable in a company?

One summary of the problem of the recent bubble was various economic agents (i) disguising risk and (ii) offloading it in disguised form. It seems that much of the remedy talk is concerned with restricting (ii) here. But (ii) is, in principle, just fine as long as you can squash (i)

I'm not sure what aspect you're talking about when you say they were offloading disguised risk in disguised form. An individual taking a loan knows more about his/her ability to repay the loan than the bank does. The bank only has formulas and standards that allow them to estimate a person's risk, but you will always know more about your finances than anyone else will. I guess I don't see a) how limited liability disguised the risk of banks making loans, b) how that risk was "offloaded" to other parties in disguised form, c) why making shareholders more legally liable would have prevented that.

Yes, except that this can shower the losses all over the place and manufacture other losses (due to a confidence crisis) that would not have arisen otherwise.

But government intervention only serves to "disguise" the situation even more doesn't it? Are you in support of the government bailout of Bear Sterns? That was done to protect confidence in the financial system, wasn't it? They were worried about a panic.

I hear people object to central bank "bailouts" because these socialise losses. Unfortunately the free market would magnify and socialise a lot more losses if left to its own devices (in modern economies with fractional reserve finance and securitisation, that is)

You have to convince me that these magnified and socialized losses aren't part of "true" loss but are rather manufactured loss. If a business fails, that hurts confidence in the financial system, yes, but are you arguing that the government should protect the system from this "loss" that results from lagging confidence. But I think a loss of confidence should be included as part of the measure of "true" loss. For instance, if an airplane crashes, that will hurt confidence in the airline industry. If FEMA can't rescue people from a flooded New Orleans, that hurts confidence in the federal government. I consider this all to be part of "true" loss and not magnified loss.

*wishes more people would post this stuff in the business forum*
We can continue this there if you want.

[Francesca R]

Companies have an obligation to their shareholders, that's who they're responsible to. If looking out for your shareholders is what you mean by social welfare, then we're agreed. I don't, however, believe that companies have an obligation to boost the public's confidence in the financial system.I was clearly not clear enough (!). Companies have no social responsibility other than the prusuit of profit for their owners. I detect we agree on that. Some would say that this is social responsibility enough (EG the late Milton Friedman). Others disagree. For those others (I count myself among them), it is the role of government to compel companies to adopt other responsibilities, which are actually often to the detriment of shareholders, by law. This involves--for example--regulating the amount of financial risk (leverage) an institution can take, in the interest of system stability. If no institution would ever take on leverage that could threaten the system, no regulation would be necessary. But they would and it is. And now, after the latest wreck, there are calls for more government regulation.

You might argue that, indirectly, it's in a company's best interest to boost confidence as that might result in more people willing to invest in general which could lead to that company getting more capital, but I'm not sure that's what you're arguing.No, not really.

I'm not sure what aspect you're talking about when you say they were offloading disguised risk in disguised form. An individual taking a loan knows more about his/her ability to repay the loan than the bank does. The bank only has formulas and standards that allow them to estimate a person's risk, but you will always know more about your finances than anyone else will. In this example, mortgage brokers arrange deals with customers, but banks loan money, then sell them to investment banks who wrap them up into collateralised debt obligations, then they buy insurance for some tranches of that, then rating agencies stamp AAA on some of it, then they are sold to institutional investors and other investment banks, often sheltered from balance sheets in special investment vehicles domiciled in offshore centres. This convoluted "supply-chain" allows incentives to evaluate and price risk correctly to be quite easily lost. Everyone in the chain adds a little bit of disguise, starting with the borrower, and cumulatively at the end of the chain, the risk of these instruments has been revealed to have been comprehensively mis-estimated.

Does that make clear what I mean?

I guess I don't see a) how limited liability disguised the risk of banks making loans, b) how that risk was "offloaded" to other parties in disguised form, c) why making shareholders more legally liable would have prevented that.I have covered (b). I am not really arguing that (a) was a cause or that (c) is a solution. Perhaps, perhaps not. In non-specific terms, it is, again, the job of government regulation to identify what is the genuine (a) and execute the required (c). I swung in that link to limited liability thread because it comes from thinking about these issues.

Again, some (still) say that regulation is not necessary.

But government intervention only serves to "disguise" the situation even more doesn't it? Are you in support of the government bailout of Bear Sterns? That was done to protect confidence in the financial system, wasn't it? They were worried about a panic. The Bear Stearns arrangement is something I support yes (it was the least bad option, and a considerable improvement on what my (UK) government did with Northern Rock plc). I guess I don't regard lending of last resort to be disguise, no.

You have to convince me that these magnified and socialized losses aren't part of "true" loss but are rather manufactured loss. If a business fails, that hurts confidence in the financial system, yes, but are you arguing that the government should protect the system from this "loss" that results from lagging confidence. But I think a loss of confidence should be included as part of the measure of "true" loss. For instance, if an airplane crashes, that will hurt confidence in the airline industry. If FEMA can't rescue people from a flooded New Orleans, that hurts confidence in the federal government. I consider this all to be part of "true" loss and not magnified loss.By "manufactured losses" I mean unnecessary ones that can be fully avoided because they are overreactions borne of the forced simultaneous correction of correlated mistakes. In your plane crash and Katrina examples there is no possibility of government intervention avoiding them (if a plane does crash, tragic though it is, there is rarely if ever a need for the government to buy massive amounts of airline shares to prevent them being taken out by a market panic)

We can continue this there if you want.If you would like to repost your comments on that OP in that thread, I'd be delighted to take it up :)

[Trakar]

I seem to remember that it was the government encouraging sub-prime loans under the pretense that minorities were being shut out of the housing market.

I thought it was the government encouraging loans (refis) so people could go on spending sprees at the malls to fight terrorism?

[Solitaire]

What made the housing bubble?


The market place created a series of unbacked loans.

Examining The Roots Of United States Economic Woes by Paul Solman (http://www.pbs.org/newshour/bb/business/jan-june08/domino_03-21.html)


Ultimately, regulation to prevent bubbles must deny you the choice to take risk or to pay premium prices.


Which is a good thing because I get the house without the high price and the risk of being thrown out by the sherif when the bank forecloses.


In the case of the housing market they would have done what the day after the BC strip came out?


Simple. Stop the zero percent loans, require five percent down, and a percentage of the payment for the principal. Any small downturn will not turn into a crises and speculators will not overbuy.

[WildCat]

I thought it was the government encouraging loans (refis) so people could go on spending sprees at the malls to fight terrorism?
:rolleyes:

[Trakar]

:rolleyes:

hardly a surprising reaction

[Sefarst]

I was clearly not clear enough (!). Companies have no social responsibility other than the prusuit of profit for their owners. I detect we agree on that. Some would say that this is social responsibility enough (EG the late Milton Friedman). Others disagree. For those others (I count myself among them), it is the role of government to compel companies to adopt other responsibilities, which are actually often to the detriment of shareholders, by law. This involves--for example--regulating the amount of financial risk (leverage) an institution can take, in the interest of system stability. If no institution would ever take on leverage that could threaten the system, no regulation would be necessary. But they would and it is. And now, after the latest wreck, there are calls for more government regulation.

I'm with Milton Friedman on this (obviously) and against the side of government regulation. Banks all ready have standards regarding the amount of risk they are willing to allow. On what grounds do we stand to tell them otherwise? I'm not sure what you mean by "threaten the system" as I don't think the system is threatened right now. I think a lot of people are going to lose money and some companies are going to go out of business, but on the whole the system is working very well.

In this example, mortgage brokers arrange deals with customers, but banks loan money, then sell them to investment banks who wrap them up into collateralised debt obligations, then they buy insurance for some tranches of that, then rating agencies stamp AAA on some of it, then they are sold to institutional investors and other investment banks, often sheltered from balance sheets in special investment vehicles domiciled in offshore centres.

That's a different issue than the one I thought we were talking about. In this case, the risk should be reflected in the price as the debt is sold. I'm not sure what you mean by "sheltered from balance sheets." Investors have a legal right to examine financial statements and I'm not sure what percentage of these debts are being held offshore. The Office of Compliance, Inspections and Examinations all ready inspects broker deals and credit rating agencies. I'm no expert though, I've dealt very little with what you're talking about.

This convoluted "supply-chain" allows incentives to evaluate and price risk correctly to be quite easily lost. Everyone in the chain adds a little bit of disguise, starting with the borrower, and cumulatively at the end of the chain, the risk of these instruments has been revealed to have been comprehensively mis-estimated.

Yes, but I'm still confused as investment banks have risk management departments in the so called "Middle Office." Is your criticism that most of them aren't doing their job correctly?

The Bear Stearns arrangement is something I support yes (it was the least bad option, and a considerable improvement on what my (UK) government did with Northern Rock plc). I guess I don't regard lending of last resort to be disguise, no.

Indeed, Northern Rock was a travesty. But government interference in the case of Bear Stearns does disguise the overall risk. As I'm sure you know, the argument against government bailouts is most often the fact that it encourages riskier and riskier actions.

By "manufactured losses" I mean unnecessary ones that can be fully avoided because they are overreactions borne of the forced simultaneous correction of correlated mistakes. In your plane crash and Katrina examples there is no possibility of government intervention avoiding them (if a plane does crash, tragic though it is, there is rarely if ever a need for the government to buy massive amounts of airline shares to prevent them being taken out by a market panic)

My reasoning behind those examples is that after any failure anywhere, panic is a natural part of the loss rather than a manufactured one. Going back to what you were originally saying, the objection to bank bailouts because they socialize losses, it seems you are arguing that the natural magnification of a loss is worse than the socialized loss that occurs when there is a bailout. Am I correct in that regard?

In that case, it requires that we ask ourselves, which is the greater evil? The panic that occurs when a bank announces it is doing badly and investors start selling its shares or the moral hazard that results from the government bailing that bank out and the potential cost to tax payers?

If you would like to repost your comments on that OP in that thread, I'd be delighted to take it up :)
Will do. The thread is a few months old though, so I'll defer to you if anyone accuses me of grave digging;)

[Francesca R]

I'm with Milton Friedman on this (obviously) and against the side of government regulation. Banks all ready have standards regarding the amount of risk they are willing to allow. On what grounds do we stand to tell them otherwise? I'm not sure what you mean by "threaten the system" as I don't think the system is threatened right now. I think a lot of people are going to lose money and some companies are going to go out of business, but on the whole the system is working very well. Well are you opposed to existing regulation of banks (so that you just don't want any more)? There is, of course, no "free" / unregulated market in banking; they are already doing what they do because "we" (or, the state) tell them they can. Bear Stearns being allowed to break would, in my view, have threatened the system. It's hard to imagine exactly how, but via a domino effect where because Bear was in default that triggered default and panic across many other institutions, which are not in default today, because of the forced fire-sale takeover.

That's a different issue than the one I thought we were talking about. In this case, the risk should be reflected in the price as the debt is sold. I'm not sure what you mean by "sheltered from balance sheets." Investors have a legal right to examine financial statements and I'm not sure what percentage of these debts are being held offshore. The Office of Compliance, Inspections and Examinations all ready inspects broker deals and credit rating agencies. I'm no expert though, I've dealt very little with what you're talking about.Sheltered from balance sheets: not included in them. I simply point out that the value-chain behind the origin, sale and re-sale of much of the debt now colloquially referred to as "toxic waste" was, apparently, so convoluted that the risk was easily hidden and therefore mis-estimated, and that the value-chain contained incentives for this to happen.

Yes, but I'm still confused as investment banks have risk management departments in the so called "Middle Office." Is your criticism that most of them aren't doing their job correctly?And that the incentive structure has evidently not been well set up for this job to be done well enough. But not just investment banks.

Indeed, Northern Rock was a travesty. But government interference in the case of Bear Stearns does disguise the overall risk. As I'm sure you know, the argument against government bailouts is most often the fact that it encourages riskier and riskier actions. I accept that criticism. IMO it is not, however, strong enough to outweight the argument in favour of some bailouts, such as Bear.

My reasoning behind those examples is that after any failure anywhere, panic is a natural part of the loss rather than a manufactured one. Going back to what you were originally saying, the objection to bank bailouts because they socialize losses, it seems you are arguing that the natural magnification of a loss is worse than the socialized loss that occurs when there is a bailout. Am I correct in that regard?Yes. Over-reactions may be natural (as in the result of collective action of human beings), but unnecessary and in some cases sufficiently undesirable to be worth avoiding at non-zero public cost, since the public cost of non-avoidance may be greater. Put simply, when the dust settles, if a large number of banking institutions have toppled and nobody wants to place money in one again, it is rather harder for a natural recovery to ensue

In that case, it requires that we ask ourselves, which is the greater evil? The panic that occurs when a bank announces it is doing badly and investors start selling its shares or the moral hazard that results from the government bailing that bank out and the potential cost to tax payers?Exactly.

Will do. The thread is a few months old though, so I'll defer to you if anyone accuses me of grave digging;)Thank you. Apologies that I may not get to it very quickly, but I appreciate it.

[NeoRicen]

Keep in mind that the government that would be stepping in would be the same government that brought you the the Iraq war you're so fond of, the impending Social Security financial catastrophe, the even-more-impending Medicare financial catastrophe...
Oh **** off...

Democracy. Ever heard of it???

Conservatives and Libertarians are pathetic with their stupid ideas that the 'government' is an unchanging entity. It's not the corporations you all love so much, it's a democratically elected body that represents the people. Well at least it would be if you stopped electing conservatives.

What do you bloody expect when you elect anti-government politicians to government? They **** it up!

[Foolmewunz]

This thread should be moved to either Politics or CE, IMHO. It's too good to be relegated to the election squabbling threads.....

thanx to all for some interesting info/opinions

[Francesca R]

This thread should be moved to either Politics or CE, IMHO. It's too good to be relegated to the election squabbling threads.....

thanx to all for some interesting info/opinionsI vote for "business"

[Sefarst]

Well are you opposed to existing regulation of banks (so that you just don't want any more)? There is, of course, no "free" / unregulated market in banking; they are already doing what they do because "we" (or, the state) tell them they can.

I would be in favor of legislation to slowly start de-regulating several sectors of the financial system and seeing what the response is.

Bear Stearns being allowed to break would, in my view, have threatened the system. It's hard to imagine exactly how, but via a domino effect where because Bear was in default that triggered default and panic across many other institutions, which are not in default today, because of the forced fire-sale takeover.

That requires a lot of speculation and we don't really no if that would happen because we haven't allowed a large, central investment bank to collapse in.....I'm not even sure how long.

Sheltered from balance sheets: not included in them. I simply point out that the value-chain behind the origin, sale and re-sale of much of the debt now colloquially referred to as "toxic waste" was, apparently, so convoluted that the risk was easily hidden and therefore mis-estimated, and that the value-chain contained incentives for this to happen.

Your suggestions require a couple of assumptions, if I'm not mistaken. 1) Government is always the most rational player in the financial system and 2) Government agencies and bureaucrats have greater incentives to clarify levels of risk for investment banks than the banks themselves do. If I'm wrong about your position, please correct me. However, IMO the government is normally the LEAST rational player in financial systems because their decisions are always politicized. The Feds have to deal with not only the economic effects of the situation but also with the perceived effects by the public. As for 2), I don't see how the government agents would have greater incentive to catch "hidden" risk than the risk managements officers of the bank would. Management at the bank has not only their careers, but often their entire livelihoods and the bank's very existence riding on their decisions.

Then there are of course the usual criticisms about the overwhelming inefficiency and bureaucracy of the government.

And that the incentive structure has evidently not been well set up for this job to be done well enough. But not just investment banks.

I would accept that if this were a problem that happened all the time. However, this is the first very serious banking crisis we've had in quite some time. It kind of reminds me of the "Bear Patrol" from The Simpsons in which a bear gets loose one day because someone made a mistake and digs through the trash of some people in town. People panic and demand money to create a bear patrol to guard the town against bears.

In the same way, the first a big mistake in a bank happens and people start demanding more regulation, that is also a form of panic.

Yes. Over-reactions may be natural (as in the result of collective action of human beings), but unnecessary and in some cases sufficiently undesirable to be worth avoiding at non-zero public cost, since the public cost of non-avoidance may be greater. Put simply, when the dust settles, if a large number of banking institutions have toppled and nobody wants to place money in one again, it is rather harder for a natural recovery to ensue

Maybe the place to look is the Great Depression and the arguments that surround it. The Austrian School argues that the New Deal legislation and Keynsian outlook of the government at the time pro-longed the depression and the failures of the financial institutions at the time (ala Hayek and Murray Rothbard).

Exactly.

I think for the argument in favor of more regulation to work, we need a more convincing basis that some inherent flaw in the financial system is what has caused the current crisis. I'm against this idea on the basis that, if it were an inherent flaw, we would see the banks encounter this same problem in regularly cycles or the entire system might have all ready collapsed in the past. The fact that this appears to be a one-time situation, at least in current memory, suggests to be that there is a one-time cause, possibly in the Congressional legislation of the late '90s Wildcat (I think) mentioned earlier, combined with a low interest rate set by the Fed to combat recessionary fears in 2001.

Thank you. Apologies that I may not get to it very quickly, but I appreciate it.

Sure.

[Dr Adequate]

I would accept that if this were a problem that happened all the time. However, this is the first very serious banking crisis we've had in quite some time ... The fact that this appears to be a one-time situation, at least in current memory ... My dad (former economics teacher) was talking about this the other day. He said that this sort of thing happens once per generation, precisely because the banks, having little in the way of institutional memory, forget how dumb it was the last time.

I'm afraid I can't produce examples and references, this isn't really the area of economics I'm interested in.

[DaChew]

I'd just like to point out that the housing and loan bubble worked out really well for a lot of us. I went years trying to get a low interest rate standard mortgage on a piece of family property that I bought from an estate. Couldn't get anyone to write me a loan because the land was more valuable than the house that sat on it. Along comes the load frenzy a few years ago. So I got my low interest rate loan. Of course, it's fixed rate. I could've got an ARM, was offered several. Just didn't seem like a good idea. Especially for something I intend to keep for a while. My home's the same way. I refi'd twice a couple of years ago. Got a low interest fixed rate on that too.

I understand that the banks are having problems now. I feel bad for them. I really do.

[The Central Scrutinizer]

Free market is sure working great for the housing sector right now.

It sure is. Lots of bargain prices for home buyers and investors.

[The Central Scrutinizer]

If we knew that this was coming ahead of time, why could no one stop it from getting as bad as it did? I don’t think that is a crazy question.

The only way to have prevented it was to stop idiots from being idiots.

How do you propose we do that?

[The Central Scrutinizer]

Stinky's song (http://www.youtube.com/watch?v=vDDynVQMKD8&feature=related)

NSFW

:dl:

[The Central Scrutinizer]

Gold is next.

And I'll love it! Listening to all the smarmy gold bugs whining and wailing.

"But....but....but...gold was supposed to be a hedge against inflation!" :cry1

[Oliver]

Yeah, the Government totally controlling the marketplace sure worked great in the Soviet Union.


Why the Soviet Union? Both parties are working on legislation to enhance their and the Federal Reserves influence.

http://money.cnn.com/2008/03/28/news/economy/paulson_financial_overhaul/index.htm?postversion=2008032909

Nearly all of the proposals will require the approval of Congress, where Democrats are already at work on their own proposals. Sen. Charles Schumer, D-New York, said that Democrats "agree with large parts" of Paulson's plan but think the proposals should go further.


At least there are two parties involved. This way you at least have the choice to choose the lesser of two evils. :p

[UserGoogol]

Yeah, the Government totally controlling the marketplace sure worked great in the Soviet Union.

The dose makes the poison.

[JoeEllison]

And, boy, deregulation certainly improved the economy for everyone! "Free market capitalism" and "Soviet-style communism" are basically the same thing from a practical standpoint. No pure system has a chance of working, because they all wind up becoming a few very powerful groups working for their own profit, to the detriment of everyone else. Only a balanced system, with regulations to make sure uncontrolled freedom doesn't lead to uncontrollable corruption, has any chance of working towards the benefit of society as a whole.

[KoihimeNakamura]

Sssh, Joe. You're applying logic to government systems. The last time someone did that, the Earth Stood Still.

[JoeEllison]

Sssh, Joe. You're applying logic to government systems. The last time someone did that, the Earth Stood Still.

No, the last time someone did that, we were running a surplus.

[Sefarst]

And, boy, deregulation certainly improved the economy for everyone! "Free market capitalism" and "Soviet-style communism" are basically the same thing from a practical standpoint.
Can you defend that position?

[Beerina]

Free market is sure working great for the housing sector right now.

I'll take the occasional bubble over command-and-control any day.


Any politician who says they can do away with business cycles is a lying fraud.

Biologists assumed, in the animal world, that predator-prey relationships would stabilize around static ratios.

Then someone modeled it using differential equations and found out that this was completely wrong. Any stable state will start to oscillate and go back to unstable ratios.

As the prey multiply, the predators can multiply, too. Then they start to over-graze, and whittle down the prey too much. The predators start starving, and this allows the prey to rebound.


Business cycles are similar (unfortunate analogy of predator-prey aside). In "good times", people take out more loans and buy more product, cars, refrigerators, etc. Then they "have enough" for a few years. Stuff slows down a bit, people get laid off, etc.

But the idea this can be tweaked to stability is a complete fraud. The best you can do is ameliorate the harshness of the downside.


But too much regulation and you've slowed things so much that growth is slowed, and people suffer and die when they otherwise would have lived, thanks to delays on technological and medical development. This can add up unil, after a few decades, you've killed, by inaction, people on the order of the greatest mass murderers in history.

[Dr Adequate]

I'll take the occasional bubble over command-and-control any day.


Any politician who says they can do away with business cycles is a lying fraud.

Biologists assumed, in the animal world, that predator-prey relationships would stabilize around static ratios.

Then someone modeled it using differential equations and found out that this was completely wrong. Any stable state will start to oscillate and go back to unstable ratios.

As the prey multiply, the predators can multiply, too. Then they start to over-graze, and whittle down the prey too much. The predators start starving, and this allows the prey to rebound.


Business cycles are similar (unfortunate analogy of predator-prey aside). In "good times", people take out more loans and buy more product, cars, refrigerators, etc. Then they "have enough" for a few years. Stuff slows down a bit, people get laid off, etc.

But the idea this can be tweaked to stability is a complete fraud. Or it would be if anyone had promised to do so.

The best you can do is ameliorate the harshness of the downside. We're allowed to do that? Oh good.

But too much regulation and you've slowed things so much that growth is slowed, and people suffer and die when they otherwise would have lived, thanks to delays on technological and medical development. This can add up unil, after a few decades, you've killed, by inaction, people on the order of the greatest mass murderers in history. And, of course, too little regulation is also bad for the economy (by definition) slowing down technological and medical development. So, all we have to do to discover whether you rank up there with Hitler and Stalin is to find out whether you favor either too much or too little regulation (the chances that you should turn out to favor exactly the right amount of regulation can be dismissed as negligible).

To get a balanced view, I asked a Marxist and a Libertarian, and guess what, you favor too much regulation and too little regulation. I bet you eat kittens as well.