Blaming the Market
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talkpoliticsHere are some readily accessible programs on the gist of the financial crisis:
Frontline- The Warning.
Frontline- Inside the Meltdown.
CNBC- House of Cards.
Sony Pictures- The Inside Job. (Netflix it, or torrent it.)
The contrast in style is quite striking. CNBC is sort of the standard outlet for Wall St. so it naturally focuses on the consumer end of the problem, and their interviews are more buddy-buddy. They maintain access to big players by being jokey-jokey, grin-grin, nudge-nudge like everything is a funny prank. Frontline, obviously, comes from the evil liberal world of public broadcasting, so they focus on the institutions and systemic issues. People don't agree to be interviewed by Frontline very much, unless they're ousted, denigrated or have a reason to go on Frontline. The Inside Job, even more obviously, is a straight up finger jabbed at Wall St. and the government. Even better, it points to academia as well, and sends up vaunted Ivy-Leaguers for a well-deserved whipping.
History
In any case, the financial crisis should have caused American liberals to seriously critique their mythology. While Bill Clinton remains a "rock-star" in the minds of many American lefties, it is only because he appointed a cabal of free-marketeers which gave rise to recent bubble markets-- making everyone crow about "the longest economic expansion in history!" and stuff like that. Never mind that the financial regulatory scheme of Bill Clinton's administration was equal-to or more ideologically libertarian than Bush's. Bill Clinton's "Presidential Working Group" was chock-full of non-regulatory free-marketeers who roundly rejected any ideas about regulations, and even questioned the validity of policing fraud.
The academic world was equally compromised, as free-market mania swept the business schools, and professors and economists were paid to write glowing reports about the next-great-thing in investment banking. They even underwrote Iceland's new-fangled financial sector, with all sorts of a orgasmic praise, and tsk-tsking about nay-sayers who don't know what they are talking about.
If large earthquakes are preceded by tremors, the 2008 financial earthquake was signaled by the collapse of Long Term Capital Management, 10 years before our current boondoggle. The unregulated and secretive firm held 3.2 billion dollars in assets, or so. Their outstanding obligations amounted to over 1 trillion dollars. They were leveraged 250 to 1. And nobody had any idea. Except, of course, for the fund operators. With the collapse of the dot-com boom, LTCM found itself staring at the abyss. After LTCM failed, it's operators went on to run another investment fund using the same strategies, only with a little less risk. Guess what? They failed again, in 2009, because, you know, if at first you don't succeed...
The Market
Whether we are to blame regulators, politicians, Wall St. or consumers, the underlying point, I think, gets missed. There appears to be a distinction in a lot of discourse between "the industry" and consumers. Or rather, that when we talk about "the market", what we really mean to talk about are the institutional players and businesses. But that isn't "the market". At least not by itself. There were many arguments about what the problem was: stupid investment bankers or stupid homeowners. Well, obviously, the problem was both. But here's the deal: blaming consumers doesn't help the libertarian side at all, since you know, consumers are a huge part of the market.
Regulation and Moral Hazard
Anytime someone makes a "self-regulatory" argument, they do so with an implicit distinction between the industry and consumers. This is a false distinction. Laying the blame at the feet of consumers is... well... pointing out that the market can't self-regulate. And I mean, there were some pretty stupid people on the consumer side of it. People who went from living in a rented house in Compton to a 570,000 dollar house in the richest neighborhood in California, for instance. I mean, I understand if you game the system to get a cheap, affordable house in some low-to-middle class neighborhood. But a 600,000 dollar house? Yeah, that's stupid.
If someone wants to make a "moral hazard" argument, one can only do so while neatly ignoring the inherent moral hazard of Wall St. Namely, rewarding failure, and rewarding failure at such a rate as to make business something of a sick joke. The moral hazard of compensation packages while you're selling your failing company is perhaps the greatest obstacle to a sane financial system. The moral hazard of rewarding ratings agencies who give out bad ratings is another huge obstacle. It would seem that moral hazard was one huge chunk of the problem to begin with, so to raise the moral hazard objection to regulation is to, well... miss the entire point of the argument you're ostensibly trying to make.
The only people to suffer in this case are the shareholders and the workers, who are quite simply not prone to feeling like they made a mistake, or have any lessons to learn. The only way to make shareholders amenable to moral instruction would be to increase reporting requirements so that people can no longer run black-box derivative funds with a disclosure amounting to: "Give us the money, don't ask questions." Or they could just not invest in the private derivatives market: but then you wouldn't have a burgeoning derivatives market, you wouldn't have stellar economic growth, and you wouldn't have ammunition for your libertarian arguments.
The New Maths
After World War Two, mathematical and statistical experts had to find somewhere to work. Naturally, they found the financial markets as a place to try and test out their new models. Traders began to use sophisticated mathematical models to help make their bets. The heart of this new math? Figuring out the equation to getting people to sign bad contracts. The whole point of this style of trading is to mathematically calculate inherently broken deals, and then go find a sucker willing to take it. It is, quite simply, fraud perpetrated upon investors by investors, under a thin guise of "speculation". We are not talking about price signaling here. We are simply talking about finding the worst deal someone can make, and then going and making it.
Moral hazard was at the heart of the crisis: a free market that not only failed to regulate itself, but consistently rewarded dangerous behavior as well as failed behavior: from Wall St. to Harvard, from California to North Carolina. From mortgage originators to investment firms. We will not come to grips with our financial system if we do not undertake a sober accounting of the inherent moral hazards present in the private sector.
(no subject)
Date: 22/6/11 19:36 (UTC)(no subject)
Date: 22/6/11 19:40 (UTC)"Consumers would benefit from even more mortgage option alternatives. I encourage banks to come up with even more products to to help put people in homes." -Alan Greenspan
(no subject)
Date: 22/6/11 19:49 (UTC)(no subject)
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Date: 22/6/11 20:11 (UTC)(no subject)
Date: 22/6/11 20:15 (UTC)Free Market advocates do not deny the need for regulation, the question is WHAT KIND of regulation.
6 million pages of rules updated on a constant basis by regultory agencies is not a system of regulation which benefits ANYONE but the largest, richest, and most politically connected organizations.
On the other hand a small limited set of regulations designed to ensure that natuaral consequences of poor decision making are borne as much as possible by those who made those decisions and not passed down the line to someone else so as to minimize moral hazard is exactly what we want to see in place.
For example, how does this sound.
Rather than developing complex rules about what kinds of investments banks can and cannot make, every VP level and above officer, every member of the Board of Directors, and any stockholder who owns more than 5% of the outstanding stock of the bank is personally liable for reimbursing the FDIC should it be necessary for the FDIC to step in and seize the bank and this liability cannot be discharged in bankruptcy and applies to anyone who held any of the responsible positions within the 10 years prior to the collapse of the bank.
Now with that one rule in place would we have had a Countrywide Mortgage?
(no subject)
Date: 22/6/11 20:26 (UTC)You're not the prophet who speaks for relevant free market advocates. The relevant free market advocates go so far as to deny the need for fraud-related actions. These people are in the government, funded by think-tanks, pushed by ideologues, and have a large amount of influence. What you happen to think is interesting, but not as some kind of spokesperson for those of whom which we speak.
6 million pages of rules updated on a constant basis by regultory agencies is not a system of regulation which benefits ANYONE but the largest, richest, and most politically connected organizations.
This isn't what is on the table anyways. Simple things like not freezing the CFTC out of derivatives oversight would be what is on the table. Or simple reporting requirements. The main point of regulation isn't pages of rules, it is simply providing information. This information is what people don't want to be public.
For example, how does this sound...
That isn't really regulation. That's a punitive scheme but as far as everyday, nuts and bolts operation, it isn't all that germane to the issue.
Now with that one rule in place would we have had a Countrywide Mortgage?
As long as Countrywide wasn't a public bank, funded by non-public investment institutions, and operated only as an originator, pass-through organization, I don't think the rule would have much impact on that.
(no subject)
Date: 22/6/11 22:14 (UTC)"
Um...
http://www.philadelphiafed.org/bank-resources/publications/src-insights/2011/first-quarter/navigating-dodd-frank.cfm
"Reform involves a dynamic, ongoing process. The act is categorized into 16 titles and requires regulators to create rules, conduct studies, and issue periodic reports. Implementation will occur in stages, with much of the rulemaking at the forefront over the first 6 to 18 months following the passage. The rulemaking phase began shortly after enactment, and widespread and complex changes are expected.
The Dodd-Frank Act contains more than 300 provisions that expressly indicate that rulemaking is either required or permitted. However, it is unclear how many rules will ultimately be issued pursuant to the act because, among other things: 1) many of the provisions appear to be discretionary (e.g., stating that an agency “may” issue a rule); 2) individual provisions may result in multiple rules; 3) some provisions appear to provide rulemaking authorities to agencies that the agencies already possess; and 4) rules may be issued to implement provisions that do not specifically require rulemaking. Nearly 80 percent of the relevant provisions in the Dodd-Frank Act assign rulemaking responsibilities or authorities to four agencies: the Securities and Exchange Commission (SEC), the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission (CFTC), and the Consumer Financial Protection Bureau (CFPB).3"
Assume each of those provisions spawns a mere 10 pages of regulations on average. That is over 3000 pages of regulations from just 1 law.
Yes, currently what passes for government "regulation" is largely attempts to micromanage activity to produce desired results and while there are not "millions" of pages of regulations there are actually hundreds of thousands of them
"You're not the prophet who speaks for relevant free market advocates. The relevant free market advocates go so far as to deny the need for fraud-related actions."
Which free market advocates are these? Even the arch conservative Heratige foundation admits that regulations are necessary and proper in a free market...
http://www.heritage.org/research/reports/2008/03/red-tape-rising-regulatory-trends-in-the-bush-years
"Certainly, many of these regulations are justified-and even necessary.>/b> For instance, most would agree on the need for security rules to protect citizens against terrorism, although the extent and scope of those rules may be subject to debate. Moreover, imposition of a regulation is not per se inconsistent with market principles. Some in fact reinforce property rights and market mechanisms."
So lets see some names.
(no subject)
Date: 22/6/11 22:45 (UTC)2)The Dodd-Frank bill has little to do with OTC derivatives and the unregulated markets connected to slightly-regulated investment banks. The CFTC routinely hands out exemptions anyways, so it's still a non-regulatory paper tiger posing as something it isn't.
"Certainly, many of these regulations are justified-and even necessary.>/b> For instance, most would agree on the need for security rules to protect citizens against terrorism, although the extent and scope of those rules may be subject to debate. Moreover, imposition of a regulation is not per se inconsistent with market principles. Some in fact reinforce property rights and market mechanisms."
This completely dodges the realm of the question. Regulation, specific to private investment and hedge funds, is non-existent. This is an issue because public-chartered retail banks, as well as non-chartered investment banks, are inextricably tied up with the private unregulated markets. We can't simply ignore it.
(no subject)
Date: 23/6/11 11:20 (UTC)The law behind this simple document, however, is immense. That doesn't mean the face I see of it has to be. As for worrying about the cost of the accounting department at a bank, I don't really give a shit. But if you want to simplify things then this whole financial crisis would have been solved with a law that says "You can do these things, if you do anything that isn't these things, then it is illegal, if you want something added to the list, come and see us". One of the big problems was all these products that the regulators had no idea how they worked.
(no subject)
Date: 22/6/11 20:38 (UTC)(no subject)
Date: 23/6/11 11:21 (UTC)(no subject)
Date: 23/6/11 13:22 (UTC)(Hope that answered your question - not sure if I addressed it correctly.)
(no subject)
Date: 24/6/11 08:48 (UTC)I also find the idea that a government department is more liable to pressure from corporations than a corporation absolutely laughable.
(no subject)
Date: 24/6/11 11:45 (UTC)(no subject)
Date: 23/6/11 00:38 (UTC)There are at least some people who understand this, but by and large it seems most of the politicians are owned by corporations.
(no subject)
Date: 23/6/11 11:23 (UTC)So, you're saying...
Date: 23/6/11 00:45 (UTC)BTW, there was fraud in the stock market long before the math majors arrived.
Re: So, you're saying...
Date: 23/6/11 01:09 (UTC)(no subject)
Date: 23/6/11 04:22 (UTC)(no subject)
Date: 23/6/11 04:28 (UTC)(no subject)
Date: 23/6/11 04:45 (UTC)It's just my pet peeve in these narratives. :P
(no subject)
Date: 23/6/11 20:23 (UTC)(no subject)
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Date: 24/6/11 08:51 (UTC)(no subject)
Date: 24/6/11 13:19 (UTC)(no subject)
Date: 23/6/11 10:43 (UTC)It's so depressing that that's just what houses cost here now...
(no subject)
Date: 23/6/11 11:28 (UTC)(no subject)
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Date: 24/6/11 10:00 (UTC)