On April 20 2009 01:34 Diomedes wrote: it's always used by a powerful institution to restrict someone else: "Free markets for you, not for me."
This crisis is a perfect example for that.
I agree completely. Free markets for everyone except the banks, who get to create money as dictated by regulations. If the banks, including the central banks, simply had to follow the law - that counterfeit should be illegal - then the problem would resolve itself.
And in the mean time you still have on you the burden of proof how free markets would have prevented this crisis. And even if it did, economics are difficult enough to manage that it would be much more convenient to prevent the crisis through other means. You need to regulate to get free markets since there are too many greedy people. And if you can do that then why would the problem of this crisis even come up?
No central bank, a 100% reserve requirement for demand deposits, and a requirement to mark-to-market - no problems. No federal guarantees backed by a printing press and no free money being given away at bargain prices and the bad loans in the system would never have been made - there wouldn't have been enough credit to do so.
There does need to be a change in regulations, but it's not the market that needs regulating, it is the central banks - their monopoly on money and powers to adjust its value need to be revoked. The government should not be allowed to offer guarantees for things it has no money to repay.
In fact, you wouldn't even need a 100% reserve requirement - banks, obviously, can operate on less than 100% reserves, but people with deposits simply need to bear the risk that entails, or need to purchase insurance which can realistically cover them in times of default. Putting money in a bank should cost money - it's meant to be an alternative to stuffing it in your mattress. To put it in someone else's matress means purchasing a service from them, and it should cost money to do that. Banks, on the other hand, pay interest on deposits because they loan them out. That's a practice that involves risk and people need to be realistic about that. If you want to use a bank as an agent to lend your money, you should be prepared to carry the burden of that risk and not to distribute it to taxpayers so that you can lend money without thinking. That means your deposits may not be there when you want them, and if you want that security you should have to pay for it.
That's not a regulation, however, it's just emergent in a system where coercion and fraud is illegal for everyone, including banks and governments.
As for subsidies, I don't get your analogy at all. Why would industry not let the governemnt take the risk? Why would they do it themselves?
If the offer is being made to take the risk, there is no reason why they wouldn't take it. Why do something risky when someone else is offering to do it instead? The point is that the government shouldn't be taking those risks because it has no real assets to back it with in default - when they get it wrong, they have to resort to fraud to make up the difference. When the government is no longer allowed to take these risks, the private sector will have to decide itself which are worth taking and which are not. The nature of your question leads me to believe I've been unclear in making my point.
“If you saw Atlas, the giant who holds the world on his shoulders, if you saw that he stood, blood running down his chest, his knees buckling, his arms trembling but still trying to hold the world aloft with the rest of his strength, and the greater his effort the heavier the world bore down upon his shoulders–what would you tell him to do?”
“I…don’t know. What…could he do? What would you tell him?”
On April 20 2009 01:57 Diomedes wrote: Wait what? You basically want to make banks illegal? And you are the one promoting free markets while I blame lack of restrictions?
I feel there's a gap in understanding here...
Of course I'm not suggesting that banks should be illegal. I'm suggesting that they be held to the same rules as everyone else. That they should not be allowed to lend money which they do not have. That credit be a function of savings, as it should be, and not something which a licenced entity can purchase the right to create.
All I can say is: it's about time. This financial crisis is basically Ayn Rand's theories on economics as described in Atlas Shrugged playing out. To people saying "deregulation and greed caused this crisis," I'm afraid you're sorely misguided. The markets ARE regulated, and have been for many many decades now. Since the early 30's we've been living under the idea that man is basically unable to take care of himself, and he needs government to decide what's good for him. This is an idea that of course has its root in Plato's "philosopher kings."
Sadly, what will happen in the future is that people will (continue to) denounce Objectivism, decry it as "dogma" (already happened multiple times in this thread), say "LOL RAND" even though they've read the first chapter of The Fountainhead max, preach that it's "already decided" that regulation is a good idea and we will continue to proceed down the path we're on. As government plays an ever increasing role in markets worldwide, the economy will rebound in the short term, just like it did after the great depression and just as it did during with the housing boom, but ultimately the increased regulation will lead to an even greater fall years after the recovery. Modern economists simply chalk this up to "market correction" but the bottom line is there is no root reason why an economy need be cyclical, and indeed a free market is not. Sadly, such a market does not exist.
For those who are unfamiliar with Objectivism, I suggest you read some Ayn Rand, some Leonard Peikoff, and decide for yourself. It all makes good sense, as it should, because it is based on reason. Unless there is a predominant shift away from collectivism and regulation, away from religion and subjectivism, this world may stop being a place in which we would want to live within our lifetimes.
The problem with applying simple economic models to the world is that the majority of them, as we are able to discuss them, are based on simple principles that aren't quite true in the real world.
One of them is the participants are rational actors. This is the assumption everyone makes for their few dozen of economic courses.
The second one goes along with the first one, and that the actors have perfect information.
In reality, the possibility for arbitrage exists, many funny little market tools and instruments can be made, etc. I think a lot of the free market stuff is idealism. Not to say that the concept is without merit, we just need to understand the limitations of our models and systems.
Not to say that the concept is without merit, we just need to understand the limitations of our models and systems.
But praexeology and at least the Austrian perspective on free markets are not models or systems in a positivist sense. You have to deny the existence of apodictically true statements to say that they are invalid.
Here's a long and detailed lecture on the topic, if it interests you.
The problem with Rand is that she wrote in a way that was akin to, for example, A Brief History of Time - it was advocacy and pulp more than rigor and, as such, much more falsifiable, at least when taken on its own, than the more academic contributions in the same domain. It leaves the reader ill equipped to defend its assertions regardless of how correct they may or may not be. It simply presents them. Rothbard, for example, is a lot more substantial. Man, Economy, and State, however, is 1400 pages long and not exactly light reading.
Atlas shrugged is about the poor taking from the rich through government intervention. The book paints a picture of the government forcing companies to do unprofitable things for arbitrary reasons, for example, the government passing a law forcing a railroad company to build a railroad to a desolate region because some lawmaker wanted it there. And of course, there's taxation. Atlas shrugged says there should be no taxation.
I don't think Rand's book has anything to do with reality, but there are people who want to believe it is true. Those people will buy and support the book.
On April 19 2009 20:23 Diomedes wrote: Problem is that banks never thought about the risk of bad loans for others or the system as a whole. A market never takes in considerations any externalities actually. So a bank may say: "Hey if this loan doesn't get payed back that's so and so probable and so and so bad. So that is my risk." But then those loans also affect other banks and institutions. So then when all these loans suddenly turned out to be worthless the system as a whole almost had a meltdown.
And the funny thing is that Adam Smith was already aware of all of this and was critical about this aspect of markets The pollution of a car is not accounted for by the price of the car. The market totally ignores all this stuff. But the car does generate costs for society. And that's all very bad.
Adam Smith, the prophet of free markets, would roll over in his grave because of all the deregulation.
they thought about it, they just didn't care because they knew they weren't risking anything... they being the people in charge who end up w/ a fat check no matter what mess of a shit heap they leave the shambles of their business
jgad there is simply no way you can come only with formal correct deductions to the undisputable fact that no government involvement would be the best policy. And that is even if your axioms are in every situation correct (which I doubt they are). Please enlighten me how you can be so sure otherwise don't talk about these things as if they have been proven.
jgad, what you propose would make the primary function of banks impossible and thus basically make banks in the sense we understand them now, illegal. You are doing exactly what was talked about. But your regulations are so extreme that it makes banking totally impossible.
And yet you claimed you want to deregulate? I don't get it.
In the US were basically no regulation for investment banks. This they did did because of market ideology. And your suggestions are so extreme compared with normal regulation proposals, its very odd. Just because the rules are the same for humans and banks that doesn't mean it's no regulation.
And who to blame for the special rights companies have? Exceeding those of normal persons when they aren't even legal persons in the first place. The same people who refuse to regulate.
I must say that while I will not say that so-and-so is wrong, that I strongly disagree with the conception that "deregulation of banks caused the financial crisis."
Here's what I think caused the crisis: a bill called the Community Reinvestment Act was passed in Congress, essentially applying pressure to commercial banks to make more loans to lower class Americans. In combination with the lowering of the interest rates by the Federal Reserve, mortgages were very popular among Americans, for the "every American should have a home" mentality was in. Now, this bill was passed with the best of intentions, but it is also said that the road to hell is paved with good intentions.
This bill now essentially forced banks to make loans to people whom otherwise may not be qualified for loans. Once banks have made these loans, they have a big problem: they know that these loans may not be very stable, and they want to offload them as fast as possible. This was during the period of Michael Millikan and Ranieri and all the other Wall Street titans, so of course the banks decided to collectivize these loans into mortgage-based securities. But nobody would buy them, because they were very risky and didn't seem to pay back properly.
Then came Freddie Mac and Fannie Mae: being government sponsored corporations, they were not only able to take up large amounts of these securities and loans, they also had the backing of the government-in other words, they could never really "lose" money in their investments, as the government would back them up. Thus, they were able to buy tons of these mortgages and loans from the banks. This is a very bad incentive.
Meanwhile, all the other Wall Street banks see Fannie and Freddie taking in these securities, and soon they feel a need to compete against them, and thus start taking in mortgage securities. Of course, obviously there were going to be making sure that the investments here were profitable. These subprime mortgages had a higher rate of return, after all, but were much more risky than a normal mortgage based security.
At this point, the incentives for the commercial banks pointed highly to fudging the data for mortgages. These banks, thanks to the CRA, were saddled with the worst of the risky mortgages. The only way they could unload those was essentially by lying, i.e. if a security would normally expect 40% to default on their mortgages, they would fudge it and change it to 20%. Fannie and Freddie bought in, and soon the Wall Street banks did as well. The Wall Street persons did not check as well as they should have into the background of these mortgages-but they figured if Fannied and Freddie were, that they were also fine.
Of course, eventually it was realized (like around 2008) that the securities that were bought were not actually worth nearly as much as they were purchased for. Now normally this would only be a small loss, but the Wall Street banks had leveraged the securities, which basically means that they can use, say, 1 billion dollars of capital to make a 10 billion dollar investment. If the investment increases by 20%, they make 2 billion dollars. If it falls by 20%, however, they lose 2 billion dollars. Fannie and Freddie were taking this leveraging to extremes, at like 100:1 leveraging, so the banks felt a need to leverage that high as well.
Thus, when the actual mortgages defaulted at a much higher rate than anticipated from the securities, any company that made these investments (and leveraging in the process) took an absolutely massive hit. The result cut down the amount of capital investment banks had, and essentially made the subprime mortgages (which the commercial banks were pushing) worthless, hurting those banks as well.
In effect, one could blame the resulting collapse on three sources: The Wall Street Banks should have known better, they should have checked more, etc. etc. etc. But it wasn't really their fault here: Fannie and Freddie were applying competitve pressure for them to get into the busting bubble. The commercial banks shouldn't have lied, either. But the CRA had essentially forced them into taking a losing proposition, so it was their incentive to unload as fast as possible. In effect, I personally blame the financial crisis on the CRA and Fannie Mae and Freddie Mac (in other news, the government)
Also, lol Rand.
EDIT: What happened here is this: The market plays the same build order all the time. Normally, it works fine. But when you change things up to the point that there is clear imbalance for one particular strategy or another, the build order is forced to change, until at some point the build order is completely incompatible with the strategy and you basically lose.
On April 20 2009 04:40 silynxer wrote: jgad there is simply no way you can come only with formal correct deductions to the undisputable fact that no government involvement would be the best policy. And that is even if your axioms are in every situation correct (which I doubt they are). Please enlighten me how you can be so sure otherwise don't talk about these things as if they have been proven.
A few thousand pages of reading to keep you busy. I refer you specifically to chapter 12 of the latter and the full Power and Market addendum, especially sections on binary and triangular intervention. They have been proven. I'm open to counterargument if you're willing to present them.
Still people in Europe claim banks shouldn't even be allowed to take those risks. And politicians and economists claim what happened would never be possible in Europe because of regulation. And I also have heard people claim that it only was possible because of recent deregulations.
Lack of regulation never causes anything, in the strict sense of the word. The point is it should never be even possible, whatever triggers it. There should be a fundamental failsafe.
And the problem isn't just those mortgages but also how those risks were packaged and traded over and over in ways no one was able to figure out.
And it wasn't the government that made those mortgages either. So how can you blame them for that? Just because they created the scenario where everything could go so wrong but because of the actions of other people. The government did what I did and the banks did what they did.
Yeah, it all wouldn't be possible with the US credit culture. But those people don't manage the banks. People are responsible for their own actions.
EPT
