David,
"I would have better faith in government regulating appropriately if they would, you know, actually regulate appropriately." This, indeed, is the crux of the problem. How, does the government regulate appropriately? I don't think either party knows the answer. Powerful Fed chairmen like Greenspan span parties. There is plenty of blame to go around with both parties. I am not optimistic about Obama's administration getting it right, but I hope they do. I want a workable solution, I don't care which party puts it into place. As you pointed out, there were essentially "no" regulations in place. The house of cards was outrageously fragile, and it fell because "Banks who thought that this was spiffy, did not adequately insure (but the insurers went belly up anyhow)..." What a mess. The reason I am not optimistic is that even with a truly bi-partisan team of the most brilliant experts in the field drafting regulatory controls, someone will eventually find a way to find a chink in the armor of the regulations. That chink will be so obscure that almost no one will be able to detect it, and even if a prodigy regulator detects a perilous situation and sounds an alarm, virtually no standard-faire legislators or government bureaucrats will be able to understand the problem. And the cycle begins anew. Chris _____ From: [email protected] [mailto:[email protected]] On Behalf Of David R. Block Sent: Tuesday, May 19, 2009 11:14 PM To: Radical Centrist discussion list Subject: Re: [RC] A Failure of Capitalism (II)--Whom to Blame? - Richard A. Posner The failure in capitalism here is a regulation induced failure. I will probably slip into and out of sarcasm without warning. With the CRA starting in the Carter Administration and the expansions to it under the Clinton Administration, co-opted by the "Ownership society" of the Bush Administration, we have the Freddie and Fannie messes. Freddie and Fannie were way stations on the path to selling mortgage backed securities. They would package up mortgages and sell them to banks and investment firms. As a quasi-private and quasi-government agency/corporation/what have you, they bundled these mortgages up and sold them. They also, together with private insurance (think AIG), insured them. So when the Adjustable rate mortgages adjusted and people could no longer afford their payments, the buyers of Freddie and Fannie mortgage packages were left holding the bag. This starts bringing down investment bankers and regular bankers who had bought those packages because suddenly they have two related problems: Decrease in revenue due to the defaults, and decrease in the worth of the mortgages themselves. So they really have double losses on their books. Some of these losses are insured, so the losses transfer to the balance sheets (now, the out-of-balance sheets) of Freddie, Fannie, and AIG, for a few. Banks who thought that this was spiffy, did not adequately insure (but the insurers went belly up anyhow), and they found themselves part of other banks (WAMU, Wachovia, BearSterns, Countrywide, etc). Instead of "deregulation" being the problem, the problem is instead NO regulation. Barney Frank and Chris Dodd fought regulation every step of the way, including regulations proposed by the cause of all of this deregulation, George Bush. Yes, Bush proposed regulation of Freddie and Fannie, as did John McCain. But this is now a newspeak world, up is down, black is white, and regulation is suddenly deregulation when proposed by Bush and McCain. Obama, Geitner, Franks and Dodd and the Lamestream Media tell me so. We must not forget the narrative: EVERYTHING is the responsibility of George W. Bush, even regulations that he couldn't get through Congress due to the obstruction by Franks and Dodd, two of the largest recipients of campaign cash from Freddie and Fannie executives. The other member of that unholy trinity is no less than.......Barack Obama. And they wonder why they have a credibility problem when they are the architects of the "fix" to this mess? Is there a working brain among them? I would have better faith in government regulating appropriately if they would, you know, actually regulate appropriately. But these guys are bought and paid for by the people they are regulating, and are so far an EPIC FAIL on regulation. Blaming it on Bush is a habit that the left as acquired for the last eight years. No surprise that they are still beating the dead horse. Oh, and that Bush deficit? Obama exceeded Bush's 8 year deficit in one year. Yeah, that's CHANGE all right. Right direction, not so much. David "There is no difference between communism and socialism, except in the means of achieving the same ultimate end: communism proposes to enslave men by force, socialism - by vote. It is merely the difference between murder and suicide."--Ayn Rand Dr. Ernie Prabhakar wrote: A useful analysis. While this could be read as blaming the government for everything, the implication is that the industry *needs* the government to regulate it appropriately, as otherwise the market incentive always ends up leading to taking on excessive risk... -- Ernie P. http://correspondents.theatlantic.com/richard_posner/2009/05/a_failure_of_ca pitalism_ii--whom_to_blame--richard_a_posner.php In fact the bankers took too many risks from an overall economic standpoint, and that is the immediate cause of the economic hole we're in. They made too many risky loans, especially in real estate, and when the risks materialized the banks' assets, which included many real estate mortgages and securities backed by such mortgages, plunged in value. The banks found themselves undercapitalized and reduced their lending, which slowed economic activity, which began the downward spiral that we're in. They were permitted and indeed encouraged to take risks that were too great from the standpoint of economic stability by the government itself, in two major respects. First, the regulatory controls that had once limited the amount of risk that banks could take, in recognition of the potentially catastrophic effects on economic stability of a collapse or near collapse of the banking industry, were gradually dismantled, beginning in the 1970s. Not completely dismantled, but enough dismantled to allow competition almost free rein to push the bankers toward taking more risks than were good for the nation's economic welfare. And second, the Federal Reserve pushed interest rates too far down at the end of 2000 and kept them there longer than made economic sense. The results included a housing bubble, a credit bubble, the bursting of the bubbles, and the ensuing swoon of the banking industry--all of which I'll explain in the next blog in this series. _____ _______________________________________________ Centroids mailing list: [email protected] http://radicalcentrism.com/mailman/listinfo/centroids_radicalcentrism.com Archives at http://radicalcentrism.org/pipermail/centroids_radicalcentrism.com/
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