Haiti: government and regulation (was Re: Two interesting Articles for Dr. Brin:)
This thread got me thinking about government, regulation and Haiti. I haven't been back from Haiti long enough to feel as though I have particularly coherent thoughts about the significance and opportunity posed by the earthquake, but a few ideas have begun to take hold. Like many poor nations in our hemisphere, Haiti has lived under a combination of highly centralized government with little regulatory authority or trade barriers. The theory, or at least the defense, of the lack of regulation was that free market forces would allow the nation's people opportunities to bootstrap new businesses, etc. Yet the reality is that its wealthy trading partners have tended to reinforce the concentration of wealth in the hands of a small minority. Simple example - U.S.-government subsidized rice has undercut the local farmers' prices, yet in the name of free markets, no trade barriers or subsidies are in place... so Haiti imports more than half of its food, even though it was a very fertile country. There have been no environmental regulations, so the Haiti half of Hispaniola is almost entirely deforested, the trees having been cut down to make charcoal for people to cook on. Deforestation led to run-off that washed the topsoil into the ocean, greatly reducing that fertility. And the topsoil killed most of the coral reefs near the island, so fishing has also become far more difficult. The lack of regulation regarding building - there were no building codes - resulted in a huge percentage of the buildings collapsing or undergoing severe damage. Wanna see some of what I saw? http://www.facebook.com/?ref=home#!/arnett.nick?v=photos As I said, my thoughts on Haiti are not especially coherent yet, but it seems like Haiti's major partners - the U.S., Canada and France -- are in favor of democracy at home, but not in Haiti. It seems like we are in favor of trade barriers and subsidies at home, but not in Haiti. The earthquake was the worst natural disaster in the western hemishere - ever - and hit the poorest nation in the western hemisphere. And it left Haiti even more vulnerable than it was, with perhaps as many as 2 million people without permanent shelter and nowhere to go if a hurricane hits. There is opportunity for real change in this disaster. Haiti is forced to start over in many ways and perhaps this time, we, its friends and neighbors, can help create something better. Nick ___ http://box535.bluehost.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
On Mon, Sep 14, 2009 at 7:41 AM, Bruce Bostwick lihan161...@sbcglobal.net wrote: I think you're oversimplifying the arguments for regulation. I don't believe anyone involved in the process seriously believes regulation is a one-dimensional parameter, I think you give politicians far too much credit. I have no doubt that quite a few politicians do not put any more thought into regulation than more, and I have to make it look like I am doing something. The measures that were most effective in the past year or so in terms of containing progressive collapse Which measures would that be, and how do you know they were beneficial in the way you claim? one which, when left completely alone, tends to evolve toward increasing instability and ultimately just the kind of collapse we saw a year ago. That is what the politicians constantly claim. The reality of the matter is that no one really knows whether there would have been a collapse. In fact, it may well be regulations and unintended consequences of regulations that made things worse than they might have been. The fact that regulations designed to enforce a certain degree of stability and the presence of certain fail-safes in the system that prevent progressive collapse when rogue players do play fast and loose is not a one-dimensional parameter at all, it's inherent in the nature of the regulations that are, in fact, necessary to protect the market system as a whole from the risky behavior of the people it's composed of. Just because regulations are designed to do something does not mean that people will behave as the designers expected. In fact, it is often the opposite. People devote a lot of energy trying to find flaws in the regulations so that they can do what they wanted to in the first place. And find flaws they do. Never forget that you're dealing with a system made up of the collective behavior of millions of individual human beings, And the corollary: governments are made up of the collective behavior of many politicians and technocrats whose sole motivation is to gain more power and to hold on to more power. ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
Tyler Cowen writes about how politics and regulations contribute to financial crises: http://www.nytimes.com/2009/09/13/business/economy/13econ.html?_r=1 | FOR years now, many businesses and individuals in the United States | have been relying on the power of government, rather than competition | in the marketplace, to increase their wealth. This is politicization | of the economy. It made the financial crisis much worse, and the trend | is accelerating. | Well before the financial crisis erupted, policy makers treated | homeowners as a protected political class and gave mortgage-backed | securities privileged regulatory treatment. Furthermore, they allowed | and encouraged high leverage and the expectation of bailouts for | creditors, which had been practiced numerous times, including the | precedent of Long-Term Capital Management in 1998. Without these | mistakes, the economy would not have been so invested in leverage and | real estate and the financial crisis would have been much milder. | But we are now injecting politics ever more deeply into the American | economy, whether it be in finance or in sectors like health care. Not | only have we failed to learn from our mistakes, but also we’re | repeating them on an ever-larger scale. | President Dwight D. Eisenhower warned of the birth of a | military-industrial complex. Today we have a financial-regulatory | complex, and it has meant a consolidation of power and | privilege. We’ve created a class of politically protected “too | big to fail” institutions, and the current proposals for regulatory | reform further cement this notion. Even more worrying, with so many | explicit and implicit financial guarantees, we are courting a bigger | financial crisis the next time something major goes wrong. ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
On Sep 14, 2009, at 11:29 AM, John Williams wrote: On Mon, Sep 14, 2009 at 7:41 AM, Bruce Bostwick lihan161...@sbcglobal.net wrote: I think you're oversimplifying the arguments for regulation. I don't believe anyone involved in the process seriously believes regulation is a one-dimensional parameter, I think you give politicians far too much credit. I have no doubt that quite a few politicians do not put any more thought into regulation than more, and I have to make it look like I am doing something. In some cases, you may be right. In others, not s0 much. The measures that were most effective in the past year or so in terms of containing progressive collapse Which measures would that be, and how do you know they were beneficial in the way you claim? I believe an answer of sorts can be found in the portion of that quote you trimmed out. The rest of the answer is that the Federal Reserve stepped in and put the brakes on the ridiculously overleveraged derivative trading that was going on, injected some strategically placed capital into the firms that had the collateral and other fundamentals to support it, let the ones that were too unsupported to survive fail with those firewalls in place to contain the damage, and essentially turned the market entirely around or at least kept it from falling a lot farther than it did. It's worth noting, too, that those injections of capital were loans, the bulk of which are already in the process of being paid back. one which, when left completely alone, tends to evolve toward increasing instability and ultimately just the kind of collapse we saw a year ago. That is what the politicians constantly claim. The reality of the matter is that no one really knows whether there would have been a collapse. In fact, it may well be regulations and unintended consequences of regulations that made things worse than they might have been. I think it was fairly obvious at the time, then, and is even more so now, that there wasn't enough reserve capital in the system to avoid a progressive collapse of the entire system, there was an entire derivative market sector that was effectively completely unregulated because no one had thought to regulate that particular kind of trading, and there was a circular scheme of reinsurance backing up the trading on paper but no actual underwriting of any risk. Those sorts of shenanigans are more or less to be expected in the complete absence of any sort of regulation. Yes, if you wire all the safety valves on the boiler shut and stoke up the fire until the rivets are popping, something's going to blow somewhere. I think that's pretty clear even to a layman like me. And I believe we've had this argument before, and others more eloquent than I am have deconstructed your side of it in detail. The fact that regulations designed to enforce a certain degree of stability and the presence of certain fail-safes in the system that prevent progressive collapse when rogue players do play fast and loose is not a one-dimensional parameter at all, it's inherent in the nature of the regulations that are, in fact, necessary to protect the market system as a whole from the risky behavior of the people it's composed of. Just because regulations are designed to do something does not mean that people will behave as the designers expected. In fact, it is often the opposite. People devote a lot of energy trying to find flaws in the regulations so that they can do what they wanted to in the first place. And find flaws they do. I believe that's the only rational assumption around which to design any regulatory strategy. One of the assumptions is that the regulation must evolve with the market and take exactly that sort of gaming the system into account. At this point I have to ask exactly what your concept of regulation *is*, because it seems to be very different from mine. Never forget that you're dealing with a system made up of the collective behavior of millions of individual human beings, And the corollary: governments are made up of the collective behavior of many politicians and technocrats whose sole motivation is to gain more power and to hold on to more power. I don't think I ever assumed otherwise. But our government, unlike the leadership of publicly owned corporations, has a (mostly, sort of) working system of checks and balances to at least theoretically make it difficult to use elected offices to gather power for power's sake. It isn't perfect, but it tends to preserve at least something of a balance of power. The few legally required structural measures in corporate leadership intended to prevent that are far less effective. ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
On Mon, Sep 14, 2009 at 7:41 AM, Bruce Bostwick lihan161...@sbcglobal.net wrote: ty and the presence of certain fail-safes in the Never forget that you're dealing with a system made up of the collective behavior of millions of individual human beings, because that understanding is fundamental to the understanding of how the system as a whole works and why it breaks down the way it does. It's very efficient at what it does, but the nature of what it does is itself chaotic, and that human element is the most chaotic part of it . This made me think of something I had read, but it took me a while to find it. This is from Friedrich A. Hayek: http://mises.org/story/3229 | This corresponds to what I have called earlier the mere pattern | predictions to which we are increasingly confined as we penetrate from | the realm in which relatively simple laws prevail into the range of | phenomena where organized complexity rules. As we advance, we find | more and more frequently that we can in fact ascertain only some but | not all the particular circumstances which determine the outcome of a | given process; and in consequence we are able to predict only some but | not all the properties of the result we have to expect. Often all that | we shall be able to predict will be some abstract characteristic of | the pattern that will appear — relations between kinds of elements | about which individually we know very little. Yet, as I am anxious to | repeat, we will still achieve predictions which can be falsified and | which therefore are of empirical significance. | Of course, compared with the precise predictions we have learned | to expect in the physical sciences, this sort of mere pattern | predictions is a second best with which one does not like to have to | be content. Yet the danger of which I want to warn is precisely the | belief that in order to have a claim to be accepted as scientific it | is necessary to achieve more. This way lies charlatanism and worse. To | act on the belief that we possess the knowledge and the power which | enable us to shape the processes of society entirely to our liking, | knowledge which in fact we do not possess, is likely to make us do | much harm. In the physical sciences there may be little objection | to trying to do the impossible; one might even feel that one ought | not to discourage the overconfident because their experiments may | after all produce some new insights. But in the social field, the | erroneous belief that the exercise of some power would have beneficial | consequences is likely to lead to a new power to coerce other men | being conferred on some authority. Even if such power is not in | itself bad, its exercise is likely to impede the functioning of those | spontaneous-ordering forces by which, without understanding them, man | is in fact so largely assisted in the pursuit of his aims. We are | only beginning to understand on how subtle a communication system | the functioning of an advanced industrial society is based — a | communications system which we call the market and which turns out to | be a more efficient mechanism for digesting dispersed information than | any that man has deliberately designed. | If man is not to do more harm than good in his efforts to improve the | social order, he will have to learn that in this, as in all other | fields where essential complexity of an organized kind prevails, | he cannot acquire the full knowledge which would make mastery of | the events possible. He will therefore have to use what knowledge | he can achieve, not to shape the results as the craftsman shapes | his handiwork, but rather to cultivate a growth by providing the | appropriate environment, in the manner in which the gardener does | this for his plants. There is danger in the exuberant feeling of | ever-growing power which the advance of the physical sciences has | engendered and which tempts man to try, dizzy with success, to use | a characteristic phrase of early communism, to subject not only our | natural but also our human environment to the control of a human | will. The recognition of the insuperable limits to his knowledge | ought indeed to teach the student of society a lesson of humility | which should guard him against becoming an accomplice in men's fatal | striving to control society — a striving which makes him not only a | tyrant over his fellows, but which may well make him the destroyer of | a civilization which no brain has designed but which has grown from | the free efforts of millions of individuals. ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
On Mon, Sep 14, 2009 at 7:41 AM, Bruce Bostwick lihan161...@sbcglobal.netwrote: I think you're oversimplifying the arguments for regulation. I don't believe anyone involved in the process seriously believes regulation is a one-dimensional parameter, and I think it's disingenuous to suggest that supporters of plans that involve regulation that is stricter overall are thinking that way. At the very best, that's a straw man argument. Forbes magazine seems to take it as a given that lack of regulation was the problem behind our current economic woes: Despite multiple layers of government oversight and industry self-policing, dangerous gaps in regulation allowed a speculative bubble to build, and then burst, rocking the financial system as it hasn't been since the Great Depression. Its corollary, the belief that the government would step in to prevent an important bank from collapsing, created a sense of complacency about the risks being created. Yet neither the gaps nor the too big to fail concept have been eliminated. See http://www.forbes.com/2009/09/11/financial-regulation-reform-business-wall-street-year.html The market system is made up of people whose sole motivation is to make more money and make money faster, and whose altruistic motivations are far behind their motivations to get richer faster if they're there at all, and often what altruistic motivations they *do* have are overruled by the contractual obligations the corporations they work for have to pursue every possible means of making a profit. Hmm. If it really were that simple, I suspect that things wouldn't be so chaotic. People do things for all sorts of reasons, not just profit. Power is a great temptation, too, which leads companies to get in over their heads. The need to get big fast, as one famous Silicon Valley venture capitalist puts it, creates a lot of pressure on VC-funded companies to grow much faster than they probably otherwise would, which has been the downfall of many. They find that they can't grow the management, IT infrastructure and such fast enough. They can't regulate what they're growing, so to speak. As another VC said to me years ago when he raised questions about a computer retail chain that seemed to be a huge success, You can hide a lot of problems when you're growing. Let's see how they do when the growth slows down. Sure enough, they failed not long after they ran out of room to grow. That was BusinessLand, if anyone remembers them. They weren't trying to maximize profits, they were just trying to get as big as they could, as fast as they could... because investors imagine that big profits would have to follow. In reality, an industry can undergrow tremendous growth in a short time but fail to produce above-average profits. The airline industry in the 1950s is a standard example - lots of investment in the future, enormous growth, but nobody really made big profits. Nick ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
I think you're oversimplifying the arguments for regulation. I don't believe anyone involved in the process seriously believes regulation is a one-dimensional parameter, and I think it's disingenuous to suggest that supporters of plans that involve regulation that is stricter overall are thinking that way. At the very best, that's a straw man argument. The measures that were most effective in the past year or so in terms of containing progressive collapse were measures that were very carefully strategically targeted at key elements of the overall system, and the regulations being proposed now are equally strategically targeted from what I can see. The fact that there's more regulation overall, in those proposals, isn't a decision to move the dial on one single parameter, it's more an artifact of the process being regulated, one which, when left completely alone, tends to evolve toward increasing instability and ultimately just the kind of collapse we saw a year ago. The market system is made up of people whose sole motivation is to make more money and make money faster, and whose altruistic motivations are far behind their motivations to get richer faster if they're there at all, and often what altruistic motivations they *do* have are overruled by the contractual obligations the corporations they work for have to pursue every possible means of making a profit. The fact that regulations designed to enforce a certain degree of stability and the presence of certain fail-safes in the system that prevent progressive collapse when rogue players do play fast and loose is not a one-dimensional parameter at all, it's inherent in the nature of the regulations that are, in fact, necessary to protect the market system as a whole from the risky behavior of the people it's composed of. Never forget that you're dealing with a system made up of the collective behavior of millions of individual human beings, because that understanding is fundamental to the understanding of how the system as a whole works and why it breaks down the way it does. It's very efficient at what it does, but the nature of what it does is itself chaotic, and that human element is the most chaotic part of it .. On Sep 9, 2009, at 10:39 AM, John Williams wrote: | The biggest myth is that regulation is a one-dimensional problem, in | which the choice is either “more” or “less.” From this myth, | the only reasonable inference following the financial crisis is that | we need to move the dial from “less” to “more.” There is a fundamental difference between the mythical imagery we apply to reality and the reality itself. -- Me ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
On Mon, Sep 14, 2009 at 9:55 AM, Bruce Bostwick lihan161...@sbcglobal.net wrote: On Sep 14, 2009, at 11:29 AM, John Williams wrote: The rest of the answer is that the Federal Reserve stepped in and put the brakes on the ridiculously overleveraged derivative trading that was going on, How exactly did the Fed put the brakes on derivative trading? injected some strategically placed capital into the firms that had the collateral and other fundamentals to support it, The government bailed out firms that had made errors and would have otherwise failed, thus creating a huge moral hazard. Instead of allowing creative destruction -- bad firms fail and better firms survive, leading to a gradual improvement in the strength of surviving firms -- the government propped up the bad firms and preserved most of the flawed systems that led to the 2008 downturn. Thanks to the government, the next downturn may be deeper. It's worth noting, too, that those injections of capital were loans, the bulk of which are already in the process of being paid back. Not by a long shot. In reality, the government has committed money to backstop hundreds of billions or even trillions of dollars of risky assets. Even the auditor of the Fed could not answer how much and where this money has been committed, or how many trillions were at risk. Only a tiny fraction of this money has been paid back. Those sorts of shenanigans are more or less to be expected in the complete absence of any sort of regulation. Those sorts of shenanigans are the RESULT of unintended consequences of regulations providing incentives to do things in more obscure ways. ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
On Mon, Sep 14, 2009 at 9:55 AM, Bruce Bostwick lihan161...@sbcglobal.net wrote: I believe that's the only rational assumption around which to design any regulatory strategy. One of the assumptions is that the regulation must evolve with the market and take exactly that sort of gaming the system into account. But in practice government bureaucracy does not manage to keep the regulations -- the huge number of complex regulations, which interact with each other in unpredictable ways -- in sync with the market players. Government is far too slow to keep up, and not nearly clever enough to reign in millions of highly-motivated individuals all trying to accomplish their goals. At this point I have to ask exactly what your concept of regulation *is*, because it seems to be very different from mine. I think my view of regulation is less theoretical and idealized than yours. I do not see regulation as behaving at all as the designers expect. The systems involved are far too complex to be understood and predicted. In most cases, regulation causes more problems than it prevents. Here is an example of what I am talking about: Cause and Effect - Government Policies and the Financial Crisis Peter J. Wallison http://www.rgemonitor.com/financemarkets-monitor/255258/cause_and_effect_-_government_policies_and_the_financial_crisis | Although the media are full of talk that we face a crisis of | capitalism, the underlying cause of the financial meltdown is something | much more mundane and practical--the housing, tax, and bank regulatory | policies of the U.S. government. The Community Reinvestment Act | (CRA), Fannie Mae and Freddie Mac, penalty-free refinancing of home | loans, tax preferences granted to home equity borrowing, and reduced | capital requirements for banks that hold mortgages and mortgage-backed | securities (MBS) have all weakened the standards for granting mortgages | and the housing finance system itself. Blaming greedy bankers, | incompetent rating agencies, or other actors in this unprecedented | drama misses the point--perhaps intentionally--that government policies | created the incentives for both a housing bubble and a reduction in the | bank capital and home equity that could have mitigated its effects. To | prevent a recurrence of this disaster, it would be far better to change | the destructive government housing policies that brought us to this | point than to enact a new regulatory regime that will hinder a quick | recovery and obstruct future economic growth. ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
On Mon, Sep 14, 2009 at 10:48 AM, John Williams jwilliams4...@gmail.comwrote: I think my view of regulation is less theoretical and idealized than yours. I do not see regulation as behaving at all as the designers expect. The systems involved are far too complex to be understood and predicted. In most cases, regulation causes more problems than it prevents. Here is an example of what I am talking about: This is the same old baloney about government policy causing these problems, which has been thoroughly debunked -- notice that even Forbes magazine takes it as a given that it was the lack of regulation, not bad regulation, that enabled the problems we're talking about. You haven't explained the astonishing coincidence that all this started after Congress passed the Commodity Futures Modernization Act of 2000. Are you going to claim that that bill instituted regulations? If so, you're crazy. It was *deregulation* that allowed derivatives trading to lose all touch with reality by erasing laws that had been in place for half a century to prevent this kind of gambling and theft. Your views are almost totally ideological - you take it as a given that government regulation is bad, as you've said right here. That's as ideological as it gets, especially since the only way you have ever managed to refute the mainstream thinking is by repeating the same ideology over and over and citing sources that are as biased as you are. And that doesn't make it true, so maybe it's time to stick a sock in it. The fact is that all this was enabled when Congress passed that bill, which was heavily supported by the financial industry. Arguing that Congress's mistake proves government is bad at regulation is like asking a court for mercy because you're an orphan after you murdered your parents. Nick ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
There appears to be some ignorance masquerading as certainty floating around here. In the interest of reducing ignorance and increasing humility, here are some educational papers. The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong John B. Taylor http://www.stanford.edu/~johntayl/FCPR.pdf | In this paper I have provided empirical evidence that government | actions and interventions caused, prolonged, and worsened the | financial crisis. They caused it by deviating from historical | precedents and principles for setting interest rates, which had worked | well for 20 years. They prolonged it by misdiagnosing the problems | in the bank credit markets and thereby responding inappropriately | by focusing on liquidity rather than risk. They made it worse by | providing support for certain financial institutions and their | creditors but not others in an ad hoc way without a clear and | understandable framework. While other factors were certainly at play, | these government actions should be first on the list of answers to the | question of what went wrong. Causes of the Financial Crisis Viral V. Acharya and Matthew Richardson http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/acharya_richardson_critical.pdf | ABSTRACT: Why did the popping of the housing bubble bring the | financial system—rather than just the housing sector of the | economy—to its knees? The answer lies in two methods by which | banks had evaded regulatory capital requirements. First, they | had temporarily placed assets—such as securitized mortgages— | in off-balance-sheet entities, so that they did not have to hold | significant capital buffers against them. Second, the capital | regulations also allowed banks to reduce the amount of capital | they held against assets that remained on their balance sheets— | if those assets took the form of AAA-rated tranches of securitized | mortgages. Thus, by repackaging mortgages into mortgage-backed | securities, whether held on or off their balance sheets, banks reduced | the amount of capital required against their loans, increasing | their ability to make loans many-fold. The principal effect of this | regulatory arbitrage, however, was to concentrate the risk of mortgage | defaults in the banks and render them insolvent when the housing | bubble popped. THE REGULATED MELTDOWN OF 2008 Juliusz Jablecki and Mateusz Machaj | ABSTRACT: Capital regulations stemming from the Basel accords | created incentives for banks to securitize mortgages, even risky | ones; hold them at a correspondingly low Basel risk weight; or | shift them off of banks’ balance sheets to obtain even greater | leverage. Securitization was praised by economists and regulators for | dispersing risks to investors across the world, providing greater | resilience to the financial system. However, since in reality banks | tended to hold onto securitized assets—either on their balance | sheets or off of them, in off-balance-sheet entities—the accumulated | credit risk remained with the banks, especially in the “shadow | banking sector.” This explains the heightened vulnerability of the | financial system to a sudden collapse. The Credit Rating Agencies: Understanding Their Central Role in the Subprime Debacle of 2007-2008 Lawrence J. White http://w4.stern.nyu.edu/economics/docs/workingpapers/2009/credit%20rating%20agencies.critical%20review.revised%204-8-09.pdf | The three major credit rating agencies -- Moody's, Standard Poor's, | and Fitch -- played a central role in the subprime mortgage debacle | of 2007-2008. That centrality was not accidental. Seven decades of | financial regulation propelled these rating agencies into the center | of the bond information market, by elevating their judgments about | the creditworthiness of bonds so that those judgments attained the | force of law. The Securities and Exchange Commission exacerbated this | problem by erecting a barrier to entry into the credit rating business | in 1975. Understanding this history is crucial for any reasoned debate | about the future course of public policy with respect to the rating | agencies. ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
Three Myths about the Crisis Jeffrey Friedman http://causesofthecrisis.blogspot.com/2009/09/three-myths-about-crisis-bonuses.html ... | To be sure, banks that bought mortgage-backed securities to reduce | their capital cushions were, indeed, knowingly increasing their | vulnerability if the securities went sour.[6] But absent the Recourse | Rule, there is no reason that banks seeking a safe way to increase | their profitability would have converged on asset-backed securities | (rather than Treasurys or triple-A corporate bonds); thus, they would | not have been so vulnerable to a burst housing bubble. The Recourse | Rule artificially boosted the profitability of a certain type of | investment that the Fed, the FDIC, and the other regulators thought | was safe. | We know in retrospect that the capitalists who took advantage of the | Recourse Rule, such as those at Citibank, were making a mistake. But | not all capitalists did. JPMorgan, for instance, recognized the danger | and escaped destruction. None of these capitalists were irrational; | all were self-interested; yet they had different perceptions of how to | pursue their self-interest, based on different perceptions of risk. | In relatively unregulated markets, this diversity of viewpoints is | precisely what makes capitalism work. One capitalist thinks that | profit can be made, and loss avoided, by pursuing theory A; another, | by pursuing theory B. These heterogeneous strategies compete with each | other, and the better ideas produce profits rather than losses. In a | complex world where nobody really knows what will work until it is | tried, competition is the only way that people’s endless capacity | for error can be checked, and loss is the regrettable but inescapable | result. | In the banking industry, however, bankers’ heterogeneous ideas | were homogenized (although not entirely) by the Recourse Rule, which | loaded the dice in favor of the regulators’ idea of where risk | did and did not lie. The regulators thought that AA or AAA tranches | of asset-backed securities were 60-percent safer than individual | mortgages. This was not an “irrational” theory, either: The | tranching structure created by Moody’s, Standard and Poor, and Fitch | had a lot to be said for it, and even the little-known fact that the | SEC had effectively conferred oligopoly status on these three rating | companies[7] did not guarantee that disaster would follow. But the | crucial fact is that the Recourse Rule imposed a new profitability | gradient over the bankers’ calculations, producing the same effect | intended by all regulations: It altered their behavior, the better to | align with the regulators’ ideas--in this case, their ideas about | prudent banking. By thus homogenizing the inherently heterogeneous | competitive process, the regulators inadvertently made the banking | system more vulnerable--if, in fact, the regulators’ theory was | wrong. | If we seek the sources of a systemic failure, a logical place | to look is among the legal rules that govern the system as a | whole. Unfortunately, these rules, being legal mandates, have not | survived a competitive process, so if they are based on mistaken | ideas, we all suffer the consequences. That turned out to be the case | with the Recourse Rule. | Contrary to popular belief, then, the crisis of 2008 is best described | as a crisis of regulation—not a crisis of capitalism. ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
On Mon, Sep 14, 2009 at 12:56 PM, Nick Arnett nick.arn...@gmail.com wrote: On Mon, Sep 14, 2009 at 11:57 AM, John Williams jwilliams4...@gmail.com wrote: There appears to be some ignorance masquerading as certainty floating around here. In the interest of reducing ignorance and increasing humility, here are some educational papers. The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong John B. Taylor http://www.stanford.edu/~johntayl/FCPR.pdf Interesting that you chose not to quote the paragraph that describes his opinion of the heart of the financial crisis. It seems to have been summarized by the part I excerpted, which was Taylor's conclusion. The big MBS push was largely an unintended consequence of government regulations. And it was made worse by government regulations, as described in the paragraph after the one you quoted: | In the United States there were other government actions at play | here. The government sponsored agencies Fannie Mae and Freddie Mac were | encouraged to expand and buy mortgage backed securities, including those | formed with the risky sub-prime mortgages. While legislation, such | as the Federal Housing Enterprise Regulatory Reform Act of 2005, was | proposed to control 9 these excesses, it was not passed into law. These | actions of these agencies should be added to the list of government | interventions that were part of the problem. The behavior he describes below is precisely what the Commodity Futures Modernization Act of 2000 made lawful by removing the regulatory barriers that were in place for decades. Where does Taylor write that? Or do you claim it from another source? If so, what source? ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
On Mon, Sep 14, 2009 at 1:08 PM, John Williams jwilliams4...@gmail.comwrote: Interesting that you chose not to quote the paragraph that describes his opinion of the heart of the financial crisis. It seems to have been summarized by the part I excerpted, which was Taylor's conclusion. Oh, come on. When somebody says that X is the heart of the problem, that's not subject to your interpretation. The paragraph you chose was just the one that supported your argument best. Never bet that people here won't go look at the sources you cite. Or that we're stupid. Where does Taylor write that? Or do you claim it from another source? If so, what source? He didn't need to write it, any more than he needed to write that the sky is blue. He was describing the behavior that was illegal for decades. Nick ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
On Mon, Sep 14, 2009 at 1:30 PM, Nick Arnett nick.arn...@gmail.com wrote: On Mon, Sep 14, 2009 at 1:08 PM, John Williams jwilliams4...@gmail.com wrote: Interesting that you chose not to quote the paragraph that describes his opinion of the heart of the financial crisis. It seems to have been summarized by the part I excerpted, which was Taylor's conclusion. Oh, come on. When somebody says that X is the heart of the problem, that's not subject to your interpretation. The paragraph you chose was just the one that supported your argument best How about when someone writes an article, and at the end puts a heading Conclusion? What is your interpretation of that? Taylor also wrote a similar paper to the one I referenced, but unfortunately the full-text of the article is not available online, as far as I can tell. But it has an abstract he wrote, and so should settle this silly argument over what Taylor considered most important: ECONOMIC POLICY AND THE FINANCIAL CRISIS: AN EMPIRICAL ANALYSIS OF WHAT WENT WRONG John B. Taylor | ABSTRACT: The financial crisis was in large part caused, prolonged, | and worsened by a series of government actions and interventions. The | housing boom and bust that precipitated the crisis were enabled | by extraordinarily loose monetary policy. After the housing | boom came to an end, the Federal Reserve misdiagnosed financial | markets’ uncertainty about the location and value of risky subprime | mortgagebacked securities as being, instead, a liquidity problem, and | it took inappropriate compensatory actions that had side effects that | included raising the price of oil. Finally, in mid-September 2008, | the government’s ad-hoc bailouts, and the unpredictable terms of | the proposed TARP legislation, appear to have caused a sharp spike in | uncertainty in the financial markets. Never bet that people here won't go look at the sources you cite. Or that we're stupid. Huh? I provided the links so that anyone interested could read the entire article. He didn't need to write it, any more than he needed to write that the sky is blue. He was describing the behavior that was illegal for decades. Is that your way of saying that you do not have a reference to cite about your claim? ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
At 01:28 PM Monday 9/14/2009, Nick Arnett wrote: On Mon, Sep 14, 2009 at 10:48 AM, John Williams mailto:jwilliams4...@gmail.comjwilliams4...@gmail.com wrote: I think my view of regulation is less theoretical and idealized than yours. I do not see regulation as behaving at all as the designers expect. The systems involved are far too complex to be understood and predicted. In most cases, regulation causes more problems than it prevents. Here is an example of what I am talking about: This is the same old baloney about government policy causing these problems, which has been thoroughly debunked -- notice that even Forbes magazine takes it as a given that it was the lack of regulation, not bad regulation, that enabled the problems we're talking about. You haven't explained the astonishing coincidence that all this started after Congress passed the Commodity Futures Modernization Act of 2000. Are you going to claim that that bill instituted regulations? If so, you're crazy. It was *deregulation* that allowed derivatives trading to lose all touch with reality by erasing laws that had been in place for half a century to prevent this kind of gambling and theft. Your views are almost totally ideological - you take it as a given that government regulation is bad, as you've said right here. That's as ideological as it gets, especially since the only way you have ever managed to refute the mainstream thinking is by repeating the same ideology over and over and citing sources that are as biased as you are. And that doesn't make it true, so maybe it's time to stick a sock in it. The fact is that all this was enabled when Congress passed that bill, which was heavily supported by the financial industry. Arguing that Congress's mistake proves government is bad at regulation is like asking a court for mercy because you're an orphan after you murdered your parents. Not that that hasn't been tried, too. :( . . . ronn! :) ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
On 14 Sep 2009 at 18:53, Ronn! Blankenship wrote: by the financial industry. Arguing that Congress's mistake proves government is bad at regulation is like asking a court for mercy because you're an orphan after you murdered your parents. Not that that hasn't been tried, too. :( Isn't that a stock example of Chutzpah? AndrewC ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Re: Regulation and the financial crisis
On Mon, Sep 14, 2009 at 5:36 PM, Andrew Crystall dawnfal...@upliftwar.comwrote: On 14 Sep 2009 at 18:53, Ronn! Blankenship wrote: by the financial industry. Arguing that Congress's mistake proves government is bad at regulation is like asking a court for mercy because you're an orphan after you murdered your parents. Not that that hasn't been tried, too. :( Isn't that a stock example of Chutzpah? Indeed. Nick ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Regulation and the financial crisis
http://www.american.com/archive/2009/september/regulation-and-the-financial-crisis-myths-and-realities | Myth 1: Banking regulators were in the dark as new financial | instruments reshaped the financial industry. | Myth 2: Deregulation allowed the market to adopt risky practices, such | as using agency ratings of mortgage securities. | Myth 3: Policy makers relied too much on market discipline to regulate | financial risk taking. | Myth 4: The financial crisis was primarily a short-term panic. | Myth 5: The only way to prevent this crisis would have been to have | more vigorous regulation ... | The biggest myth is that regulation is a one-dimensional problem, in | which the choice is either “more” or “less.” From this myth, | the only reasonable inference following the financial crisis is that | we need to move the dial from “less” to “more.” | The reality is that financial regulation is a complex problem. Indeed, | many regulatory policies were major contributors to the crisis. To | proceed ahead without examining or questioning past policies, | particularly in the areas of housing and bank capital regulation, | would preclude learning the lessons of history. ___ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
Government Regulation
Exactly how does what work? Government regulation? Not very well. really, how so? cite examples please and explain how well de-regulation works... ___ http://www.mccmedia.com/mailman/listinfo/brin-l
Regulation and deficit spending
I'm done with this conversation since you ducked my question about what should replace government regulation. our resident troll does that a lot. i suspect he is an ayn rand, libertarian wannabe, or he just likes to agitate. one would think that the current collapse would wake this guy up. It depends on what they think is the cause of the current collapse. If you're crazy enough, I am pretty sure you can blame it on what little regulation remained getting in the way of good, honest business people trying to do good, honest business. I'm so tired of that old song. They've been singing it since FDR, and it's still not true, although they've sung it so long and so loud that it has actually bent many millions of minds into thinking that it is common sense. It never was, it is not now, it never will be. Dave i still don't understand how regulation is to blame; i would sure like to hear some examples from someone... i'm not saying de-regulation is the only cause of the current crisis. there are many other factors. the iraq war had a lot to do with it, which made a lot of money for arms dealers, war contractors, etc. bush's cronys and other opportunists also did well with the real estate and other bubbles. now they will all be buying and selling their ill gotten capital and bailout subsidies to make even more during the continuing wild market fluctuations. Just like the crash of '29 cured many of the excesses from selling on margin, a way was found around such regulations, thanks again to the bush administration and his chainsaw surrogates. i wonder how long the lessons being learned from current excesses will prevent greed in the future? a way will be found... we have a deficit economy; it served a purpose at one time, but it is way out of control. pouring taxpayer liens in at the top of the financial system is not the answer. people are out of work. now people are beginning to start to live within their means. now is a good time to play the market corrections if you have disposable cash, or can get some of that bailout money now is the time for a new new deal to deal with america's. infrastructure projects. now that the rest of the world is feeling the domino effect of globalization, it is time to turn away from unrestrained growth. the developing nations should see where it leads and start producing for themselves, instead of sending the fruit of their workers' labors to us. maybe they will see how the bankers, brokers, agents, arms dealers and other contract pimps are ripping off the disenfranchised. we need a new, green socialism model that conserves the earth's resources, recycles industrial waste, reuses, rebuilds and extends the longevity of technology rather than designing products to wear out in three years or less, so they can be trashed for the next version. if governments are going to indulge in deficit spending then do it creating jobs in cleaning up the planet, health care, education and other creative, rather than destructive enterprises... jon ___ http://www.mccmedia.com/mailman/listinfo/brin-l
Re: Regulation and deficit spending
On Sat, Nov 15, 2008 at 11:32 AM, Jon Louis Mann [EMAIL PROTECTED] wrote: i still don't understand how regulation is to blame; i would sure like to hear some examples from someone... I know you were on this list before September 23. Maybe you weren't interested in examples then? If you are now, then check the archive: http://www.mccmedia.com/pipermail/brin-l/Week-of-Mon-20080922/144140.html ___ http://www.mccmedia.com/mailman/listinfo/brin-l
Re: Regulation and deficit spending
On Sat, Nov 15, 2008 at 1:03 PM, John Williams [EMAIL PROTECTED]wrote: On Sat, Nov 15, 2008 at 11:32 AM, Jon Louis Mann [EMAIL PROTECTED] wrote: i still don't understand how regulation is to blame; i would sure like to hear some examples from someone... I know you were on this list before September 23. Maybe you weren't interested in examples then? If you are now, then check the archive: http://www.mccmedia.com/pipermail/brin-l/Week-of-Mon-20080922/144140.html Ah, yes, the McCain argument that Fannie Mae and Freddie Mac (via the CRA) supposedly caused the sub-prime meltdown. The only trouble with that explanation is that it is baloney. You have confused the tail with the dog. Those two were LOSING market share rapidly from 2002 to 2007 as the sub-prime market exploded, led not by them (or they'd have increased their share) but by investment bankers and mortgage brokers. They only got involved (unfortunately) after the private market led them there. So, any *real* examples of how government regulation caused the sub-prime crisis? Nick ___ http://www.mccmedia.com/mailman/listinfo/brin-l
Regulation and deficit spending
i still don't understand how regulation is to blame; i would sure like to hear some examples from someone... I know you were on this list before September 23. Maybe you weren't interested in examples then? If you are now, then check the archive: http://www.mccmedia.com/pipermail/brin-l/Week-of-Mon-20080922/144140.html long before september 13th, but i don't read everything. if i read your posts, it is usually because you comment to one of mine, or i get drawn in by someone else's, who you insulted. anyway, my question was how REGULATION was to blame for the meltdown. i recognize there are other causes, even some preceding bush. i have stated many times that the he (and his cronys) are the single most responsible causes of the crisis becoming critical. fannie and freddie had far, far less to do with it, after it was well on the way. i am still waiting for ANY genuine examples of how government regulation caused the sub-prime crisis? jon ___ http://www.mccmedia.com/mailman/listinfo/brin-l
Re: Regulation and deficit spending
On Sat, Nov 15, 2008 at 1:56 PM, Nick Arnett [EMAIL PROTECTED] wrote: Ah, yes, the McCain argument that Fannie Mae and Freddie Mac (via the CRA) supposedly caused the sub-prime meltdown. The only trouble with that explanation is that it is baloney. You have confused the tail with the dog. Those two were LOSING market share rapidly from 2002 to 2007 as the sub-prime market exploded, led not by them (or they'd have increased their share) but by investment bankers and mortgage brokers. They only got involved (unfortunately) after the private market led them there. Actually, FNM and FRE are the largest players in the mortgage markets, by far. Looking at their combined (both companies) assets, from 1998 to 2008, they are 806, 962, 1134, 1417, 1640, 1813, 1816, 1640, 1657, 1677, 1776 billion dollars. That is $1.776 trillion even today! Total assets did go down a bit in 2005, but they have since come back up almost to the 2004 levels (of course, if the bad mortgages were marked down it may be lower). The government subsidizes FNM and FRE (through the implicit guarantee and the loose capital requirements) so that they can borrow money at lower rates, thereby having lower costs than all of the competition. This has the effect of making business tough for any smaller players, without government subsidies, trying to compete in the prime mortage market. It is not surprising that many of them resorted to subprime, where FNM and FRE initially did not play. If that is not bad enough for you, then FNM and FRE were pushed by Congress to help support low-income borrowers. Their management knew it was a bad idea, so instead of directly buying subprime mortgages, they bought mortgage backed securities that contained subprime loans. Since FNM and FRE are so huge, this significantly increased the demand for subprime mortgages, and again, it is not surprising that people started making the subprime loans to sell those subprime mortgages. By the way, do you really get your information from McCain? I don't think I mentioned McCain in my examples, so I don't really understand why you brought him up. So, any *real* examples of how government regulation caused the sub-prime crisis? Not all of the reasons I listed involved FNM and FRE. ___ http://www.mccmedia.com/mailman/listinfo/brin-l
Government regulation
I'm done with this conversation since you ducked my question about what should replace government regulation. our resident troll does that a lot. i suspect he is an ayn rand libertarian wannabe, or he just likes to agitate. one would think that the current collapse would wake these people up. jon ___ http://www.mccmedia.com/mailman/listinfo/brin-l
Government regulation
tired of the repetition of one answer to every problem, because some things are just not nails. Government regulations are definitely not nails. Ticking time bombs would be a better metaphor. the economic boom due to unregulated greed has turned into an exploded bomb - no longer ticking... jon ___ http://www.mccmedia.com/mailman/listinfo/brin-l
Re: Government regulation
On Nov 1, 2008, at 2:19 PM, Jon Louis Mann wrote: I'm done with this conversation since you ducked my question about what should replace government regulation. our resident troll does that a lot. i suspect he is an ayn rand libertarian wannabe, or he just likes to agitate. one would think that the current collapse would wake these people up. It depends on what they think is the cause of the current collapse. If you're crazy enough, I am pretty sure you can blame it on what little regulation remained, getting in the way of good, honest business people trying to do good, honest business. I'm so tired of that old song. They've been singing it since FDR, and it's still not true, although they've sung it so long and so loud that it has actually bent many millions of minds into thinking that it is common sense. It never was, it is not now, it never will be. Dave Government is what we let it be. ___ http://www.mccmedia.com/mailman/listinfo/brin-l
Re: Government regulation
On Sat, Nov 1, 2008 at 2:22 PM, Jon Louis Mann [EMAIL PROTECTED] wrote: the economic boom due to unregulated greed has turned into an exploded bomb - no longer ticking... I like what Tom Evslin had to say about this at http://budurl.com/ejfz: This correction from excess has been violent and in many ways harmful but it HAS cured many of the excesses; the goal shouldn't be to reestablish them. We don't want housing prices to boom out of reach again; we don't want oil prices to go up or credit to be extended promiscuously; we don't want a banking economy based on the third derivative of valueless debt. We need to be wary of those crying crisis because they have a solution to sell. We've already gone too far in pouring aid in at the top of the financial system hoping (to put a good light on it) that it'll trickle down. We will need to cushion some of the pain at the bottom of the economic heap; there'll be more need for unemployment insurance before there's less. We can't afford to let starved states cut back on infrastructure projects both for the sake of the infrastructure and for the sake of the economy. But we also want the excesses that have been corrected stay corrected – at least until the next bubble. We also want the excesses that have been corrected to stay corrected. A nice dream. Dave ___ http://www.mccmedia.com/mailman/listinfo/brin-l
Re: Government regulation
To give credit where it is due: Tim O'Reilly posted a reply on Twitter (@timoreilly) to Tom Evslin's (@tevslin) piece. On Sat, Nov 1, 2008 at 3:52 PM, David Land [EMAIL PROTECTED] wrote: On Sat, Nov 1, 2008 at 2:22 PM, Jon Louis Mann [EMAIL PROTECTED] wrote: the economic boom due to unregulated greed has turned into an exploded bomb - no longer ticking... I like what Tom Evslin had to say about this at http://budurl.com/ejfz: This correction from excess has been violent and in many ways harmful but it HAS cured many of the excesses; the goal shouldn't be to reestablish them. We don't want housing prices to boom out of reach again; we don't want oil prices to go up or credit to be extended promiscuously; we don't want a banking economy based on the third derivative of valueless debt. We need to be wary of those crying crisis because they have a solution to sell. We've already gone too far in pouring aid in at the top of the financial system hoping (to put a good light on it) that it'll trickle down. We will need to cushion some of the pain at the bottom of the economic heap; there'll be more need for unemployment insurance before there's less. We can't afford to let starved states cut back on infrastructure projects both for the sake of the infrastructure and for the sake of the economy. But we also want the excesses that have been corrected stay corrected – at least until the next bubble. We also want the excesses that have been corrected to stay corrected. A nice dream. Dave ___ http://www.mccmedia.com/mailman/listinfo/brin-l
Regulation
The solution is simple. He must have more children! We need a new regulation. right john, just like the economic policies mc cain wants to continue without, despite the mess the bush created. jon ___ http://www.mccmedia.com/mailman/listinfo/brin-l
