TCS Daily


Government Solving Its Own Crises

By Alvaro Vargas Llosa - March 24, 2008 12:00 AM

The Federal Reserve recently announced new measures to tackle the current financial crisis. They include helping J.P. Morgan Chase acquire Bear Stearns, lowering the discount rate and offering short-term loans to about 20 investment banks-- and they came only days after the government said it would inject $200 billion into the financial system.

These are the latest steps taken by the U.S. government to solve a problem created in large measure by the government itself. We have seen this movie before.
As a reaction to the bursting of the dot-com and telecom bubbles at the end of the 1990s, the Fed inflated the currency through the actions of its Open Market Committee. By June 2003, the policy of easy money was reflected in the drop of the federal funds rate to 1 percent. The loose monetary policy was maintained, with variations, for almost five years. The result was a fiction economy in which millions of people borrowed and consumed too much. The fact that mortgage loans were turned into sophisticated securities traded internationally made the fiction global.

Greedy investors and profligate consumers are but a symptom of the real problem, which is monetary policy. The history of the boom-bust cycle since the creation of the Federal Reserve in 1913 has been the deliberate increase of the money supply, the misallocation of resources due to the perverse incentives of inflation, and eventually the bursting of the bubble. It is the consequence of the Federal Reserve system, a central bank that confers upon a chosen elite -- the Federal Reserve governors -- the monopoly of money creation and the power to decide what amount of money is appropriate for an economy in which millions of people are making decisions they cannot anticipate.

The Fed was created as a response to the periodic bank runs of the late 19th and early 20th centuries. Some of the greatest economists have explained that part of that instability was caused not because private banks were free to issue currency (even as late as 1907) but because the government maintained a policy of rewarding irresponsible behavior by rescuing financial institutions when they reached the verge of collapse. In any case, as Milton Friedman wrote, the instability of the pre-Federal Reserve years was nothing compared to the booms and busts caused by the monetary authorities after 1913.

Nobel laureate Friedrich Hayek, whose free-market ideas triumphed with the collapse of the Soviet Union, frequently denounced the connection between central banks and the boom-bust cycle. In an interview conducted in 1977, he said, "If it were not for government interference with the monetary system, we would have no industrial fluctuations and no periods of depression. ... The mistake is the creation of a semi-monopoly where the basic money is controlled by the government. Since all the banks issue secondary money (in the form of loans based on deposits), which is redeemable in the basic money, you have a system which nobody can control."
In many countries, money used to be in private hands (think House of Rothschild). The fact that money was issued by private institutions in part accounts for the extraordinary prosperity that Argentina enjoyed in the 19th century.

In a system of free banking, institutions that do not protect the value of the currency simply collapse -- and their collapse does not wreck the entire economy. Under a rule of law that punishes fraud and counterfeiting, the risk of failure without bailouts is enough to guarantee a more stable system. And in such a system, it would be harder for the government to spend as much money as it does now -- a major factor in the devaluation of the dollar -- because it could not create money, only tax and borrow.
Advocating the abolition of the Federal Reserve, an institution people take for granted, seems too radical for most people, who think financial crises are the result of too little, not too much, government regulation.

So the knee-jerk reaction, as exemplified in so many editorials and statements on the campaign trail nowadays, is to scream in favor of government intervention -- the reason why bank rescues and the pumping of new money is the government's sacrosanct policy.

It is time to think more boldly. If abolishing the Federal Reserve is politically inconceivable right now, there are less dramatic measures that can be taken on the road toward a definitive solution. The most obvious one is to simply stop using the Federal Reserve to inflate the currency.

If a crisis in which at least $400 billion has already been lost and millions of people have been badly hurt is not enough to set minds thinking audaciously, nothing will.

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295 Comments

I haven't read the article. I am in a hurry to go out and earn my bread. Still, so happy
to know that TCS is live and kicking.

Welcome back. And thak you Joanne, for alerting me to the new articles.

Another paradigm to shift: Government IS the problem
NOT 'greedy' investors.

Why do dogs lick themselves? Because they can.

Why do people spend and invest money they don't have? Because they can.

Hooray! Someone speaks the truth!
Finally someone speaks the unspeakable truth!

This article should be required reading for every single American. The author is saying the same thing that I have been saying for years and years. It is the monopoly power (and moral hazard) associated with the existence of the FED itself that has created all of these problems.

It was FED created artificially cheap money that created the bubble of the 1920's which, in turn, led to the great depression of the 1930's. Idiots continually rant and rave about how the central authorities (FED and U.S. government) helped get us out of the great depression and completely ignore the fact that it was the same institutions that created the depression in the first place.

Milton Freedman, Frederick Hayak, and others have talked about how the boom/bust cycle is generated by flawed policies of the FED itself. Yet, idiots refuse to listen and stupidly insist that these institutions are necessary for our well-being.

Proving the idiocy of deregulation
First, welcome back, Nick. Everyone thought you were a goner.

Next... can anyone here think of another solution that doesn't involve federal intervention? Everyone's a libertarian when times are good. But if we have a choice between keeping our ideology pure and having the entire financial system collapse at our feet... things always look different.

So then, we should anticipate the federal government redistributing quite a lot of income until everyone who made bad choices is rewarded in some degree for them. And we should also anticipate that just as was done after the 1929 crash, the banks that had cunningly unregulated themselves during the 1990s again fall under stern regulation. Maybe not a Glass-Steagall this time, but some reasonable steps to keep their habits prudent-- under strict penalty of law. The existing lack of rules has made the game unworkable, as too many people have gone too far out on a limb in pursuit of wealth, and the limb has broken.

OR, you can explain how it was really all the government's fault. They made all those people invest in questionable baskets full of eggs.

*****

Here's an analysis I think would be very, very hard to disagree with, as to how we got to this point:

http://www.nytimes.com/2008/03/23/business/23how.html?em&ex=1206504000&en=545585f39cd180f0&ei=5087

Here's a good surmise about the timeliness of Eliot Spitzer's fall:

http://www.atimes.com/atimes/Global_Economy/JC20Dj04.html

And here's the article in question:

http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html

Stop rewarding stupidity.
People will engage in risky behavior to the degree they believe they will be rescued.

How many people are rescued from mountains or back country skiing or any other risky behavior? Governments have trained personnel to rescue fools from themselves.

You money in a bank is guaranteed by the government regardless of how sound the bank managers are.

I am all for economic natural selection. Life is hard. It is even harder when you are stupid. And stupidity should not be rewarded by the government.

Poor Roy
...who is under the delusion that just because some things are deregulated while others are not, then all deregulation is bad.

On the contrary, only half-assed deregulation is bad. If we fully deregulated the economy (albeit gradually) then such imbalances and conflicts would not arise.

We learned this from the Savings & Loan Mess, the California 'semi' energy deregulation mess and countless others.

As for the topic on hand, the HISTORICAL verdict has long since been in: The Fed is a failure when objectively evaluated against what it was founded to do. Or rather, what its supporters 'claimed' it was founded to do (which was not its true purpose). The Bank of Japan -- which pulled off its own version of the Great Depression in Japan in the 90s -- is in similar straits and the European Central Bank is headed there too.

Central Banking is like all the other monoliths of the Industrial Age -- institutions that just hold us back or outright harm our economic interests.

Why do 'progessives' believe more government will help?
'Progressives' want more government regulation to control corporations.

If government must to anything, it must prosecute fraud but not enable it.

Fools and their money are soon parted. Stop protecting fools.

In Roy's World (Hah! I beat everyone else to the punch)...
...there are only greedy corporations and 'rich' people causing this problem, not idiot little guys who ALWAYS thought (in some form or another), "Well, if I get into trouble I can always just mail in the keys. The important thing is to try!" (btw, that is precisely what a lot of folks are doing now -- just mailing in the keys)

Now, in some ways that is admirable (the risk taking part). But, like you said Joanie, the responsibility part is where all this is breaking down. And, normally, we've had a tough time here getting Roy to concentrate as much on the little guy's fault as he likes to rip into the 'greedy rich' guy.

Answer: Because they don't know any better?
If you only tool is a hammer, all problems look like nails.

roy honestly believes that the solution to every problem runs through Washington
To him, it doesn't matter whether or not the problem in question was caused by govt, only more govt can solve it.

Another factor
to this problem was the govt forcing banks to loan to people who ordinarily wouldn't have qualified in order to avoid prosecution for racial discrimination.

The so called "red lining" myth.

Good article
Its stunning to me how much and how many economists I see everywhere that don't make the same arguments as this article. WHY is that!? Even to a liberal like myself I think its obvious that what the Fed is doing is only making things worse. The pain will be more severe and prolonged by the Fed's actions. Once again, its what we get when government exists for the benefit of corporations and Wall Street.

I'll add too however, I've seen a convincing argument that the government failed in being proactive enough in oversight with the investment banks to keep things from getting this bad in the first place. The problem is too many regulators, that all regulation should be run by one regulator, as they do in the UK. So as the banks wade into more risky water they are kept in check by a regulator to avoid being SO exposed. It makes sense to me, if we must have regulation lets make it intelligent and efficient.

Who gave the Fed that authority? (As Mr. Rogers asks)
We did...in 1913. And several people at that time KNEW it.

"This [Federal Reserve Act] establishes the most gigantic trust on earth. When the President
[Wilson} signs this bill, the invisible government of the monetary power will be legalized....
the worst legislative crime of the ages is perpetrated by this banking and currency bill."
-- Charles A. Lindbergh, Sr. , 1913

Mr. Rogers is wrong about the Fed using "taxpayer's money." The Fed just prints it and the Fed is a private corporation (specially chartered).

"Some people think the Federal Reserve Banks are the United States government's institutions.
They are not government institutions. They are private credit monopolies which prey upon the people
of the United States for the benefit of themselves and their foreign swindlers"
-- Congressional
Record 12595-12603 -- Louis T. McFadden, Chairman of the Committee on Banking and Currency (12 years) June 10, 1932


Mr. Rogers is right in that the Neighborhood is going to hell. Pretty soon, the Purple Panda will be buying the Trolly on a short sale.

"Give me control of a nation's money and I care not who makes it's laws" -- Mayer Amschel Bauer Rothschild

I have a guess about the economists
It's simple: most are employed by the very large corporations that want the bail out or those 'regulating' them.

As much as I hate regulation as a means of 'helping' society, I have to say that if you want more INEFFECTIVE regulation then you place it all under one monopoly authority. Having bureaucratic agencies competing over turf means competition. It may be warped competition, but in the absence of any competition you set yourself with a single point of failure. It also means you won't have anything that resembles intelligence or efficiency either, if there is a monopolistic bureaucratic organization.

Case in point is the UK itself. Recently a bank failed because their regulatory regime screwed the pooch.

"when government exists for the benefit of corporations and Wall Street."
"The problem is too many regulators, "

What kind of liberal are you?

Ah, then you redeem yourself.

" It makes sense to me, if we must have regulation lets make it intelligent and efficient."

Until 'liberals' and 'progressives' and 'conservatives' realize that the problem IS the government, you are pissing in the wind.

The solution is the free market. But the liberals/progressives/conservative statists would loose their delusion of control so they must conspire to maintain such a deluded state.

Growing forever
I was very far from making an argument that "just because some things are deregulated while others are not, then all deregulation is bad." Or, for that matter, that ALL regulations are good. Anyone with an IQ above 90 can tell us that what is needed for any game to work well is a really good set of rules. Plus enforcement.

There are many people vastly more informed than I who can point precisely to which regulations we trashed, and now see we should have kept. One such is the sweeping away of the ability of individual states to regulate activities taking place at least partially within their borders.

I understand the argument that this makes a mess of the requirements placed on some monolith operating out of South Dakota, where there is no regulation. But that's the monolith's problem. Of far greater concern is the fact that the investment banks who told us they could operate better without the rules, appear to have gotten themselves and everyone else into serious trouble by operating without the rules. Therefore we need some good rules back.

Another area in need of a good overhaul is margin requirements. It's hard to imagine we've let investors get this far out on a limb for so many years. Does Vegas let you gamble ten or a hundred, with just one chip?

And a third area would be forcing transparency on the newest classes of unregulated vehicles. Apparently even the smartest guys on the block are not immune to bidding up the latest gold brick futures. Anyone not in the business-- like me-- could tell you it was a house of cards.

And in fact there were pundits telling us five years ago that there were too many people putting paper trillions into newfangled gimmicks no one even understood.

In response, what you and Ludwig von M appear to be telling us to do is just to scrap the entire financial system once again-- and this time start out with some untested theory you're greatly enamored of. Way to restore investor confidence!

Let's first pick up the pieces of what we've got and try to put it back together. Then once things get back to a steady course, we can talk about changing all the rules. But one problem I see with goldbacks already is that you can't tie money to gold in any way. We only have as much gold as we have-- some finite amount-- while we are always going to need more money, just by virtue of the fact that all the money in existence expects to earn interest.

Who brought up blame?
You know very well that my argument doesn't rely on blame-- whether blaming the rich guys who lend or the poor guys who borrow. It's true that among the borrowers there appears to have been a lot of wilful self delusion. Still and all, are we to blame the dumb guys as much as we blame the smart ones? Who set these deals up?

Another question: why was it that the people who wrote shaky loans by the thousand were so easily able to bundle and sell them to big fish who apparently were incapable of assessing risk? THAT is the $64 question. It looks like what happens when someone gets passed some counterfeit money. They gussy it up and pass it on. And every one of the big boys got taken to the cleaners.

So now what do we do about it? Once again, who's getting bailed out or rewarded for their greed is a little beside the point. We're talking a major run on the investment banks.

Is it your opinion we should teach them a lesson, and just let them all fail? Wasn't that experiment tried back in 1930? If all those trillions explode in their faces, doesn't everyone get burned?

You will note that in all the efforts being made to save what's left of the investment dollar, no one is talking bailing out any little guys. They're on their own. Bear Sterns? Different story. Have I said anything at all about this? Like it's unfair? I don't think I have.

"Roy's world" is the world all the economists describe. And among them there is quite a lot of agreement on causes and solutions. Zyndryl's world? That of a few thousand 19th century Austrians.

I respectfully disagree
I'm not sure I buy it that most economists are employed by the very large coporations that want the bail outs. I've seen profesors make the same points too. But these economists seem to be coming out of the woodwork, so maybe there is some validity to your point.

I've only seen the proper caveat offered once, on PBS I think, the economist pointed out that inflation is a problem when the Fed lowers the rate as it has (the first time in a dozen interviews an economist mentioned inflation, that I saw), but inflation isn't currently the most pressing issue to deal with. I admit, at most that makes sense, but I think the Fed is going too far. I'm with Joanie, the pain will be deeper and prolonged by the Fed's actions.


Z: "I have to say that if you want more INEFFECTIVE regulation then you place it all under one monopoly authority. Having bureaucratic agencies competing over turf means competition. It may be warped competition, but in the absence of any competition you set yourself with a single point of failure. It also means you won't have anything that resembles intelligence or efficiency either, if there is a monopolistic bureaucratic organization."

I simply disagree with that. The problem with competing bureaucracies is mixed messages and confusion. Corporations have to work that much harder, expend that many more resources to satisfy competing regulators. I think there is a benefit of 'single point of failure' in this case. Its better than multiple points of failure, and thus no one is accountable because they all point the finger at each other. I think its good to have one set of rules and then enforce them. There is always the potential for abuse, so there must be stringent oversight of regulators also. You raise an interesting point about monopolistic bureaucratic organization, I'm inclined to question a scheme like that, but I think in the regulatory realm competitive bureaucracy breeds inefficiency and confusing expectations. I'm not sure the concern about monopolistic bureaucracy is valid.


Z: "Case in point is the UK itself. Recently a bank failed because their regulatory regime screwed the pooch."

I assume you're talking about Northern Rock. I looked it up after your comment. Its looking like the most likely response is going to be to tighten down on regulation in the UK so regulators can spot problems more quickly and reign in overzealous banks before they get too far out on a risky limb. Sounds familiar, regulators in the US weren't quick enough to recognize that investment banks were expanding too fast in high-risk investments.

One difference is that they know who the regulators are that failed to prevent the disaster in the UK. We'll see how it works out if and when they tighten regulation to deal with the problem. No system is perfect, but I do think the UK system is on the right track more than we are.

I hate to say it, but in this case it seems tighter regulation is a better answer than no regulation. There basically was no regulation going on in the US, that has led to this disaster we're in now. I'd rather regulators head it off early and potentially hurt profits, than bail them out on the back-end. To add insult to injury, the corporations get bailed out but consumers are left to fend for themselves.

From Enron to Bears-Stearns, the case for regulation over non-regulation is being made by experience. I really think it extends from the Bush-culture, the regime is showing us how not to conduct business more than anything. It continues to this day in the actions of the Fed.

Amazing...
First, you start off with this statement:

"...what is needed for any game to work well is a really good set of rules. Plus enforcement."

And then proceed to mention 'solutions' that run completely contrary to it.

I guess it is because you don't seem to understand the difference between 'rules' and 'regulation'. You also take a preventative approach that effects everyone no matter what like the Europeans like to do -- instead of a punitive one that effects only the rule-breakers, which is what your opening statement originally confers .

And what untested theory (that I am enamored of) are you referring to? Letting the markets self-regulate themselves? Letting those who screw up pay the ultimate price instead of bailing them out? There are reasons why there are Darwin Awards awarded every year and why the number of them is but a small fraction of what it should be (these days, you aren't stupid if you spend recklessly and are bailed out for it).

$64 answer: fools and their money are soon parted.
If they could not assess the risk, how could they evaluate the reward?

They deserve to loose their investment.

It's not about blame...but about consequences according to responsiblity
"Still and all, are we to blame the dumb guys as much as we blame the smart ones?"

THANK you for proving my point. The answer to your question is YES -- the dumb idiots get blamed as much as the scammers. Because the point is: The dumb won't get any smarter if they are not expected to and if it keeps paying to be dumb.

"why was it that the people who wrote shaky loans by the thousand were so easily able to bundle and sell them to big fish who apparently were incapable of assessing risk? THAT is the $64 question."

Actually, no. It is the SAME question you ask before. And the same answer applies. Those fools who didn't assess or didn't think it was necessary to asses said risk are just as dumb as the little guys who took out those exotic loans in the first place.

"Once again, who's getting bailed out or rewarded for their greed is a little beside the point. We're talking a major run on the investment banks."

No, it is EVERYTHING about the point. We wouldn't be in this situation if people had to pay more for the consequences of their actions or inactions, Roy. Just bailing it out is another patch that will lead to a bigger mess later on.

" If all those trillions explode in their faces, doesn't everyone get burned?"

"Wasn't that experiment tried back in 1930?"

Not what I am advocating, no. The government got involved, jacked up tax rates and heaped tons of regulation on the economy. The Smoot-Hally Tariff. The Fed caused massive deflation with its monetary policies. It was a disaster lasting over 10 years that didn't have to happen and required a world war to finally pull us out of.

Yup. That is what happens when things have been bandaided over and over again. The pain only gets worse. But eventually it gets paid.

"Roy's world" is the world all the economists describe. "
Uh...no. Zyndry's world is the world all the economists-who-know-better describe. It is a world where moral hazards (an economics term, Roy) are minimal and thus risk reflects in decision-making that is more sound and safe.

The Federal Reserve
...is not funded by the taxpayers.

The very word 'Federal' is a total PR scam to fool people into believing it is a 'federal' government agency.

The Fed is extending a non-recourse loan. If the assets backing the collateral of that loan (some of Bear Stearns' shakier assets) deep-six, the Fed eats the difference, yes. But its not taxpayer money.

And...although I could be incorrect concerning the Bear Stearns situation, the $30 billion is not in cash but T-Bills the Fed has. In short, it is an asset swap and a temporary one. Bear Stearns/JP Morgan now has $30 billion in grade AAA paper on its books that it didn't have before and $30 billion (technically) of grade F- crappola removed off its books (the Fed has it now).

"A non-recourse debt of $30 billion was issued to JPMorgan Chase by the Federal Reserve in order to purchase Bear-Stearns on March 16, 2008. The non-recourse loan was issued with Bear-Stearns less liquid assets as collateral, meaning that the Federal Reserve will absorb the loss should the value of those assets be below their collateralized value."

http://en.wikipedia.org/wiki/Non-recourse_loan

reply
1) The reason why most economists work for business is simple -- that's where the jobs for economists mostly are. There aren't enough academic positions open compared to that.
2) Those economists get paid to deliver results their employers demand, just like the rest of us in private industry do.

Yup. I was talking about Northern Rock. For all the supposed superiority of the British 'monolithic' regulatory approach, it didn't stop that from happening, now did it? I offer that as supporting evidence for my points about regulation in general.

"There basically was no regulation going on in the US, that has led to this disaster we're in now. I'd rather regulators head it off early and potentially hurt profits, than bail them out on the back-end."

There is plenty of regulation going on in the US. It just isn't the Magic Wand you think it will be if we 'just fix it some more!'. Take Enron as you so like to bring that up. Let me ask you: Will Sarbanes-Oxley (which DOES hurt profits and economic growth) prevent another Enron from happening? Would it have prevented the actual Enron mess that happened from happening if we could go back in time and put it in place then? Answers are to both: No and No.

And, Bush had nothing to do with Enron. That was all under Clinton's watch. So, let's drop the Bush Derangement Syndrome, shall we?

Where the bail out is going to REALLY happen
Watch Freddie Mac and Fannie Mae. They are planning on buying $200B up to "trillions" of mortgage paper. I don't know how much on the hook the taxpayers will be if Freddie and Fannie take losses on those mortgages. Anyone else know?

I have a question
I am against government regulation but the lack of government regulation is not the only issue here. Privet entities generally do well underwriting things like UL does for consumer goods. I believe that they do a better job regulating then the government. My question is why Standard and Poor’s and Moodys dropped the ball along with bond insurers? It seems to me something else went wrong.

Don't know, but
Arthur Andersen failed due to conflict of interest, I guess.

"By the 1980s, standards throughout the industry fell as accountancy firms struggled to balance their commitment to audit independence against the desire to grow their burgeoning consultancy practices. Having established a reputation for IT consultancy in the 1980s, Andersen was no exception. The firm rapidly expanded its consultancy practice to the point where the bulk of its revenues were derived from such engagements, while audit partners were continually encouraged to seek out opportunities for consulting fees from existing audit clients. By the late-1990s, Andersen had succeeded in tripling the per-share revenues of its partners."

http://en.wikipedia.org/wiki/Arthur_Andersen

In the end, the investor has to do his homework and make his own decisions.

Rules and regulations
You seek to confuse the issue when you begin with a sophistry. Rules, regulations... what I mean is constraints on behavior. And as you know, the tendency over the past sixteen years has been to sweep away any meaningful constraints on the dreams of the investment banks.

THAT, in the opinion of most people actually familiar with this area, is the reason behind the fall. They went overboard. They were too greedy, and dumped too much OPM into dubious investments that turned out to be holllow in the middle.

Their principle folly was to snatch up all those bundled mortgages, secured by avaricious brokers who were un reg u lated and thus had no constraints in duping the credulous on both ends of the deal. These people were able to legally push loans on simple marks who failed to realize they would likely be unable to repay when the loans reset, leading them to believe they could always roll the loan over and get another one. And they then sold the packages to unwitting bankers who didn't think as hard as they should have about buying up so many turd burritos.

It was greed, folly and stupidity, sure. But that's not a useful approach to use. It was made possible by a deliberate dismantling of the regulations. And the piece you obviously failed to read was Eliot Spitzer's column in WaPo, reminding us that the reason all this was ever allowed to happen was the federal negation of more sensible state rules constraining bank behavior.

The theory I'm pushing is hardly untested. When the banks failed in 1931 we got Glass-Steagall. And it served us very well, until it got nibbled away at the edges by the rats. I don't recall that we had much in the way of S&L collapses or Long Term Capital failures back in the 1950s... when regulation was strong. And I even seem to recall that the country was pretty prosperous back then.

If we go with remedies tested by time, we'll go back to smart regulation of these people, who are proven duds in their own specialty. If we just allow them to fail, they bring down the whole economy... and everyone in the country has to end up paying for mistakes they had no part in and don't even really understand.

Just like the S&Ls.

The folly of deregulation
When we get to the point where I have to pay a price for THEIR stupidity and greed... that's when I decide their freedom to get us all into trouble needs to be controlled. And like it or not, the federal and state governments are the obvious centers from which control is maintained.

If you can pick nits over their past performance, the answer is simple... better controls, better controllers. We do get to vote for them, you know. It's not just to say that robbery is a natural activity among benefit-seeking humans, so we should do away with the police and let the markets reign.

You, collectively, are so damn dumb about this basic point. Those economists who recommend letting the markets take care of themselves... weren't they the ones who deregulated the banks, thereby getting us all into this mess to begin with? Their track record over the past couple of decades is so bad, the experiment should NEVER be tried again. Ever.

You still depend upon 'good' government.
That is an oxymoron, good government.

What bank deregulation?

Doesn't the government guarantee all deposits? Doesn't sound like deregulation.

You can't be a little pregnant or be just a little regulated. When it comes to deregulation, it must be ALL or nothing.

No
"They were too greedy, and dumped too much OPM into dubious investments that turned out to be holllow in the middle."

No they weren't...UNTIL things 'went wrong'. Right up before that, nobody wanted to hear of any problems -- especially the regulators. This happens over and over again, no matter what is being regulated. And, everyone is involved.

I used to be chided at parties because I would say, "I still rent because I don't believe anyone should be taking out a mortgage w/o a traditional 20% down" in addition to "these real estate prices can not be maintained and will fall" and people would think I was some sort of Unibomber kook. This is the SF Bay Area where nobody could afford to put 5% down, yet alone 20%.

But I quickly determined that what they were really uncomfortable was that I was not conforming to the party line. Nobody wanted to hear of the Truth or even an alternate take on this. It was like Global Warming.

And these were just middle-class home 'owners' (mortgage slaves). So, the actual regulators themselves were probably under far more 'don't buck the system' pressure.

The regulation back in the 1950s (and 60s and 70s) was socialist control, not a mere setting of basic rules for behavior, Roy. The regulators determined -- not the market -- that loans could be taken out and at what interest rates. Hence the difference between you and I of opinion of what 'rules' are.

so d*mn dumb
" When we get to the point where I have to pay a price for THEIR stupidity and greed... that's when I decide their freedom to get us all into trouble needs to be controlled."

Uh, no. We don't get into trouble. Someone else will fill in the void. The sooner the irresponsible fools are bankrupt and out of the picture the sooner the transition to more competent lenders will occur.

"If you can pick nits over their past performance, the answer is simple... better controls, better controllers. We do get to vote for them, you know."

No, we get to vote for other fools who are even more greedy and even more incompetent.

"Those economists who recommend letting the markets take care of themselves... weren't they the ones who deregulated the banks, thereby getting us all into this mess to begin with?"

Uh no. The same politicians you wish us to put more faith into did that. There are whole doctoral dissertations by economists on how de-regulation was done half-assed and how it directly led to the problems that were a result.

they have the authority, power and thus the responsibility
to maintain the financial system. So do other organs of the government. But the Fed has the money or can produce it out of thin air if it doesn't. Couple that with the politicians caring more about how to maximize the whoring out of their votes as superdelegates and thus the Fed is filling in the void.

What deregulation?
The banks were never deregulated.

The fact that you are having to pay anything for the problems at these banks proves that the problem lies in govt regulation, not the free market.

Bad debts coming home to roost
Paul Krugman generally looks very good in hindsight. Here's something he wrote just over a year ago, as Bernanke succeeded Greenspan. I think he called the current crisis pretty well.

http://economistsview.typepad.com/economistsview/2006/02/paul_krugman_de.html

Deregulation? What? Where?
Three years ago, I had just concluded participating in the external audit of a small regional bank. This bank, now since purchased by another-was subject to a full pantheon of state and federal banking laws, including but not limited to: laws that are designed to serve social (read, irrational and uneconomic) ends such as the "Community Reinvestment Act" that may actually have DIRECTLY contributed to the current mess:

www.nypost.com/seven/02052008/postopinion/opedcolumnists/the_real_scandal_243911.htm?page=0

When they weren't dealing with inanity, they were dealing with repitition. FDICIA, passed in 1991 requires that (federally chartered, I believe) maintain a set of internal controls. If that sounds similar to SOX 404, it is, but despite the 99% similiarity-this bank had to have two seperate sets of control documentations.

My work on this audit dealt primarily with the lending function, therefore, I know there were other regulators involved-such as the ones that govern brokerage operations.

Nonetheless, I personally saw actual submissions or preliminary work related to submissions for the following regulators and quasi-regulatory bodies.

State Banking Department
Federal Reserve
Office of the Comptroller of the Currency
FNMA (aka Fannie Mae)
Federal Home Loan Mortgage Corporation (aka Freddie Mac)
Securities and Exchange Commission
Federal Housing Administration (FHA)
Our state version of the FHA
Government National Mortgage Association (GNMA, aka Ginnie Mae)

At a certain point, we must Mr. Bean, our resident hypergraphic a simple and succint question:

What the he** are you talking about, deregulation?

Market regulation
This isn't the first time this kind of thing has happened. Earlier, an ill considered deregulation left investment brokers with the power to rate their own offerings. Thus everything they wanted to sell came with a tag saying "BUY!". A collapsing stock had to be a real turkey before it was demoted to a mere "hold" label. Nothing ever got a "sell" label. That was back during the 2001-2002 market failure.

The moral is, never trust a referee who's a party to the game. There are some things only government has even a chance of doing well. And market regulation is one.

The restrictions should have been drawn around the types of mortgages lenders were able to place. Then the bath water would never have gotten into the bourbon in the first place.

It's inexplicable why bond insurors, down the line, would have failed to do their homework, and backed bonds built from unworkable loans.

All the fault of the regulators
"No they weren't...UNTIL things 'went wrong'. Right up before that, nobody wanted to hear of any problems -- especially the regulators."

So who were these regulators, who failed to do their job? Isn't it the case that no one is currently regulating the market in secondary mortgages?

Any entity whose job that was has been dismantled by now. But please, name some names.

Now he's getting angry
You say "Uh, no. We don't get into trouble. Someone else will fill in the void. The sooner the irresponsible fools are bankrupt and out of the picture the sooner the transition to more competent lenders will occur."

The problem is that the poor judgment was so pervasive that the entire lending structure in the US has become traumatized-- because they don't know when it will end, and are well advised in these instances to fear the worst. The resulting credit contracture does indeed harm us all. Employment founders, production slows down and consumption-- upon which everything else rests under our system-- falters.

Or don't they teach you those things in the Austrian School?

I believe you can look over every posting I've made on this theme, and failed to find a one where I say we should just put our faith in the hands of politicians. What I'm saying is that we should see good evidence of smart advice being given to those knwoledgable people who exist in the Senate, and good bills coming out of committee. It's not a faith based deal, but one that can be verified by the body of informed opinion we have available to us on the net and in print.

How is the government doing a good job of regulating any market?
"The moral is, never trust a referee who's a party to the game. There are some things only government has even a chance of doing well. And market regulation is one.
"

How is any government referee not a party in the game?

But someone has to be able to add more cash
The author seems to be advocating a system in which there is a fixed amount of US currency in circulation. But increasing labor supply (from population growth, for example), improving productivity, and growing markets are causing the economic pie to continually grow. Thus a fixed money pool would lead to massive deflation, which could eventually lead to a situation where my dollars get the best return by sitting under my mattress in nice little bundles. So massively deflating the currency also is not the answer. Since we're stuck with this currency thing, we do need someone to manage it. That's what the Federal Reserve is for. It's another question altogether whether or not they're doing their job well, but it's definitely a job that needs to be done. The only alternative to the currency conundrum is to go back to a barter system.

"just put our faith in the hands of politicians"
That's exactly what you will get when you say government must to the job, but only 'good' government, right?

Like you have said many times, socialism will work if only the right people are in charge.

Bad laws
We're talking about two different things. In your position, naturally you chafe at the hoops an idiotic government makes your clients jump through. (but you'll have to admit, you personally seem to be profiting by that necessity.)

What I'm talking about is the systematic dismantling of needed controls. And the WaPo article I reference by our Mr Spitzer was a classic one, of the behind the scenes processes that lead to financial mega-fizzles like the current one.

The one has little to do with the other. It's the meaningful, important regulations that get quietly cancelled out.

I agree with a part of your NYPost article. A failure of underwriting standards was a, or maybe even the, proximal cause of the mess. But I wouldn't pin the blame on the principle of regulation. The principle of regulation of markets is certainly sound. A market fails when we have to spend all our time trying to avoid the gold brick salesmen.

The story your article is telling appears to relate to flaws and weaknesses within the Home Mortgage Disclosure Act. And the answer is not to abolish all laws. The moral is to write better laws.

Referees in the Games-The Instrusion Olympics
In fact, look where government is most heavily involved:

Healthcare
Education
Energy
Agriculture
Financial Services
Communications
Highways, Bridges and "Infrastructure".

All of which are the very areas the left tells us government involvement is only a problem in so much as its insufficient. Yeah, that's the ticket-more, more, more.








Informed opinion?
It seems to me that the Austrian schools and the Chicago schools and the George Mason schools have provided excellent advice.

But those who support socialism know it won't advance their cause, more government control of private property, so they are ignored.

Perfect leaders make perfect laws and make perfect government
Paradise!

blu ray
What government bureaucrat decided blue ray was the best standard?

Yes, there were regulators
...who were supposed to clamp down on bad lending practices -- both by banks as well as non-banks. How's that for an example?

Why do you bring up the Austrian School and other paradoxes
In 1906, virtually the entire US financial brokerage industry was wiped out. Same thing happened in Japan in 1966. Wow! Life went on! Others replaced them.

Once again, your static view of the world sets you up for a major disservice. And they call people like me 'conservative'?

As for your postings that point to 'putting our faith in the hands of the politicians' just who sets up the regulators? Who run the agencies at the top? Who pass the half-assed regulation legislation that mess things up worse than whatever cure they 'do'? Answer: Politicians.

So, every time you call for more regulation you are calling for more of that. Hence that is where you will find the proof in your postings you seem blissfully unaware thereof.

As for more explicit proof, this statement right here nails it on the head:

"What I'm saying is that we should see good evidence of smart advice being given to those knwoledgable people who exist in the Senate, and good bills coming out of committee."

That very statement is putting your faith in the hands of the politicians. And yet, in the very same posting you deny doing so! Amazing!

Two things
1) "A market fails when we have to spend all our time trying to avoid the gold brick salesmen."

No, markets themselves do not 'fail'. They can be imperfect, yes. But they don't fail by themselves. External distortions of the market incentives and/or information being conveyed to all the participants is what causes systemic failure that you and others like to attribute to the markets in question when you say, 'market fails'. That is a concept you just don't seem able to grasp.

2) "The moral is to write better laws."

Sure, and we might as well keep believing in the Tooth Fairy as well. It is is just as 'rational' as what you propose. Oh, and another thing...this is a clear case of you stating a preference in putting your faith into the hands of politicians, since you seem to not realize it when you do.

Paul Krugman always looks bad in hindsight
Given his gross errors and willful distortions that are too numerous to count. For almost a decade now, he's had quite a following of bloggers and other folks on the net maintaining a 'Krugman Watch' to expose his screw-ups.

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