TCS Daily


Irreconcilable Differences

By Barry A. Liebling - April 7, 2009 12:00 AM

The debate on how to address the economic crisis can leave you breathless. Discerning free-market advocates understand that government meddling contributed to the troubles and restricting the government to its proper function of protecting individual rights is the path to setting things right.

Interventionists take the opposite view. They are convinced that the problems are due to inadequate regulation and describe the last eight years of the Bush administration as being inspired by an "anything goes" keep-the-government-out ideology. They argue that if the government had used a stronger hand the current malaise might have been avoided. The long-term remedy is to increase government involvement in business.

Free-market enthusiasts counter that Bush's policies were not characterized by deregulation, "anything goes," or hands-off - but were marked by massive increases in government domestic spending. The United States has not had anything close to a free market at least since the Federal Reserve System was established in 1913. During the New Deal the government's muscular reach was prodigiously expanded and has been growing ever since.

We live in a mixed economy - where some activities are free-market while others are regulated by the government. So when things go wrong the mixture serves as a talking point for both sides. Free-marketers identify government interference as the culprit, while interventionists say that a lack of government supervision leads to pain.

Bring a principled free-market advocate and a committed interventionist together for a calm, unhurried discussion. Can they ever see eye-to-eye? Have them review the historical evidence, discuss the anticipated consequences of interventions and what they think public policy ought to be. What is the prospect that they will agree with one another about what should be done? Anorexically slim.

When you drill down, the conflict between conscientious free-marketers and interventionists is not about facts or about what people are likely to do. It is about values - what each regards as the way things should be.

The core premise supporting the free-market is individual rights. Every person has the right to life, liberty, property, and the pursuit of happiness. This means that all economic exchanges must be by voluntary mutual consent. No one has the right to anyone else's efforts or property without his or her permission. No outside force, whether bandits or a governmental body, can justifiably interfere with what terms you or your trading partners decide among yourselves. Government is essential for the maintenance of a free-market, and its role is protecting individual rights - prohibiting the use of force or fraud.

By contrast, the assumption of the interventionist is that society and the state take precedence over the individual. It is the group that counts and has rights. Thus, interventionists focus their attention on "social justice" which is different from genuine justice. They have antipathy for "unfettered" individual freedom because they realize that when people act according to their own judgement and preferences the outcome may not be to the interventionist's liking. Interventionists see wealth redistribution as a key function of government. Money should be taken from those they despise and given to those they favor.

How do the adversaries think differently about the creation of wealth? Both agree that free-markets have historically been highly effective engines for generating riches. The principled free-market advocate understands that individual freedom is the essential rationale for non-interference. It is true that free-markets create more prosperity than any regulated system, but that beneficial consequence is not the primary justification. If it were, it would open the door to meddlers who would endlessly propose schemes that violate individual rights in an attempt to crank out more wealth.

The interventionist understands that more freedom and less interference leads to greater productivity, so he does not want to institute too much of a command economy. Interventionists are perpetually searching for ways of encouraging producers to create lots of wealth that later can be confiscated for "the common good." The interventionist conundrum is how to squeeze the most out of producers without demoralizing them.

What do free-marketers and interventionists think about criminals? Both are incensed by thieves and fraudsters. The principled free-marketer knows that villains who violate the rights of individuals should be stopped in their tracks. This is where government should take a strong stand.

Interventionists are ambivalent about criminals. On the one hand they believe that force or fraud perpetrated by private individuals is odious and deserves penalties. But every time a criminal is exposed there is opportunity. The incident can be used as a rallying cry for more control of the economy. Interventionists can proclaim that in spite of any laws that are on the books, criminals are still doing mischief. And the solution is more laws, rules, and regulations.

Principled free-marketers and interventionists cannot reach consensus because they have incompatible visions about how people should live. Of course, interventionists might learn to understand and appreciate the value of individual rights. Don't hold your breath.


Barry A. Liebling, PhD is the president of Liebling Associates Corporation in New York a management consulting firm specializing in marketing, marketing research, and organizational analysis. His monthly column appears at AlertMindPublishing.com.
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198 Comments

More deep seated.
I think the issue boils down to the level of self-esteem of each and every individual.
Those with low self-esteem feel the need to be in control and to control others. Unalienable individual rights interfere with their control.
That may be one issue the 'liberals' have right. Except their solution is not to build real self-esteem, but to make people feel good about being inadequate instead of doing the hard work of real accomplishment.

Trading Justice for Prosperity
While you have your “principled free-market advocate and a committed interventionist together for a calm, unhurried discussion”, ask them this question:

“If you could solve the financial crisis, bringing peace, prosperity, (and don’t forget fraternity and equality) to our troubled nation, and the only price you would have to pay was that a very small minority would be denied justice, would you do it?”

The principled free market advocate, of course, would (if he truly is principled) reply in the negative. The interventionist would have to think about it.

“Hmmm.”

While the interventionist is mulling it over, sweeten the pot. “What if you could also, at the same time, make “reparations” for the injustices of the past, so that the oppressed could finally retake what is rightfully theirs from the oppressors?”

“Hmmmm. Tempting. I don’t like injustice, but…if I really could bring blessings to thousands of people, and only a very small group would be harmed, would it be worth it?”

Now, for the final temptation - presenting injustice as righteousness: “And what if that small minority had already received more than their “fair” share of blessings? What if those blessings were (probably) ill-gotten gain, taken (somehow) from the hand of the oppressed, by a cold-hearted system that exploits the needs of the needy to feed the greed of the greedy?”

Now you’ve got him. He’ll follow you anywhere. He’ll sell his grandchildrens' inheritance for this noble cause. (He may even sell his soul.)

Never mind that the “cold-hearted system” is, in fact, a wealth producing free market where every transaction is free, voluntary, and just – i.e., the very definition of justice.

Is this not where we stand today? Has not every proposal out of Washington for the last six months been a perversion of justice?

Justice demands that those who cannot afford their houses honor their loan contracts and move to less expensive accommodations. Justice forbids shifting that burden onto innocent third party bystanders (taxpayers).

Justice demands that those who invested in risky assets accept their losses when those risks come to fruition. (If the ball had bounced the other way, and the risks not come to fruition, would we taxpayers be sharing in their profits, even as we are now sharing in their losses?) Justice demands that those who stand to gain from their investments also be the ones who lose when those investments go sour.

Justice demands that companies which operate at a loss (wasting material and human resources by making cars that are not competitive on the open market) either change their business or go out of business. Justice forbids taking money from public funds to support private enterprises (and failing ones at that!)

Ironically, each one of these perversions of justice has, been “justified” by some economic “crisis” or another. Apparently, frightened people are easily convinced to compromise on their principles.

Or, perhaps I am being too harsh. Perhaps it is as the author suggests – for the interventionist, the abandonment of justice is not a violation of principle at all. He is following his “principles” to the letter. His principles are simply not as fixed as those of the principled free market man. His principles are much more pragmatic. He actually believes the old Vulcan line from Star Trek – “The needs of the many outweigh the needs of the few.” Unfortunately, humans are not as logical and unemotional as Vulcans. Exactly what constitutes a need, and what constitutes a desire, are subjective determinations. We quickly digress into “the desires of the many outweigh the rights of the few.” Justice be damned; we want prosperity, we want it now, and we don’t care who has to pay for it.

Pity the fool for whom “standing on principle” means standing on shifting sand, rather than solid rock.

for prospertiy
All very well, but you take an angle that the article doesn't even mention ; fraternity, justice, equality.
These things are beyond the scope of 'free markets and private property'. They are vague terms that can be defined too many ways to be useful.

I think the main point that this author missed was the fact that the interventionists policy must be based on force, whereas the free-market position is voluntary, thus has the moral high ground.

No Subject

the Interventionists (statists) also like to take a hand in Redistributive Justice in areas of gay rights vs democratic voters as well as Unevenhanded legal treatment of votes when that disrupts their agenda. Politicizing everything possible is an end in itself for the left and that aim should never be left unexamined as motivation. The state becomes their god and hammer and all else is subservient to that statist end.

'Nuff Said
>"The United States has not had anything close to a free market at least since the Federal Reserve System was established in 1913."

No sh*t.

Fair Weather Capitalism
In order for Free Enterprise to work, the 'pain' from the consequences of one's actions need to be felt in all its glory, w/o softening from the State, or the markets just won't work. Paying for failure is just as important as being rewarded for success in capitalism.

But 'rich' societies and democratic ones in particular are very loath to allow the pain of failure to be felt. They are in effect, 'fair weather' capitalist nations. When the music stops, then the 'democratic' Fascist/Corporatist or even outright Socialist interventions unthinkable just a short time ago kick in.

FYI: A real good article explaining what 'corporatism' is in the current context: http://www.realclearmarkets.com/printpage/?url=http://www.realclearmarkets.com/articles/2009/04/obama_and_the_reawakening_of_c.html

Hence why the Chairman O and Slick Willy both have in common a powerful knack for projecting the meme "Don't worry, I feel your pain! I'll fix the boo-boos! You don't have to be an adult and take any of this after *I* am elected..." and why both got/get away with almost anything.

Too many 'feel' the world owed them a living.
That's where I fault the 'greatest generation' that did such a poor job of raising their kids.

Why I went there.
Yeah. My “equality and fraternity” comment was a lame jab at the French Revolution, which illustrates what can happen if you let conditional or derived virtues trump true virtues. Some things which we think of as virtues can easily become vices. For example, tolerance is often presented as a virtue, and it often is applied in virtuous ways. But tolerance, in and of itself, is neither virtuous nor vile. The virtue (or vice) of tolerance is not intrinsic to itself, but derived from the object of toleration. Tolerating your neighbor’s obnoxious sense of humor, his political views, or his religious ideology may be a virtue, but tolerating his sexual abuse of his daughter would not be.

Likewise, Equality, if held up as a virtue in and of itself, leads to the subjection of justice to the “higher virtue” of equality. Under this mindset, stealing from the rich to give to the poor is seen as a virtue. Under this pragmatic ethic, the ends justify the means, and Robin Hood is a hero. Of course, we need not look back to old legends or the French Revolution for examples – the socialistic “equality before justice” ideology is alive and well here in America today.

The sad truth is that while you and I both understand that a policy based on the free and voluntary actions of individuals is not only more productive, but also morally superior to a policy based on force and coercion wielded through the power of the state, there are clearly many among us who either disagree, or don’t really care. For them, other “values” - such as equity, stability, security, high salaries, etc – are more important. For them, your moralizing (and mine) is the self-righteous ramblings of the unenlightened. (Or, better yet, the tortured squeals of the selfish, greedy imperialistic capitalist oppressor pigs - a thought which just encourages them all the more.)

It was an overreaction
After the GD and WWII, they didn't want their kids to know want or any of that.

So, they spoiled the hell out of them.

I don't blame them as much as I do the Boomers themselves. Compared to their parents, they had all the choices in the world and opportunity on top of that. As a demographic block, they chose poorly.

Just 53% of Americans think Capitalism is superior to Socialism
According to a Rassmussen Poll:

http://www.rasmussenreports.com/public_content/politics/general_politics/just_53_say_capitalism_better_than_socialism

Note how it references how another recent survey where 'capitalism' was referred to as 'free markets' instead, that number was around 70% instead.

Note also how the younger people are, the more stupid they get about accepting 'socialism'. More hearts than brains.

53%
It's a reflection of 2 things;

-how well the brainwashing works in the government run gulag popaganda schools with all those liberal teachers;

-how the word capitalism is so often wrongly defined, like; capitalism means that B. Madoff can cheat people; or capitalism doesn't work because lobbyists can pay off politicians.

Free marketers vs interventionists
Interesting to note how similar the World Socialists' view of the financial crisis is to the libertarian view:

http://www.wsws.org/articles/2009/apr2009/pers-a10.shtml

Unprincipled plutocrats
This is one of those rare and joyous occasions when you and I are in agreement.

Probably a great many of the loudest of the Bible thumpers extolling the virtues of the free markets turn out to be closet socialists when it comes to losing a billion or two as a matter of honor and principle. Then they have to come whining to the government they normally pretend to scorn, hats outheld, beseeching alms for the newly poor.

Once refreshed with crisp new bills, they will again heap scorn on the government, trying to take "their" money away for so long as the market remains bullish.

Until the bottom falls out. Then they must go to the well again, eating their humble pie.

not similar at all
The only thing I saw in that article that libertarians would agree with is the comment on how the russian looted by old stalinist aparachniks and gangsters.

Other than that liberatarians would disagree with;
-the Public-Private inst, plan,
-the FDIC,
-the bailouts at all,

-and where did they get this from?

"The answer can be seen in the Obama Auto Task Force’s demands for the liquidation of much of the US auto industry and the brutal downsizing of what remains, combined with the imposition of poverty-level wages on those workers who remain in the surviving plants and the gutting of the pensions and health benefits of retirees. It can be further seen in the administration’s pledge to slash social programs, including Medicare, Medicaid and Social Security."

I've never seen any obama handlers say anthing like that, or even liberal commentators.


Silly Socialists
A surprisingly cogent article for a socialist. I guess everybody agrees that the taxpayers are getting hosed (again). The socialists apparently think Wall Street is manipulating Obama. Of course they do; Wall Street = Capitalists, and as we all know, capitalists are only in it for the money. Obama, therefore, must be either a bought pawn (who is selling out the taxpayers for his own gain) or a complicit fool (who is screwing the taxpayer not for his own gain, but out of pure ignorance).
Funny thing is that I find myself agreeing with more of this than I thought I would. Yes, Wall Street is in the money making business, and if I can make a profit by fleecing the taxpayer, why not? Hell, the government does it all the time, and they are very good at it, so maybe we could learn a thing or two. So, let’s make business arrangement. You use the IRS to confiscate the wealth of the populace, pass a portion of the action our way, and well support you. Both parties benefit, and the fools in the street don’t even know what is happening.
It just goes to show why government needs to be kept as small and weak possible. You can’t put power into the hands of people with different interests than you, and expect them to protect your interests. You would think that the socialists would see that this applies to both business and government. Instead, they somehow believe that if you make the government big enough, and give it enough power, and choose just the “right people”, (you know, those few enlightened intellectuals with that rare, advanced combination of big brains and big hearts, acquired through years of studying Marxist philosophy) government will magically turn into a friend of the people. Dream on. That would be like us capitalist thinking that GM was making cars not for their own interest, but for our interest. Silly kids.

Reminds me of old western movies
You know the ones where some rich rancher or businessman owns the sheriff and the city council and drives away all competition.
Its the same with Capone and organized crime. Only Congress and Corporatism is 'legal'.
What they always want us to forget is that the voters and consumers really do have the power to cut them both off at the knees if we want to.
Vote the b@$t@rd$ out and stop buying stuff.

Looks pretty much the same to me
Not similar? The World Socialists object to privately held toxic assets being bought up at public expense.. as do you.

The World Socialists object to the government "offering to provide up to 95 percent of the capital, insure almost all potential losses and virtually guarantee large profits for hedge funds and other financial firms that agree to purchase the bad debts of the banks at inflated prices, with the taxpayers underwriting the windfall for Wall Street and assuming virtually all of the risk." And so do you.

They also say "opening the scheme up to small investors is seen as a way of providing a “democratic” gloss to what is, in reality, a brazen plan to plunder the public treasury for the benefit of the very bankers and speculators who are responsible for the financial crash. Evidently not seeing a contradiction, the article also makes clear that the bailout measures are being drawn up in the closest consultation with the Wall Street insiders who stand to profit from them."

Any objection there?

They say that “Main Street” will be given the opportunity to absorb the bulk of any losses while the “big guys” cream off the best assets and pocket the profits."

Would you agree?

Your misunderstanding of what the article actually says becomes explicit here, where you say

"Other than that liberatarians would disagree with;
-the Public-Private inst, plan,
-the FDIC,
-the bailouts at all,
-and where did they get this from?"

Do you mean you disagree with this?

"The article begins by noting that the FDIC was established 76 years ago, in the depths of the Great Depression, to provide a government guarantee, initially up to $5,000 and now up to $250,000, on the bank deposits of small savers. It describes the transformation of the FDIC, under the toxic asset disposal plan of the Obama administration, as follows:

“It’s going to be insuring 85 percent of the debt, provided by the Treasury, that private investors will use to subsidize their acquisition of toxic assets.”

"In other words, the function of the FDIC is being transformed from guaranteeing the bank deposits of small savers to guaranteeing the investments of multimillionaire investment fund managers. And, as the article notes, this is occurring without a vote by Congress."

It would seem to me that the expansion of the role the FDIC plays in using tax dollars to underwrite market losses, while allowing market gains to remain private, is something you would oppose just as much as the author.

And so forth. The entire article, in fact, other than the two closing paragraphs, could have been submitted to TCS and published here. And you'd have agreed with every word of it.

Bought and paid for
"The socialists apparently think Wall Street is manipulating Obama. Of course they do; Wall Street = Capitalists, and as we all know, capitalists are only in it for the money. Obama, therefore, must be either a bought pawn (who is selling out the taxpayers for his own gain) or a complicit fool (who is screwing the taxpayer not for his own gain, but out of pure ignorance).

"Funny thing is that I find myself agreeing with more of this than I thought I would. Yes, Wall Street is in the money making business, and if I can make a profit by fleecing the taxpayer, why not?"

Capitalists only in it for the money? Certainly that's not so! And Obama, a bought pawn, or a complicit fool? How can that be?

Normally the way business gets done in Washington is that "you gots to dance with them that brung you". And it has been the commercial banks that bankrolled the Obama victory. Here's the distribution of their 2008 contributions:

B. Obama, $3,167,000
J. McCain, $2,260,000
H. Clinton, $1,459,000
M. Romney, $802,000
R. Giuliani, $766,000.

http://www.opensecrets.org/pres08/select.php?ind=F03

Nothing new here. Nor is there anything new about corporations taking public money. Oil depletion allowances are just a front-end taking, by reducing taxes owed. And why should passive investors get to pay less on their capital gains than laborers do on their wages?

Government is run on, by and for Serious Money. And rich people have considerably more of it than do the poor. That, in a nutshell, explains our politics.

And your solution is to give more power to the government?
Which immediately equates to more power for those evil corporations.

My solution would be to re-regulate
That way the financial industry could do a better job for us as well as for themselves. This last time around, they got to make their own rules. And everybosdy lost.

We should start by limiting their ability to create novel derivatives and sell them as though they had intrinsic value. What we have seen is that these vehicles only have value to the degree that they are insured against loss. Otherwise they are something of an unknown quantity.

Such an approach would seem to me to equate to LESS power for those "evil" corporations. I really don't think they're all that evil. But they're misguided.. and without proper guidance they can be very destructive of wealth.

Looking for solutions
>” Government is run on, by and for Serious Money. And rich people have considerably more of it than do the poor. That, in a nutshell, explains our politics.”

So, if we agree on this much, and we agree that it is bad, how do we change it? Do we try to change the “rich people have more money than poor people” side of it, or do we try to change the “government is run on, by, and for Serious Money" side of it?

I think I side with our founding fathers when I declare that the problem is not rich people having too much money, but the government being too powerful.

The rich/poor division is natural, and, under a just system (where the rich get rich by earning their wealth by providing services for others) it is proper. The poor you will always have; if you are lucky, you will have some rich people too.

If you keep government small, and limit its powers to those minimum functions required for fulfilling its legitimate purposes, (enforcing justice, national defense, etc) and make it smaller, less powerful, it becomes less of a prize for the rich and power hungry to chase after. I would rather have the rich and powerful chasing after CEO positions and trying to build their empires via increased market share than have them chasing after political offices and building their empires that way. If the CEO of Intel or Coke decides to risk the money under his control on some fancy scheme, and that scheme goes sour, or if he runs up huge debts and ruins the company, the people who pay for it are the same people who voluntarily signed up for that risk – the stockholders. But when the president or congress does this, the people who pay for it are involuntary stockholders, who really had no personal choice – the taxpayers.

We don’t agree on much sometimes. But do we agree that the best solution is to limit the size and power (and budget) of government? Or, if we can’t agree that it is the BEST solution, can we at least agree that it is A solution?

There was NO shortage of regualtions in the past decade.
Re-regulate what?

Homer Simpson says: "DOH!"
"We should start by limiting their ability to create novel derivatives and sell them as though they had intrinsic value."

You'd think so, but....

A derivative has intrinsic value. The value is a function of the underlying asset and the time to expiry among other things. As an example, a savings bond has a value which is derived from the interest rate at purchase, the time to redemption and the face value. That is, it has an intrinsic value. That is, you can sell it on the open market. Another example is homeowner's insurance. That you purchased a policy means you purchased a "put option." That is, it is the right to sell an asset (your burned out home) at a future date (in 60 days) for an agreed price (replacement value less depreciation, and other limits). Every time someone takes delivery for something in the future and pays for it now they enter into a futures contract - a type of "derivative" where the price is locked in and thus avoids currency fluctuations. So, how are these things regulated???

The Congress (yes that congress) is the US agency which licensed a few companies (called NRSROs) to provide the bond (and equivalent) ratings of various (OTC traded among others) "financial instruments." You'd recognize the names: Moodys, Standard and Poors, Fitch and fewer than a dozen others.

It is these companies which under the authorization of the US government (SEC), rates the financial instruments under their review. Obviously, if an NRSRO rates a financial instrument AAA then it must be safe - almost as safe as the full faith and credit of the US government (which is always AAA+ or the equivalent) and these companies are proxies for the government...

Well, we know now that for example, CDOs (consolidated debt obligations) which were the bundled mortgages of liar loans, ninja loans, predatory lending and all the other variations of "toxic assets" were rated as AAA in many instances by the Congress/SEC-authorized NRSROs. Why they did that is an interesting story in itself.

So, what is a money manager to do? Take AAA-rated paper from the US debt at say 3-4% or AAA-rated CDOs paying 7%? Remember, both are rated AAA by the same US government-authorized analysts. As Homer Simpson would say: "DOH!"

But before you jump in and yell "fiduciary responsibility!!! - They should have known...", also realize that federal and state regulations require that money market and insurance funds hold NRSRO-designated securities.

"What we have seen is that these vehicles only have value to the degree that they are insured against loss. Otherwise they are something of an unknown quantity."

No, they (CDOs) have virtually no value. That nobody wants them is evidence of that. That government might retroactively revalue them after purchase (changing tax rates or demanding public clawbacks) introduces regulatory uncertainty. That also makes the assets worthless or effectively worthless. But you are quite right when you state they are something of an unknown quantity. Much like purchasing a used car "as is" while it leaks all its oil and transmission fluid.

The NRSROs failed to correctly state the risks and underlying values of financial instruments under their review. How can anyone expect more regulation - say of "novel derivatives" to work of the underlying government regulatory mechanism is such a sham?

The almost religious believe that "more regulation" will fix the problem. That is just as naive as believing the market will solve the problem. Our regulators are incompetent or at best overwhelmed. And we don't have a free market - it is massively regulated by government; relying on it to solve the problem is a fool's errand.

A better solution is to recognize that a majority of Americans are woefully under-educated and ignorant of reality. Rather than regulating the markets, we should regulate the the ability of people to assume a mortgage, purchase a derivative instrument or download tricycle motors or vote in a public election for that matter.

I feel better now.

Government will not decrease its own power - ever.
Government will not decrease its own power, scope or reach without a strong external stimulus.

Its chief enablers (Congress, national media, unions, advocacy groups) will also fight to keep a large, powerful, intrusive government.

Unless we had a French Revolution-style second civil war, the federal government will absolutely not decrease in power. There is absolutely no personal danger to the representatives of the various support groups to allow it.

Case in point, the yearly "online child predator protection act" or similarly inane new law. Every one has been declared unconstitutional but congress keeps writing them. Why? There is political gain, and no personal potential loss if they are struck down. But if we somehow forced a Senator or Congressman to pay a hefty fine for every law they signed which was later declared unconstitutional, you'd see fewer laws proposed. Bankrupt a Chris Dodd or Barney Frank over their incompetence....

The free market would solve the problem.
And it would do so swiftly and, for a time, result in exactly what we have now, people holding on to their money deciding who or what to trust. Except the taxpayers would not be holding the bag.

Which is why we need the 'anarchists'.
We need more and louder voices standing up for extremely limited government with a hope of slowing the power creep.
When good gives in to evil, even a little, evil wins.

decreasing power
That's right, but mostly people think the govrnmt is there to do them good somehow. Naievly thinking it will change would be like asking the mafia to become the Salvation Army instead.

There certainly was
It sounds as though you've never actually thought about any of the actual issues. The only thing you've thought about is how your libertarian theory must interpret things.

It's not the number of regulations in existence that matters. That's Zyndryl's constant point.. that we have a large number of regulations. What matters is whether or not they are effective in creating an orderly marketplace in which our affairs may be constructively transacted.

You fellows (I put this in the plural) consistently feel as though the game could be played better without a lot of constricting rules. But games without rules really don't work. They lead to playground fights, every time.

Here's a real-world example: bond ratings agencies. Obviously, such things can NOT be relied upon if there is not a sturdy firewall placed between them and the salesmen who tout such products in the marketplace. Yet in our current state of deregulation, one commercial bank can perform both functions.

That's like allowing the ref to be part owner in one of the teams. It wrecks the game. He's no longer impartial.

So, in response to your poorly thought out "Re-regulate what?" I would offer that a firewall be placed between the sellers of bonds and the ratings agencies that evaluate them. And I can offer many other examples of, boundaries, caps and curbs that would improve the state of play.

Appraising value
"A derivative has intrinsic value. The value is a function of the underlying asset and the time to expiry among other things. As an example, a savings bond has a value which is derived from the interest rate at purchase, the time to redemption and the face value. That is, it has an intrinsic value. That is, you can sell it on the open market."

Certainly so for the simple derivatives on offer. But I think you can see that the issues I was speaking of would be those complex financial derivatives whose value CAN NOT be discerned by the investor. And not just the casual investor looking to place his $5,000 before mowing the lawn one weekend, but large institutions who were unwary enough to risk a billion or more on instruments they came to be convinced were "sure things".

Asset backed securities were just based on the anticipated future performance of entire classes of assets that had not been properly evaluated. And I would agree entirely if you said that the first blame should lay on the shoulders of those unwise investors, who failed to instinctively steer clear of them.

What happened was that they carefully invested in rapidly spoiling apples, based on the previous track record of fresh apples. They were not told, and failed to figure out for themselves, that when one sells an overpriced house to someone who can't afford it, and gives them an introductory low-rate, zero-down, interest-only loan on a place that's been appraised for $90K more than it would rationally be worth on a traditional market, the match has been lit in the munitions store.

Now they know.

So we have two alternatives left, to go forward from. Either we remove the remaining regs, let the buyers all beware and watch the investment markets dwindle to nothing.. or, we restore integrity and trust, by putting strong teeth in retrospect where they should have been in the first place.

But the free market WAS the problem
Marjon-- What you're describing is exactly what actually happened. The market was totally free. Anybody could buy anything anyone else was selling. And they all bought lemons, packaged as gourmet fruit.

This brought the share price of just about every commercial bank on earth down to pennies per share. They were all on the verge of being delisted. So you're telling us the solution would have been just to let the big dogs die, and provoke a run on the remaining banks as everyone tried to get their cash back. FDIC would have been the next domino to fall. And after all, that's just another kind of government bailout.

The real estate market would have never recovered. Another domino. And the credit markets would never have recovered. And another one. This would have become the Big One.. just like the 1929 Crash, only without any recovery.

Which domino would be next? Well, all the institutional investors who were putting their money into US Treasuries would be demanding their money back. So the next tile to fall would be the United States, with $11 trillion due immediately that they had no way of paying.

But it's okay, folks. It would all just be from the natural workings of unregulated markets.

Better rules would be the first step to take
"We don’t agree on much sometimes. But do we agree that the best solution is to limit the size and power (and budget) of government? Or, if we can’t agree that it is the BEST solution, can we at least agree that it is A solution?"

You repeat the classic formulaic refrain: government is the problem, ergo less government is, in and of itself, better.

I disagree. Complex flow systems need attentive management. Otherwise those problems that constantly occur compound themselves, becoming intractable and then insoluble. I'm speaking as a manager here.

Money serves the purpose of facilitating trade. When it is widely spread, it maximises consumption. That is, it maximises demand, which stimulates production, which increases employment, which creates more demand. It's a nice system.

Intrinsic to the system is that some people end up with more money than they can spend. And so a secondary market is created, in speculation. This also serves a useful purpose, that of providing funding for startups that can create novel products and markets. So far, the capitalist impulse serves society in a very positive way.

But let us get to a point where incomes are not equalizing, and one sector of society enjoys the upper hand over the others. This means that they now have an excess of income, which they can only spend on an increasing panoply of speculative financial products. Meanwhile the other sectors, starved of funds, can't keep demand for commercial products strong. And so employment begins to sag. It's the low end of the business "cycle".

The real problem enters when there are not enough legitimate vehicles conveying value to consume all the excess money entering the financial sphere. The bubble gets created at the precise moment that empty vehicles must be found to soak up all the extra money.

Normally this occurs in real estate, although at the turn of the century the hot new thing was high tech gadgetry and services, so the planet could be wired.

The most recent one was in real estate, though. This is the quickest place to stash speculative capital when the markets don't have enough other products on offer. You had builders who still wanted to build, plumbers who still wanted to plumb, sales agents who still wanted to sell.. the only problem was, everyone who was qualified to own a house already owned one.

So how to tap that remaining market.. those millions of families who should have stayed renters? Easy. Delete the rules preventing no-doc, no-down payment, interest-only balloon mortgages. And make sure the government backs them to the hilt, as the originators all well know they are pure self destructing market dynamite. Then sell those bad boys by the million.. fast! All across the land you could hear the sound of bulldozers taking down what remained of the wooded areas outside of town. Everybody, for a short while, was just minting money while this new model played itself out.

What I'm saying is that there's part of the formula you haven't properly considered. And excess of funds in one area, combined with shortages in other areas, creates conditions for a wholesale destruction of value every few years. Back in 2002 it was about seven trillion that was destroyed. That was all money that, more properly and effectively deployed, could have been put to very productive use.

The problems came about precisely because the markets weren't well MANAGED. And millions of investors, each operating in his own best interest, failed to cumulatively create an engine that promoted prosperity. Collectively, they were their own worst enemies.

We could do this much better with better management. But, to concede your point, we've found the exercise to be a disastrous one when put into the hands of politicians influenced by those profiting from the unsustainable market conditions our politics perpetuate.

It's a problem in search of a solution. Not one to be ignored and left to its own devices, according to some unfounded laissez faire philosophy.

well said josephtrese
You're putting forth a strawman of course, you're defining your opposition in the light of your preference. You don't know how an interventionist would answer your hypothesis. Assuming we even accept the author's strawman definition of "interventionists" to begin with. Undoubtedly in this environment the scags would define bobjones as an interventionist, but the reality is somewhere between the extremes of the strawmen. Thus is reality. It is not black and white, it is not easily simplified into us vs. them. That said, your comment is thought provoking and mostly on the right path in my opinion. Nice. I'm with you on the point you make. Spock chose to sacrifice himself for the good of the many. To force him would be unjust.

That highlights the fraudulent manner conservatives choose to define the nature of tax policy. This is America, a democratic republic. Tax is not force, its the cost of living in the greatese land in the world. Don't like it? Leave. We all can vote and be active to change our system as we wish. We're even free to define things how we choose and criticize freely, but that doesn't make fraud anything other than fraud. MOdern conservatives have yet to learn this lesson.

Your comment also leaves a glaring question open, one I believe is probably the largest reason the differences are irreconcilable. Can we finally put to rest the fallcy the Bush Administration supported free markets? They removed/stifled regulation on the front end while allowing epic fraud on the back end. The FBI warned us about it 5 years ago for goodness sake. For some reason conservative idiots are unable to see this reality and instead choose the hobby of cheerleading for their philosophical comfort. They only see what is easy to see, what they choose to see. And they believe it as the whole truth.

The problem there was fraud
investors put faith in credit ratings, as you'd think they could since they're private companies. Right? Oops.

The piles of stinking crap had AAA stamped on them, so investors had no reason to think it was actually piles of crap they were buying.

I would add, the fraud and failure of the credit raters is just one domino in a long line that has led to this economic meltdown. A perfect storm.

Fraud guaranteed by the US government.
Freddie and Fannie guaranteed the securitized mortgages and banks used that fact to sell them around the world.

THE MARKET WAS NOT FREE!!!!!!!!
As I have pointed out many times, the FDIC forced banks into risky loans to satisfy CRA.

Freddie and Fannie guaranteed securitized mortgages.

In a free market, banks would assume all risk and would not be forced to lend to anyone they believed to be too great a risk.

Who made the rules?
"In helping potential counterparties to assess the creditworthiness of individual bond issues, Credit Rating Organizations (CROs) earn profits by producing classificatory information that regulators find helpful and that investors and guarantors use to compare credit spreads on issues of risky debt. However, CRO revenues come not from the investor or regulatory side, but from fees that issuers pay CROs for analyzing the credit quality of different issues.
Because regulatory agencies and many investors and bond insurers use CRO credit ratings to substitute for their own due diligence, the contract interest rate an issuer has to pay falls whenever its credit rating rises. Although accurate ratings benefit investors and issuers alike, issuers are asked to pay the freight because, once it is announced, a security’s credit rating becomes public knowledge. This asymmetric arrangement poses an obvious conflict of interest for CRO managers. Borrowers have an incentive to play different CROs against one another and to hold out for higher-than-appropriate ratings. "

http://www2.bc.edu/%7Ekaneeb/Who%20Should%20Bear%20Responsibility%20for%20Mistakes%20Made%20in%20Assigning%20Credit%20Ratings.doc

better rules
On the one hand you say, "a disastrous one when put into the hands of politicians influenced by those profiting", and on the other hand, "left to its own devices, according to some unfounded laissez faire philosopy".

It can't be both. If it were laissez faire, then you couldn't have crooked politicians being bought off. If it were business/political collusion then it wasn't laissezy faire.

It's the same old tired, typical left wing mantra that it was a free market, it didn't work, therefore we need a command economy. \

There was no free markek.

soak up the money
This is the same old fallacy you keep mentioning in differnt ways again. The too much money was printed and borrow by governments, so it's a government problem; they should do it.

Then you make another financial fallacy. You say some guys with too much money will invest properly, but some will just speculate on this you don't approve of; with the implication that they should be forced to behave in ways that YOU approve of, not themselves. If you do that, then it's not a free economy but some sort of planned, or command economy where you will have decisions made by politically motivated bearuocrats.

You also say that some sectors will be 'starved of funds'. This is also not true because when there is a lot of excess money, the cost of money always goes down, like any commodity, and it then costs less to lend it. A free market handles that aspect too without and interference from politicians that like to pick favorites for their own benefidt or misperceived social goals.

Your justifications for authoritrianism can never be on financial grounds.

You don't get it.
What matters is that the players agree to the rules.

The best rules of a game are the rules agreed to in advance by the players and the fans.

What wrecks the game are rules imposed by a side for the benefit of some and not for all.

FDIC CRA rules 'encouraged' banks (and still encourage banks) to make risky loans and GSEs guaranteed those bad loans.

When the government won't decide on rules the players do as was done with blu ray disks and many other industry standard rules.

But money is power and the politicians won't easily give up that power to twist the rules for their special interest, reelection.

Surprise
"What matters is that the players agree to the rules."

I agree.

In fact, Obama agrees. That's why he asked everyone to get together so we could craft a good bipartisan effort to correct the crash.

The Republicans didn't agree. That's why they stonewalled the effort. Without offering anything of their own, as I recall.

So my conclusion would be that rules everyone can agree on will be impossible for as long as we have this kind of divisive spirit. The Rs have shot themselves in the foot in precisely the same way the Sunnis did back in Iraq's first election.. the one the Sunnis boycotted.

You have to play to win. And it's generally accepted that we need rule changes if we're going to have game changes. Only thing is, one side wants to boycott the effort.

The polls will likely teach them the mistake in this approach. The public is clamoring for better rules to control unstable financial markets. And things have gotten so bad it's a matter of survival now.

Change is going to be forced upon those who refuse to go along. My advice? Join the club. That way your voice can get heard.

Who promoted CRA?
How many Obama democrats were on the boards of Freddie and Fannie?

So insurance, then, is the enemy?
I think I see what you're getting at. It's the existence of insurance that promotes moral hazard.

You would like to live in a world where people who want to wager on disaster are not permitted to practise their trade? You think the custom of insurance should be outlawed?

Do you feel that it's only by prohibiting this class of people from getting into a business they see a need for, that FREEDOM can be upheld? I think there's a flaw in that reasoning.

I would agree only that Fannie and Freddie became mismanaged in ways that promoted instabilities in the market to develop and very quickly become massive in extent. And I think a very good case can be built upon the fact that they were corrupted from within.. by real estate and lending interests who applied subtle pressure.

What you would want to do first, I think, would be to look back and see just when these toxic loans began accumulating. I will suggest that this began during Dubya's first term in office. Prior to 2001 I don't think you'll find there was any greater default rate in subprime loans than there was in prime loans.

Why not take a look? Check it out.

The answer to your question
The push to change the rules and promote the massive origination of subprime loans, as a way to gather large numbers of loans together for securitization, would be the people behind deregulation itself:

"The subprime market has grown for a number of reasons.

"Deregulation allowed cross-fertilization between banks and financial service firms, while the federal government in the 1980s lifted mortgage interest ceilings. Congress in 1986 ended the deductibility of consumer debt, such as credit card payments, though still letting filers deduct mortgage interest. The change provided incentives for refinancing. Even rates for subprime loans at 3 percentage points above prime loans, or about 8% to 9% now, are lower than many 18% credit card rates.

"Advances in risk modeling have produced standardization. The bond market for subprime loans has provided cash.

"The majority of subprime mortgages are now sold by the initial lenders, bundled into bonds and offered to individual and institutional investors. In 1994, $11 billion of subprime mortgages were sold on the secondary market; in 2003, it was more than $200 billion."

The subprime market has grown for a number of reasons.

Deregulation allowed cross-fertilization between banks and financial service firms, while the federal government in the 1980s lifted mortgage interest ceilings. Congress in 1986 ended the deductibility of consumer debt, such as credit card payments, though still letting filers deduct mortgage interest. The change provided incentives for refinancing. Even rates for subprime loans at 3 percentage points above prime loans, or about 8% to 9% now, are lower than many 18% credit card rates.

Advances in risk modeling have produced standardization. The bond market for subprime loans has provided cash.

The majority of subprime mortgages are now sold by the initial lenders, bundled into bonds and offered to individual and institutional investors. In 1994, $11 billion of subprime mortgages were sold on the secondary market; in 2003, it was more than $200 billion.

http://www.usatoday.com/money/perfi/housing/2004-12-07-subprime-day-2-usat_x.htm

You can read more about it here:
http://www.finfacts.com/irelandbusinessnews/publish/article_10009416.shtml

http://www.realtor.org/rmodaily.nsf/pages/News2007020501?OpenDocument

I don't think this is something you can blame on Obama's people. It started gathering momentum back in 2002. The fingerprints belong to other forces in American life.

The answer to your question
The push to change the rules and promote the massive origination of subprime loans, as a way to gather large numbers of loans together for securitization, would be the people behind deregulation itself:

"The subprime market has grown for a number of reasons.

"Deregulation allowed cross-fertilization between banks and financial service firms, while the federal government in the 1980s lifted mortgage interest ceilings. Congress in 1986 ended the deductibility of consumer debt, such as credit card payments, though still letting filers deduct mortgage interest. The change provided incentives for refinancing. Even rates for subprime loans at 3 percentage points above prime loans, or about 8% to 9% now, are lower than many 18% credit card rates.

"Advances in risk modeling have produced standardization. The bond market for subprime loans has provided cash.

"The majority of subprime mortgages are now sold by the initial lenders, bundled into bonds and offered to individual and institutional investors. In 1994, $11 billion of subprime mortgages were sold on the secondary market; in 2003, it was more than $200 billion."

The subprime market has grown for a number of reasons.

Deregulation allowed cross-fertilization between banks and financial service firms, while the federal government in the 1980s lifted mortgage interest ceilings. Congress in 1986 ended the deductibility of consumer debt, such as credit card payments, though still letting filers deduct mortgage interest. The change provided incentives for refinancing. Even rates for subprime loans at 3 percentage points above prime loans, or about 8% to 9% now, are lower than many 18% credit card rates.

Advances in risk modeling have produced standardization. The bond market for subprime loans has provided cash.

The majority of subprime mortgages are now sold by the initial lenders, bundled into bonds and offered to individual and institutional investors. In 1994, $11 billion of subprime mortgages were sold on the secondary market; in 2003, it was more than $200 billion.

http://www.usatoday.com/money/perfi/housing/2004-12-07-subprime-day-2-usat_x.htm

You can read more about it here:
http://www.finfacts.com/irelandbusinessnews/publish/article_10009416.shtml

http://www.realtor.org/rmodaily.nsf/pages/News2007020501?OpenDocument

I don't think this is something you can blame on Obama's people. It started gathering momentum back in 2002. The fingerprints belong to other forces in American life.

Let's take a closer look
When the rules were in effect there wasn't a problem. Then when the rules were removed, all of a sudden there were problems.

It's like the rules on assault weapons. When the Brady Bill was passed, gun crimes dropped. Then when it was repealed they went back up. No amount of waving your hands in the air will obviate that fact.

http://clinton5.nara.gov/WH/Accomplishments/eightyears-06.html

Your quotation is less than enlightening. Yes, there were incentives for CROs to flub the information they passed along to potential investors. These became law when the commercial banks were deregulated, allowing them to sell mortgage-backed securities out of one department while running ratings agencies out of another.

This kind of thing never happened before the Reagan Revolution. So let's ask your question again. Who made the new rules? The ones that eliminated the old rules?

that doesn't make sense
First off, Freddie and Fannie are only two, somewhat minor players in causing the economic meltdown. They were stung bad by the housing bubble, they weren't leaders in originating bad loans. And as I understand it, they didn't securitize a bunch of high risk, toxic loans either.

They're not innocent though, and its questionable whether they should exist in the manner they do. FAct is, they do a lot to keep money flowing in the mortgage industry, despite the weakness caused by their government mandate. But I would join you marjon in further removing the companies from the tethers of government. Clinton put them under tighter regulation, closer to the realities of the free market experienced, but the association is still damaging in the false confidence it raises in greedy idiots.

But beyond that, how did Fannie and Freddie guarantee securitized mortgages sold by other banks to other banks around the world? A WAY bigger factor is the AAA rating these securities received from the CRA's.

How this all got started
Here's some useful background on how all this came about:

"Government, under Franklin Roosevelt, got serious about regulating financial markets after the first cycle of financial bubble and economic ruin in the 1920s. Then, as now, the abuses were complex in their detail but very simple in their essence. They included the sale of complex securities packaged in deceptive and misleading ways; far too much borrowing to finance speculative investments; and gross conflicts of interest on the part of insiders who stood to profit from flim-flams. When the speculative bubble burst in 1929, sellers overwhelmed buyers, many investors were wiped out, and the system of credit contracted, choking the rest of the economy.

"In the 1930s, the Roosevelt administration acted to prevent a repetition of the ruinous 1920s. Commercial banks were separated from investment banks, so that bankers could not prosper by underwriting bogus securities and foisting them on retail customers. Leverage was limited in order to rein in speculation with borrowed money. Investment banks, stock exchanges, and companies that publicly traded stocks were required to disclose more information to investors. Pyramid schemes and conflicts of interest were limited. The system worked very nicely until the 1970s -- when financial innovators devised end-runs around the regulated system, and regulators stopped keeping up with them."

http://www.prospect.org/cs/articles?article=seven_deadly_sins_of_deregulation_and_three_necessary_reforms

The article goes on to specifically describe the problem with selling securitised bonds based on bogus ratings. The collusion of the ratings agencies is essential to the scam.

"Allowing Unregulated Bond Rating Agencies to Decide What was Safe.

"Sub-prime is only the best known of a widespread fad known as "securitization." The idea is to turn loans into bonds. Bonds are given ratings by private companies that have official government recognition, such as Moody's and Standard and Poors, but no government regulation. These rating agencies have become thoroughly corrupted by conflicts of interest. If you want to package and sell bonds backed by risky loans, you go to a bond-rating agency and pay it a hefty fee. In return, the agency helps you manipulate the bond so that it qualifies for a triple-A rating, even if the underlying loans include many that are high-risk. Without the collusion of the bond-rating agencies, sub-prime lending never would have gotten off the ground, because it would not have found a mass market. Had regulators looked inside this black box, they would have shut it down. They might have needed new legislation, but they never asked for it. And public-minded regulators might have done a lot under existing law, since banks (which are regulated) were heavily implicated in the financing of sub-prime."

FDIC punishes a sound MA bank for not meeting CRA requirments.
Where is your answer to CRA coercion initiated by Carter and Clinton.

Fannie and Freddie were government agents.
How can such a market be free when the government is guaranteeing risky loans?

Fannie and Fredding guaranteed securitized loans.
Minor players?
Not according to Wachovia who started securitizing mortgages in '97, with a virtual AAA rating thanks to the government. And they securitized mortgages to meet government CRA obligations.

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