4 ms·

Harsh lessons we may need to learn again

15 points by bensummers 17y ago

wendroid 17y ago
Adam Smith's warned us that self regulation of the financial industry would lead to the financial ruin of the country. His invisible hand concerned the freedom to trade physical goods. I don't have a bunch of snappy quotes available, the book is 1200+ pages long and took me 3 months to read, I wished I'd taken notes! "The legal rate ought not be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent would be lent to prodigals and projectors [promoters of fraudulent schemes], who alone would be willing to give this high interest. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it. When the legal rate of interest, on the contrary is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people than in those of the other. A great part of the capital of the country is thus thrown in the hands in which it is most likely to be employed with advantage." Adam Smith - On The Wealth Of Nations
- glymor 17y ago
  High interest rates normally occur with high inflation making it cheaper to borrow. The "real" rate your paying back is interest-inflation. Prodigals and projectors borrow at a premium above the interest rate whatever the prevailing rate. Directly quoting Adam Smith is an argument via authority. Evolution doesn't rest on The Origin of the Species but on predictive power. Unless your interest is historical you would be better off reading a modern text. edit: Actually Smith is talking about Usury Laws.
  - wendroid 17y ago
    The quote was to illustrate that Smith wasn't anti-regulation.
    - deleted 17y ago
      [deleted]
mseebach 17y ago
Major Propaganda Vessel of Communist Country Denounces Capitalism; Hell Stays Hot; film at 11. I'm sorry for the cheap joke, but the op-ed doesn't even try to be coherent. Lesson one is that free markets don't work, even though 3/4 of the argument supporting it has to do with the huge government bail-out of the financial industry. Lesson two is that the reliance on that kind of bailout creates perverse incentives (and lesson one was that markets don't work?). Lesson three is that Keynesian policies do work. Which seems to contradict lesson one. (Yes, Keynesian policies do work. The debatable issues is whether they work better than letting the free-market work things out). I don't understand lesson four (mea culpa) and lesson five "is that not all innovation leads to a more efficient and productive economy". Well, duh, no. But bailing out the innovation that doesn't work doesn't lead to anything good, either.
- IsaacL 17y ago
  It's an exaggeration to call China Daily a propaganda vessel. Yes, I'm serious. Also, the present leadership of China has no real desire to denounce capitalism. Other than that, your criticisms are valid.
  - mseebach 17y ago
    > Also, the present leadership of China has no real desire to denounce capitalism. Not directly, but the more the people can be led to believe that the current state of wealth is due to the glorious policies of their benevolent leaders, the better. This column serves that purpose nicely.
- jhancock 17y ago
  "The author is an Economics Nobel laureate and university professor at Columbia University." Are you implying the author is being used as tool of the China government? Or that this isn't his original text and the "Propaganda Vessel" twisted his words? As for the China Daily and Shanghai Daily, I've read them regularly for close to 10 years and find the reporting to be mostly professional and many times more informative than U.S. mainstream reporting.
fauigerzigerk 17y ago
What I find kind of funny is how roles and identities are mixed up in texts like this to make everything appear wonderfully clear when it is not. He says: "In this case, too-big-to-fail financial institutions had perverse incentives: if they gambled and succeeded, they walked off with the profits; if they lost, the taxpayer would pay" So we have the banks and the tax-payers he says. Are these disjoint sets? No, these are roles and there are individuals, lots of individuals, who are both owners of banks _and_ tax-payers. The more taxes someone pays the more likely they are owners of banks as well. The perverse incentives were provided by these owners, demanding low risk and returns way above anything that could possibly be sustainable. He goes on to say "It certainly did not serve homeowners who are losing their homes, workers who have lost their jobs, retirees who have seen their retirement funds vanish, or taxpayers who paid hundreds of billions of dollars to bail out the banks." Homeowners are sadly losing their homes. Homes they wouldn't have been able to afford if it hadn't been for the reckless lending of banks. And those risky sup-prime loans, who bought them? Pension funds bought them (among others). Pension funds who demanded outsized profits for the benefit of exactly those people who now lost their retirement funds. If the banks had walked away with all the profits or were saved when they made mistakes then people would not have lost their retirement funds, because the banks' profits _are_ their retirement funds. Workers sadly lost their jobs. Jobs in the financial industry were lost. Construction workers lost their jobs building sup-prime homes. Many other people lost their jobs that used to be funded by people (themselves) borrowing like there's no tomorrow trusting in their homes gaining value and their retirement funds growing fat from fat bank profits. Now, is this a zero-sum game? Have only people lost who had gained from the same system before? No, of course not, there were indeed people who did not benefit much and are now suffering hardship. And there are rich people who benefited and did not lose much. But what Stiglitz does not say is that these people are few. Most people, particularly those who are tax-payers, are on both sides of the game in various different roles.
- yummyfajitas 17y ago
  Actually, there are a huge number of people who lost: home owners (as distinct from mortgage-owners) and renters. Both these groups were forced to subsidize mortgage holders and banks on the way up and on the way down.
teeja 17y ago
Where he published the article is funny. Who cares about theories? A pox on all their houses. His core observations are unassailable: * The bankers' pursuit of self-interest (greed) did not lead to the well-being of society * It certainly did not serve homeowners who are losing their homes, workers ... retirees ... or taxpayers. * Those who had preached fiscal restraint when it came to small welfare programs for the poor now clamored for the world's largest welfare program Our 'leadership' has failed us repeatedly. The appropriate response is obvious.
- anamax 17y ago
  > Those who had preached fiscal restraint when it came to small welfare programs for the poor now clamored for the world's largest welfare program What are you babbling about? The folks that brought us the financial crisis did claiming to be fighting poverty. Why do you think Fannie and Freddie were created and lied about mortage quality?

15 points by bensummers 17y ago

Adam Smith's warned us that self regulation of the financial industry would lead to the financial ruin of the country. His invisible hand concerned the freedom to trade physical goods. I don't have a bunch of snappy quotes available, the book is 1200+ pages long and took me 3 months to read, I wished I'd taken notes! "The legal rate ought not be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent would be lent to prodigals and projectors [promoters of fraudulent schemes], who alone would be willing to give this high interest. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it. When the legal rate of interest, on the contrary is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people than in those of the other. A great part of the capital of the country is thus thrown in the hands in which it is most likely to be employed with advantage." Adam Smith - On The Wealth Of Nations

glymor 17y ago
High interest rates normally occur with high inflation making it cheaper to borrow. The "real" rate your paying back is interest-inflation. Prodigals and projectors borrow at a premium above the interest rate whatever the prevailing rate. Directly quoting Adam Smith is an argument via authority. Evolution doesn't rest on The Origin of the Species but on predictive power. Unless your interest is historical you would be better off reading a modern text. edit: Actually Smith is talking about Usury Laws.
- wendroid 17y ago
  The quote was to illustrate that Smith wasn't anti-regulation.
  - deleted 17y ago
    [deleted]

mseebach 17y ago

Major Propaganda Vessel of Communist Country Denounces Capitalism; Hell Stays Hot; film at 11. I'm sorry for the cheap joke, but the op-ed doesn't even try to be coherent. Lesson one is that free markets don't work, even though 3/4 of the argument supporting it has to do with the huge government bail-out of the financial industry. Lesson two is that the reliance on that kind of bailout creates perverse incentives (and lesson one was that markets don't work?). Lesson three is that Keynesian policies do work. Which seems to contradict lesson one. (Yes, Keynesian policies do work. The debatable issues is whether they work better than letting the free-market work things out). I don't understand lesson four (mea culpa) and lesson five "is that not all innovation leads to a more efficient and productive economy". Well, duh, no. But bailing out the innovation that doesn't work doesn't lead to anything good, either.

IsaacL 17y ago
It's an exaggeration to call China Daily a propaganda vessel. Yes, I'm serious. Also, the present leadership of China has no real desire to denounce capitalism. Other than that, your criticisms are valid.
- mseebach 17y ago
  > Also, the present leadership of China has no real desire to denounce capitalism. Not directly, but the more the people can be led to believe that the current state of wealth is due to the glorious policies of their benevolent leaders, the better. This column serves that purpose nicely.
jhancock 17y ago
"The author is an Economics Nobel laureate and university professor at Columbia University." Are you implying the author is being used as tool of the China government? Or that this isn't his original text and the "Propaganda Vessel" twisted his words? As for the China Daily and Shanghai Daily, I've read them regularly for close to 10 years and find the reporting to be mostly professional and many times more informative than U.S. mainstream reporting.

fauigerzigerk 17y ago

What I find kind of funny is how roles and identities are mixed up in texts like this to make everything appear wonderfully clear when it is not. He says: "In this case, too-big-to-fail financial institutions had perverse incentives: if they gambled and succeeded, they walked off with the profits; if they lost, the taxpayer would pay" So we have the banks and the tax-payers he says. Are these disjoint sets? No, these are roles and there are individuals, lots of individuals, who are both owners of banks _and_ tax-payers. The more taxes someone pays the more likely they are owners of banks as well. The perverse incentives were provided by these owners, demanding low risk and returns way above anything that could possibly be sustainable. He goes on to say "It certainly did not serve homeowners who are losing their homes, workers who have lost their jobs, retirees who have seen their retirement funds vanish, or taxpayers who paid hundreds of billions of dollars to bail out the banks." Homeowners are sadly losing their homes. Homes they wouldn't have been able to afford if it hadn't been for the reckless lending of banks. And those risky sup-prime loans, who bought them? Pension funds bought them (among others). Pension funds who demanded outsized profits for the benefit of exactly those people who now lost their retirement funds. If the banks had walked away with all the profits or were saved when they made mistakes then people would not have lost their retirement funds, because the banks' profits _are_ their retirement funds. Workers sadly lost their jobs. Jobs in the financial industry were lost. Construction workers lost their jobs building sup-prime homes. Many other people lost their jobs that used to be funded by people (themselves) borrowing like there's no tomorrow trusting in their homes gaining value and their retirement funds growing fat from fat bank profits. Now, is this a zero-sum game? Have only people lost who had gained from the same system before? No, of course not, there were indeed people who did not benefit much and are now suffering hardship. And there are rich people who benefited and did not lose much. But what Stiglitz does not say is that these people are few. Most people, particularly those who are tax-payers, are on both sides of the game in various different roles.

yummyfajitas 17y ago
Actually, there are a huge number of people who lost: home owners (as distinct from mortgage-owners) and renters. Both these groups were forced to subsidize mortgage holders and banks on the way up and on the way down.

teeja 17y ago

Where he published the article is funny. Who cares about theories? A pox on all their houses. His core observations are unassailable: * The bankers' pursuit of self-interest (greed) did not lead to the well-being of society * It certainly did not serve homeowners who are losing their homes, workers ... retirees ... or taxpayers. * Those who had preached fiscal restraint when it came to small welfare programs for the poor now clamored for the world's largest welfare program Our 'leadership' has failed us repeatedly. The appropriate response is obvious.

anamax 17y ago
> Those who had preached fiscal restraint when it came to small welfare programs for the poor now clamored for the world's largest welfare program What are you babbling about? The folks that brought us the financial crisis did claiming to be fighting poverty. Why do you think Fannie and Freddie were created and lied about mortage quality?