5 ms·

It seems to me that bubbles only form to catastrophic sizes around the unregulated edges of markets. e.g. If not for the ineffectual IPO regulation, the dot-co

by roc 16y ago

It seems to me that bubbles only form to catastrophic sizes around the unregulated edges of markets. e.g. If not for the ineffectual IPO regulation, the dot-com boom couldn't have built so much irrational exuberance. Similarly with nonexistent regulation of derivatives and the ratings thereof during the real-estate bubble. And also with Savings & Loans being deregulated in the late 80s, leading directly to that real estate disaster.

lionhearted 16y ago
> It seems to me that bubbles only form to catastrophic sizes around the unregulated edges of markets. Most recent economic crisis was primarily driven to crazy low interest rates, set by the Federal Reserve. Everything else about the crisis pales in significance compared to the disaster that loads of almost free cash causes. If you set interest rates below the price of inflation, you're always going to have a short, illusory boom, followed by a massive crash. Like, around 100% of the time that's going to happen. Those interest rates were set by regulation. Derivatives shenanigans is nowhere near as scary as effectively-free-money, which always breaks things always.
- Retric 16y ago
  Inflation is not a constant. The single most destructive force in a crash is deflationary pressure which can quickly feed on its self and spiral out of control. PS: When people start buying T-Bills with negative interest rates you know you have a problem. (This has happened on a few occations over the last few years.)
  - lionhearted 16y ago
    > The single most destructive force in a crash is deflationary pressure which can quickly feed on its self and spiral out of control. Well, that's part of the Keynesian view yes. I'm personally of the belief that currency-fuckery causes crashes in the first place, and that more currency-fuckery isn't the answer [1]. But let's just say Keynes is right for now. That still doesn't explain why the healthy Clinton/Bush economies had crazy-low interest rates, which was the main cause of this mess. [1] While it has a humorous spin, the Keynes vs. Hayek rap is incredibly well informed about both positions, and it's pretty easy to follow and entertaining - http://www.youtube.com/watch?v=d0nERTFo-Sk http://www.youtube.com/watch?v=d0nERTFo-Sk
    - borism 16y ago
      Monetarism has very little to do with Keynes, its' main figurehead is Milton Friedman (not too far to the left of political spectrum from your beloved Hayek).
  - brc 16y ago
    Give me deflation over hyperinflation any day.
yummyfajitas 16y ago
I'm not sure how you can possibly characterize the housing bubble as occurring in the "unregulated edges" of markets. Banks purchased AAA rated MBS because they were legally obligated to own AAA securities (by Basel I and II) [1]. The securities underlying an MBS are heavily subsidized and regulated by the government, and several major players in the market were backed by the government [2]. Derivatives are a sideshow. The speculative bubble was created by banks and real estate speculators ("homeowners", as politicians call them, even though most of them only own highly leveraged call options on a house), with the strong encouragement of the government. [1] You can satisfy capitalization requirements by purchasing AAA bonds from another party. [2] In spite of assorted claims that they had nothing to do with the crisis, the GSEs seem to require the biggest bailouts.
- roc 16y ago
  The ratings were obviously unregulated. The oversight committees that received reports that agencies were slapping AAA on garbage outright ignored those complaints. The unregulated derivatives were a necessary instrument to obscure the risk of the underlying assets. I don't know how you could imagine institutional investors being conned into thinking trash tranches of subprime mortgages were safe investments without derivatives obscuring their contents and ratings agencies blessing garbage as AAA. If the bubble only wiped out speculators, it would have been the sideshow. The money that chases high risk is a rounding error compared to the money that can only chase 'safe' investments. Without derivatives and fraudulent ratings the bubble couldn't have ensnared nearly as much money, the banks couldn't have become so precariously leveraged and the system itself wouldn't have been on the brink.
  - yummyfajitas 16y ago
    Let me get this straight. The government requires banks and other financial institutions to purchase securities rated AAA by one of five ratings agencies. As of 2006, the ratings agencies could even be subject to some penalties if they screw up the ratings in certain ways. The ratings agencies are all selected by the SEC. The downside risk is bounded below by the implicit guarantee of a government bailout, and again the biggest players in the market are government sponsored entities. I think we have a very different definition of "unregulated". Also, I don't know where you get the idea that the crash of the housing bubble was somehow based on people being conned into buying securities that were too complex to understand. An MBS is a fairly simple security, and so far MBS's have done exactly what they are supposed to do: allow you to take exposure to a long position on housing.

by roc 16y ago

lionhearted 16y ago

> It seems to me that bubbles only form to catastrophic sizes around the unregulated edges of markets. Most recent economic crisis was primarily driven to crazy low interest rates, set by the Federal Reserve. Everything else about the crisis pales in significance compared to the disaster that loads of almost free cash causes. If you set interest rates below the price of inflation, you're always going to have a short, illusory boom, followed by a massive crash. Like, around 100% of the time that's going to happen. Those interest rates were set by regulation. Derivatives shenanigans is nowhere near as scary as effectively-free-money, which always breaks things always.

Retric 16y ago
Inflation is not a constant. The single most destructive force in a crash is deflationary pressure which can quickly feed on its self and spiral out of control. PS: When people start buying T-Bills with negative interest rates you know you have a problem. (This has happened on a few occations over the last few years.)
- lionhearted 16y ago
  > The single most destructive force in a crash is deflationary pressure which can quickly feed on its self and spiral out of control. Well, that's part of the Keynesian view yes. I'm personally of the belief that currency-fuckery causes crashes in the first place, and that more currency-fuckery isn't the answer [1]. But let's just say Keynes is right for now. That still doesn't explain why the healthy Clinton/Bush economies had crazy-low interest rates, which was the main cause of this mess. [1] While it has a humorous spin, the Keynes vs. Hayek rap is incredibly well informed about both positions, and it's pretty easy to follow and entertaining - http://www.youtube.com/watch?v=d0nERTFo-Sk http://www.youtube.com/watch?v=d0nERTFo-Sk
  - borism 16y ago
    Monetarism has very little to do with Keynes, its' main figurehead is Milton Friedman (not too far to the left of political spectrum from your beloved Hayek).
- brc 16y ago
  Give me deflation over hyperinflation any day.

yummyfajitas 16y ago

I'm not sure how you can possibly characterize the housing bubble as occurring in the "unregulated edges" of markets. Banks purchased AAA rated MBS because they were legally obligated to own AAA securities (by Basel I and II) [1]. The securities underlying an MBS are heavily subsidized and regulated by the government, and several major players in the market were backed by the government [2]. Derivatives are a sideshow. The speculative bubble was created by banks and real estate speculators ("homeowners", as politicians call them, even though most of them only own highly leveraged call options on a house), with the strong encouragement of the government. [1] You can satisfy capitalization requirements by purchasing AAA bonds from another party. [2] In spite of assorted claims that they had nothing to do with the crisis, the GSEs seem to require the biggest bailouts.

roc 16y ago
The ratings were obviously unregulated. The oversight committees that received reports that agencies were slapping AAA on garbage outright ignored those complaints. The unregulated derivatives were a necessary instrument to obscure the risk of the underlying assets. I don't know how you could imagine institutional investors being conned into thinking trash tranches of subprime mortgages were safe investments without derivatives obscuring their contents and ratings agencies blessing garbage as AAA. If the bubble only wiped out speculators, it would have been the sideshow. The money that chases high risk is a rounding error compared to the money that can only chase 'safe' investments. Without derivatives and fraudulent ratings the bubble couldn't have ensnared nearly as much money, the banks couldn't have become so precariously leveraged and the system itself wouldn't have been on the brink.
- yummyfajitas 16y ago
  Let me get this straight. The government requires banks and other financial institutions to purchase securities rated AAA by one of five ratings agencies. As of 2006, the ratings agencies could even be subject to some penalties if they screw up the ratings in certain ways. The ratings agencies are all selected by the SEC. The downside risk is bounded below by the implicit guarantee of a government bailout, and again the biggest players in the market are government sponsored entities. I think we have a very different definition of "unregulated". Also, I don't know where you get the idea that the crash of the housing bubble was somehow based on people being conned into buying securities that were too complex to understand. An MBS is a fairly simple security, and so far MBS's have done exactly what they are supposed to do: allow you to take exposure to a long position on housing.