9 ms·

Devil's advocate: 2008 was bad because of regulatory failures (specifically deregulation). Lack of transparency was only part of the problem. So if you want t

Devil's advocate: 2008 was bad because of regulatory failures (specifically deregulation). Lack of transparency was only part of the problem. So if you want to avoid 2008 in cryptocurrency, the answer would be more regulation, not less.

grenoire 5y ago
Right, OP, CDOs were also very innovative when they first got rolled out!
cwkoss 5y ago
Was 2008 an issue of lack of regulation or lack of enforcement? I thought it was more about "too big to fail" attitudes preventing enforcement from being fairly applied to the largest participants.
- LatteLazy 5y ago
  Too big to fair came after 2008. Before then it was assumed that if a large institution did fail it would be orderly and the system could take the shock. That turned out to be wrong when it did happen...
- jcranmer 5y ago
  It's a little unclear, because (like many things in public policy) there's several putative explanations for what caused the crises, peoples' preconceived notions color which ones they favor, and it's manifestly unclear who is right. And it should be remembered that "everyone" is a perfectly plausible answer. At a broader level, there is most consensus on the idea that the key failure in 2008 was that no one--neither investors nor creditors nor credit-rating agencies nor regulators--correctly understood the risk profiles of the new financial products, and things that were thought to be very safe or at least combined uncorrelated risk profiles suddenly started all taking in unison at the same time.
  - mullingitover 5y ago
    > It's a little unclear, because (like many things in public policy) there's several putative explanations for what caused the crises, peoples' preconceived notions color which ones they favor, and it's manifestly unclear who is right. I thought 2008's cause was perfectly clear: the banks all sold insurance policies on each other (in the form of credit default swaps) that they couldn't fulfill. When one bank went under due to bad bets in the market, this triggered policies that, if fulfilled, would bankrupt the next bank. That in turn bankrupted the next, and so on. People focus on the conditions that bankrupted the first bank, but that was just the final snowflake that happened to trigger the avalanche.
    - secondaryacct 5y ago
      But why was there bad debt on the market ? Yes the defense mechanisms couldnt work since they were interdependent, but I saw a hairdresser on tv talking of how she used to flip 600k houses before the crisis, makes me think she s also part of the problem by failing to obey general accounting principles (dont borrow what you cant repay just because market goes up). And no, saying natural idiocy in the citizenry is to be embraced, does not simplify the issue: it was caused by natural idiocy which was enabled by lax enforcement. There are countries where your credit score matters not at all and your current ability to actually repay is analyzed. You can fix the banks all you want but if people take stupid loans you ll never run out of ways to crash.
      - mullingitover 5y ago
        > But why was there bad debt on the market ? This is my point, the focus on bad debt is like obsessing over the last snowflake that fell before the avalanche. The bad debt didn't cause the avalanche, the underlying structure of credit default swap contracts between the banks did. They were all writing each other checks that they couldn't cash. If the underlying problem of unaccounted-for credit default swaps didn't exist, the bad debt would've just been another snowflake falling on the ground, essentially.
        5y ago
- tw04 5y ago
  It was entirely a result of deregulation. https://en.m.wikipedia.org/wiki/Glass%E2%80%93Steagall_legislation https://en.m.wikipedia.org/wiki/Glass%E2%80%93Steagall_legis...
- intended 5y ago
  Not sure if it’s not both. In America, the SEC had been systematic defunded and weakened - over successive administrations. The argument, in the years before 2008, was that more regulation only holds wealth creator back. Especially when the market self corrects itself. To suggest otherwise was even nearly un-American. The SEC policy had adapted to pursue slam dunk cases, ensuring that it’s resources were spent in achieving some form of guaranteed deterrence. However things like CDOs and the rest were out of its reach. This leads to the low oversight. The self correcting aspect of the market was also more mythical than practical. As a financial analyst we were encouraged to ensure that model predictions were within range of other firms. Multiples out of range meant that you were likely wrong. Faith in the market became a shortcut meaning “someone else has done the homework”. With all the rating agencies beholden to the purchaser of the rating, you start setting up the dominos for 2008.
beiller 5y ago
Hot take: 2008 was caused by over regulation, resulting in broken incentives for rating agencies and preventing any real bad outcomes from them just rating everything as great.
- ethbr0 5y ago
  Finding a trustworthy oracle is always a problem. Either you can let (systemically important) people buy whatever junk they want, or you can mandate a minimum bar. But if you mandate a minimum, who judges what does or doesn't meet it?
  - beiller 5y ago
    I don't think this is an oracle problem. I watch reviews online for products I want to buy. Seems to work fine. But let's say now legal action is threatened for any negative reviews. What happens to the trust now of online reviews?
    - marcosdumay 5y ago
      It's more than that. Do you read reviews paid by you or by the seller of the product they are reviewing?
      - smaryjerry 5y ago
        I think the rating system he referred to was supposed to be independen.
      - beiller 5y ago
        I've kinda lost track of the analogy at this point. I'm surprised I was downvoted so much. I didn't have a strong case to begin with. To try and carry on, if I was paying for product reviews like companies do for the rating agencies, I'd expect them to be even more accurate and impartial! If the companies (reviewees) are paying the reviewers (bribes?), I'd expect them to be crap. But companies are not paying Fitch to rate them are they. Other investors are paying Fitch for the supposed impartial review. But since high ratings makes markets go up, and monetary policy is greasing the wheels so that nothing can fail, it caused all ratings to creep up. Because after all the rating are based on empirical data and nothing is allowed to fail (bail out).
sunshinerag 5y ago
(OR) these sort of crisis cannot be fixed by regulations. Having more of the same may not necessarily fix the issue.
mbesto 5y ago
> So if you want to avoid 2008 in cryptocurrency, the answer would be more regulation, not less. To expand on this point. Deregulation with a federal reserve fallback is especially dangerous because it's essentially fake deregulation. When you know that you're too big to fail and the government is going to bail you then your risk to allocate capital effectively becomes zero.
- miohtama 5y ago
  I think the Boeing CEO (or some other airline) was famously quoted for this that they do not need any cash buffers, as the government will always bail them out, no matter what https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3571441 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3571441 Thus, it’s ok to spend extra cash to stock buybacks and maintain no cash reserves.
  - philwelch 5y ago
    I mean, he isn't wrong, is he? If he's wrong, then maybe the next time Boeing needs a bailout, we should make an example of them and not bail them out. If we don't have the balls to do that, why should they have a cash buffer?

grenoire 5y ago

Right, OP, CDOs were also very innovative when they first got rolled out!

cwkoss 5y ago

Was 2008 an issue of lack of regulation or lack of enforcement? I thought it was more about "too big to fail" attitudes preventing enforcement from being fairly applied to the largest participants.

LatteLazy 5y ago
Too big to fair came after 2008. Before then it was assumed that if a large institution did fail it would be orderly and the system could take the shock. That turned out to be wrong when it did happen...
jcranmer 5y ago
It's a little unclear, because (like many things in public policy) there's several putative explanations for what caused the crises, peoples' preconceived notions color which ones they favor, and it's manifestly unclear who is right. And it should be remembered that "everyone" is a perfectly plausible answer. At a broader level, there is most consensus on the idea that the key failure in 2008 was that no one--neither investors nor creditors nor credit-rating agencies nor regulators--correctly understood the risk profiles of the new financial products, and things that were thought to be very safe or at least combined uncorrelated risk profiles suddenly started all taking in unison at the same time.
- mullingitover 5y ago
  > It's a little unclear, because (like many things in public policy) there's several putative explanations for what caused the crises, peoples' preconceived notions color which ones they favor, and it's manifestly unclear who is right. I thought 2008's cause was perfectly clear: the banks all sold insurance policies on each other (in the form of credit default swaps) that they couldn't fulfill. When one bank went under due to bad bets in the market, this triggered policies that, if fulfilled, would bankrupt the next bank. That in turn bankrupted the next, and so on. People focus on the conditions that bankrupted the first bank, but that was just the final snowflake that happened to trigger the avalanche.
  - secondaryacct 5y ago
    But why was there bad debt on the market ? Yes the defense mechanisms couldnt work since they were interdependent, but I saw a hairdresser on tv talking of how she used to flip 600k houses before the crisis, makes me think she s also part of the problem by failing to obey general accounting principles (dont borrow what you cant repay just because market goes up). And no, saying natural idiocy in the citizenry is to be embraced, does not simplify the issue: it was caused by natural idiocy which was enabled by lax enforcement. There are countries where your credit score matters not at all and your current ability to actually repay is analyzed. You can fix the banks all you want but if people take stupid loans you ll never run out of ways to crash.
    - mullingitover 5y ago
      > But why was there bad debt on the market ? This is my point, the focus on bad debt is like obsessing over the last snowflake that fell before the avalanche. The bad debt didn't cause the avalanche, the underlying structure of credit default swap contracts between the banks did. They were all writing each other checks that they couldn't cash. If the underlying problem of unaccounted-for credit default swaps didn't exist, the bad debt would've just been another snowflake falling on the ground, essentially.
      - 5y ago
tw04 5y ago
It was entirely a result of deregulation. https://en.m.wikipedia.org/wiki/Glass%E2%80%93Steagall_legislation https://en.m.wikipedia.org/wiki/Glass%E2%80%93Steagall_legis...
intended 5y ago
Not sure if it’s not both. In America, the SEC had been systematic defunded and weakened - over successive administrations. The argument, in the years before 2008, was that more regulation only holds wealth creator back. Especially when the market self corrects itself. To suggest otherwise was even nearly un-American. The SEC policy had adapted to pursue slam dunk cases, ensuring that it’s resources were spent in achieving some form of guaranteed deterrence. However things like CDOs and the rest were out of its reach. This leads to the low oversight. The self correcting aspect of the market was also more mythical than practical. As a financial analyst we were encouraged to ensure that model predictions were within range of other firms. Multiples out of range meant that you were likely wrong. Faith in the market became a shortcut meaning “someone else has done the homework”. With all the rating agencies beholden to the purchaser of the rating, you start setting up the dominos for 2008.

beiller 5y ago

Hot take: 2008 was caused by over regulation, resulting in broken incentives for rating agencies and preventing any real bad outcomes from them just rating everything as great.

ethbr0 5y ago
Finding a trustworthy oracle is always a problem. Either you can let (systemically important) people buy whatever junk they want, or you can mandate a minimum bar. But if you mandate a minimum, who judges what does or doesn't meet it?
- beiller 5y ago
  I don't think this is an oracle problem. I watch reviews online for products I want to buy. Seems to work fine. But let's say now legal action is threatened for any negative reviews. What happens to the trust now of online reviews?
  - marcosdumay 5y ago
    It's more than that. Do you read reviews paid by you or by the seller of the product they are reviewing?
    - smaryjerry 5y ago
      I think the rating system he referred to was supposed to be independen.
    - beiller 5y ago
      I've kinda lost track of the analogy at this point. I'm surprised I was downvoted so much. I didn't have a strong case to begin with. To try and carry on, if I was paying for product reviews like companies do for the rating agencies, I'd expect them to be even more accurate and impartial! If the companies (reviewees) are paying the reviewers (bribes?), I'd expect them to be crap. But companies are not paying Fitch to rate them are they. Other investors are paying Fitch for the supposed impartial review. But since high ratings makes markets go up, and monetary policy is greasing the wheels so that nothing can fail, it caused all ratings to creep up. Because after all the rating are based on empirical data and nothing is allowed to fail (bail out).

sunshinerag 5y ago

(OR) these sort of crisis cannot be fixed by regulations. Having more of the same may not necessarily fix the issue.

mbesto 5y ago

> So if you want to avoid 2008 in cryptocurrency, the answer would be more regulation, not less. To expand on this point. Deregulation with a federal reserve fallback is especially dangerous because it's essentially fake deregulation. When you know that you're too big to fail and the government is going to bail you then your risk to allocate capital effectively becomes zero.

miohtama 5y ago
I think the Boeing CEO (or some other airline) was famously quoted for this that they do not need any cash buffers, as the government will always bail them out, no matter what https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3571441 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3571441 Thus, it’s ok to spend extra cash to stock buybacks and maintain no cash reserves.
- philwelch 5y ago
  I mean, he isn't wrong, is he? If he's wrong, then maybe the next time Boeing needs a bailout, we should make an example of them and not bail them out. If we don't have the balls to do that, why should they have a cash buffer?