8 ms·

An even better solution would be to just allow the market to take its course. Thinking up ways to allow to big too fail institutions to keep existing is counter

by fleitz 15y ago

An even better solution would be to just allow the market to take its course. Thinking up ways to allow to big too fail institutions to keep existing is counterproductive. Just allow it to fail and people will stop doing those things. If your bank doesn't exist you can't very well collect a bonus from it. I bet you if the big money families started losing big chunks of their fortunes that there would be serious reform. Same with retirees and their pensions. How do you think the prosecution of bankers would go if bankers put the DOJ pension at risk?

st0p 15y ago
Ah, like what happened in 2008.
- fleitz 15y ago
  I wasn't at all aware of the market being allowed to take its course in 2008. (Save for LB/BS)
  - st0p 15y ago
    Well, the market successfully lobbied against regulation on CDO and CDS. It was the market that pushed the Gramm–Leach–Bliley Act. It was the market which gave AAA ratings to junk investments. I see your point, but I think that if the whole deregulation (and thus free market) hadn't happened, a lot of the damage could have been avoided.
    - fleitz 15y ago
      A partially deregulated market is not a free market. Also, if you read anything about the SEC you'll know that they don't enforce the current regulation so any point about extra regulations helping anything is largely moot. Also, regarding the 'regulated market' look at the massive frauds that took place at Fannie and Freddy which are essentially arms of the gov't. Look at how the Social Security System is administered if any corporate pension plan was run the same way they'd be thrown in jail (if the SEC cared to enforce the law). Look at the pressure on those institutions to create subprime loans under the federal housing laws. Look at the Fed Reserve chief talking about how great ARM loans were. Regulators, market participants, law makers all conspired to create a toxic environment that was not stable in the long term. Yes, a lot of damage could be avoided if the gov't, regulators and market participants weren't going around telling everyone that they had guaranteed investments. To think that after passage of GLB we had a free market is incredibly naive.
      - Retric 15y ago
        Gov regulations did little to promote sub prime lending. The simple fact was once investors started to buy loans banks where free to make loans as fast as they could repackage and sell those loans. This inundated the housing market with cheap loans and drove up prices creating the bubble in the first place. Computer models built in the middle of a housing bubble without much historical data where easy to trick into thinking housing loans where overly safe investment which let people churn loans until the only people left where those least able to afford them. Toss in late night infomercials promoting get rich quick house flipping and the pump was primed with people willing to fudge the paper work. And loan servicing companies willing to look the other flip crap loans with little downside. The only thing that really hurt many of these company's is they ended up with to large a loan inventory, if they been a little leaner far fewer companies would have been at risk.
        anamax 15y ago
        > Gov regulations did little to promote sub prime lending. Actually, they did. See http://news.investors.com/Article/589858/201110311638/Housing-Crisis-Obama-Clinton-Subprime.htm http://news.investors.com/Article/589858/201110311638/Housin... . "At President Clinton's direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties." "The threat was codified in a 20-page "Policy Statement on Discrimination in Lending" and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining." http://www.ots.treas.gov/_files/25022.pdf http://www.ots.treas.gov/_files/25022.pdf Then there's Fannie and Freddie lying about the composition of the loans they were buying, which threw off everyone's risk evaluation.
        Retric 15y ago
        That's a stretch, if you look at the history of sub prime lending Clinton was out of office long before it took off. Most people would argue that subprime was a fairly healthy part of the overall loan / risk landscape until 2000. So, I think you need to look for slightly more recent causes. If you want to look for mis regulation the fed's stimulus to deal with .bust was a significant contributing factor. http://dallasfed.org/research/eclett/2007/el0711.html http://dallasfed.org/research/eclett/2007/el0711.html
  - cynicalkane 15y ago
    That's because they tried it, saw the global financial system freeze like a deer in headlights, and decided to backpedal.
barrkel 15y ago
That's a very naive perspective. The big money families, retirees etc. are precisely the people who won't let big organizations fail; it is those people that politicians are looking after when they spend taxpayers' money bailing them out, because those people are reliable sources of donations or votes. So you have to take a step back, and look at political incentives. How are you going to convince these people to support putting their capital at risk?
- jwallaceparker 15y ago
  >> That's a very naive perspective. It's still the correct solution. The correct solution is to let corrupt and reckless institutions fail. Just because the deck is stacked against the actual implementation of the correct solution because of 'big money families' and so on doesn't nullify the correctness of the solution.
  - fleitz 15y ago
    Exactly, which is why any non-free market solution will eventually accrue capital (or other benefits) to those in power, rather than to those who produce. See regulatory capture and moral hazard for why our system is screwed.
    - JabavuAdams 15y ago
      Ok, but who has the power to enforce this mythical free market against the powerful people who benefit from the current system? Power means never having to say you're sorry. If you're not part of the elite, your only realistic options are to become part of the elite, or to change the game (i.e. create a new elite including you and those you care about) in some way not easily anticipated / countered by the current elite.
    - barrkel 15y ago
      Well, free markets don't accrue capital to "those who produce" either; there's a lot of problems in completely free markets. Efficiency can't be achieved without complete information; since nobody is omniscient (never mind everybody), there will be plenty of inefficient allocation of capital not in proportion to production. Moreover, free markets have no moral content. Quite apart from unrestricted transactions creating injustice, free markets reward scarce resources in high demand. But something being in high demand does not make it virtuous - fashions change with the wind - and nor is there necessarily virtue in rewarding the owners of those scarce resources, which may be sheer luck. As a collective, we only want markets that are free to the degree that they are not also unjust; and that's a much harder problem.
pspeter3 15y ago
We already tried this in the 1930s and that didn't go so well. Banks are different than other business because they act like a heart to pump cash through our economy. Allowing banks to fail would only make it harder for new businesses to find cash and for people to trust saving their money.
- fleitz 15y ago
  Actually in the 30s we did exactly what we're doing now, deflating our currency, passing a bunch of legislation to prevent competition, disallowing people from holding solid investments, paying people to be unproductive, a massive expansion of government predicated upon a weird interpretation of the commerce clause, and surprise surprise, it's having the same effect it did in the 30s. Keep in mind that the economy 'failed' in 28, but it wasn't until FDR that things really got bad.
  - thecage411 15y ago
    Are you sure? I just pulled up the a graph of US GDP from Google: http://www.housingbubblebust.com/GDP/Depression.html http://www.housingbubblebust.com/GDP/Depression.html FDR took office in March of 1933, which looks like when things got better.
- anonymoushn 15y ago
  Actually, we tried this in the depression of 1920-21. We recovered so quickly that the depression is hardly notable enough to make it into a history class.
sethg 15y ago
In 1907, there was a financial panic leading to widespread bank runs. To quell the panic, J. P. Morgan brokered arrangements among other wealthy financiers to redirect capital to the banks that they considered weak but salvageable. After the dust cleared, Congress (and, for that matter, bank executives) decided that they would rather not have the stability of the American financial system depend on one rich man’s charisma. Thus the Federal Reserve was born.

by fleitz 15y ago

st0p 15y ago

Ah, like what happened in 2008.

fleitz 15y ago
I wasn't at all aware of the market being allowed to take its course in 2008. (Save for LB/BS)
- st0p 15y ago
  Well, the market successfully lobbied against regulation on CDO and CDS. It was the market that pushed the Gramm–Leach–Bliley Act. It was the market which gave AAA ratings to junk investments. I see your point, but I think that if the whole deregulation (and thus free market) hadn't happened, a lot of the damage could have been avoided.
  - fleitz 15y ago
    A partially deregulated market is not a free market. Also, if you read anything about the SEC you'll know that they don't enforce the current regulation so any point about extra regulations helping anything is largely moot. Also, regarding the 'regulated market' look at the massive frauds that took place at Fannie and Freddy which are essentially arms of the gov't. Look at how the Social Security System is administered if any corporate pension plan was run the same way they'd be thrown in jail (if the SEC cared to enforce the law). Look at the pressure on those institutions to create subprime loans under the federal housing laws. Look at the Fed Reserve chief talking about how great ARM loans were. Regulators, market participants, law makers all conspired to create a toxic environment that was not stable in the long term. Yes, a lot of damage could be avoided if the gov't, regulators and market participants weren't going around telling everyone that they had guaranteed investments. To think that after passage of GLB we had a free market is incredibly naive.
    - Retric 15y ago
      Gov regulations did little to promote sub prime lending. The simple fact was once investors started to buy loans banks where free to make loans as fast as they could repackage and sell those loans. This inundated the housing market with cheap loans and drove up prices creating the bubble in the first place. Computer models built in the middle of a housing bubble without much historical data where easy to trick into thinking housing loans where overly safe investment which let people churn loans until the only people left where those least able to afford them. Toss in late night infomercials promoting get rich quick house flipping and the pump was primed with people willing to fudge the paper work. And loan servicing companies willing to look the other flip crap loans with little downside. The only thing that really hurt many of these company's is they ended up with to large a loan inventory, if they been a little leaner far fewer companies would have been at risk.
      - anamax 15y ago
        > Gov regulations did little to promote sub prime lending. Actually, they did. See http://news.investors.com/Article/589858/201110311638/Housing-Crisis-Obama-Clinton-Subprime.htm http://news.investors.com/Article/589858/201110311638/Housin... . "At President Clinton's direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties." "The threat was codified in a 20-page "Policy Statement on Discrimination in Lending" and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining." http://www.ots.treas.gov/_files/25022.pdf http://www.ots.treas.gov/_files/25022.pdf Then there's Fannie and Freddie lying about the composition of the loans they were buying, which threw off everyone's risk evaluation.
        Retric 15y ago
        That's a stretch, if you look at the history of sub prime lending Clinton was out of office long before it took off. Most people would argue that subprime was a fairly healthy part of the overall loan / risk landscape until 2000. So, I think you need to look for slightly more recent causes. If you want to look for mis regulation the fed's stimulus to deal with .bust was a significant contributing factor. http://dallasfed.org/research/eclett/2007/el0711.html http://dallasfed.org/research/eclett/2007/el0711.html
- cynicalkane 15y ago
  That's because they tried it, saw the global financial system freeze like a deer in headlights, and decided to backpedal.

barrkel 15y ago

That's a very naive perspective. The big money families, retirees etc. are precisely the people who won't let big organizations fail; it is those people that politicians are looking after when they spend taxpayers' money bailing them out, because those people are reliable sources of donations or votes. So you have to take a step back, and look at political incentives. How are you going to convince these people to support putting their capital at risk?

jwallaceparker 15y ago
>> That's a very naive perspective. It's still the correct solution. The correct solution is to let corrupt and reckless institutions fail. Just because the deck is stacked against the actual implementation of the correct solution because of 'big money families' and so on doesn't nullify the correctness of the solution.
- fleitz 15y ago
  Exactly, which is why any non-free market solution will eventually accrue capital (or other benefits) to those in power, rather than to those who produce. See regulatory capture and moral hazard for why our system is screwed.
  - JabavuAdams 15y ago
    Ok, but who has the power to enforce this mythical free market against the powerful people who benefit from the current system? Power means never having to say you're sorry. If you're not part of the elite, your only realistic options are to become part of the elite, or to change the game (i.e. create a new elite including you and those you care about) in some way not easily anticipated / countered by the current elite.
  - barrkel 15y ago
    Well, free markets don't accrue capital to "those who produce" either; there's a lot of problems in completely free markets. Efficiency can't be achieved without complete information; since nobody is omniscient (never mind everybody), there will be plenty of inefficient allocation of capital not in proportion to production. Moreover, free markets have no moral content. Quite apart from unrestricted transactions creating injustice, free markets reward scarce resources in high demand. But something being in high demand does not make it virtuous - fashions change with the wind - and nor is there necessarily virtue in rewarding the owners of those scarce resources, which may be sheer luck. As a collective, we only want markets that are free to the degree that they are not also unjust; and that's a much harder problem.

pspeter3 15y ago

We already tried this in the 1930s and that didn't go so well. Banks are different than other business because they act like a heart to pump cash through our economy. Allowing banks to fail would only make it harder for new businesses to find cash and for people to trust saving their money.

fleitz 15y ago
Actually in the 30s we did exactly what we're doing now, deflating our currency, passing a bunch of legislation to prevent competition, disallowing people from holding solid investments, paying people to be unproductive, a massive expansion of government predicated upon a weird interpretation of the commerce clause, and surprise surprise, it's having the same effect it did in the 30s. Keep in mind that the economy 'failed' in 28, but it wasn't until FDR that things really got bad.
- thecage411 15y ago
  Are you sure? I just pulled up the a graph of US GDP from Google: http://www.housingbubblebust.com/GDP/Depression.html http://www.housingbubblebust.com/GDP/Depression.html FDR took office in March of 1933, which looks like when things got better.
anonymoushn 15y ago
Actually, we tried this in the depression of 1920-21. We recovered so quickly that the depression is hardly notable enough to make it into a history class.

sethg 15y ago

In 1907, there was a financial panic leading to widespread bank runs. To quell the panic, J. P. Morgan brokered arrangements among other wealthy financiers to redirect capital to the banks that they considered weak but salvageable. After the dust cleared, Congress (and, for that matter, bank executives) decided that they would rather not have the stability of the American financial system depend on one rich man’s charisma. Thus the Federal Reserve was born.