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>> I HAVE a solution for the problem of bankers who take risks that threaten the general public: Eliminate bonuses. I'm sorry but that's not the solution. The

>> I HAVE a solution for the problem of bankers who take risks that threaten the general public: Eliminate bonuses. I'm sorry but that's not the solution. The solution is for the government to stop bailing out private institutions, regardless of whether they are deemed "too big to fail." There are some incredibly elegant natural laws built into the fabric of the universe, one of which is expressed through economic systems in which corrupt, reckless institutions are eliminated because they go broke. The only way corrupt, reckless institutions are allowed to persist are when they are propped up by taxpayer money.

tptacek 15y ago
And if tens of thousands of people lose their jobs because the corporate credit markets freeze and otherwise-profitable companies can't fund their day-to-day operations, well, "externality" is just a fairy-tale idea thought up by ivory tower economists? I'm sorry to be so glib, but if the answer isn't as simple as "end bonuses", it also isn't as simple as "just let the banks fail".
- prostoalex 15y ago
  A system that's based on infallibility of a few large proxies is unstable to begin with.
- jwallaceparker 15y ago
  >> I'm sorry to be so glib, but if the answer isn't as simple as "end bonuses", it also isn't as simple as "just let the banks fail". But there is a "simple" difference between philosophies of how to address corruption in financial markets. >> And if tens of thousands of people lose their jobs because the corporate credit markets freeze and otherwise-profitable companies can't fund their day-to-day operations There is no way to avoid the day of reckoning. Don't pretend that any crises that were avoided in 2008 won't be that much larger when they eventually materialize.
  - drusenko 15y ago
    >> There is no way to avoid the day of reckoning. That would be true if it weren't for the fact that a good bit of our economy relies on confidence and trust. Confidence that there isn't a huge recession or depression in the near future, and trust that others will remain in business if you deposit/lend them money/invest. So in a very real sense, a panic, even if it isn't based on anything fundamental, can set you back very significantly.
- nickik 15y ago
  The only reason the money marked freezed up is because everybody thought the fed would bail out all banks (greenspan put). When Lehman-Brother failed they all went creazy because the knew alot of banks war acctually bad.
  - inthewoods 15y ago
    I don't think so - the money market froze up because everyone was worried about a failure of the overall system and therefore was not willing to loan money - they wanted all money to be at home. Thus, the Fed stepped in as the lender of last resort.
    - nickik 15y ago
      1) Why didn't it happen after the Bear stearns bust then? The banks had simular balance sheets, the only diffrence is the saving. 2) Ok lets asume your right: Im against a fed in general but acting as a lender of last resort is the one of the few valid things the should do (sometimes). The problem is that the lender of last reserve thing is for banks that still are liquid and just need some cash now. A lot of banks like Lehman and other weren't liquid anymore and in that case its not really lending its more saving them. Banks that violate the golden rule of banking (lending long, borrowing short) should not get these kinds of lendings. The plaid at there own risk with ful knowlage what the do. Capitalism puniches this kind of stuff and acts as a filter. If no bank ever goes bust the banking sector will be much bigger then it normaly would (missalocation of resources). Little extra note: Lending as last reserve should be done with high rates (if a bank really only needs it to guard agains the run the can afford it) the fed just floded the banking sector with cheap money. Thats quite diffrent then beeing lender of last reserve.
      - inthewoods 15y ago
        1. It didn't happen with Bear Sterns because the street didn't believe, yet, that Bear going down would take down the entire financial system. That changed after that. 2. That is a fine argument - I agree with you that banks should not be saved. Unfortunately, when they get too big, then they threaten the system itself and that was the worry. But I agree that the proper approach would have been a pre-packaged bankruptcy aka the Swedish approach. Moreover, we should reinstate the laws that separated commercial banking from investment banking. And we should regulate the CDS market - a huge component of the system failure worry wasn't that an individual bank was going to fail - it was that all these different banks had CDSs to protect themselves. That created a stronger interconnection between the banks. Regulate the CDS market via a central marketplace with a clearing mechanism. On your last point, if the goal is to provide liquidity, lending at a high interest rate won't do it. The point is to keep the market being a market - if you have the high interest rates people won't borrow and the banks will just hold onto that capital, and the market will continue to be frozen. Runs on the bank are stopped by the FDIC which secures depositor money - so you're mixing up why a bank might need the money. Also, I'm really not talking about the individual depositors - I'm talking about the commercial paper market which serves business, not individuals.
graeme 15y ago
Did you read the article? In the third paragraph, he says it's impossible for a government to promise not to bail out banks. The banks will outmaneuver everyone when the time comes. Another way of making the same point: - We can't guarantee that future governments won't bail out banks. - We can discourage one-sided risk-taking by banning bonuses in institutions that likely would manage to convince the government to bail them out. Why not do the thing we can do?
- jwallaceparker 15y ago
  >> In the third paragraph, he says it's impossible for a government to promise not to bail out banks. I read the article. The solution is still to not bail out corrupt and reckless private institutions. This idea should not be obscured by concerns about what is politically viable. I'm not talking about what is politically viable. I'm talking about right versus wrong.
  - JabavuAdams 15y ago
    We know that. So ... now what? Corruption exists. Power exists. When faced with this reality, what do you do to shift towards a reality with less corruption and power imbalance? Saying to the powerful, and corrupt: "Don't do that -- what you're doing is wrong." is useless. If they had to listen to you they would be de facto not powerful.
    - jwallaceparker 15y ago
      >> what do you do to shift towards a reality with less corruption and power imbalance? Absolute power corrupts absolutely. Governments have absolute power. Businesses don't. Governments have the ability to point their guns at the populace and say, "You have to pay for these failing businesses or some very bad things will happen." Stop mixing government with business.
      - graeme 15y ago
        You're not disagreeing with anyone. Taleb, the above commentator, and myself all agree that banks shouldn't get bailouts. We also agree that murder is bad. But saying "murder is bad" doesn't stop murder. Likewise, saying "bailouts are bad" won't stop a future bailout. If you think Taleb's idea to limit bonuses is bad, then say so. But don't attack an argument he didn't make.
jcampbell1 15y ago
> The solution is for the government to stop bailing out private institutions, regardless of whether they are deemed "too big to fail." We tried that by letting Lehman go bankrupt. While your "solution" has a ton of populist appeal, it seems lack an understanding of the events of the past few years. Let's accept the fact that banks are going to fail, and ask the government work on the "too big" part. Denying that it is even possible to be "too big to fail" is only compounding the problem.

tptacek 15y ago

And if tens of thousands of people lose their jobs because the corporate credit markets freeze and otherwise-profitable companies can't fund their day-to-day operations, well, "externality" is just a fairy-tale idea thought up by ivory tower economists? I'm sorry to be so glib, but if the answer isn't as simple as "end bonuses", it also isn't as simple as "just let the banks fail".

prostoalex 15y ago
A system that's based on infallibility of a few large proxies is unstable to begin with.
jwallaceparker 15y ago
>> I'm sorry to be so glib, but if the answer isn't as simple as "end bonuses", it also isn't as simple as "just let the banks fail". But there is a "simple" difference between philosophies of how to address corruption in financial markets. >> And if tens of thousands of people lose their jobs because the corporate credit markets freeze and otherwise-profitable companies can't fund their day-to-day operations There is no way to avoid the day of reckoning. Don't pretend that any crises that were avoided in 2008 won't be that much larger when they eventually materialize.
- drusenko 15y ago
  >> There is no way to avoid the day of reckoning. That would be true if it weren't for the fact that a good bit of our economy relies on confidence and trust. Confidence that there isn't a huge recession or depression in the near future, and trust that others will remain in business if you deposit/lend them money/invest. So in a very real sense, a panic, even if it isn't based on anything fundamental, can set you back very significantly.
nickik 15y ago
The only reason the money marked freezed up is because everybody thought the fed would bail out all banks (greenspan put). When Lehman-Brother failed they all went creazy because the knew alot of banks war acctually bad.
- inthewoods 15y ago
  I don't think so - the money market froze up because everyone was worried about a failure of the overall system and therefore was not willing to loan money - they wanted all money to be at home. Thus, the Fed stepped in as the lender of last resort.
  - nickik 15y ago
    1) Why didn't it happen after the Bear stearns bust then? The banks had simular balance sheets, the only diffrence is the saving. 2) Ok lets asume your right: Im against a fed in general but acting as a lender of last resort is the one of the few valid things the should do (sometimes). The problem is that the lender of last reserve thing is for banks that still are liquid and just need some cash now. A lot of banks like Lehman and other weren't liquid anymore and in that case its not really lending its more saving them. Banks that violate the golden rule of banking (lending long, borrowing short) should not get these kinds of lendings. The plaid at there own risk with ful knowlage what the do. Capitalism puniches this kind of stuff and acts as a filter. If no bank ever goes bust the banking sector will be much bigger then it normaly would (missalocation of resources). Little extra note: Lending as last reserve should be done with high rates (if a bank really only needs it to guard agains the run the can afford it) the fed just floded the banking sector with cheap money. Thats quite diffrent then beeing lender of last reserve.
    - inthewoods 15y ago
      1. It didn't happen with Bear Sterns because the street didn't believe, yet, that Bear going down would take down the entire financial system. That changed after that. 2. That is a fine argument - I agree with you that banks should not be saved. Unfortunately, when they get too big, then they threaten the system itself and that was the worry. But I agree that the proper approach would have been a pre-packaged bankruptcy aka the Swedish approach. Moreover, we should reinstate the laws that separated commercial banking from investment banking. And we should regulate the CDS market - a huge component of the system failure worry wasn't that an individual bank was going to fail - it was that all these different banks had CDSs to protect themselves. That created a stronger interconnection between the banks. Regulate the CDS market via a central marketplace with a clearing mechanism. On your last point, if the goal is to provide liquidity, lending at a high interest rate won't do it. The point is to keep the market being a market - if you have the high interest rates people won't borrow and the banks will just hold onto that capital, and the market will continue to be frozen. Runs on the bank are stopped by the FDIC which secures depositor money - so you're mixing up why a bank might need the money. Also, I'm really not talking about the individual depositors - I'm talking about the commercial paper market which serves business, not individuals.

graeme 15y ago

Did you read the article? In the third paragraph, he says it's impossible for a government to promise not to bail out banks. The banks will outmaneuver everyone when the time comes. Another way of making the same point: - We can't guarantee that future governments won't bail out banks. - We can discourage one-sided risk-taking by banning bonuses in institutions that likely would manage to convince the government to bail them out. Why not do the thing we can do?

jwallaceparker 15y ago
>> In the third paragraph, he says it's impossible for a government to promise not to bail out banks. I read the article. The solution is still to not bail out corrupt and reckless private institutions. This idea should not be obscured by concerns about what is politically viable. I'm not talking about what is politically viable. I'm talking about right versus wrong.
- JabavuAdams 15y ago
  We know that. So ... now what? Corruption exists. Power exists. When faced with this reality, what do you do to shift towards a reality with less corruption and power imbalance? Saying to the powerful, and corrupt: "Don't do that -- what you're doing is wrong." is useless. If they had to listen to you they would be de facto not powerful.
  - jwallaceparker 15y ago
    >> what do you do to shift towards a reality with less corruption and power imbalance? Absolute power corrupts absolutely. Governments have absolute power. Businesses don't. Governments have the ability to point their guns at the populace and say, "You have to pay for these failing businesses or some very bad things will happen." Stop mixing government with business.
    - graeme 15y ago
      You're not disagreeing with anyone. Taleb, the above commentator, and myself all agree that banks shouldn't get bailouts. We also agree that murder is bad. But saying "murder is bad" doesn't stop murder. Likewise, saying "bailouts are bad" won't stop a future bailout. If you think Taleb's idea to limit bonuses is bad, then say so. But don't attack an argument he didn't make.

jcampbell1 15y ago

> The solution is for the government to stop bailing out private institutions, regardless of whether they are deemed "too big to fail." We tried that by letting Lehman go bankrupt. While your "solution" has a ton of populist appeal, it seems lack an understanding of the events of the past few years. Let's accept the fact that banks are going to fail, and ask the government work on the "too big" part. Denying that it is even possible to be "too big to fail" is only compounding the problem.