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"This is excellent evidence that the system regulates itself." As it regulated itself with the current financial and economic crisis? Like AIG regulated itsel

"This is excellent evidence that the system regulates itself." As it regulated itself with the current financial and economic crisis? Like AIG regulated itself? Like Lehman Brothers, Bear Stearns, et al.?

manny 18y ago
are people still seriously thinking that this economic crises was because of greedy CEOs and capitalism? Jesus Christ. :|
- quoderat 18y ago
  I personally don't think it was caused by those things, though I am sure that there are those who do. I think the five major factors that contributed to it, in rough order of importance: 1) Too much leverage, without understanding the risks. 2) Trade imbalances causing capital flow imbalances. 3) Complete lack of regulation and lack of enforcement of existing regulation. 4) A culture of "gotta have it now." 5) Productivity surge that couldn't last. As for greedy CEOs, many of them were non-productive parasites on the system (John Thain, etc.), but it wasn't their fault. And as for capitalism, my observation was that it's going to change drastically, not that it was at fault.
  - kirse 18y ago
    I would agree with most of your reasons, but for each of them you need to ask "why" until you get to the real source of the problem. For the most part, the greediness of people is why we had such ridiculously leveraged financial securities and special-purpose vehicles etc. designed to stuff as many fistfuls of cash as possible into the pockets of those who could game the system the best. Greed was the cause, and insane levels of leverage were the flimsy supports for this recent collapse of the financial house of cards. Of course, that's not to say leverage is inherently bad, but in excess it clearly points the way to financial ruin.
    - quoderat 18y ago
      I agree with you. Well-stated. And that's why I feel that even if regulation isn't perfect, and even if it sometimes is counterproductive (which it is!), it can often help to stave off such things as this.
      - corentin 18y ago
        Well, then just how much did regulation helped prevent this whole fiasco?
        quoderat 18y ago
        That's my whole point. It didn't prevent it, but the lack of it sure contributed greatly to it all. The biggest single example: the exempting of the four largest investment banks from the previous 12-to-1 leverage rules, allowing them to leverage up to 40-to-1, thus greatly exacerbating the fallout and causing further follow-on crises. That, among many, many other things, would not have occurred without those IBs being exempted from previously-existing regulation. Do you really believe non-regulation will be the panacea for all these ills? Somalia is pretty unregulated. Maybe try your luck there.
        corentin 18y ago
        Companies doing risky stuff shouldn't be too surprised when they suddenly run out of good luck. On the other hand, if I were running a company and I knew that my buddies in Washington would end up bailing me out with other people's money because I'm "too big to fail", I would be a fool not to take as much risk as I can. With state capitalism, you can have your cake and eat it.
  - dantheman 18y ago
    I think you are missing the systemic causes -- the low cost of money and its devaluation through inflation cause makes taking risks more economical (safe investments lose money). The markets are more regulated now than they've ever been. The cause of this crises has been building for a long time, and goes back to the 70s when the united states went off the gold standard. Additionally, there were things that happened that never happened before. For instance selling stock in financial institutions, which incentivises risk taking. This of course led to a mistake on the public's part of not realizing what they were investing in was riskier than they thought. A culture of "gotta have it now." doesn't mean anything except that those participating in it will be poorer than those who don't, and lending to the first group is riskier than lending to the second so their interest rates should vary. Productivity is constantly increasing, and will be increasing at faster rates. As for CEOs if they were acting wrongly then their board, or shareholders should revolt. If it's a private company then the owner, if the CEO is the owner then it's his to do what he wants with it.
    - quoderat 18y ago
      Ah, the old gold standard canard again. Not even worth refuting these days, so I won't try. " As for CEOs if they were acting wrongly then their board, or shareholders should revolt." Hasn't happened yet, but it's a nice pie-in-the-sky fantasy. I'm perplexed by many people's ideas here that the best way the system self-corrects is by effectively allowing the system to self-immolate. Is there no better way? "Productivity is constantly increasing, and will be increasing at faster rates." Doubtful, but even if true, when will that productivity lead to better standards of living for all but the wealthy few? Incomes of the richest Americans more than doubled in the past eight years. Do you think they got twice as productive? Before you answer, remember that in the financial sector at least, in the last two years, banks have lost more money than they have made in profits in the last 2,500 years of banking — even adjusted for inflation.
      - pwk 18y ago
        Incomes of the richest Americans more than doubled in the past eight years. Do you think they got twice as productive? Well, lots of people are now coding in Ruby/Python/etc instead of Java/PHP/C++/etc. (Written only mostly tongue in cheek)
- noodle 18y ago
  greedy CEOs, no, not really. they're more a byproduct, i think. not all of capitalism, but some aspects of capitalism definitely did play into the problem, yes.
Dobbs 18y ago
The system was trying to regulate itself. Thats why the economic crisis is happening. The companies that are in trouble are ones that can not be maintained that either need to restructure them selves or die. In the infinite wisdom of our leaders they decided to stray from the theory of capitalism and interfere. Everyone likes to think that capitalism means that everything is happy daisy, but its not. If things go wrong in capitalism, then life can get hard but it will eventually self correct if you allow it.
- quoderat 18y ago
  And meanwhile, what happens to the people who are bankrupted, ruined, cannot eat or get health care, while the system self-corrects? Reasonably happy, non-malnourished people make better employees, you'll have to admit.
  - corentin 18y ago
    The system doesn't self-correct everywhere at the same time (unless there is a central bank point of failure, if you see where I'm going...), so if your company is bankrupt you can find a job elsewhere. Mind you, people who were careful with their money and didn't believe in the pipe dream of ever increasing home equity need not worry about what's going on (well, they need to worry about what the government is doing, but that's another matter).
    - redrobot5050 18y ago
      Um, we didn't have a central bank point of failure. We had 5 large investment banks, most of which had the intelligence to survive the first great depression. The major problem is that the American economy had become entirely dependent on consumer spending, which, because of a lack of real wage growth among the bottom 80% led to a massive expansion and dependence on credit. When the housing bubble burst, credit went cold turkey, and many defaulted on their debt because of their inflated lifestyle. As a result, everyone suffered. Consumers stopped spending, which lead to businesses credit lines being downgraded, leading to a halt in manufacturing and importing. The global ripples of having a force (like credit) simply disappear are obvious, just as they were right before the first great depression.
eds 18y ago
He didn't say each player would regulate itself, but that the system as a whole would regulate itself. The system did regulate the companies you mentioned--they went out of business. Unfortunately, the federal government threw the taxpayers under the bus in order to keep the system from working like it's supposed to.
- quoderat 18y ago
  Working like it was supposed to during, say, the Great Depression? That was a likely outcome if we'd followed the prescriptions you seem to advocate above.
jhickner 18y ago
Hybrid free/regulated systems like ours have all of the downsides of both approaches but none of the benefits. I do believe that the free market regulates itself, but we don't have a free market. In a free market, there would be no bailouts. In our system, on the other hand, wall street counts on bailouts. You don't leverage your company 40 to 1 unless you believe there's a safety net. It's in vogue to believe that everyone in finance is an idiot, but they're not. They do exactly what makes business sense within the rules of the market. And our rules say: leverage yourself as much as you can. The fed will be there to bail you out if you fail.
glymor 18y ago
Actually none of those companies regulated themselves. The federal government took on the role. Regulation has caused part of this crises via procyclical mark to market and capital requirements. Regulation also stipulated what kind of assets banks should have creating an enormous market in the deliberate obfuscation of risk. What is your suggestion? Just because you create regulation doesn't cause people to want to follow it. Nor do the affects end with or necessarily include the stated goal.
Andys 18y ago
I view it as, above all else, a failure of education. People can't teach their children what money really is, if they themselves don't understand fiat currency and the power that the central banks have to expand and contract money supply.

manny 18y ago

are people still seriously thinking that this economic crises was because of greedy CEOs and capitalism? Jesus Christ. :|

quoderat 18y ago
I personally don't think it was caused by those things, though I am sure that there are those who do. I think the five major factors that contributed to it, in rough order of importance: 1) Too much leverage, without understanding the risks. 2) Trade imbalances causing capital flow imbalances. 3) Complete lack of regulation and lack of enforcement of existing regulation. 4) A culture of "gotta have it now." 5) Productivity surge that couldn't last. As for greedy CEOs, many of them were non-productive parasites on the system (John Thain, etc.), but it wasn't their fault. And as for capitalism, my observation was that it's going to change drastically, not that it was at fault.
- kirse 18y ago
  I would agree with most of your reasons, but for each of them you need to ask "why" until you get to the real source of the problem. For the most part, the greediness of people is why we had such ridiculously leveraged financial securities and special-purpose vehicles etc. designed to stuff as many fistfuls of cash as possible into the pockets of those who could game the system the best. Greed was the cause, and insane levels of leverage were the flimsy supports for this recent collapse of the financial house of cards. Of course, that's not to say leverage is inherently bad, but in excess it clearly points the way to financial ruin.
  - quoderat 18y ago
    I agree with you. Well-stated. And that's why I feel that even if regulation isn't perfect, and even if it sometimes is counterproductive (which it is!), it can often help to stave off such things as this.
    - corentin 18y ago
      Well, then just how much did regulation helped prevent this whole fiasco?
      - quoderat 18y ago
        That's my whole point. It didn't prevent it, but the lack of it sure contributed greatly to it all. The biggest single example: the exempting of the four largest investment banks from the previous 12-to-1 leverage rules, allowing them to leverage up to 40-to-1, thus greatly exacerbating the fallout and causing further follow-on crises. That, among many, many other things, would not have occurred without those IBs being exempted from previously-existing regulation. Do you really believe non-regulation will be the panacea for all these ills? Somalia is pretty unregulated. Maybe try your luck there.
        corentin 18y ago
        Companies doing risky stuff shouldn't be too surprised when they suddenly run out of good luck. On the other hand, if I were running a company and I knew that my buddies in Washington would end up bailing me out with other people's money because I'm "too big to fail", I would be a fool not to take as much risk as I can. With state capitalism, you can have your cake and eat it.
- dantheman 18y ago
  I think you are missing the systemic causes -- the low cost of money and its devaluation through inflation cause makes taking risks more economical (safe investments lose money). The markets are more regulated now than they've ever been. The cause of this crises has been building for a long time, and goes back to the 70s when the united states went off the gold standard. Additionally, there were things that happened that never happened before. For instance selling stock in financial institutions, which incentivises risk taking. This of course led to a mistake on the public's part of not realizing what they were investing in was riskier than they thought. A culture of "gotta have it now." doesn't mean anything except that those participating in it will be poorer than those who don't, and lending to the first group is riskier than lending to the second so their interest rates should vary. Productivity is constantly increasing, and will be increasing at faster rates. As for CEOs if they were acting wrongly then their board, or shareholders should revolt. If it's a private company then the owner, if the CEO is the owner then it's his to do what he wants with it.
  - quoderat 18y ago
    Ah, the old gold standard canard again. Not even worth refuting these days, so I won't try. " As for CEOs if they were acting wrongly then their board, or shareholders should revolt." Hasn't happened yet, but it's a nice pie-in-the-sky fantasy. I'm perplexed by many people's ideas here that the best way the system self-corrects is by effectively allowing the system to self-immolate. Is there no better way? "Productivity is constantly increasing, and will be increasing at faster rates." Doubtful, but even if true, when will that productivity lead to better standards of living for all but the wealthy few? Incomes of the richest Americans more than doubled in the past eight years. Do you think they got twice as productive? Before you answer, remember that in the financial sector at least, in the last two years, banks have lost more money than they have made in profits in the last 2,500 years of banking — even adjusted for inflation.
    - pwk 18y ago
      Incomes of the richest Americans more than doubled in the past eight years. Do you think they got twice as productive? Well, lots of people are now coding in Ruby/Python/etc instead of Java/PHP/C++/etc. (Written only mostly tongue in cheek)
noodle 18y ago
greedy CEOs, no, not really. they're more a byproduct, i think. not all of capitalism, but some aspects of capitalism definitely did play into the problem, yes.

Dobbs 18y ago

The system was trying to regulate itself. Thats why the economic crisis is happening. The companies that are in trouble are ones that can not be maintained that either need to restructure them selves or die. In the infinite wisdom of our leaders they decided to stray from the theory of capitalism and interfere. Everyone likes to think that capitalism means that everything is happy daisy, but its not. If things go wrong in capitalism, then life can get hard but it will eventually self correct if you allow it.

quoderat 18y ago
And meanwhile, what happens to the people who are bankrupted, ruined, cannot eat or get health care, while the system self-corrects? Reasonably happy, non-malnourished people make better employees, you'll have to admit.
- corentin 18y ago
  The system doesn't self-correct everywhere at the same time (unless there is a central bank point of failure, if you see where I'm going...), so if your company is bankrupt you can find a job elsewhere. Mind you, people who were careful with their money and didn't believe in the pipe dream of ever increasing home equity need not worry about what's going on (well, they need to worry about what the government is doing, but that's another matter).
  - redrobot5050 18y ago
    Um, we didn't have a central bank point of failure. We had 5 large investment banks, most of which had the intelligence to survive the first great depression. The major problem is that the American economy had become entirely dependent on consumer spending, which, because of a lack of real wage growth among the bottom 80% led to a massive expansion and dependence on credit. When the housing bubble burst, credit went cold turkey, and many defaulted on their debt because of their inflated lifestyle. As a result, everyone suffered. Consumers stopped spending, which lead to businesses credit lines being downgraded, leading to a halt in manufacturing and importing. The global ripples of having a force (like credit) simply disappear are obvious, just as they were right before the first great depression.

eds 18y ago

He didn't say each player would regulate itself, but that the system as a whole would regulate itself. The system did regulate the companies you mentioned--they went out of business. Unfortunately, the federal government threw the taxpayers under the bus in order to keep the system from working like it's supposed to.

quoderat 18y ago
Working like it was supposed to during, say, the Great Depression? That was a likely outcome if we'd followed the prescriptions you seem to advocate above.

jhickner 18y ago

Hybrid free/regulated systems like ours have all of the downsides of both approaches but none of the benefits. I do believe that the free market regulates itself, but we don't have a free market. In a free market, there would be no bailouts. In our system, on the other hand, wall street counts on bailouts. You don't leverage your company 40 to 1 unless you believe there's a safety net. It's in vogue to believe that everyone in finance is an idiot, but they're not. They do exactly what makes business sense within the rules of the market. And our rules say: leverage yourself as much as you can. The fed will be there to bail you out if you fail.

glymor 18y ago

Actually none of those companies regulated themselves. The federal government took on the role. Regulation has caused part of this crises via procyclical mark to market and capital requirements. Regulation also stipulated what kind of assets banks should have creating an enormous market in the deliberate obfuscation of risk. What is your suggestion? Just because you create regulation doesn't cause people to want to follow it. Nor do the affects end with or necessarily include the stated goal.

Andys 18y ago

I view it as, above all else, a failure of education. People can't teach their children what money really is, if they themselves don't understand fiat currency and the power that the central banks have to expand and contract money supply.