4 ms·

Financial collapse shows failure of free markets?

14 points by peter123 18y ago

deleted 18y ago
[deleted]
fallentimes 18y ago
There never were free markets.
- gnaritas 18y ago
  Nor will there ever be, free markets are a fantasy. The only real free market is the black market.
  - cwan 18y ago
    Free markets require rule of law and property rights to thrive. That's the problem with black markets. You can't monetize some of the less tangible assets required to operate in formal markets. This is something that Hernando De Soto has written a considerable amount about. For an example - developing markets because of the lack of property rights, a lot of people don't have the ability to borrow against their homes - or even properly sell them. And what prices they do get, are at a discount because they have illegal additions, or what have you. Same thing for businesses that can take years to start and formalize (that's just for the paperwork!). Check out the World Bank's doingbusiness.org - and the places that are most difficult to do business consistently have the largest thriving black markets. Those markets definitely are not free. Black markets are definitely not the answer.
    - gnaritas 18y ago
      You make good points, but you misunderstand, I wasn't claiming they were the answer.
- yummyfajitas 18y ago
  There are no frictionless newtonian particles either. But they remain a useful object to think about; under the right conditions, they are a good approximation to the real world. You can also add corrections to the model (i.e. add terms to the equations) and do an even better job at modeling the real world.
cwan 18y ago
It's intensely frustrating that blame is being heaped solely on "wall street". The resulting legislation is completely reactionary and will create all sorts of unintended consequences not the least of which will result in restricting funds to support the growth of firms that create real value. (Sarbanes-Oxley anyone?) Perhaps even more irritating is the equivalency that critics place between criticizing Wall Street and "free markets"/capitalism. I don't think anyone would say that "wall street" did not play their role - but it was a role played on a field designed by regulators - many of whom are the same ones who now disclaim all responsibility. To quote Daniel Hannan, a British MEP in a recent interview: "Don't make the same mistake that a lot of people on the left make that financiers are for free trade. They're really not. All financiers are monopolists. All financiers will grab a subsidy if they can. Every big businessman left to himself is a corporatist and the beauty of the capitalist system is it doesn't let them indulge that instinct or at least it didn't until the last 6 months when we've suddenly turned the clock back." (As a side note, I used to be a financier)
- crux_ 18y ago
  As counterpoints, first consider that blame for the current situation and the proper next steps are two separate issues. The myopic (to put it gently) decisions made by "Wall street" most certainly are the single largest contributing factor to the urgency and depth of this crisis. Second, I think it's rather difficult to pin much blame on regulators. The two levers used that have made this so particularly awful, CDOs and CDSs, were almost entirely over-the-counter, unregulated affairs, and the extent of our economy's exposure was and still is cloaked behind regulatory loopholes that allow these firms to keep it at least partly off their books. Funny, the language you use (financiers, corporatist, monopolists) makes me think of Lenin's "Imperialism: The Highest Stage of Capitalism." Saw it in a bookstore and flipped through, but I decided it would be too cynical for me to buy it.
  - cwan 18y ago
    Fair enough to consider the situation and next steps as two separate issues. But I really don't think that saying that Wall Street is the largest contributor is fair. It is quite easy to pin the blame on regulators who encouraged high levels of debt and large levels of regulation that financiers sought to work around and game. They were given the incentives to pursue destructive policies (ironically those with the lowest levels of regulation - hedge funds, private equity, etc aren't causing the level of systemic risk that was initially feared). CDS and CDO products were not to blame (they may well have have been contributors) - but if you look at the aftermath, their role was overblown (net everything out and the amounts are relatively small). Maybe that's the issue here in that there isn't a lot of understanding as to what the causes have been - and there clearly were several. Rich Kilgaard calls the problem as being one of "capital on strike". Credit markets have been freezing up because no one really knows who to trust and whether stated numbers are real and what the values of assets are. The levels of leverage is either a primary or secondary problem depending on who you ask. The chairman of FedEx has been talking about the problem and relationship between high taxes and leverage for a long time. High taxes and double taxation of dividends means that the tax code favors companies taking on greater amounts of debt over what would be more stable but already expensive equity (ie you can expense interest but you can't expense dividend payments). And then finally - something that we can definitely squarely lay the blame at the feet of regulators is the promotion of home ownership to those who couldn't afford it. Look at the levels and amounts of subprime lending post revisions to the CRA in 1999. Heck, if memory serves, the first subprime MBS was about a week after its passing. Bush working with a Democratic Congress was also to blame in encouraging Fannie Mae and Freddie Mac to continue buying up basically any mortgage that was written. What Wall Street did - which really complicated the mess was create investment vehicles that weren't transparent relative to the underlying assets making them difficult to understand and subsequently break apart. Then you have such things as mark to market which really sped up the decline of financial institutions in the US. As a principle, it's laudable - the basic idea being that your assets should be valued as close to what the market thinks as close to real time as possible. The problem when it comes to regulatory capital calculations is that when you have a large market essentially stop trading, or collapse in value (even if the loans will be held to term), is that you rapidly have "undercapitalized" institutions in the worst of markets - made particularly worse by the levels of leverage they have (the situation in Europe here is far far worse - and the irony is that they are far more regulated). Then there's the fed which kept interest rates too low for far too long which allowed for an asset bubble which in turn fueled demand for debt. And now Geithner is attempting a massive power grab in the middle of all of this. He wants to have the power to force unregulated institutions into insolvency - this despite the fact they're not like banking institutions where they are obligated to guarantee deposits up to a given amount per FDIC. So now the end result is that venture capital funds and private equity firms may need to report to the SEC resulting in higher costs and regulations - costs I would add that mean aren't going back into investing in productive parts of society for problems that may or may not even exist! It's a big mess but everywhere you look, regulators and government agencies had their grubby little hands everywhere.
nazgulnarsil 18y ago
financial collapse shows that the incentive structures in the financial industry were completely insane. Only in a world where dubious loans could be sold off en masse to government lenders does the so called "predatory lending" occur. what incentive is there to do honest business when you're going to collect your commission and then wash your hands of the loan?
trapper 18y ago
If only shuffling money couldn't make a profit.

14 points by peter123 18y ago

deleted 18y ago

[deleted]

fallentimes 18y ago

There never were free markets.

gnaritas 18y ago
Nor will there ever be, free markets are a fantasy. The only real free market is the black market.
- cwan 18y ago
  Free markets require rule of law and property rights to thrive. That's the problem with black markets. You can't monetize some of the less tangible assets required to operate in formal markets. This is something that Hernando De Soto has written a considerable amount about. For an example - developing markets because of the lack of property rights, a lot of people don't have the ability to borrow against their homes - or even properly sell them. And what prices they do get, are at a discount because they have illegal additions, or what have you. Same thing for businesses that can take years to start and formalize (that's just for the paperwork!). Check out the World Bank's doingbusiness.org - and the places that are most difficult to do business consistently have the largest thriving black markets. Those markets definitely are not free. Black markets are definitely not the answer.
  - gnaritas 18y ago
    You make good points, but you misunderstand, I wasn't claiming they were the answer.
yummyfajitas 18y ago
There are no frictionless newtonian particles either. But they remain a useful object to think about; under the right conditions, they are a good approximation to the real world. You can also add corrections to the model (i.e. add terms to the equations) and do an even better job at modeling the real world.

cwan 18y ago

It's intensely frustrating that blame is being heaped solely on "wall street". The resulting legislation is completely reactionary and will create all sorts of unintended consequences not the least of which will result in restricting funds to support the growth of firms that create real value. (Sarbanes-Oxley anyone?) Perhaps even more irritating is the equivalency that critics place between criticizing Wall Street and "free markets"/capitalism. I don't think anyone would say that "wall street" did not play their role - but it was a role played on a field designed by regulators - many of whom are the same ones who now disclaim all responsibility. To quote Daniel Hannan, a British MEP in a recent interview: "Don't make the same mistake that a lot of people on the left make that financiers are for free trade. They're really not. All financiers are monopolists. All financiers will grab a subsidy if they can. Every big businessman left to himself is a corporatist and the beauty of the capitalist system is it doesn't let them indulge that instinct or at least it didn't until the last 6 months when we've suddenly turned the clock back." (As a side note, I used to be a financier)

crux_ 18y ago
As counterpoints, first consider that blame for the current situation and the proper next steps are two separate issues. The myopic (to put it gently) decisions made by "Wall street" most certainly are the single largest contributing factor to the urgency and depth of this crisis. Second, I think it's rather difficult to pin much blame on regulators. The two levers used that have made this so particularly awful, CDOs and CDSs, were almost entirely over-the-counter, unregulated affairs, and the extent of our economy's exposure was and still is cloaked behind regulatory loopholes that allow these firms to keep it at least partly off their books. Funny, the language you use (financiers, corporatist, monopolists) makes me think of Lenin's "Imperialism: The Highest Stage of Capitalism." Saw it in a bookstore and flipped through, but I decided it would be too cynical for me to buy it.
- cwan 18y ago
  Fair enough to consider the situation and next steps as two separate issues. But I really don't think that saying that Wall Street is the largest contributor is fair. It is quite easy to pin the blame on regulators who encouraged high levels of debt and large levels of regulation that financiers sought to work around and game. They were given the incentives to pursue destructive policies (ironically those with the lowest levels of regulation - hedge funds, private equity, etc aren't causing the level of systemic risk that was initially feared). CDS and CDO products were not to blame (they may well have have been contributors) - but if you look at the aftermath, their role was overblown (net everything out and the amounts are relatively small). Maybe that's the issue here in that there isn't a lot of understanding as to what the causes have been - and there clearly were several. Rich Kilgaard calls the problem as being one of "capital on strike". Credit markets have been freezing up because no one really knows who to trust and whether stated numbers are real and what the values of assets are. The levels of leverage is either a primary or secondary problem depending on who you ask. The chairman of FedEx has been talking about the problem and relationship between high taxes and leverage for a long time. High taxes and double taxation of dividends means that the tax code favors companies taking on greater amounts of debt over what would be more stable but already expensive equity (ie you can expense interest but you can't expense dividend payments). And then finally - something that we can definitely squarely lay the blame at the feet of regulators is the promotion of home ownership to those who couldn't afford it. Look at the levels and amounts of subprime lending post revisions to the CRA in 1999. Heck, if memory serves, the first subprime MBS was about a week after its passing. Bush working with a Democratic Congress was also to blame in encouraging Fannie Mae and Freddie Mac to continue buying up basically any mortgage that was written. What Wall Street did - which really complicated the mess was create investment vehicles that weren't transparent relative to the underlying assets making them difficult to understand and subsequently break apart. Then you have such things as mark to market which really sped up the decline of financial institutions in the US. As a principle, it's laudable - the basic idea being that your assets should be valued as close to what the market thinks as close to real time as possible. The problem when it comes to regulatory capital calculations is that when you have a large market essentially stop trading, or collapse in value (even if the loans will be held to term), is that you rapidly have "undercapitalized" institutions in the worst of markets - made particularly worse by the levels of leverage they have (the situation in Europe here is far far worse - and the irony is that they are far more regulated). Then there's the fed which kept interest rates too low for far too long which allowed for an asset bubble which in turn fueled demand for debt. And now Geithner is attempting a massive power grab in the middle of all of this. He wants to have the power to force unregulated institutions into insolvency - this despite the fact they're not like banking institutions where they are obligated to guarantee deposits up to a given amount per FDIC. So now the end result is that venture capital funds and private equity firms may need to report to the SEC resulting in higher costs and regulations - costs I would add that mean aren't going back into investing in productive parts of society for problems that may or may not even exist! It's a big mess but everywhere you look, regulators and government agencies had their grubby little hands everywhere.

nazgulnarsil 18y ago

financial collapse shows that the incentive structures in the financial industry were completely insane. Only in a world where dubious loans could be sold off en masse to government lenders does the so called "predatory lending" occur. what incentive is there to do honest business when you're going to collect your commission and then wash your hands of the loan?

trapper 18y ago

If only shuffling money couldn't make a profit.