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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

by 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.
- crux_ 18y ago
  Further counterpoints... (warning; I'm a touch sleepy). First, there is the primary issue, severely undermining almost everything you write, of "encouraging" vs "doing". (I'm making an assumption here:) It's really quite ironic to see a libertarian claiming that one who encourages a decision bears greater responsibility than the individual who actually made the decision him/her/itself. In other words: if I take you at face value, the regulators encouraged bad behavior, individuals and institutions behaved badly, and it is the former who bears the majority of the blame. Pardon me if I don't buy it. Sure, the regulators screwed up, but to a tar-and-feathering degree rather than a torches-and-pitchforks level. Further complicating the "regulators are more to blame" approach, even if we overlook the basic contradiction at its core, are the issues of regulatory capture: Wall Street and the regulators in question are pretty much the exact same people at this point, and their motives pretty much identical (due to many reasons; e.g. the revolving door). (I digress, but I believe this is a big part of the reason the current response has sucked so badly: too much Wall Street, not too much regulators!) Finally, although I'm sleepy, I believe I detect huge amounts of spin in your response here. A couple of examples: CDS contracts entered into by AIG were rather larger than the entire value of the company, for example, not what I would call a "relatively small" amount. And Geitner doesn't want to "force unregulated institutions into insolvency" ... the institutions in question are already insolvent! What he wants is, presumably, is to force them into something along the lines of a slowed-down, taxpayer supported restructuring (aka: bankruptcy). This may or may not be a good thing but to cast it as "forcing an organization into insolvency" is duplicitous.
  - anamax 18y ago
    > Further complicating the "regulators are more to blame" approach, even if we overlook the basic contradiction at its core, are the issues of regulatory capture: Regulatory capture is a consequence of regulation, so its effects are problems with regulation. > CDS contracts entered into by AIG were rather larger than the entire value of the company, for example, not what I would call a "relatively small" amount And they were hedged by contracts that were of comparable size. That's how insurance companies work. And all of this was approved by regulators. In AIG's case, by both bank and insurance company regulators in the US and (at least) bank regulators from other countries. (I don't know if other countries also regulated AIG as an insurance company, but I suspect that they did.) Note that the foreign banks that bought AIG policies did so with the express permission of their regulators. We know that because banks get no benefit from unregulated assets.
anamax 18y ago
> 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, As has been pointed out repeatedly, that's wrong. (I note the absence of the other two legs, namely subprime, and the bank balance sheet concentration caused by tax policy wrt fannie and freddie stock, both of which are clearly regulator caused.) Regulators approved all use of CDOs and CDSs by banks and insurance companies. We know that because those institutions get no benefit from holding unapproved assets. (Solvency is a measure of the relationship between regulated assets and liabilities.) In the case of insurance companies, there are additional restrictions on the other side - they can't write unapproved policies. Every part of AIG is regulated, uusually by regulators from multiple nations and they do cooperate. Yes, I know what the fed chairman said about AIG's London office. He was dead wrong about that, which is consistent with his record of predictions over the last two years.
- crux_ 18y ago
  Without needing to dive into the details, I don't think it would change things a bit if "regulators" were offering free cocaine to anyone who asked for it: it would not somehow absolve the junkies of the responsibility for their choice to snort it up.
  - anamax 18y ago
    The difference is that banks are free to ignore free cocaine. They're not free to ignore regulators. It appears that much of AIG's financial insurance was actually regulator driven, as in regulators insisted that banks buy it. More to the point, regulation is being proposed as a solution. Since they're the common element in all of the failures, this is a curious approach.
    - crux_ 18y ago
      > The difference is that banks are free to ignore free cocaine. They're not free to ignore regulators. Misdirection. The toxic, risky, highly over-leveraged speculation they engaged in was certainly voluntary.

by crux_ 18y ago

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.

crux_ 18y ago
Further counterpoints... (warning; I'm a touch sleepy). First, there is the primary issue, severely undermining almost everything you write, of "encouraging" vs "doing". (I'm making an assumption here:) It's really quite ironic to see a libertarian claiming that one who encourages a decision bears greater responsibility than the individual who actually made the decision him/her/itself. In other words: if I take you at face value, the regulators encouraged bad behavior, individuals and institutions behaved badly, and it is the former who bears the majority of the blame. Pardon me if I don't buy it. Sure, the regulators screwed up, but to a tar-and-feathering degree rather than a torches-and-pitchforks level. Further complicating the "regulators are more to blame" approach, even if we overlook the basic contradiction at its core, are the issues of regulatory capture: Wall Street and the regulators in question are pretty much the exact same people at this point, and their motives pretty much identical (due to many reasons; e.g. the revolving door). (I digress, but I believe this is a big part of the reason the current response has sucked so badly: too much Wall Street, not too much regulators!) Finally, although I'm sleepy, I believe I detect huge amounts of spin in your response here. A couple of examples: CDS contracts entered into by AIG were rather larger than the entire value of the company, for example, not what I would call a "relatively small" amount. And Geitner doesn't want to "force unregulated institutions into insolvency" ... the institutions in question are already insolvent! What he wants is, presumably, is to force them into something along the lines of a slowed-down, taxpayer supported restructuring (aka: bankruptcy). This may or may not be a good thing but to cast it as "forcing an organization into insolvency" is duplicitous.
- anamax 18y ago
  > Further complicating the "regulators are more to blame" approach, even if we overlook the basic contradiction at its core, are the issues of regulatory capture: Regulatory capture is a consequence of regulation, so its effects are problems with regulation. > CDS contracts entered into by AIG were rather larger than the entire value of the company, for example, not what I would call a "relatively small" amount And they were hedged by contracts that were of comparable size. That's how insurance companies work. And all of this was approved by regulators. In AIG's case, by both bank and insurance company regulators in the US and (at least) bank regulators from other countries. (I don't know if other countries also regulated AIG as an insurance company, but I suspect that they did.) Note that the foreign banks that bought AIG policies did so with the express permission of their regulators. We know that because banks get no benefit from unregulated assets.

anamax 18y ago

> 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, As has been pointed out repeatedly, that's wrong. (I note the absence of the other two legs, namely subprime, and the bank balance sheet concentration caused by tax policy wrt fannie and freddie stock, both of which are clearly regulator caused.) Regulators approved all use of CDOs and CDSs by banks and insurance companies. We know that because those institutions get no benefit from holding unapproved assets. (Solvency is a measure of the relationship between regulated assets and liabilities.) In the case of insurance companies, there are additional restrictions on the other side - they can't write unapproved policies. Every part of AIG is regulated, uusually by regulators from multiple nations and they do cooperate. Yes, I know what the fed chairman said about AIG's London office. He was dead wrong about that, which is consistent with his record of predictions over the last two years.

crux_ 18y ago
Without needing to dive into the details, I don't think it would change things a bit if "regulators" were offering free cocaine to anyone who asked for it: it would not somehow absolve the junkies of the responsibility for their choice to snort it up.
- anamax 18y ago
  The difference is that banks are free to ignore free cocaine. They're not free to ignore regulators. It appears that much of AIG's financial insurance was actually regulator driven, as in regulators insisted that banks buy it. More to the point, regulation is being proposed as a solution. Since they're the common element in all of the failures, this is a curious approach.
  - crux_ 18y ago
    > The difference is that banks are free to ignore free cocaine. They're not free to ignore regulators. Misdirection. The toxic, risky, highly over-leveraged speculation they engaged in was certainly voluntary.