Markets & Government Regulation - The Collapse of 2008

[August1991]

In another thread, Dobbin posted the following:

Faith that Freidman was right and Keynes was wrong.

A long time ago, in the imagination of the North American left wing, there was an apocryphal pseudo-debate between Milton Friedman and John Kenneth Galbraith. (In any real sense, the debate never occurred - I'm not even certain that the two ever met.) As it turns out, Friedman and Galbraith were speaking about different questions at the time and these questions are largely irrelevant now. BTW, Friedman was one of the first economists to win a Nobel Prize and Galbraith, to his chagrin, never won one. (This must be doubly insulting since Paul Krugman just got one.)

So, what was this pseudo-debate? It supposedly concerned free markets and government control.

At the time, the 1970s or so, "government control" meant the "socialism" or the "Soviet Union". I don't think anyone is now advocating that the State control the commanding heights of an economy. No one is now advocating that governments nationalize Microsoft, CNN, Air Canada, Intel, Exxon, GM and so on. No one is even suggesting that the government direct these enterprises. The term "industrial strategy" seems vague, now.

IOW, the right has largely won the economic debate over the past three or four decades. The collapse of the Soviet Union more or less showed to almost all six billion people on the planet that socialism or communism doesn't work. The appearance of Natasha prostitutes and Boris thugs in farflung holiday destinations made the Soviet/communist/socialist utopia an obvious fraud.

No one today wants socialism: IOW, no one wants the government to control the means of production. We all know that doesn't work. (As Vaclav Havel noted, the only Marxists or people advocating socialism today teach in western universities. I could add that the only Marxists in the world today either teach in western universities and/or they post on Internet forums.)

----

Nevertheless, many otherwise intelligent people question free markets today. After various financial meltdowns and collapses this year, they somehow believe that free markets are bad and that they require "government regulation".

Some people say that this current financial crisis was caused by "greed" (as if greed never existed in the past and greedy people suddenly discovered anew way to be evil). Others say that our financial system is so complicated that no one really knows what is going on. The smart took advantage of the stupid.

I have a belief in markets as profound as my belief in magnets. Both, in my view, are subject to replicable testing. At the same time, I also appreciate the limits of markets (and the limits of magnets). Markets with prices, a wonderful human invention, work well under specific conditions. They don't work generally. But here's my main point: I don't believe that government rules can make markets work better. By their nature, markets are self-regulating - that's why we invented markets.

If markets fail to work well, I'm not certain that coercive government can do better.

I truly fear that, as in the 1930s after a different financial market meltdown, people will insist that governments get involved and regulate markets and organize society. In the 1930s, such government intervention (tariffs, gold standards, sound money) lead to horrific consequences. Nowadays, I don't want to see more government regulation of our financial markets and I certainly don't want to see more government regulation of trade, in particular international trade.

Edited November 7, 2008 by August1991

[eyeball]

The freer the market the freer the people. The biggest impediment to my making a better living is definitely red-tape.

I'm a still lefty however, and I think the best way to regulate the market and check the human corruption that destroys the utility of greed is to regulate the government. I imagine a government that is utterly transparent and subject to total public awareness. I subscribe to the trickle down theory. Outlaw secrecy in the uppermost levels of government so that decency and honesty will trickle down through the rest just like wealth is supposed to but for real. Who knows maybe wealth itself might actually start to flow better once the regulators are regulated.

Myself, I'd monitor the government to an extent that it would make Orwell himself blush. We've seen no end of governments who wish to increase their ability to monitor us but as of yet there is not a single one that hasn't also sought to strengthen its own control or keep hidden from sight as much information about itself as it can. This is fundamentally unethical to say the least.

I say we turn the Telescreens around and aim them in the other direction. Total transparency and total public awareness are the final frontier of human governance. Its the only thing we haven't tried because we haven't had the means but we have the technology of Internet now.

[msj]

People should spend less time pining for the good old days where their theoretical models appeared so practical (but were not so good after all) and spend more time reading about some of the details of what has gone on in the US (and other countries):

See Calculated Risk and the Big Picture.

Even the "Maestro" easy Al Greenspan has partially admitted the errors of this way.

[August1991]

People should spend less time pining for the good old days where their theoretical models appeared so practical (but were not so good after all) and spend more time reading about some of the details of what has gone on in the US (and other countries)...

Should I conclude, msj, that you favour State regulation of otherwise free markets?

Where do you draw the line? And how do you draw it?

And critically: why do you believe a politician/bureaucrat will do better than the market?

Edited November 7, 2008 by August1991

[msj]

Should I conclude, msj, that you favour State regulation of otherwise free markets?

Where do you draw the line? And how do you draw it?

I would recommend that one spend time reading the links I have provided.

I see no benefit trying to get into details on such a subject with such an ideological person.

It would be a waste of time for both of us.

Those interested in learning about mortgage fraud, appraisal fraud, credit rating conflicts of interest, how the "free market" failed to take adequate steps to truly reduce risk, accounting rule changes etc... then read the links provided and learn something.

Others can choose to discuss amongst themselves "free markets" while not understanding that "free markets" already have rules in place - some work well, some don't, and others are in-between.

Edit: And the reason the government can do a better job than the private sector in some instances is because the government doesn't have the same conflicting interests that the private sector faces.

It is about balance - put in effective regulation now or be prepared to buy AIG and spend trillions bailing out the "free market" later.

Either way, we end up with the government intruding on the "free market."

How come you don't mind the government making such decisions as to which companies get to be bailed out and which don't?

Edited November 7, 2008 by msj

[August1991]

I see no benefit trying to get into details on such a subject with such an ideological person.

It would be a waste of time for both of us.

I'm sorry that you see me in such a light.

If you have patience, I hope you'll give me your time to read what I post. I'll admit to be "only a Canadian".

[msj]

There is nothing wrong with being ideological.

Everyone is ideological to a certain degree.

I just don't see the point in going into details on a forum like this - it is not practical as compared to spending some time reading up on some of the specific issues and making up one's own mind.

[August1991]

The freer the market the freer the people. The biggest impediment to my making a better living is definitely red-tape.

I'm a still lefty however, and I think the best way to regulate the market and check the human corruption that destroys the utility of greed is to regulate the government.

I admire your desire to improve markets but your confidence in gvernment is naive and misplaced. Politicians and bureaucrats face the same problem that anonymous markets often face: parties to a transaction are not always honest.

Eyeball, I'm suspicious that governments can help people to do deals.

There is nothing wrong with being ideological.

Everyone is ideological to a certain degree.

I just don't see the point in going into details on a forum like this - it is not practical as compared to spending some time reading up on some of the specific issues and making up one's own mind.

msj, that's a fair criticsm. I'm not certain what exactly my ideology is but I'll admit to having one. I have some basic principles that guide me through the thickets of life.

I try however to question always in an intelligent manner these principles. I try to be an intelligent skeptic.

----

Calculated Risk is a good web site and Noubini certainly has a following. Are you surprised that they are suddenly right? A stopped clock is right twice a day. We have had sustained real growth for several years now, arguably for over 15 years. In that time, many people have predicted impending recession, depression, doom-and-gloom.

In starting this thread, I wanted to argue that markets with prices work. IMHO, markets with prices are the single greatest achievement of human civilization in the past several thousand years. No one knows who first invented a number and a clear term of trade but in doing so, that person advanced immeasurably civilization.

Yet, like mathematics and numbers in general, markets with prices still confuse many people. These people question whether free markets can contribute to a civilized society. They ultimately believe that society depends on a strong man who makes and enforces the rules. They think that the (democratic) State should regulate, establish order and ensure civilization.

I fear that such people will now argue that the State should regulate markets for society's better good. IMV, this would be a grave error.

[msj]

Calculated risk is often right.

If you truly did read Calculated Risk on a regular basis then you would know this. In fact, I don't think you really know what Calculated Risk talks about.

As for Roubini - I don't follow him that closely. I pick up his feed once in a while but I was skeptical of him for a long time (until he was proven right well before the recession deniers were forced to swallow their BS). I read him for a different perspective but he is too interventionist for my liking.

The thing about regulating the markets is not the numbers - it is the humanity.

People set up poor incentives (and, once again, you would know this if you had spent any time reading Barry Ritholtz at the Big Picture or Calculated Risk) which lead to poor decisions.

Enron and Worldcom are good examples where accounting rules and other factors were not appropriate.

The current financial mess is a good example where regulation (and lack thereof) was/is insufficient to prevent mortgage fraud, appraisal fraud, ratings fraud, and a host of other problems for which I have already linked to in other threads and see little point of wasting my time linking to them again.

As for the supposed free market - I see that the US government is making yet more decisions - picking winners and losers - with talk of using the TARP funds (which are supposed to be for the banks that the government chooses to survive or not) for GM, Chrysler and/or Ford.

AIG is going back to the government well, too.

Amazing! To think that putting some common sense rules that would allow banks to do their business prudently (you know - like not allowing the investment banks to leverage up to 40:1 like they were allowed to do starting in 2004) would have prevented a lot of this mess.

Granted, it would not have prevented the Big 3 fiasco - although who knows? Maybe if their financial arms didn't prop up the vehicle business for so long thanks to easy Al Greenspan, then maybe changes would have been implemented sooner.

And that's the funny part - the market isn't free. The government puts into place many rules already. The Fed plays with interest rates and prints money up as required.

To think that that isn't government intervention of some kind is pure drivel.

It is a question of which regulation is effective and which isn't effective and that's why this thread is a waste time for which I see little point in further contributing too.

Edited November 11, 2008 by msj

[geoffrey]

People set up poor incentives (and, once again, you would know this if you had spent any time reading Barry Ritholtz at the Big Picture or Calculated Risk) which lead to poor decisions.

Yes. But those incentives are driven by the demands of the 'average investor'. Foolish.

You miss a quarterly estimate and everyone dumps you. It's not the managers faults that they build short-term incentives to promote the short-term desires of investors.

Enron and Worldcom are good examples where accounting rules and other factors were not appropriate.

Enron was not an accounting rule issue... it was fraud.

All the regulation in the world will not stop thieves.

ratings fraud...

Whoa... nope. Sorry. That's a huge accusation that you should back up a little bit. Rating agencies were not fraudulent.

Amazing! To think that putting some common sense rules that would allow banks to do their business prudently (you know - like not allowing the investment banks to leverage up to 40:1 like they were allowed to do starting in 2004) would have prevented a lot of this mess.

Let them leverage and let them fail. Any counterparties and investors to these banks knew how much they were leveraged. You bought or lent to them? Ooopss! Let them fail.

Granted, it would not have prevented the Big 3 fiasco - although who knows? Maybe if their financial arms didn't prop up the vehicle business for so long thanks to easy Al Greenspan, then maybe changes would have been implemented sooner.

SIVs are a key component of risk management, you know that. Eliminating SIVs would do more harm then good. There is nothing wrong with SIVs or securitization that is done prudently.

To think that that isn't government intervention of some kind is pure drivel.

Agreed.

[msj]

Geoff, I will entertain you a little but I'm not going to get into much detail as I really do think this thread is a waste of time.

1) To the extent that ratings agencies were giving triple AAA ratings to bundled loans when they knew that they were not worthy of such a rating is fraud in my mind.

I am only willing to look up one example of this: S&P: We Knew Nothing! Nothing!

As I have mentioned in previous posts and threads - anyone interested on getting an education about economics and this financial mess would be well served to read The Big Picture by Barry Ritholtz, Calculated Risk and some of the other blogs on their sites.

2) I never talked about ending SIV's per se. I'm talking about the extent that such matters should be regulated.

3) To use your logic about never going to stop all fraud then I suppose we should not have any laws (regulations) in place about murder or theft or any other offences that continue to plague humanity.

4) And #3 is exactly why I think this is a waste of time - we are talking about the degree of regulation (laws) that should be put in place.

In order to have an intelligent discussion over such things would require us to delve into details that most of us are unwilling to spend time on.

Instead, the discussion descends into ideological nonsense about "free markets" and "socialism" and generalities like "all the regulation in the world will not stop thieves" - well, no kidding, really?

[August1991]

To think that that isn't government intervention of some kind is pure drivel.

It is a question of which regulation is effective and which isn't effective and that's why this thread is a waste time for which I see little point in further contributing too.

I agree that your examples are "government intervention". Heck, Bush's decision to invade Iraq and remove Saddam is an example of government intervention.

My fear is that with this recent market collapse, many people who are bad at math and confused by markets and prices will turn to the strong man to fix things. They want the government to step in and "do something". I fear that this "something" may be worse than the problem. In particular, I fear restrictions on trade.

I'm not a Libertarian and I think government, even large government, has a role to play in a civilized society. Government is one institution like friendship, family and anonymous market relations that make sophisticated life possible.

-----

I recall reading this quote and wondering about Obama and government. Recently, Obama invited McCain to Chicago to assist the new administration:

Putting aside the bitter words thrown about with abandon by both sides during the election campaign, McCain flew to meet Obama at his headquarters in the Kluczynski Federal Building, in downtown Chicago.

Obama, speaking before the meeting, said: "We're going to have a good conversation about how we can do some work together to fix up the country."

Guardian

Fix up? That struck me as homespun, southern talk. We're fixin' to do something. All the "fixin's'", as the American restaurant menus say.

Well, here's a link to a better understanding of the phrase, and government in general:

Yep. The country is like a house. It just needs a new coat of paint, some piering done in the basement and some dry wall replaced. This is the biggest fantasy of politics, that the country is broken or damaged and we just need to get a different contractor in charge of the project who knows more about how to do renovations. It is a dangerous metaphor and an inaccurate one. It ignores the fundamental insight of economics that there are no solutions only trade-offs. It presumes, impossibly, that we share goals as a people when in fact, virtually every government policy benefits one group at the expense of another.

The essence of political action is a compromise over who wins and who loses. The essence of politics is pretending that such actions benefit everyone.

Link

If there were an easy solution to a problem, we could all agree and then do it. Then, there would be no problem.

The dishonesty of politicians is to pretend that they have the "solution" when any solution to any non-trivial problem is necessarily a trade-off, with winners and losers.

Edited November 21, 2008 by August1991

[Michael Hardner]

Auguste, some comments:

Quote 1:

I agree that your examples are "government intervention". Heck, Bush's decision to invade Iraq and remove Saddam is an example of government intervention.

My fear is that with this recent market collapse, many people who are bad at math and confused by markets and prices will turn to the strong man to fix things. They want the government to step in and "do something". I fear that this "something" may be worse than the problem. In particular, I fear restrictions on trade.

I'm not a Libertarian and I think government, even large government, has a role to play in a civilized society. Government is one institution like friendship, family and anonymous market relations that make sophisticated life possible.

Thanks for being more specific. I think your viewpoint would be easier to understand if you use this level of specificity.

We clearly have had some 'good' level of government intervention between 1987 until now. Let's not turn to the 'strong man' as you pointed out, but have a rational examination of what went wrong. The situation, to me, is analogous to looking at causes for engineering failures, such as the sinking of the Titanic.

Quote 2:

Where do you draw the line? And how do you draw it?

If we have a discussion along these lines, then that would be a good thing.

Quote 3:

In starting this thread, I wanted to argue that markets with prices work. IMHO, markets with prices are the single greatest achievement of human civilization in the past several thousand years.

Actually, the advent of markets (by way of barter) had a far less significant impact than that of central banking. From my readings in history, I remember that the invention of a centrally managed accounting system for trade had such an impact giant cities of 100,000 people were born almost overnight. ( Ancient Sumaria. ) Surpluses were given to a central office that equated goods with a value, and recorded trade on clay tablets.

And the attendant corruption began almost immediately, with a new court of high priests and accountants required for 'managing' the central banking office.

[jdobbin]

If markets fail to work well, I'm not certain that coercive government can do better.

Where is the coercion from government when the big automaker CEOs go with begging bowls to Congress?

Business is begging government to get involved in their mess or they will die in a massive lemming like leap from the cliff.

That might make some sense from a business point of view but from a country point of view of massive unemployment, displacement and suffering, it does not.

I truly fear that, as in the 1930s after a different financial market meltdown, people will insist that governments get involved and regulate markets and organize society. In the 1930s, such government intervention (tariffs, gold standards, sound money) lead to horrific consequences. Nowadays, I don't want to see more government regulation of our financial markets and I certainly don't want to see more government regulation of trade, in particular international trade.

The government seems skeptical of getting that deeply involved right now. It is business that is begging for help.

We are now looking at Citibank is about to collapse.

[eyeball]

I truly fear that, as in the 1930s after a different financial market meltdown, people will insist that governments get involved and regulate markets and organize society. In the 1930s, such government intervention (tariffs, gold standards, sound money) lead to horrific consequences. Nowadays, I don't want to see more government regulation of our financial markets and I certainly don't want to see more government regulation of trade, in particular international trade.

What we need to do differently this time is insist that people get involved and better regulate the government.

I admire your desire to improve markets but your confidence in gvernment is naive and misplaced.

Actually I want to improve government. I have far less confidence in them than I do markets.

Politicians and bureaucrats face the same problem that anonymous markets often face: parties to a transaction are not always honest.

Its the dishonesty within the ranks of politicians and bureaucrats that is the real problem and that's why I think we should subject them to constant monitoring. If there is any truth to the notion these people work for us there should be no reason why they should be treated any differently than workers in a 7/11 corner store. Next time you're in one notice that at least one of the security cameras is always aimed at the till and the person who's minding it.

I wonder how many more societies will rise and fall before human beings finally do something with the knowledge that power and wealth corrupts?

Edited November 21, 2008 by eyeball

[Oleg Bach]

Trade means just that - a mutual benefit to both sides. International trade is rarely fair...in fact our traders attempt to profit through international trade that has the character of a school boy that gives you a counterfeit playing card in exchange for all of your collectables. It is not fair trade when one person on our side of the fence profits...and the rest of us do not. When a nation trades with a nation it is like one family trading with another. The whole national family should benefit equally. Modern international trade reminds me of my crooked sister - we would build a house and she would take all the profits...then leave the country. Charity begins and should stay at home.

[Michael Hardner]

Its the dishonesty within the ranks of politicians and bureaucrats that is the real problem and that's why I think we should subject them to constant monitoring. If there is any truth to the notion these people work for us there should be no reason why they should be treated any differently than workers in a 7/11 corner store. Next time you're in one notice that at least one of the security cameras is always aimed at the till and the person who's minding it.

Eyeball,

I have pointed this out to you several times:

We don't need extra monitoring when our existing monitoring (i.e. the press and medai) is ignored by the voting public.

This latest crisis is yet another example. Banking deregulations were well publicized and discussed.

Your idea of extra electronic monitoring would not have helped.

[eyeball]

So...the collapse of the global economy should be blamed on the public's disdain for the media? How does that work?

[Oleg Bach]

So...the collapse of the global economy should be blamed on the public's disdain for the media? How does that work?

The public respects the media in a very unwarranted fashion. The collapse is due to the fanning of small sparks that are now flames - this was caused by media. Funny - the very media that is owned by those who at the top are now petrified of continued collapse seem to have lost managerial control of their own companies.

[Michael Hardner]

So...the collapse of the global economy should be blamed on the public's disdain for the media? How does that work?

EB,

You're turning the tables on me. I've shown you that your idea of monitoring public officials more closely won't fix these problems.

I would say that if we have complex issues that need to be monitored, we should have people monitoring those issues, and we should have the public listening to those people.

[Oleg Bach]

EB,

You're turning the tables on me. I've shown you that your idea of monitoring public officials more closely won't fix these problems.

I would say that if we have complex issues that need to be monitored, we should have people monitoring those issues, and we should have the public listening to those people.

In other words real informative reports directly from the field - old fashioned concept - but workable.

[Michael Hardner]

OB,

Yes but it requires learned folks to read and analyze the data on our behalf. Politicians can no longer be trusted. The media supports only 0 attention span issues...

We need a new institution.

[Oleg Bach]

OB,

Yes but it requires learned folks to read and analyze the data on our behalf. Politicians can no longer be trusted. The media supports only 0 attention span issues...

We need a new institution.

You could build a new institution by gathering up clandestine observers - laymen with a keen sense of human nature and the ability to gage the character of a person in a glance. This would be like the "friendly visitor" to the hospital system. Benevolent persons who scope a place out. Those in our existing institutions would eventually understand that they were being watched and judged by members of the common public. You would be surprised for instance what effect the right person observing in a court room for instance - or at a city council meeting can have. They behave themselves better and become more accountable - most persons in our institutions are a sleep at the wheel because they are dulled out and in a state of institutionalization...this would be a cheap or a voluntary group to maintain..just get a citizen in to make sure everyone is working - After all - they are our servants.

[Michael Hardner]

You could build a new institution by gathering up clandestine observers - laymen with a keen sense of human nature and the ability to gage the character of a person in a glance. This would be like the "friendly visitor" to the hospital system. Benevolent persons who scope a place out. Those in our existing institutions would eventually understand that they were being watched and judged by members of the common public. You would be surprised for instance what effect the right person observing in a court room for instance - or at a city council meeting can have. They behave themselves better and become more accountable - most persons in our institutions are a sleep at the wheel because they are dulled out and in a state of institutionalization...this would be a cheap or a voluntary group to maintain..just get a citizen in to make sure everyone is working - After all - they are our servants.

Yes, Olech.

This is what the press is *supposed* to provide. But the press is a one-size-fits-all entertainment machine. CPAC is atomically dull and there's nothing else right now...

If only MapleLeafWeb had power...

Seriously, a serious website such as this with an honest and intelligent membership reminds me of some of the elements of the earliest American democracies. It would be interesting to see what kind of stewardship could be harnessed from these types of forums.

[Oleg Bach]

Yes, Olech.

This is what the press is *supposed* to provide. But the press is a one-size-fits-all entertainment machine. CPAC is atomically dull and there's nothing else right now...

If only MapleLeafWeb had power...

Seriously, a serious website such as this with an honest and intelligent membership reminds me of some of the elements of the earliest American democracies. It would be interesting to see what kind of stewardship could be harnessed from these types of forums.

You would be surprised where the power truely resides. If you think this stuff is not being read by those attempting to gather intelligence to be dispersed to politicals you may be naive...Intelligence must be gathered because as you know our politicals have none of their own and they know that one fact...advisory postions are available to all who want to contribute - from the comfort and privacey of your own home. For instance when Speakfreeamerica.net was in it's original form as a virtual government - the members consisted of school girls - young undergraduate males - former intelligent officers who had done tours in Iraq...lawyers - and their resident Canadian - me - the lunitic....This site was constantly scaned and the average person can now make a difference..planting small seeds can change the world.