>> ^Farhad2000:
> Too much regulation?
> Sub-prime markets and derivatives were fully deregulated due to Greenspan's belief that banks would self regulate.

and you're probably aware that Greenspan was among the most vocal critics of the Federal Reserve, until he got put in charge of it. nice, eh?

but since regulation can be a weaselly and charged term, which rarely gets a proper definition?

the 'regulation' that we need more of is simply the SEC, FBI, etc, being allowed to do their jobs and enforce laws against fraud, insider trading, bribery, and whatnot.

the 'regulation' we could do without is red tape, created solely to justify an ever-inflating budget. or regulation that's just protectionism, or some other intervention into a free market on behalf of either the supply, or demand, side.
one protectionist example paul gave in his last book is american sugar. and it's the reason that, not so long ago and ever since, soda suddenly got made with high-fructose corn syrup instead.

Comment hidden because you are ignoring dag. (show it anyway)

>> ^Farhad2000:
Too much regulation?
Sub-prime markets and derivatives were fully deregulated due to Greenspan's belief that banks would self regulate.


I think though that there was still a "perception" of regulation - enough that people felt confident to invest their money. If the government made an announcement "we're not regulating shit. caveat emptor mother fuckers" people would be much, much more conservative with their investments.

At least I think that's what Ron is saying.

Too much regulation?

Sub-prime markets and derivatives were fully deregulated due to Greenspan's belief that banks would self regulate.

The really simplified version - Alan Greenspan did it.

Well the gambling occurred simply because all the institutions believed they could get out or arbitrate their risks further down the line and this is the argument that Greenspan put forward that firms essentially got greedy and did not trade honorably within the market and self regulate.

Derivatives like useful in spreading risk around an economy but not when that risk is complied and passed on and on to the point that instead of spreading risk around to several players the the risk takers and issuers become intertwined. This is why regulation is needed in this market. I believe they are useful but not when their value is so overinflated to the value of the underlying assets.

In reply to this comment by jwray:
My point exactly. It's just gambling. It contributes nothing to the economy. So why should banks be allowed to do it?

In reply to this comment by Farhad2000:
There is no tangible production created. Derivatives differ but mostly its betting, you are taking a huge risk for a large pay off, based around performance factors, everything from how well company stock do or not, how currency exchanges do or even how weather will play out, which was part of Enron's strategy when it introduced weather futures.

In reply to this comment by jwray:
to put it another way... what actual, tangible production might derivatives trading promote or facilitate? Can it accomplish anything in the real world that conventional arbitrage cannot, besides sometimes creating the illusion of lower risk?

In reply to this comment by Farhad2000:
Not really since you derive the value from the original financial instrument, so if you are deriving the value off a risky mortgage payment that may or may not complete it stops being a zero sum game. Even more so when toxic debt packages are combined with other debts and financial packages.

In reply to this comment by jwray:
Isn't derivatives trading a zero-sum game?

My point exactly. It's just gambling. It contributes nothing to the economy. So why should banks be allowed to do it?

In reply to this comment by Farhad2000:
There is no tangible production created. Derivatives differ but mostly its betting, you are taking a huge risk for a large pay off, based around performance factors, everything from how well company stock do or not, how currency exchanges do or even how weather will play out, which was part of Enron's strategy when it introduced weather futures.

In reply to this comment by jwray:
to put it another way... what actual, tangible production might derivatives trading promote or facilitate? Can it accomplish anything in the real world that conventional arbitrage cannot, besides sometimes creating the illusion of lower risk?

In reply to this comment by Farhad2000:
Not really since you derive the value from the original financial instrument, so if you are deriving the value off a risky mortgage payment that may or may not complete it stops being a zero sum game. Even more so when toxic debt packages are combined with other debts and financial packages.

In reply to this comment by jwray:
Isn't derivatives trading a zero-sum game?

There is no tangible production created. Derivatives differ but mostly its betting, you are taking a huge risk for a large pay off, based around performance factors, everything from how well company stock do or not, how currency exchanges do or even how weather will play out, which was part of Enron's strategy when it introduced weather futures.

In reply to this comment by jwray:
to put it another way... what actual, tangible production might derivatives trading promote or facilitate? Can it accomplish anything in the real world that conventional arbitrage cannot, besides sometimes creating the illusion of lower risk?

In reply to this comment by Farhad2000:
Not really since you derive the value from the original financial instrument, so if you are deriving the value off a risky mortgage payment that may or may not complete it stops being a zero sum game. Even more so when toxic debt packages are combined with other debts and financial packages.

In reply to this comment by jwray:
Isn't derivatives trading a zero-sum game?

to put it another way... what actual, tangible production might derivatives trading promote or facilitate? Can it accomplish anything in the real world that conventional arbitrage cannot, besides sometimes creating the illusion of lower risk?

In reply to this comment by Farhad2000:
Not really since you derive the value from the original financial instrument, so if you are deriving the value off a risky mortgage payment that may or may not complete it stops being a zero sum game. Even more so when toxic debt packages are combined with other debts and financial packages.

In reply to this comment by jwray:
Isn't derivatives trading a zero-sum game?

Not really since you derive the value from the original financial instrument, so if you are deriving the value off a risky mortgage payment that may or may not complete it stops being a zero sum game. Even more so when toxic debt packages are combined with other debts and financial packages.

In reply to this comment by jwray:
Isn't derivatives trading a zero-sum game?

I think one of the modern success stories of free markets and interesting self regulatory bodies that emerge are the labor unions. They were able to strike out their claims more effectively and nimbly than any government regulation.

Labour unions are given power through Federal and State government. In both cases business claim that minimum wages, safety standards, and work agreements pushed through by labor unions stifle business growth. Labor is seen as an input factor in economic thinking, not as a group of people. Mises always argued for the elimination of minimum wage for example. Furthermore if you remember the when the Detroit bailout was being discussed it was the Union workers that were blamed for over inflating their wages.

If labor mobility is taken as presented in Austrian economics then all trade restrictions must be done away with, there is efficiency reached when US manufacturing jobs are taken to less regulated non union parts of the world such as China.

The business has great power then its workers to dictate the terms of employment, dissatisfaction with labor conditions would mean mass firings and replacements, the exact reason why China has no labor problems with regards to unions there are so many people vying for the jobs as is.

Who are these "others" to which your refer? If a company charges a fair market price for its product, it can pay its workers well, and his family can prosper as well, the consumer also gets his product at a reasonable price. It is the happy medium.

Fair price is never set in the capitalist market, its is the abnormal profits price that is set. With migration of manufacturing to Chinese nations there has been no price fall in basic commodities like clothes. Per unit production costs are in the pennies, however the price charged is inflated. So what you bought for 50$ made in the US is still $50 when made in China, even though production costs are reduced. This applies to almost every industry. Even though market competitiveness is supposed to drive down price we do not see that as there is unspoken collusion of where to set the price. Or rather how much can you set such that demand is stable but with the highest profit creation possible. There is an entire course on profit maximization at the expense of the consumer.

It is when the government interferes with this that the unfairness is introduced.

What about Government intervention on child labour laws? Social externalities and pollution? In the last 8 years the argument has always been that firms in a free market system can account for externalization given the chance because they are hurting their own market in the long run.

However firms operate on short term profit maximization, and do the best they can in socializing their losses, and privatizing their gains. See Banking bailout.

It is only government regulation that allows or rather forces through economic incentives such as carbon trading to make firms pollute less or increase the welfare with regards to its work force.

Trying to merge two opposites is not wisdom. This is the idea of having your cake and eating it too. You can not have the powers of the market work if they are stifled in other areas. There ends up with a bubble of something eventually, and the market will always find that and exploit it until it bursts.

Really? Explain how socialistic and free market governments flourish in places like Sweden, Norway, Netherlands, Finland and shit even China? Mixed economy systems are the most prevalent in the world yet somehow you claim they are all made to internally fail because there is government intervention. That flies in the face of historical fact.

China is the perfect example because you have centralized government which allows free market activity in the economy but nowhere else basically proving Mises belief that the free market leads to democracy in a populace is not altogether sound.

The resent housing bubble is the greatest explained of poor government regulation. the The Community Reinvestment Act of 1977 caused the housing bubble by not alowing banks to use their normal risk evaluation models when considering blacks and other minorities for loans.

Utter right wing spin rubbish, I mean do you even think about it? A 1977 act results in a market meltdown some 32 years later. Be serious. The banks knew the risks, they just hoped the bubble wouldn't burst before making out, further increased exposure by repacking toxic debt and then selling that off as investment packages.

There clear causality found in the 1994 to 2004 time of Fed debates regarding regulating sub prime and derivatives markets, remember junk bonds of the 1980s? Same shit different name but far more severe effects.
For more http://www.videosift.com/video/Klein-Blames-Greenspan-Deregulation-for-Economic-Crisis

Greenspan believed that banks would self regulate themselves.
http://news.bbc.co.uk/2/hi/business/7687101.stm
http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html

Committee chairman Henry Waxman, a Democrat, suggested that Mr Greenspan had added to the problem by rejecting calls for the Fed to regulate the sub-prime sector and some complex, risky financial products.

"The list of regulatory mistakes and misjudgements is long," Mr Waxman said.

"Our regulators became enablers rather than enforcers. Their trust in the wisdom of the markets was infinite," he added, saying that the mantra became "government regulation is wrong".

Central planning nearly always results in tyranny of the most extreme kind. Once the power is centralized, the ability to abuse that power becomes irrefutable as far as history is concerned.

Of course it does, but that makes my comment sound like an endorsement of communism and central planning, its not, its rather a clarificaition in that there is no idealized free market system that enables all citizens to be free in the vein of Rand and Friedman. One extreme is a mirror of the other.

Goverment intervention is needed to regulate markets through laws, laws that protect from monopolies from emerging and allow free market competitiveness to occur. To state that a free market system would simply regulate and account for all external costs that it imposes is ridculous.

At the end of the day the onus of proof lies at the feet of Free marketers to prove it can, well the derivatives and sub prime market was a free market entirely with no regulation and see how much profit maximazation and risky behavior that developed, primarily because each firm was acting as an independent actor working towards its own profit maximization.

What did it create? A huge social externality that they were bailout out for, so we continuously social the costs and risks through government and privatize the profits and benefits because that is capitalism.

If we allow free market thinking to take over all these banks should have been allowed to fail for their risky behavior in the market, but that would mean socio-economic collapse, though I think it would have been better since it would clarify to any one else that risky business behavior has its costs. But the people running the banks are tied closely to those running the economy, and you can't have a major change in the Wall Street it would create a huge loss of investor confidence that would create even worse effects. Business confidence is a frighteningly fickle beast.

Definitely one to mark down:

Schiff says we'll have a crash of our economy driven by hyperinflation by the end of the year, or maybe in 2010.

Krugman (who unlike Schiff is a Nobel prize winning economist) also predicted the problem we're having now, and says if we don't do something even bigger than an $800bn stimulus, we're in for a deflationary problem, just like the Great Depression.

Clearly, someone will be proven right, even if disaster ensues.

Flim-flam artists like Schiff should know better, if the problem now is because Greenspan made the interest rate too low in 2002 then the real problem is that our current 0% interest rate will cause a new asset bubble that will collapse, so he should allow for a much longer period of time for it to gestate, like say Obama's second term, 2014 or so.

But that wouldn't get him on the TeeVee machine to throw bricks at Democrats as often.

The stimulus is not really written to address the topics you mentioned since writing a bill like that would make the US into the USSR, the bill is two fold the way I see it, it aims to help those in dire need now (unemployment insurance and food stamps) and it is written to spur on investment spending in the long term through fiscal expenditure (infrastructure spending). The aim is to increased aggregate demand in the whole economy in the short term and reduce the job losses.

Now people instantly say why don't we just give tax cuts and this will give the same effect? It has been done already and it didn't work, you had a large tax cut in 2008 that did nothing to alleviate the economic crisis we face today. People simply saved or paid off debt which does not generate economic activity. e.g. from Krugman in Jan.2008

Instead, what seems to be happening is that the Bush administration refuses to sign on to anything that it can’t call a “tax cut.” Behind that refusal, in turn, lies the administration’s commitment to slashing tax rates on the affluent while blocking aid for families in trouble — a commitment that requires maintaining the pretense that government spending is always bad. - Stimulus gone bad

The same thing will happen again if tax cuts are given, at the same time the tax cuts would be essentially government income that is written off and only adds to the budget deficit.

This is where monetary policy of controlling the economy through the money supply basically could not avert the problems we face today, the Fed is keeping interest rates low but you do not see increased economic activity due to lack of consumer/business confidence in the economy as a whole. We face a liquidity trap, the banks and financial institutions are simply unwilling to make any kinds of loans to spur economic activity.

You can read more about the exact steps summed up nicely at NYT since am not going to rewrite everything http://topics.nytimes.com/topics/reference/timestopics/subjects/u/united_states_economy/economic_stimulus/index.html

Will this work and make the US spurt flowers tomorrow? No. The economy will keep spiraling down, since effects like this take years to transmit through the entire economy. Remember that the Housing bubble, sub prime mortgages and other issues were highlighted nearly 2 years ago before the actual effects started being seen. But this bill will help Americans in need now.

Blankfist doesn't really know what he is talking about, and is buying into the conservative blame game, it was deregulation in the derivatives market that helped created this crisis, all Greenspan needed to do at one point to prevent alot of this is say the words "Housing bubble" - http://www.videosift.com/video/Klein-Blames-Greenspan-Deregulation-for-Economic-Crisis

We will see how it pans out. However am with Krugman and Stiglitz, I don't think it goes far enough at all, the program needs to be much larger. In Krugman's words:

According to the CBO’s estimates, we’re facing an output shortfall of almost 14% of GDP over the next two years, or around $2 trillion. Others, such as Goldman Sachs, are even more pessimistic. So the original $800 billion plan was too small, especially because a substantial share consisted of tax cuts that probably would have added little to demand. The plan should have been at least 50% larger.

Now the centrists have shaved off $86 billion in spending — much of it among the most effective and most needed parts of the plan. In particular, aid to state governments, which are in desperate straits, is both fast — because it prevents spending cuts rather than having to start up new projects — and effective, because it would in fact be spent; plus state and local governments are cutting back on essentials, so the social value of this spending would be high. But in the name of mighty centrism, $40 billion of that aid has been cut out.

Just wait a few months for this stimulus to be ineffective, the Republicans come out and politicize it, criticize it saying it didn't work because it was stupid and we needed more tax cuts. But is a difficult situation, you got large government debt on one hand, and you need a large stimulus on the other. How do you reconcile those.

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An AP report from October 2008 - Badgered by lawmakers, former Federal Reserve Chairman Alan Greenspan denied the nation's economic crisis was his fault on Thursday but conceded the meltdown had revealed a flaw in a lifetime of economic thinking.



From 2007. Alan Greenspan forecasting the economies state and the credit crunch problems, upon creation of Greenspan Associates.

Ahh Right Wing historical revisionism.

Never looking at Reagen's record expenditure on nuclear armament, star wars, iran contra, trickle down economics and so much more. How was that as a economic stimulus?

Let's not forget the constant axiom held that free markets would allows a growing market, well insider trading of sub prime mortgages was about as close to a free market as you got, yet look how that panned out. The SEC and Credit approves all rolled over to allow big business to fuck up even more, which was then rescued by government bailout. Free market engineering allowed Enron to jack California for money over power, because somehow Alan Greenspan thought everyone would simply self regulate themselves.

What about defense spending? privatization of military contracts and logistics was supposed to save the government money instead it spends even more now on logistics and upkeep routinely private firms would blow up equipment and charge ungodly rates to the government.

Right wing nut economics has always been about privatizing profits while socializing the costs. Relying solely on outdated criticisms on FDR and LBJ. What happened with Bush you guys? What was that about small government?

No you can't afford tax cuts when you have run away deficit and a crumbling infrastructure. The same ones built through government expenditure.