Accurate summary of what went wrong?

[rwguinn]

Does the summary here accurately depict what went wrong/led to the problems? (It's a free download of the paper)
THis is NOT F=m(d²x/dt², so I don't fully understand it.
IS the "Blurring between credit (loans) and securities" a big part of the problem?
I know that too-easy credit was a big factor for individuals--and it dominoed into the banks, but do these guys describe it accurately?

 

[Puppycow]

I'm not very impressed by it. I don't see any glaring errors, but it's boring.

I recommend this:
http://www.thisamericanlife.org/Radio_Episode.aspx?sched=1318

 

[SaulOhio]

Ok, so this paper has another proposal about how to regulate the capitalist system in order to make it stable. One question:

Are they going to get it right this time?

For the last 120 years, since the Sherman Antitrust Act, the government has been trying to fix the economy, regulate it so it won't fall apart or tear itself to pieces or whatever. And even before then it has been shoving its thumb fingers into the works with railroad grants, subsidies, inflationary monetary policies, and even wars. Every time, it has actually made more of a mess of the whole thing, making more excuses to impose even more regulation to stabilize the inherent problems in the unfettered free market system (actually, the problems the government itself caused).

So when will they get it right? When will the new regulations imposed on capitalism actually provide us the perpetually stable utopia promised?

Don't answer that. It was a rhetorical question. The answer is: Never.

An economy is too complex a thing to regulate. Not only does it involve a vast number of parts, those parts are PEOPLE, each a vastly complex entity in itself, having free will and capable of all sorts of ingenuity to evade, ignore, or even use the regulations imposed to their advantage. The result is unintended consequences, perverse incentives, the throttling of the creative powers of the best among us, often rewarding the most corrupt businessmen, causing the stagnation or instability the regulations were intended to solve.

Your clever mathematical models ("F=m(d2x/dt2") of how the economy works are just child's games compared to the real thing. They cannot model the incentives and ingenuity involved in the interactions of so many human beings.

The Myth that Laissez-Faire Is Responsible for Our Financial Crisis by George Reisman

 

[oldhat]

I'm not very impressed by it. I don't see any glaring errors, but it's boring.

I recommend this:
http://www.thisamericanlife.org/Radio_Episode.aspx?sched=1318

I was going to suggest the exact same thing. Listen to all 4 episodes in the series. A+ radio work.

 

[Corsair 115]

Ok, so this paper has another proposal about how to regulate the capitalist system in order to make it stable.

Not every country suffered disastrous financial system troubles. Some, in fact, avoided any significant financial systems altogether. Canada, to name one example, has had a financial and banking system that largely escaped the turmoil. Indeed, so far in 2009 some 94 banks have failed in the U.S.; the last failure of a Canadian bank was in 1928.

The Canadian financial and banking system is more tightly regulated than in the U.S. Is it merely coincidence that its system was more regulated and escaped most of the financial calamity?

 

[rwguinn]

Ok, so this paper has another proposal about how to regulate the capitalist system in order to make it stable. One question:

Are they going to get it right this time?

For the last 120 years, since the Sherman Antitrust Act, the government has been trying to fix the economy, regulate it so it won't fall apart or tear itself to pieces or whatever. And even before then it has been shoving its thumb fingers into the works with railroad grants, subsidies, inflationary monetary policies, and even wars. Every time, it has actually made more of a mess of the whole thing, making more excuses to impose even more regulation to stabilize the inherent problems in the unfettered free market system (actually, the problems the government itself caused).

So when will they get it right? When will the new regulations imposed on capitalism actually provide us the perpetually stable utopia promised?

Don't answer that. It was a rhetorical question. The answer is: Never.

An economy is too complex a thing to regulate. Not only does it involve a vast number of parts, those parts are PEOPLE, each a vastly complex entity in itself, having free will and capable of all sorts of ingenuity to evade, ignore, or even use the regulations imposed to their advantage. The result is unintended consequences, perverse incentives, the throttling of the creative powers of the best among us, often rewarding the most corrupt businessmen, causing the stagnation or instability the regulations were intended to solve.

Your clever mathematical models ("F=m(d2x/dt2") of how the economy works are just child's games compared to the real thing. They cannot model the incentives and ingenuity involved in the interactions of so many human beings.

The Myth that Laissez-Faire Is Responsible for Our Financial Crisis by George Reisman

Excuse the hell out of me.
The equation I used was to indicate that I Am a bloody engineer, and have no clue if the scenarios in the paper are true of not. That equation describes Force due to acceleration (2nd time derivative of displacement) and has not a goddamn thing to do with economics. If you want to rant and rave, have at it, but your credibility just hit -6E6 with me, since you obviously cannot or will not read, and just go off for the hell of it.
If you're an expert, no wonder the world is in such sad ****ing shape!

 

[PixyMisa]

Not every country suffered disastrous financial system troubles. Some, in fact, avoided any significant financial systems altogether. Canada, to name one example, has had a financial and banking system that largely escaped the turmoil. Indeed, so far in 2009 some 94 banks have failed in the U.S.; the last failure of a Canadian bank was in 1928.

The Canadian financial and banking system is more tightly regulated than in the U.S. Is it merely coincidence that its system was more regulated and escaped most of the financial calamity?

Part of the problem was that the U.S. system had regulations pushing banks to make bad loans.

Good regulation helps. Bad regulation, no so much.

 

[Oliver]

As far I remember, PBS Frontline's next report will be about a detailed analysis of the crisis.

 

[SaulOhio]

rwguin: Excuse me! I did not recognize the equation, since it didn't even seem complete. You were missing at least a parenthesis. A lot of economist these days are into very complicated mathematical formulas and models which, for the reason I gave, are entirely invalid. I thought you were quoting one of those. My bad.

Corsair 115: Canada didn't have any Glass-Steagal Act separating commercial and investment banking. Repealing that is what is often blamed for the crisis in America. But Canada does have waiting lists for important surgical procedures and a historically higher unemployment rate than America.

Regulation of the banking sector is made necessary by central banking, fiat currency, and government deposit insurance. Take all that away, and you don't need regulation to keep it stable. Bankers themselves would be motivated to manage risk more responsibly.

 

[Kestrel]

Regulation of the banking sector is made necessary by central banking, fiat currency, and government deposit insurance. Take all that away, and you don't need regulation to keep it stable. Bankers themselves would be motivated to manage risk more responsibly.

Libertarian theology assumes that individuals running corporations will act in the best long term interests of the corporation. Reality is that individuals act in their own, often short term interest.

Insiders at investment banks like Lehman Brothers created unregulated securities (credit default swaps) for personal gain. Maximizing short term profits to maximize personal bonuses with little consideration of long term stability of the bank. When Lehman Brothers collapsed, liabilities totaled over 40 times the assets of the bank. The motivation was to take the money and run, not keep the firm going over the long haul.

 

[Emperor_Gestahl]

Two things.. First about Canada, did they escape the troubles or are they just lagging behind? http://www.greaterfool.ca/2009/10/07/end-of-days/

Maybe they're just not as quick at bubble-blowing as we are? Looks like they've got it figured out now though!

Second, the content of this PBS segment may not be a surprise to most of you but it's a good layman-level explanation of the root cause of this mess. And I though Kucinich was the only good Ohio congressman!

http://www.pbs.org/moyers/journal/10092009/watch.html

 

[Francesca R]

Things "went wrong" with government and private sector decisions.

People who argue that in the absence of government decisions, all the private decisions would have been fine, or that in the absence of private decisions, all the government decisions would have been fine . . . are likely trying to rip you off. They are not interested in understanding or discussing what went wrong.

 

[SaulOhio]

Things "went wrong" with government and private sector decisions.

People who argue that in the absence of government decisions, all the private decisions would have been fine, or that in the absence of private decisions, all the government decisions would have been fine . . . are likely trying to rip you off. They are not interested in understanding or discussing what went wrong.

And of course, as usual with your arguments, nobody is saying that all private decisions would have been fine in the absence of government decisions. Certainly private decisions are often mistakes. People would not suddenly become superhuman angels in the absence of government regulation. NOBODY is arguing that.

The argument is that in the absence of government regulation, privately made errors would be corrected more quickly, and would not accumulate in the economy. Its the government regulations, like FDIC insurance and low interest rates that allow errors to go uncorrected for a long time. It is the accumulation of uncorrected mistakes, malinvestments, that eventually cause the collapse of the economy.

America's Great Depression by Murray Rothbard

A general review of entrepreneurship is now in order. Entrepreneurs are largely in the business of forecasting. They must invest and pay costs in the present, in the expectation of recouping a profit by sale either to consumers or to other entrepreneurs further down in the economy’s structure of production. The better entrepreneurs, with better judgment in forecasting consumer or other producer demands, make profits; the inefficient entrepreneurs suffer losses. The market, therefore, provides a training ground for the reward and expansion of successful, far-sighted entrepreneurs and the weeding out of inefficient businessmen. As a rule only some businessmen suffer losses at any one time; the bulk either break even or earn profits. How, then, do we explain the curious phenomenon of the crisis when almost all entrepreneurs suffer sudden losses? In short, how did all the country’s astute businessmen come to make such errors together, and why were they all suddenly revealed at this particular time? This is the
great problem of cycle theory.

When NOBODY seems to ever make a mistake, when every investment seems to make a profit, that's when you know there is a boom going on, and its not a good thing. In a free market, with a stable money supply, there would always be failures, businesses that lose money. This is a NECESSARY PROCESS by which inefficient businesses and incompetent managers get weeded out. The government protection against failure by bailouts and high interest rates increasing the rate of profit prevents this necessary process from taking place.

Ever hear of creative destruction?

Libertarian theology assumes that individuals running corporations will act in the best long term interests of the corporation. Reality is that individuals act in their own, often short term interest.

Again, you seem to know nothing about "libertarian theology". Libertarians often criticize our present corporate structure.

You people need to really understand the positions you are criticizing before you open your mouths.

 

[Kestrel]

Part of the problem was that the U.S. system had regulations pushing banks to make bad loans.

Good regulation helps. Bad regulation, no so much.

Time for a reality check here.

The Community Reinvestment Act^WP required banks with FDIC insurance to apply the same standards for lending to all customers, regardless of where they lived. It did't require lending to customers with bad credit records or income levels that will not allow paying off the mortgage.

 

[Kestrel]

The argument is that in the absence of government regulation, privately made errors would be corrected more quickly, and would not accumulate in the economy. Its the government regulations, like FDIC insurance and low interest rates that allow errors to go uncorrected for a long time. It is the accumulation of uncorrected mistakes, malinvestments, that eventually cause the collapse of the economy.

The institutional failures that led to the current economic crises were not FDIC insured banks. They were investment banks like Lehman Brothers and Bear Sterns that were operating in a largely unregulated market. Selling products such as credit default swaps that lacked the transparency needed for a market to operate properly. At the same time, they were hiding the risk from their own stockholders by keeping these liabilities off the books. The same tricks used by Enron a few years earlier.

 

[SaulOhio]

Kestrel: I just gave FDIC insurance as ONE example of the kinds of government interventions we have in the market. What about Fed policy? What about Federal licensing requirements? How about the SEC? "Oh, this investment bank is governed by the SEC, so its safe to give them your money." How about all the government encouragement of home ownership, giving the investment banks a glut of new mortgages to bundle and sell as derivatives?

And my argument wasn't just about investment banks. It was about the whole economy, how rising inflation results in poor judgment throughout the economy, since everything looks like a good investment.

 

[Francesca R]

nobody is saying that all private decisions would have been fine in the absence of government decisions.

Looks like that's exactly what you're doing:

The argument is that in the absence of government regulation, privately made errors would be corrected more quickly, and would not accumulate in the economy. Its the government regulations, like FDIC insurance and low interest rates that allow errors to go uncorrected for a long time. It is the accumulation of uncorrected mistakes, malinvestments, that eventually cause the collapse of the economy.

 

[kevinquinnyo]

Looks like that's exactly what you're doing:

Not really.

I think his point is basically that markets succeed on their own as the rule, and fail as the exception.

Government policy fails as a rule, and succeeds as an exception to the rule.

 

[Francesca R]

As I said, anyone spinning that line is not interested understanding or discussing what went wrong.

 

[Just thinking]

An economy is too complex a thing to regulate. Not only does it involve a vast number of parts, those parts are PEOPLE, each a vastly complex entity in itself, having free will and capable of all sorts of ingenuity to evade, ignore, or even use the regulations imposed to their advantage.

You left one out ... behave irrationally. When someone can truly model irrational behavior, only then will one be able to regulate and control an economy.