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Old 10-24-2008, 06:59 PM   #41
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I have to add that I was very shocked that Greenspan was "shocked" that companies did what they did and actually admitted that he was shocked. (That is if you believe his testimony was honest).

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Old 10-24-2008, 09:40 PM   #42
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Originally Posted by ERD50 View Post
Well, I think FoA's comments apply here as well. The CEO really can take a short term view, and that may mean gambling on long term risks. Not good. BTW, I do think that something is wrong with the current CEO/BOD relationship in many companies. I don't think it is as free a market as it could/should be.

I'm not certain this situation fits the "Tragedy of the Commons" exactly, it might - I'd need to read up a bit more. I think it can be viewed that way - as the neighborhood is a "common area", but the company does not have to pay the neighbors for the risk that they are being put in, so it does seem to fit that description of " take what you need, it's free to all". So at least, transparency is needed, the company has to be forced to produce records that describe the dangers and what they are doing to contain them.

Now IMO, if an industry is smart - they will set up their own standards. If companies meet those standards (and are audited if needed) they get to show that with a certificate of some sort. And, if the industry runs that program effectively, the public is happy, and they can totally avoid govt intervention. If they don't, then they are going to get govt involvement. What's best - do your own policing, in a manner that probably will be more effective and less bureaucratic than what the govt would do, or "contract out" that job to the govt.

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Okay, I think I've got the vocabulary right.

I'm thinking here that "transparency" is always good, but it doesn't solve the whole problem. If the company is making a good decision for its stockholders, wouldn't it continue that decision even after it told its neighbors that it is putting them at risk?

The reason I'm going this direction is that I think this is an issue in regulating financial institutions. Suppose that well-informed bank stockholders are comfortable with the company increasing leverage to increase ROE. The stockholders know there is a risk, but the risk/reward balance says it's a good decision for them. But the rest of us are at risk of a "complete meltdown of the financial system" - a loss that far exceeds anything an individual company loses.

This is the problem with Greenspan's idea that the rest of us could rely on the self-preservation instincts of private companies to keep the system functioning. They do the calculation using only their own risk/reward, the rest of us take an additional risk that doesn't get into their calculations.
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Old 10-24-2008, 10:45 PM   #43
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What really amazed me (continuing from my "I'm shocked" post above), was Greenspan's language to Congress where he confessed that he had a "[fatal?] flaw in my model" which was that "a company would never do that [take way excessive risk] to their shareholders".

Wow!

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Old 10-24-2008, 10:48 PM   #44
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The reason I'm going this direction is that I think this is an issue in regulating financial institutions. Suppose that well-informed bank stockholders are comfortable with the company increasing leverage to increase ROE. The stockholders know there is a risk, but the risk/reward balance says it's a good decision for them. But the rest of us are at risk of a "complete meltdown of the financial system" - a loss that far exceeds anything an individual company loses.

This is the problem with Greenspan's idea that the rest of us could rely on the self-preservation instincts of private companies to keep the system functioning. They do the calculation using only their own risk/reward, the rest of us take an additional risk that doesn't get into their calculations.
Yes, this is a very good point! They completely discounted the unwanted risk that the public assumed unwillingly. This attitude is rampant throughout our society among power stakeholders. Think about the decisions that corporate executives make when not adequately funding their company's pension funds and cities that make pension/health care promises to civil employees that can never be fufilled through city coffers or taxation. Our congress which passed the medicare prescription drug plan which greatly increased the cost of medicare, now in danger of running out of funds.

These people in power often do what is expedient without weighing the costs, short and long term. I think our entire society is wanting in that regard. And it is a failure of our ethical culture, I think. Something not easily changed without a big wake up call. Unfortunately, that is very painful.
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Old 10-24-2008, 11:39 PM   #45
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RE: transparency vs regulation ...

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Okay, I think I've got the vocabulary right.

I'm thinking here that "transparency" is always good, but it doesn't solve the whole problem. If the company is making a good decision for its stockholders, wouldn't it continue that decision even after it told its neighbors that it is putting them at risk?
Yes, the company would likely try to do that, but with the transparency there, the neighbors (and their appointed officials) should be challenging the company, and saying they can't do that. So yes, this could come back to the community threatening to set regulations, which could be required in a "tragedy of the Commons" situation. I'm still thinking that this is best served by the industry itself. They could say - "here are the safety standards we use when there are residential units within X feet of our facility. We exceed all these standards, and have been audited by independent parties to verify that. You can hire an auditor, and we will pay the fee." If the industry has been conservative with this approach, the neighberhood should be satisfied. I'm guessing that approach could generally be better than leaving it to legislative bodies to determine.

However, this is a long term view. In the short term, it might be 'best' for the company to try to get away with it. I think this plays into FoA's comments on short term CEOs running long term companies.


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The reason I'm going this direction is that I think this is an issue in regulating financial institutions. Suppose that well-informed bank stockholders are comfortable with the company increasing leverage to increase ROE. The stockholders know there is a risk, but the risk/reward balance says it's a good decision for them. But the rest of us are at risk of a "complete meltdown of the financial system" - a loss that far exceeds anything an individual company loses.
Yes, but if we have transparency - who wants to do business with a bank with a poor rating? So THAT will affect the shareholders.

Some of this recent talk about companies that are "too big to let fail", because they take so much down with them concerns me. I am thinking that the govt should get in and take action before a company can get so big and have so much impact. It's tough to say what would trigger that, and what the action should be, but it does frighten me that a single company or industry can hurt so many out side that company/industry.


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Yes, this is a very good point! They completely discounted the unwanted risk that the public assumed unwillingly. This attitude is rampant throughout our society among power stakeholders. Think about the decisions that corporate executives make when not adequately funding their company's pension funds and cities that make pension/health care promises to civil employees that can never be fufilled through city coffers or taxation. Our congress which passed the medicare prescription drug plan which greatly increased the cost of medicare, now in danger of running out of funds.

These people in power often do what is expedient without weighing the costs, short and long term. I think our entire society is wanting in that regard. And it is a failure of our ethical culture, I think. Something not easily changed without a big wake up call. Unfortunately, that is very painful.
Well said. I think this is playing into the "tragedy of the Commons" thing again. So many people want something from the govt, and want to let the "other guy" pay for it. An individual can take more than their share, but if a majority take more than their share, it falls apart.

I still think the solution is education. We need to somehow make the majority aware that, for example, not everyone can benefit from an insurance program (which is really what a lot of these govt programs are). Everyone pays, and everyone (on average) loses. But some people are saved from an extreme problem, so (on average) we decide that is worth the cost. But it seems like too many people think that *everybody* should benefit - hey, the govt will pay for it!".

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Old 10-25-2008, 06:00 AM   #46
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But it seems like too many people think that *everybody* should benefit - hey, the govt will pay for it!".
I agree, but it's not the Government that pays. They're just redistributing the taxpayer's (those who actually pay fed income taxes) money.

From my perspective, it seems to be getting worse...a higher % of "victims every year that need the tax payer's (aka..Gov) assistance.

End of rant... I'm off the play 27 holes and kill some golfs
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Old 10-25-2008, 09:51 AM   #47
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From my perspective, it seems to be getting worse...a higher % of "victims every year that need the tax payer's (aka..Gov) assistance.
Yep. Like my signature says, if everyone else getting mauled by declining asset values gets a bailout, why not my 401K?
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Old 10-25-2008, 10:18 AM   #48
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I agree, but it's not the Government that pays. They're just redistributing the taxpayer's (those who actually pay fed income taxes) money.

From my perspective, it seems to be getting worse...a higher % of "victims every year that need the tax payer's (aka..Gov) assistance.


exactly. That's why I said, when the majority want more than they put in, it all falls apart. The math doesn't work. But people will still want to get in line ahead of the other guy, before it all runs out.

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Old 10-25-2008, 02:07 PM   #49
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Yes, the company would likely try to do that, but with the transparency there, the neighbors (and their appointed officials) should be challenging the company, and saying they can't do that. So yes, this could come back to the community threatening to set regulations, which could be required in a "tragedy of the Commons" situation. I'm still thinking that this is best served by the industry itself. They could say - "here are the safety standards we use when there are residential units within X feet of our facility. We exceed all these standards, and have been audited by independent parties to verify that. You can hire an auditor, and we will pay the fee." If the industry has been conservative with this approach, the neighberhood should be satisfied. I'm guessing that approach could generally be better than leaving it to legislative bodies to determine.

However, this is a long term view. In the short term, it might be 'best' for the company to try to get away with it. I think this plays into FoA's comments on short term CEOs running long term companies.
I'm not a natural fan of regulation. Some of my toughest days at work have been dealing with regulators. I'd like to believe this works, but I have trouble seeing the incentives. I don't know why the industry wants to be transparent about tragedy of the commons issues, or what keeps one company from cheating.

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Yes, but if we have transparency - who wants to do business with a bank with a poor rating? So THAT will affect the shareholders.
First, we have to figure out where we get the transparency. But we also have trouble with the commons. Your argument seems similar to Greenspan's. The bank will operate in its own best interests, and that will be enough protection for the common good. It appears that financial institutions are willing to take risks that are acceptable to the stockholders, but not acceptable to the common good.

Quote:
Some of this recent talk about companies that are "too big to let fail", because they take so much down with them concerns me. I am thinking that the govt should get in and take action before a company can get so big and have so much impact. It's tough to say what would trigger that, and what the action should be, but it does frighten me that a single company or industry can hurt so many out side that company/industry.
I'm not sure what "action" you are looking for. Maybe it's just using different words -- could it be that you are suggesting something that I would call "regulation"?

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Well said. I think this is playing into the "tragedy of the Commons" thing again. So many people want something from the govt, and want to let the "other guy" pay for it. An individual can take more than their share, but if a majority take more than their share, it falls apart.

I still think the solution is education. We need to somehow make the majority aware that, for example, not everyone can benefit from an insurance program (which is really what a lot of these govt programs are). Everyone pays, and everyone (on average) loses. But some people are saved from an extreme problem, so (on average) we decide that is worth the cost. But it seems like too many people think that *everybody* should benefit - hey, the govt will pay for it!".
I'm losing you here. I agree that lots of people want something from the gov't and don't want to pay for it. But I don't see the application in this situation.

I think that the bank regulation we've had has generated costs for all of us. We get less interest on deposits or pay higher interest on loans because the gov't forces banks to hold "adequate" capital. This provided an opportunity for "nonbanks" to compete against banks and appear to provide better value. We now know that the extra value wasn't free, and IMO it probably wasn't worth the cost. But I'm not sure if this connects at all to your comment.
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Old 10-25-2008, 03:49 PM   #50
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exactly. That's why I said, when the majority want more than they put in, it all falls apart. The math doesn't work. But people will still want to get in line ahead of the other guy, before it all runs out.

-ERD50
Unfortunately, the majority CAN demand (and get ) more than they put in. Beause of the way income (largely a proxy for initiative and talent) is distributed, there's a long, thin tail to the right of the graph. These folks will be the bill payers, and there's no natural feedback mechanism in a pure democracy. Thankfully, we don't have a pure democracy, but the closer we get, the worse things will get. The only feedback to an ever increasing spoils system is when the goose stops laying golden eggs: The producers move out of the country, find (less productive) ways to shelter their wealth, or just quit donating their energy and talent for 20 cents on the dollar. The wealth machine grinds to a halt, and the everybody is worse off for a period of a decade or two (while we squabble over more equitable ways to divide up the ever smaller pie). Finally, with luck, a strong leader with good commmunication skills comes along and harnesses the misery, showing people that by letting the talented thrive, we'll all gain. This can take a long time.

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Old 10-25-2008, 04:12 PM   #51
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You are very correct samclem. I was thinking in simple terms where everyone puts in an equal amount, but everyone wants more than the other guy.

It is scary that 51% of the lowest income people can control Congress, which can get their vote by promising to "redistribute wealth" from the top few %.

As much as i dislike lobbyists and people with power using their connections, in a way it is just offsetting the power of the lower income groups who are able to vote themselves money.

And no, two wrongs don't make a right.


Independent - I'll try to get back to you later, it may take a little time to formulate a reply, but I'll give it a shot.


-ERD50
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Old 10-25-2008, 06:03 PM   #52
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I almost think it would be better if we went back to a system where you had to own property to have a vote. Without property you don't have the same kind of vested interest in the country that someone who owns a chunk of land has.
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Old 10-25-2008, 07:47 PM   #53
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Hopefully one good thing that will come of this mess is better regulation of the financial industry. Self regulation of professions is still common but has been curbed, for example in the UK, where Dr. Harold Shipman killed over 200 of his patients during a long career. The days of "trust me, I'm a doctor/financier/whatever" are over.
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Old 10-27-2008, 10:00 AM   #54
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I almost think it would be better if we went back to a system where you had to own property to have a vote. Without property you don't have the same kind of vested interest in the country that someone who owns a chunk of land has.
Here's an interesting piece by James Madison on this subject: Property: James Madison, Note to His Speech on the Right of Suffrage

Madison had advocated (at the constitutional convention) requiring property as a condition of suffrage. Twenty-four years later, while editing his notes on the convention, he wrote this to indicate that his thinking had changed over the years.

He recognizes the problem
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Who would rely on a fair decision from three individuals if two had an interest in the case opposed to the rights of the third?
which happens to sound like the lions/lambs example.

But also explains the other side of the issue. One observation has been repeated many times, though in our times we tend to say "wealth" instead of "property":

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The U. States have a precious advantage also in the actual distribution of property particularly the landed property; and in the universal hope of acquiring property. This latter peculiarity is among the happiest contrasts in their situation to that of the old world, where no anticipated change in this respect, can generally inspire a like sympathy with the rights of property. There may be at present, a Majority of the Nation, who are even freeholders, or the heirs, or aspirants to Freeholds.
He's saying that in the US, wealth is more equally distributed in Europe. Even those who don't have much aspire to have more. They won't vote to "soak the rich" because they already have a little, and they hope to be among the rich someday.

I think the estate tax is a good example. The tax we've got only hits 2% of the estates, so it seems that the other 98% of the people would see a self-interest in keeping it. The numbers are so lopsided this shouldn't be an issue.

But the estate tax is an issue. It seems to me that a lot of people own enough that they can envision the tax being expanded downward to catch them. They also hope to move up the ladder and get into a taxable situation that way.

So I think that maintaining these attitudes is important in avoiding a "soak the rich" policy. We need lots of people who have enough that they are concerned about losing what they have, and lots of people who believe they can move up. It seems that the wider the gap between the middle and the top 1% or 5%, the weaker these beliefs get, and the greater the popularity of spreading the wealth. Of course, the gap has been getting wider.
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Old 10-27-2008, 10:27 AM   #55
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You are very correct samclem. I was thinking in simple terms where everyone puts in an equal amount, but everyone wants more than the other guy.

It is scary that 51% of the lowest income people can control Congress, which can get their vote by promising to "redistribute wealth" from the top few %.

As much as i dislike lobbyists and people with power using their connections, in a way it is just offsetting the power of the lower income groups who are able to vote themselves money.

And no, two wrongs don't make a right.


Independent - I'll try to get back to you later, it may take a little time to formulate a reply, but I'll give it a shot.


-ERD50
it takes 2/3 of the senate to override a filibuster, which means that any bill needs 2/3 support in the senate to pass
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Old 10-27-2008, 11:13 AM   #56
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it takes 2/3 of the senate to override a filibuster, which means that any bill needs 2/3 support in the senate to pass
But that's not at all the same as 67% of the electorate, obviously.
51% of the voters can fill 100% of the senate seats. As long as politicians can win re-election by promising to forcibly take the property of the most productive minority and give it to others, that's what we'll see.

We're getting dangerously close to the Soapbox here, so I'll not go farther.
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