This is the crux of the issue. I think we need another point of view that makes the case that markets have not been allowed to be self adjusting. The case that since FDR the government has been attempting to eliminate the "adjusting". And in attempting to do so brought us to where we are today.
Maybe because before FDR the "adjusting" lead to a Depression . . . and because left to their own devices the "adjusting" would have lead to a depression this time too.
Similarly, the market won't prevent people from spinning 9% junk mortgages into 5% Aaa gold until the fraud blows up in everyone's face. For these reasons we need rules. Those rules are commonly called "regulations".
Banks made risky loans because they didn't have to keep them. They packaged them and sold them - go back to 1938.
Not really. Responsible taxpayers are all getting punished. Other people get the buzz, we get the hangover.Does not make any difference now! No one will be punished.
That's a nice argument expect it ignores the giant pink elephant of banks writing down hundreds of billions of dollars worth of loans and mortgage related securities. The truth is that banks held lots of this toxic crap so they could keep the origination game going. They even created off balance sheet vehicles so they could warehouse more of the risk than would have been allowed under existing capital adequacy requirements. And when they ran out of junk loans to bundle (even with zero lending standards) they duplicated existing loans synthetically and bundled those (no reason in the world Fannie & Freddie would have any reason to be part of that nonsense).
In your little history of I didn't see anything about the creation of the CDS market, or CDO squareds, or synthetic mortgage backed securities, or SIVs, or the leveraging of investment banks 30+:1, etc. etc.
I know there is a political death match going on with free market conservatives pitted against big government liberals to try to assign blame. But this seems pretty obviously to be a market failure at its heart.
There was not a free market in the banking industry and it wasn't regulated by the government adequately.
It was, and is, a very free market. True the government attempted to subsidize mortgage rates through Fannie & Freddie. But those subsidies didn't cause the problem any more than the mortgage interest deduction did. And those subsidies didn't cause the market not be free and are really only a small part of the problem.
The much larger problem, in a nutshell, is that the market badly misjudged risk. It did so at several points in the process and for different reasons in each case (at loan origination, during bond structuring, during the ratings process, during the risk management process at financial institutions, during the strategic planning process at those same institutions, etc.). Correct the risk assessment at one of these levels and the crisis never happens. Remove Fannie & Freddie and it still does.
Not really. Responsible taxpayers are all getting punished. Other people get the buzz, we get the hangover.
Right on.I think most people agree that markets work fabulously well when risks and rewards are transparent, and when those who stand to gain from taking risk will also lose if things go poorly. That was apparently not the case here. Saying "the free market didn't work" is like saying "automobiles don't work" after you get a flat tire. The market works fine if we just have regulations in place that set the conditions for transparency and assuring that the results (good or bad) from taking risks accrue to the proper parties.
I do wonder exactly how the current bailout orgy is helping us re-align risk and reward in our financial system. It does precisely the opposite.
Right on.
I will add another point that anti-free marketers tend to get wrong. They often assert that the free market fails when a poorly run company fails. NO! The free market succeeds when a poorly run company fails, and the value of the company is wiped out. Freedom to succeed (and be rewarded for success) and freedom to fail (and be punished for failure). Without the latter, you don't really have the former.
I think that the big issue is that there is no freedom to fail if you are too big to fail. The discussion seems to be do the Detroit 3 qualify as too big to fail. The profits are shared privately but the losses are shared publically.Right on.
I will add another point that anti-free marketers tend to get wrong. They often assert that the free market fails when a poorly run company fails. NO! The free market succeeds when a poorly run company fails, and the value of the company is wiped out. Freedom to succeed (and be rewarded for success) and freedom to fail (and be punished for failure). Without the latter, you don't really have the former.
Agreed. Another way to put it is, if you're treated as "too big to fail" by the federal government, you don't have much incentive to pursue a business model that promotes success. And those competing businesses which *are* built for success aren't given the competitive advantage they've earned.I think that the big issue is that there is no freedom to fail if you are too big to fail. The discussion seems to be do the Detroit 3 qualify as too big to fail. The profits are shared privately but the losses are shared publically.
Sure. But that begs a couple of questions in and of itself:I hate to break up this circle...
The "too big to fail" philosophy is a realization that a failure of a large and important company - like, say, Lehman Brothers (or LTCM or AIG or MBIA) - would cause further pain in the economy. If propping up a company slows down or prevents a spiral, then it might benefit the economy even though "free market" ideologies are bruised.
2. Propping up a failing "too big to fail" business or industry takes multiple forms. When the reason for the failure is largely because of the business model and cost structure, propping them up with taxpayer money with little or no demands toward fixing said business model and cost structure is just throwing good money after bad.
I think most people agree that markets work fabulously well when risks and rewards are transparent, and when those who stand to gain from taking risk will also lose if things go poorly. That was apparently not the case here. Saying "the free market didn't work" is like saying "automobiles don't work" after you get a flat tire. The market works fine if we just have regulations in place that set the conditions for transparency and assuring that the results (good or bad) from taking risks accrue to the proper parties.
I do wonder exactly how the current bailout orgy is helping us re-align risk and reward in our financial system. It does precisely the opposite.
Saying "See ya" might leave us feeling all warm and fuzzy as we curl up with Adam Smith but it may not be the wisest choice. It's hard to get an economy moving again if credit is constipated or even non-existent.
Right on.
I will add another point that anti-free marketers tend to get wrong. They often assert that the free market fails when a poorly run company fails. NO! The free market succeeds when a poorly run company fails, and the value of the company is wiped out. Freedom to succeed (and be rewarded for success) and freedom to fail (and be punished for failure). Without the latter, you don't really have the former.
...
Suppose I put up a building on my farm, cut corners on the electrical work, and the building burns down. I'm the sole loser when my gamble doesn't work out well.
If I do the same thing while remodling my downtown store, and the entire block burns down, then I've generated a much bigger loss. If I don't have enough assets to reimburse my neighbors for my failed gamble, or if my assets are protected because I made sure that the building was owned by a limited liability corporation, then neither my neighbors nor I have recieved the rewards and losses arising from our own actions.
....