Cold Turkey
The fundamental problem with any government attempt to the fix financial industry is how to stabilize it without getting involved in it. The New York Times summarized the opening arguments of both the President and his critics on the proposed financial “reform” bill. Obama depicted his proposals as a step toward reducing government liability for finance industry losses.
Mr. Obama argued that he was advocating “a common-sense, reasonable, nonideological approach” that would strengthen consumer protection, limit the size of banks and the risks they can take, enforce greater transparency for derivatives and other complex securities, and impose more scrutiny of executive compensation.
Republicans says it will accomplish the opposite: by multiplying the hooks which bind the government and the industry, it will institutionalize the bailout of failing financial institutions.
“President Obama says he believes in the power of free markets but his policies prove otherwise,” said Representative Spencer Bachus of Alabama, the senior Republican on the House Financial Services Committee. “Under the Democrat plan, certain financial institutions have no freedom to fail, and are instead propped up by taxpayer bailouts and government loan guarantees.”
The financial system is so important that Bachus’ point may be moot. For political reasons it has no real freedom to fail. That’s why the real cost of managing the financial sector’s problem is astronomical. An early version of the bill featured a $50 billion “liquidation fund” that rapidly became a target of Republican critics who portrayed it as another bailout kitty. The administration attacked the fund, saying that any costs of liquidation should be borne by the financial industry. But according to Nicole Gelinas of Investors.com, that was beside the point. What government is always in on the line for is the cost of keeping the financial market from crashing. It is not primarily the cost of picking up the pieces but holding a collapsing edifice together. “The true tab is not the retroactive cost. Rather, it’s what investors demand at the time of an acute crisis so as not to flee the unknowable risks of a financial system in meltdown, precipitating depression.”
Think about everything that Washington has done in the past two years. TARP was $700 billion; that’s easy. Outside of TARP, the Treasury said it would guarantee $3.4 trillion worth of money-market funds in the fall of 2008. The Fed has purchased $1.25 trillion in mortgage-backed securities over the past year or so — providing a floor to avoid deeper housing-price declines and bank losses. It also offered $1.8 trillion to commercial-paper markets.
The FDIC guaranteed up to $940 billion in financial-firm bonds and committed another $700 billion in expanded deposit guarantees, which allowed banks to avoid selling off assets at crisis-level prices. Taking Fannie and Freddie into conservatorship and guaranteeing other housing agencies and their debt? Another $7 trillion. Other sundry programs add up quickly
These huge government expenditures were ostensibly used to keep the system from crashing, to maintain confidence, to keep things together. The government could simply not abide the collapse of the financial, auto, housing industries — including government controlled corporations — so it propped them up. Unless the President’s financial “reform” package can tie the government’s own hands to prevent a repeat of this ‘help’ then taxpayer liability won’t be reduced by a single iota. Only by adopting strict limits — both on financial firms and government spending — can there be any hope of bounding the problem. Once a financial crisis is in full swing all thoughts turn to preventing a collapse.
But during the lulls the last word anybody wants to hear is “no”. Everybody is addicted to business as usual. Neither Wall Street, nor the Federal Government, nor California want to be put on short leash. Ask the public service unions. The Greek debt crisis (Greece being one place where public service unions are particularly strong) showed how difficult it was to put a stop to profligacy. Demonstrators took to the streets to demand an end to the crisis, by which they meant ‘pay us our salaries’. The Economist writes that the EU and the IMF must bail out Greece even though Athens shows no sign of stopping its wayward ways. Otherwise another weak Eurozone country may be the next domino to go over. Yet that “will provide only temporary relief”. But it must be done to keep the system from crashing. Like an addict who must get what he needs the entire universe collapses to the horizon of the next fix.
Baseline Scenario writes that more taxpayer money must be infused now or things will really start to fall apart. The Greek crisis, which was never supposed to get this far, must not be allowed to go further. The catch is that the solution is guaranteed to make things go not just further, but all the way.
Irrespective of the next move – which lies this weekend with the International Monetary Fund and the ministers of finance meeting in Washington for the Fund’s spring meetings – this looks like the moment when the Greek problems really start to generate contagion across the eurozone region. … And this is the heart of the problem: Will Germany and other European nations be prepared to provide the large sums needed to refinance several peripheral nations? Will these nations then take the painful austerity measures needed in the midst of recessions in order to get out of this? …
Yesterday was also a wake-up call for the United States. It is no longer reasonable or responsible to say: “US banks have no exposure to Greece”. US banks are heavily exposed to Europe, and this is turning into a serious Europe-wide problem. The US badly needs to make sure this does not spread beyond Greece and Portugal/Ireland.
To restore confidence in buying Spanish and other major European nation bonds, it would surely help to have clear signals that President Obama himself, and the Federal Reserve, are taking an active stance now on making sure this does not spread to become another threat to global financial stability. A broader wall of preventive financing must now be put in place – after all, this is exactly why (in principle) the IMF was recapitalized this time last year.
Although the “Wall Street versus Main Street” meme may be a good administration sound bite to push financial “reform”, the idea that governments will rein in irresponsible traders is about as plausible as leaving two drunks in a warehouse full of whiskey to watch over each other. Governments are the among the most profligate borrowers of all. The Financial Times described the biggest driver of public debt as unfunded healthcare and pension liabilities.
But a March 2010 Bank for International Settlements (BIS) working paper, The future of public debt: prospects and implications, which examines various developed countries including the UK, presents a more worrying picture. The BIS argues that the fiscal problems confronting industrial economies are bigger than suggested by official debt figures that show the implications of the financial crisis and recession for fiscal balances. A greater danger arises from a rapidly ageing population and the related unfunded pension and healthcare liabilities. …
For the BIS, one conclusion is very clear: “It is essential that governments not be lulled into complacency by the ease with which they have financed their deficits thus far”. Experience would suggest, however, that bond investors would be wiser to expect complacency rather than radical action.
That “free” healthcare, that “cap and trade”, that “immigration reform”, why even that financial “reform” might turn out to cost money. Where’s it going to come from? Who knows? Who cares? Both government and the financial industry have set up a gigantic problem for which they share a degree of mutual responsibility. The complicating factor is that both government and the finance industry have found it in their interest to abet each other’s reckless behavior. Given this incentive structure, it is not entirely clear whether the two left together can find a way out of the mess. What is more likely to happen is that each will keep helping itself somehow to the stash of monetary whiskey until they’ve either drunk the warehouse dry or some political upheaval forces them to clean up their act.
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I will bet on upheaval. At some point the law of diminishing returns will kick in.
Most people who head governments today are craven political opportunists. Western Civilization will have to reconstitute itself after the debacle.
Just so.
Politicians, bankers and money men don’t give a rat’s ass about the future. Just so they get their’s, and the devil take the hindmost.
Which is part and parcel of where we find the condition of the world. It has always been thus.
Life is a greed based system. Greed will out in the end.
I was with a group of traders recently – some of them traded commodities, others traded stocks, and still others traded currencies. What was striking was their uniform belief that the end times were near. The system, they believed, was truly on the edge of collapse.
The tenor of conversations that I’ve had with business leaders of late has taken a dramatic turn. For a long while, many were convinced that the Federal Government – specifically the Obama Administration – would eventually back off of its profligate agenda and focus on getting its fiscal house in order. After all, they used to maintain, President Clinton had faced a similar challenge early in his first term, and he had ended up turning into a serious deficit hawk (aided, of course, by a Republican Congress after 1994).
But this sort of optimism has all but vanished from my conversations, replaced by something approaching panic. Health care reform was the turning point. An expensive, complicated, invasive bill which lost public support in proportion to the disclosure of its specifics – a bill that seemed dead after Massachusetts elected a Republican to the “Kennedy seat.” But, failing to heed these unambiguous signals from the American people, Democrats in Congress and the White House forged ahead anyway.
This raw exercise of political power has left moderates stunned. They’re now thinking, “Our ‘rulers’ in Washington really do not care what we think. They are hell-bent on spending beyond our means, and there’s nothing we can do about it right now. And by the time the election rolls around, it might just be too late.” That’s certainly how these traders felt.
There is a huge reserve of strength and good will in the American people. It is literally the only force on this planet with the ability to turn the ship around. The “ruling class” won’t do it. The “moneyed class” won’t do it. The “chattering class” won’t do it. The “intellectual class” won’t do it. It will be the tens of millions of productive citizens who – with the help of modern communication technology – will force an accounting, and accountability.
The misadventures of the political class has awakened a sleeping giant, and it’s on the move.
L3
Government is incompetent to regulate financial markets, much less micro-manage the economy.
The only possible role for government is to enforce the premises of free markets (many small, independent agents, free flow of information, no subsidies, tariffs or other distortions; no monopolies; and no “too big to fail”). Then we let the markets operate, rewarding winners and punishing losers.
Instead, government in its vanity tries to manage where it is unfit. Regulations invariably create not only unintended consequences, but outright contradictions. In math terms, the equations are over-determined. Thus the best minds are drawn to regulatory arbitrage, which has far greater profit that real business.
Even worse, the regulatory edifices created by government invite, nay beg for, regulatory capture. Only when there is a large bureaucracy in place, is it profitable to seduce and suborn it. (Here only Goldman had the foresight to have its very own Treasury Secretary.)
And then, when it all goes bad, the answer is not a chastised modesty and withdrawal to enforcing the premises. No, the answer is always yet more regulation, offering up yet more arbitrage opportunities, and new apparatus for capture. Case: What was the price to auditors for failing to find Enron’s fraud? Why, yet more work under the useless Sarbanes-Oxley.
The feedback mechanisms are misaligned, designed to hold no one accountable, to give each player maximum flexibility and minimal responsibility.
This road is taking the whole country, government and business, to bankruptcy. Because, in the real world, even the USA is not to big to fail. The main question is how long they can prop up the house of cards. When the big players decide it’s time to get out it will crash a lot harder than 2008. Back then many had convinced themselves the scams could go on indefinitely.
Globalization has created a world financial system so complex that no human can comprehend it. It is a runaway algorithm where we only focus on variables we understand in order to feel we can get some predictive value. One thing is for sure, the more variables, the higher chance of systemic failure. My approach to such complexity is to go back to basics. The largest variable, the US economy is underwater and diving deeper. The second largest economy, the EU, is treating a metastic cancer and is most likely terminal. The third largest economy, Japan, has been in trouble for 10 years. The fourth, China, has been produciing goods for the first and second economies and taking IOU’s to complete the transaction – Ponzi would be proud.
All of these players depend on global transportation to maintain the facade. Transportation is dependent on energy which is currenty under the control of the most radical nihilist on the planet. What could possibly go wrong?
I think Obama and his backers know all of this – this is the outcome they desire – the new world order.
I think that the biggest problem of all is that trust is gone. The citizens no longer trust the government or institutions that have been the background basis of our country. The citizens now have come to realize that it’s “everyone for himself”. The promises that have been made, whether for pensions, or social security, or rule of law in financial transactions, or in respect for the founding principles of our country, are seen to be hollow. Our politicians are seen to be nothing more than gibbering baboons. There is real fear within our citizenry and it will get worse.
Pensions and Social Security can be fixed just by raising the retirement age for benefits. You can retire earlier but only on your own dime to bridge the gap.
That absolutely will happen, because you need to increase the number of workers supporting the then decreased number of retirees, no matter what arrangement you otherwise settle on.
“If you wanted to retire earlier, you should have had more children.”
Another way to fix California’s pension problem is the RICO laws. Just jail everybody involved.
State of Denial
“Support for the health care plan signed into law by President Obama is stronger in California than it is nationwide. Fifty percent (50%) of California voters think the law will be good for the country, which is 11 points higher than results found on the national level. Forty-one percent (41%) of voters in California think the health care law will be bad for the country.
Still, 51% of voters in the state favor repealing the law, including 44% who strongly favor it.!???
Forty-four percent (44%) oppose repeal, with 37% who strongly oppose. Boxer carries 77% to 81% of the vote of those who strongly oppose repeal, depending on her opponent. The Republicans earn roughly 70% of those who strongly support repeal.
Most voters in the state (53%) favor the plan’s requirement that every American buy or obtain health insurance, while 44% oppose this requirement.
Unlike voters on the national level, the plurality (45%) of California voters opposes their state suing the federal government over the constitutionality of the requirement.”
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Seems the voters of California will be the last to know that Happy Days will not be here again anytime soon.
I find it revealing that time and again, when public employee unionistas are offered the choice between a modest cut in pay, or letting fellow workers financial lives be devastated by job losses, they invariably opt for the latter.
Teachers unions respond to modest pay cuts by chopping off already meager yearly instruction days.
When Hawaii’s Governor Lingle cut the education budget, the schools reacted by simply shutting down a few extra days a month.
One might think that people concerned about educating children would come up with something like voluntary study-hall duty a couple of days a year, so kids could continue to come to school, and parents lives would not have to be further disrupted, but one would be wrong.
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Total Government Support of Financial Industry, 2008 to present:
$20 Trillion.
Wall St. Bailouts Would Be Invited, Not Prevented, Under Dodd’s Bill
In the backwater of Quebec, far from the cosmopolitan centres of the universe, a small voice.
…-
“Stencilled in bold letters on the wall in Maxime Bernier’s Parliament Hill office is the French definition of liberté.
“To act and think without any physical or moral constraint,” it says. “The state of a person who is not captive.”
What the dictionary doesn’t tell you is that exercising that freedom to challenge Quebec orthodoxy can turn you into an overnight pariah.”
“Outsider: Maxime Bernier’s blunt words rile Quebecers”
“No surprise, then, that the situation in his native province would eat at him. “Quebec has one of the biggest and most interventionist governments in North America, and one of the heaviest fiscal burdens,” he told his Mont St-Grégoire audience. “Quebec has the most far-reaching social programs. Quebec is the province that gives the most subsidies to businesses, artists, parents and to a host of other groups.” Those hallmarks of the “Quebec model” of economic and social development are unsustainable, Mr. Bernier said. The province is heavily indebted, “dependent on borrowed money to fund an unsustainable level of public services.” Political choices of the past 40 years have led Quebec to a dead end. “If we do not change direction soon, we’re going to hit a brick wall.”
http://www.nationalpost.com/news/story.html?id=2945037
Big news this morning – Lindsey Graham just walked out of the Climate Change/Energy bill negotiations. With Graham out, any Climate/energy legislation should be dead until the next Congress. And Immigration politics killed it – amazing.
Apparently Harry Reid has decided that the only chance he has of retaining his Senate seat is to motivate Hispanics to turn out massively. This is driving every other legislative priority off the legislative calendar – not just energy, but also mundane things like jobs for current citizens. Who need jobs? Just extend the unemployment benefits again. The money’s free, after all.
“The effort to enact comprehensive climate and energy legislation this year suffered a critical blow Saturday when Sen. Lindsey O. Graham (S.C.), the key Republican proponent of the bill, withdrew his support because of what he said was a “cynical political” decision by Democrats to advance immigration legislation first.
The move forced the other two authors of the climate and energy bill, Sens. John F. Kerry (D-Mass.) and Joseph I. Lieberman (I-Conn.), to cancel a much-anticipated news conference planned for Monday at which they were to unveil the plan they negotiated with Graham. ”
http://www.washingtonpost.com/wp-dyn/content/article/2010/04/24/AR2010042402193_pf.html
Wretchard:
To take this metaphor a little further… or until they both die of alcohol poisoning.
The government claims it is determined to preserve industrial structures seen as essential to the economy and the American way of life. To do so they will drain tax money from productive sectors, divert an increasing portion to feed supporters and build bureaucracy to prop up a shell of the failing structures. The models for this are Amtrack/Conrail and the Merchant Marine. In both cases we have ghosts of what were major industrial structures symbolic of America’s industrial Golden Age. Twenty years of government administration will turn the automobile, health care and financial services industries into zombies also. If the model of government support of declining industrial structures threatened by innovation had determined policy in the 19th century we would now see ourselves dependent on subsidized and regulated Clipper ships, the Pony Express and our environmental waste problem would focus on cleaning up after all the oxen hauling goods along rutted trails.
The Post Office is unable to sustain Saturday delivery, despite the legal monopoly it holds over the delivery of First Class mail. Fortunately the need to evade the strictures of government inefficiency have stimulated the growth of alternatives to evade the government controlled system. Unfortunately the freight rail industry proved less able to adapt than the air freight industry did and the Rail Express Agency (REA) failed as the rail portion of America’s infrastructure fell under government control. Private bulk delivery services, like FedEx and UPS serve the parcel delivery sector and have stimulated innovation and growth in the air services and associated industries. The need for substitutes for the government document delivery service through the Post Office has also stimulated much of the growth in the telecommunications and computer technology sectors.
This is not an efficient way to stimulate innovation, it is merely how the productive sectors react to government constraint The markets reacted to Prohibition by creating new transportation and management and distribution models that may be used by legitimate businesses but that does not men that the growth of organized crime was a good thing. The government constraints may stimulate innovation in some sectors to compensate but that does not mean that better and more rational growth would not have happened in the absence of the government imposed distortion on the market. It would not surprise me if the push to Europeanize America lead to an effort to harmonize our government structures with the general model in which telephone and related services are seen as an extension of the Post Office and placed under the control of a government department.
Good analysis, W. Good comments, readers. But one thing I see left out of the analysis throughout is Obama’s total comfort with lies. When the NYTimes quotes Obama saying his policy is “a common-sense, reasonable, nonideological approach” I and many others have come to have an automatic reaction: it is really a Wizard of Oz moment, and it will pass Congress without a single Republican vote. The man doesn’t just lie compulsively, he projects. That is, he says quite the opposite of what he knows to be the truth, putting on his opponents the intentions and beliefs he himself has. Now the question really becomes how long can he continue to do so before even his closest followers will openly reject his words as dishonest and his policies as inimical to the national interest? We’re beginning to see erstwhile supporters openly questioning what he does, but if the chattering classes can be co-opted that will only postpone the inevitable. Let’s hope the momentum builds. F
I must say the silence currently coming from Moody’s after the CMS report of increasing costs due to the health care bill is a bit disconcerting. We all know the financial system and our personal finances will go into a death spiral if the U.S. credit rating is altered. What then? I am think of the blowback here. Are enough people smart enough to understand that they have been duped by the press and academia? How will we respond? Will there be a sea change in both industries? Are our dear neighbors just too stupid? Would they even care or would they keep watching Jon Stewart and Project Runway and read their People Magazine? Rome may be burning, but it is not the emperor who fiddles… It is us.
LL3 @ 3, speaking of recent discussions with traders: “What was striking was their uniform belief that the end times were near.”
The analog I keep wondering about is the Soviet Union. It bestrode the world — until it disappeared. And virtually none of the West’s best & brightest saw it coming. The USSR had always been there, and so always would.
We certainly have a very unstable global situation at the moment, just waiting for that single shot in the Balkans to trigger the collapse of the whole structure. But that collapse will not be the end of human history, any more than WWI was.
Sudden unpredictable unwelcome change is coming. It could be weeks, months, years, maybe decades – but come it will. What can we do today to help preserve the seeds for beneficial regrowth after the devastation?
I recommend we keep digging. Then when we reach China we can borrow more money. You see, if the hole is a vacuum (and it is), then when you drop a treasury bond in on the US side it will fall all the way to the China side. It will pause there briefly, then it will fall back toward the US side. It will then collided with another treasury bond heading China’s way, so it will never reach us! We can fill up the hole with T-bills. Won’t that be fun? Could colliding treasury bonds be a source of green power?
Three points.
First, the financial industry has proven itself greedy, stupid, and destructive, to an historic degree. I fully support some pretty hefty regulation. I DEMAND some pretty heft regulation, and I suggest some even heftier fines and jail terms, if not public floggings and beheadings.
Second, much of this bill is seeking legislative support for the actions already taken. There were no laws in place allowing anyone to do what has been done, and no legel funds with which to do it. Consider that when reviewing proposals.
Third, there is a pretty strong consensus now among the thinking element of the financial industry – stuff like synthetic CDOs and CDS should be TOTALLY BANNED from any organization with taxpayer backing or a link to the funds of average consumers. The instruments are frauds, unstable, and socially pointless, like billion dollar tulip bulbs. The IRS frequently judges goofy financial arrangements to be invalid businesses, but on this scale, the IRS is beyond its competence I guess. When I hear the democratic bill wants to regulate CDS, that Obama wants more transparency on derivatives – is transparency the answer to Ponzi schemes and snake oil?
L3 @ 3: I was with a group of traders recently – some of them traded commodities, others traded stocks, and still others traded currencies. What was striking was their uniform belief that the end times were near. The system, they believed, was truly on the edge of collapse.
And they are collapsing it?
I’ve worked this industry, I know these people and the dynamics of their business. On the positive side the make markets, on the negative side they steal from the river until the river is gone. To hear them bemoaning the situation is ironic in the extreme.
I can vouch for L3 findings with respect to several people I know who manage investment portfolios in the $1B – $10B range. They all know and will confide in a non-work setting (but cannot say so for the record) that the investment climate for the next several years looks extremely risky, with lots of these big, scary unknowns out there, and even absent crisis, the fundamentals look weak. They have been riding the current equity bubble and they know that all they are doing is riding a bubble (Like Citi then-CEO Prince said in 2007, you have to keep dancing as long as the music’s playing); but they are very much trying to read the tea leaves for when to put their exit strategies in place. To the extent they are typical (which I don’t know, but suspect is pretty much true), this has all the psychological underpinnings of another panic, waiting for something to set it off.
F @ 14
Go to
http://thecapitolfaxblog.com/2010/04/22/blagojevich-hurls-allegations-at-obama-in-bid-to-force-testimony/
and click thru to the court filing and copy/paste into your word processor (which as of yesterday removed the redactions). Or, just read the post which hits the highlights. You will find it all rather interesting.
John Stossel and the Media’s “Statist Syndrome”
““I started out by viewing the marketplace as a cruel place, where you need intervention by government and lawyers to protect people,” Stossel explained shortly after undergoing his transformation. “But after watching the regulators work, I have come to believe that markets are magical and the best protectors of the consumer.”
In fact, Stossel realized that in most cases regulators and bureaucrats only made matters worse, spending billions of tax dollars on so-called “solutions” that invariably wound up creating larger problems. Needless to say, Stossel’s conversion to free market, libertarian principles – which he trumpeted every bit as loudly as he had previously trumpeted government interventionism – was not warmly received by his colleagues.
“Once I started applying the same skepticism to government, I stopped winning awards,” the 19-time Emmy Award-winner said. ”
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Josh,
CDOs and CDS are essential cogs to the (
“evil”) works.
WRT the underlying assets in real estate, very little turned out to be real.
You remind me of our president and Democrat legislators, denouncing evil profits while taking whatever they want via edicts from on high.
REGULATION INITIATED THE CRISIS!
Marty @ 19: the investment climate for the next several years looks extremely risky, with lots of these big, scary unknowns out there, and even absent crisis, the fundamentals look weak.
All of that, too.
If we get through this without a period of hyperinflation that cuts the value of a dollar by half in a matter of weeks or months, I will be shocked. And it could be worse than that.
ps – fourth point: I grudgingly support the bailout steps that were taken by the Treasury and Fed. If they had not done what they did, we’d already be to the ammunition and canned goods stage. But the piper has yet to be paid, this sure looks and feels like a false peace.
Pretty good debate about the finance bill this morning on ABC News by senators, followed by a pretty bad debate by the talking head staff, including that idiot Krugman.
Kinuachdrach @ 16,
What can we do today to help preserve the seeds for beneficial regrowth after the devastation?
Ah, that’s the question. I don’t know the answer, but what I suspect is that there are hundreds of different successful strategies for cultural preservation, and lots of folks will experiment and find ways of surviving, first, and then thriving aprés le deluge.
The money question – which is at the heart of both Wretchard’s post and today’s blue plate special reform (finance) – seems simplest of all to me. If the financial system collapses as many expect, we will see an explosion of local, private scrips emerging to sustain markets that currently rely on US dollars. Currency, after all, is a medium of exchange for different goods and services. Nowhere is it written that money must be issued by sovereign governments. In fact, most money is created by private entities when they issue credit. So when the government fails to provide a stable currency, when confidence in the currency is broken, other more local alternatives will emerge. This process occurred when the banks failed during the Great Depression; no reason it couldn’t happen again.
The reason that national currencies come to dominate is because it lowers transaction costs for everyone and increases the potential for exploiting comparative advantage. Them’s fancy words for saying it’s cheaper and more portable. But cost advantages are trivial if the currency itself loses its value, and in the electronic age portability can be obtained through other means (exchange markets, etc.). So money will survive, but not necessarily the dollar. And without the dollar, and the means for tracking it, how will taxes get collected? All of the government’s systems are designed around the dollar. If it goes away, the government will be without a way to collect taxes efficiently.
You can let your mind run as well. I have no crystal ball, and this is all rank, implausible speculation.
To me, the interesting question is what will happen to cities. The story of cities is similar to the story of currency – cities emerged to lower transaction costs (particularly transportation and communication) and improve diversity of choices. But with modern transportation and communication systems, cities have lost their logic, and they have added thick layers of bureaucracy and public sector entitlements which have eaten up their cost advantage. So, when the poor can save enough, they move to the suburbs and flee the city.
How will cities survive in a brave new world? They won’t, at least not in their current form. They’ll look like Detroit: depopulating to the point of implosion.
The good news in all this? That the majority of Americans will adapt quickly to any changes that are coming, and will do just fine. I know this because I’ve seen it happen. When Hurricane Ike rolled through Houston, it devastated the city. But people pulled themselves together, and with their neighbors found a way to make things work.
My argument is that most of America is like Houston. Not our ‘rulers,’ of course, but most of everyone else. And they’ll figure out how to make it work. Including the folks who are currently living a life of dependency and despondency.
Human beings were made to be free. So when our nation is released from our post-modern pillory, its citizens will rediscover their humanity.
Cheers,
L3
Doug @ 21: “I started out by viewing the marketplace as a cruel place, where you need intervention by government and lawyers to protect people,” Stossel explained shortly after undergoing his transformation. “But after watching the regulators work, I have come to believe that markets are magical and the best protectors of the consumer.”
So, he started out with one simplistic position, and then swerved to the exact opposite simplistic position.
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Also, my comment on “too big to fail”. WHAT was Bank of America thinking, in seeking size over everthing else? It’s just an addictive behavior. It is hard to imagine any real advantage, other than it justifies (ha!) higher pay for the central executives. Yet, it seems what they have mostly sought *is* size. They have actually been pretty lazy and unaggressive with their assets, compared to the wall street firms.
Citibank was another case. They sought size, and were extremely aggressive in everything they did, innovating (along with Merrill Lynch) in the “SIV” area, where they basically said, “hey, we’re throwing out all safety rules and controls so you get another percentage or two return”. That a bank should do this, is criminal.
Then there are the “market rate securities”, …
The senators on ABC this morning seemed more aware of the problems with the instruments themselves, the CDS from AIG, than average. Good for them! But I’m afraid they will not have the nerve to outlaw them, they will only regulate them, $600 trillion in fraudulent instruments and owned by every major financial firm in the world. What are these financial people “thinking”? Step aside, tulip traders.
L3 @ 24: How will cities survive in a brave new world? They won’t, at least not in their current form. They’ll look like Detroit: depopulating to the point of implosion.
I don’t follow … why? Nobody is depopulating Los Angeles, darn it. Weather is too nice.
Marginally apropos, a story – I had lunch the other day at The Shack, a tiny hamburgery in the old part of Playa Del Rey, which for arcane reason looks the same today as fifty or more years ago, jus a few small buildings in open marshy areas adjacent to the beach. Face this way, and you could be miles from the next nearest civilization. Maybe the only place on the coast of Los Angeles where this is still true. I guess part of the marsh is now protected from development, in exchange for which they recently developed the adjacent inland part of PDR into Condoland. Which is also decorated by signs labeling this a Tsunami Hazard Zone, it’s that low-lying … though it would take a pretty large Tsunami to make good on that warning – hasn’t happened in the last three hundred years, afaik.
… I guess I am just extra chatty this morning …
Josh @ 18,
First, the financial industry has proven itself greedy, stupid, and destructive, to an historic degree. I fully support some pretty hefty regulation. I DEMAND some pretty heft regulation, and I suggest some even heftier fines and jail terms, if not public floggings and beheadings.
Hard to disagree with the first sentence. What confuses me is why you support regulation as a response. Greed was enabled by regulation (see Mae, Fannie and Mac, Freddie), stupidity was rewarded by government intervention (see Sachs, Goldman – 100% return of capital on AIG exposure), and destruction was not stopped by regulation (see Madoff, Bernie).
As a general rule when responding to failures, more regulation does not work (see Oxley, Sarbanes). The number of true market failures is vanishingly small. And behind almost every claimed “market failure” generally lies wrong-headed and corrupt political agendas. Money is the ultimate commodity; where is the natural monopoly in need of government regulation?
What works is rule of law, property rights, transparency, and letting markets function – which means tolerating failures and keeping them small and contained.
Your reaction to this situation is reminiscent of Londoner’s reaction to the 1854 Broad Street cholera epidemic. Thinking that cholera was spread by breathing the “miasma” and treated by drinking lots of water, they inadvertently spread the disease because they didn’t understand its nature. Only when John Snow removed the handle on the Broad Street Pump did the outbreak subside.
The solution to bad and excessive regulation is not more regulation.
Cheers,
L3
Doug @ 21: CDOs and CDS are essential cogs to the (“evil”) works.
Sir, you are mistaken.
Will you also defend ponzi schemas as essential cogs?
There is nothing wrong with CDOs in principle, if they are made of real assets, and the originators are made to keep an interest in their solvency, and they are priced correctly. However, (a) the synthetic variety are absurd, (b) if required to participate, fewer organizations would participate, and (c) NONE of them, even the most conservative, were priced correctly, and if they were, again, the volume that could be packaged and sold would be reduced by 99% or so.
Ditto the CDS. There is nothing wrong with it in principle, but AIG issued trillions in CDS with no reserves at all, because they were so smart they thought they could make that work. They Were Wrong, and YOUR tax dollars have made up the difference. If they were required to hold reserves as any normal insurance company is, – they would never have issued 99% of that business.
So, strictly speaking, yes, I agree these are valid instruments in principle, but when 99% of the actual instruments are utterly unsound, what then?
And what say you do that?
The dollars sent into the system via the Federal Reserve are fundamentally different than those from the Treasury. They should almost be subtracted from each other, rather than added.
The banking system runs on positive feedback – in both directions. When the system is expanding, new loans increase the money supply, which feeds inflation which feeds more loans. The Fed reigns this in via higher interest rates.
When the system is contracting, defaulted and paid back loans decrease the money supply which feeds deflation, which fuels more defaults and paid back loans. The Fed reigns this in by printing money. It is inherent in the system that the cycles work back and forth, smoothing out the cycles isn’t possible.
I realize a free banking system is possible and maybe preferable, but I’m trying to analyze what we have and where it is going, not design something new or old.
So, if the treasury side of the government held back from running a deficit, or as big a one, the Federal Reserve would react by printing even more money. They would do this by buying US government debt. If the cycle were severe enough, and the treasury stingy enough, the Fed could eliminate the entire public debt during the collapse.
Of course, human nature being what it is, the treasury can’t be stingy, so that is a fantasy in practical terms.
My best guess is that the system is far more stable than most people think – from a value of the dollar perspective. The value of the dollar is a ratio of the “wealth produced in the country” to the “amount of money in circulation”. The total amount of money in circulation over the last 2 years has been steady to grown about 10%, depending on how you measure it. All the money the Fed has printed has roughly offset the money lost due to paid back loans and defaults.
I don’t think the ability of the economy to produce wealth has changed that much in the last two years, so I would expect that inflation won’t be an issue for a while – maybe a long while.
Socialists always try to:
1) Destroy the ability of the economy to produce wealth.
2) Make up for it by printing money.
If Obama gets his way, his policies will be very destructive. But that is a medium term to long term issue. The financial crisis of the last two years, and the Federal Reserve’s reaction to it, doesn’t affect that one way or the other.
James
24. Leo:
To me, the interesting question is what will happen to cities. The story of cities is similar to the story of currency – cities emerged to lower transaction costs (particularly transportation and communication) and improve diversity of choices. But with modern transportation and communication systems, cities have lost their logic, and they have added thick layers of bureaucracy and public sector entitlements which have eaten up their cost advantage. So, when the poor can save enough, they move to the suburbs and flee the city.
That is eerily similar to what I just said in comment #136 in “Engagement Queue”. I don’t claim that my ideas are particularly original, but to see you thinking along the same lines, well, that just made my day.
L3 @ 27: Hard to disagree with the first sentence. What confuses me is why you support regulation as a response. Greed was enabled by regulation (see Mae, Fannie and Mac, Freddie), stupidity was rewarded by government intervention (see Sachs, Goldman – 100% return of capital on AIG exposure), and destruction was not stopped by regulation (see Madoff, Bernie).
If you agree with the first sentence, then what do you propose to do in response? Nothing? Really?
Fannie and Freddie are not cases of regulation, they are affirmative business propositions in which the government took absurd positions. The “regulation” of the CRA is another matter, but I assert (frequently, repeatedly) was only a secondary factor in the recent bubble. Note that even prime mortgage MBO/CDOs are now failing as well. Bubble are bad because they are bubbles, but you can’t blame their fragility and failure on the insufficient quality of the soap.
And you can’t seriously argue that since regulation didn’t stop Madoff, then regulation is pointless. Laws against murder haven’t stopped murders, so should we repeal the laws or stop funding the police? Let’s simply enforce the laws we have, regulate according to the laws we have. That would be a good start. In fact, I argue that the overall answer to Citibank and Lehman, is civil and criminal law enforcement. Do that, and we might need hardly any futher legislation on the matter. To that degree, thank you for reminding me of my own fundamental position.
Permanent government caused these dysfunctions, in fact, it demanded them. Permanent government will not cure them.
It exist only to extend or defend itself. It will do that through the corruption of ideas through the corruption of language.
Hangtown Bob #7
“I think that the biggest problem of all is that trust is gone. The citizens no longer trust the government or institutions that have been the background basis of our country.”
Not quite, HB.
The private sector, productive citizens who exist outside of the Wall Street financial sector giants (who are now staunchly Dem) have finally realized that they were pushed out of the trust network created by public sector employees, the welfare class, media/education elite, and leftists politicians. In other words, by people who are indifferent at best but usually hostile and condescending towards entrepreneurial business and its labor force.
However, recipients of government paychecks and rent-seekers empowered to line their pockets from money extracted out of the private sector by virtue of hyperregulation and favors bought via lobbying have had their trust network strengthened hugely in the past sixteen months. They have tremendous trust in Obama, Pelosi, and Reid and their acolytes. The Dems have demonstrated absolute loyalty to the teachers unions, AFSCME and SEIU, welfare recipients, and all industries who depend on government regulation by extending the power and income stream via leglslative effort.
Marty: I’m sorry to say that didn’t work for me. I guess they fixed it, doggone it. Can you post? F
I was opposed to the bailouts from the very beginning, back in 2008. If the big financial institutions are made to understand that they will not be propped up with taxpayer money, then a lot of the financial shenanigans will end. Yes, the collapse in the fall of 2008 would have been worse without government intervention, but likewise, the economy would be well on the road to recovery now with the toxins purged from its system (and without further government intervention).
Bankruptcies, foreclosures, and business failures are tough pills to swallow, but they are necessary when businesses and individuals behave irresponsibly. Bailing them out just kicks the can down the road and ensures that the day of reckoning will be even worse when it happens, as it must.
Our elected officials are not exhibiting leadership when they refuse to make hard decisions. When they subsidize the poor, they are buying votes. When they bail out the rich, they are buying campaign contributions.
Doug #9
“Teachers unions respond to modest pay cuts by chopping off already meager yearly instruction days.
When Hawaii’s Governor Lingle cut the education budget, the schools reacted by simply shutting down a few extra days a month. One might think that people concerned about educating children would come up with something like voluntary study-hall duty a couple of days a year, so kids could continue to come to school, and parents lives would not have to be further disrupted, but one would be wrong.”
I wrote about this type of behavior on a thread last week. One of the prime examples in NMFS, which already has more employees and grant recipients in some coastal regions than there are commercial fishing licenses, and yet is trying to shut down many kinds of fishing permanently. In the end, all the employees still have their income but are doing a fraction of the work they were hired to do. Their model is based on many countries in Europe, who forced out small fishermen to create fisheries consisting of a few factory ships which required little or no effort to regulate, while at the same time cutting no jobs from the regulating agencies involved.
The tactic for most municipal employees and teachers unions these days is to hold services hostage for perfect job security and pay increases. This results in an end game where a town has five librarians who are supposed to staff the town library but in order to carry out the threat of this extortion on the taxpayers the librarians are all sitting at home in their houses receiving their paychecks, health care, and, ultimately, pensions while the library has been shut down permanently, padlocked, and mothballed.
Don’t think for a minute that this sort of scenario can’t happen, or that public sector employees have sufficent shame or ethics that they wouldn’t do this on a much larger scale.
#9 Doug
I forgot to add that Glenn Reynolds reported this week on an attempt by firefighters in some Napa Valley town who have said that they’ll refuse to do their job at some guy’s house and vinyard because he wouldn’t support a pay raise for them. Just another example.
The latest leftist meme is “epistemic closure” by which they mean conservatives are unable to deal with reality.
I used to try to comment at the Atlantic but Ta-Nehisi Coates kept banning me and if one blogger bans you at the Atlantic you can’t post anywhere else. There is a great deal of discussion of how Tea Party protesters may or may not have called John Lewis the “N” word (as we so quaintly refer to it) but little about how the USG is going to sustain trillion dollar deficits indefinitely.
The system simply cannot absorb any negative feedback. We are soberly assured that Greece simply cannot cut its budget. Which means of course only that Greece *won’t* cut its budget, which of course it will not until it is forced. Same with the USG.
The way they plan to get around this seems to be the imposition of a value-added tax. But they have the VAT in Europe and they still have unsustainable deficits. If they can pass a VAT, it will buy them a few years.
The people in power will do what they want to do, as they see fit. A lot of people are angry and trying to make themselves heard. But the realistic option is not to dignify the process by letting them pretend to let you participate in it and pretend to brook dissent.
As Cartman likes to say- “Screw you guys, I’m going home.”
Josh @ 31,
If you agree with the first sentence, then what do you propose to do in response? Nothing? Really?
Well, I guess there’s a wee bit of space between “Nothing” and “public floggings and beheadings.” I think my approach can be found somewhere in between.
Your reaction – indignation and calls for punishment – is precisely the sort of emotional response that politicians feed upon to support the expansion of the state. I can appreciate that you want to “just do something” and hang the nogoodniks. But perhaps a step back and a calm, mature assessment of the situation is called for.
It would appear that financial regulators have largely been “captured” by the industry. Increasing regulation in such an environment is likely to continue rewarding the incumbents at the expense of new entrants. In addition, it would also appear that politicians have been quite content to create regulatory structures that favor generous campaign contributors.
I don’t pretend to be an expert on the financial services business. But there are a few principles that I would pursue:
1. Transparency. Markets function on information. Trading should be public, even if the counterparties are big and sophisticated, because pricing relays information to the market. I do not share your concern about CDSs as a product, but believe that the market should be transparent.
2. Eliminate Moral Hazard. We should eliminate the FDIC and any implicit government guarantee program.
3. Increase and Improve Reserve Requirements. Banks should hold more reserves, and should not be allowed to count pro-cyclical instruments like bank preferred stock as part of their reserves.
4. Strictly Enforce Anti-Trust Legislation. Any bank that is too big to fail should be broken up.
These are a few ideas submitted for your consideration.
Finally, you appear to believe that government played a minor role in the housing bubble. I maintain that the main driver of the bubble was the long-term policy of the Federal Government to promote home ownership, and this led to a series of policy blunders (F/F, CRA, etc.) that distorted the market. They were, in essence, regulatory failures. You may claim that F/F was “an affirmative business proposition,” but in reality they were the market makers in mortgages, and their underwriting criteria were the de facto standard of the industry, and those standards were either explicitly or implicitly controlled by Congress. To assert that they were not “regulators” is, at best, a game of semantics. At worst, it’s deception.
I hope this somewhat answers your question. I gotta go to Mass now and pray for forgiveness of my many sins, like responding to your comment instead of playing with my kids on a Sunday.
Cheers,
L3
Hope you all have had the pleasure of hearing Bill Black testimony at the House Financial Services Committee last week.
http://firedoglake.com/2010/04/20/bill-black-testimony-on-lehman-bankruptcy-transcript-and-video/
“You asked earlier for a stern regulator. You have one now in front of you. And we need to be blunt. You haven’t heard much bluntness in hours of testimony.”
LL# @ 24: “But with modern transportation and communication systems, cities have lost their logic …”
Aye! There’s the rub. “with modern transportation and communication systems”.
Change is coming. If that change results (for example) in a breakdown in reliable electric supply, then modern communication systems will be shot. Similarly, the costs of transportation may increase from a variety of causes.
Thus it may be that when change comes, it will result in revitalized cities. Globe-spanning supply networks may simply no longer be reliable enough, and global distribution of production from Chinese factories may no longer be feasible. Instead, the city may again become the locus of manufacturing.
Of course, those revitalized cities would be very different from today’s. No bureaucrat handing out other people’s money to pregnant teenage girls or alcoholics. No bureaucratic army deployed to delay or stop new businesses. Summary punishment for drug dealers and undesirables. Hmmm! This is beginning to sound like Singapore.
My guess at the consequence of breakdown is closer to one of your earlier speculations, L3. Some State-level (or maybe city/county level) governments will rise to the challenge, and create zones of relative order. This could be Texas or Salt Lake City. Others areas will descend into chaos; California is the poster child for this. Eventually, after much destruction and many deaths, the zones of order will reach out to each other and start to expand over increasingly wide territories. We have to hope that, when the rebirth occurs, we remember enough of the past to put real constraints on government, to prevent the regrowth of today’s travesty.
Regarding the fate of the cities …
The powers that be will fight tooth and nail to keep them going. They are sources of control: social, financial, and political. You want people to give up smoking? Make it illegal for them to do it at all in your city. And you have so many current and potential taxpayers in one place.
About a month ago I recall some one from the Administration say something to the effect that we needed to “de-suburbanize” America. I haven’t heard much else about that or what that person had in mind, but what I imagine isn’t good.
The greatest impediment to social control in the 20th century was the rise of the automobile. Prior to that urban dwellers pretty well had to live close by to their place of employment. The automobile changed all that. It decoupled the link of proximity between the two. If one lived in a city that suffered from bad, oppressive, or incompetent government they simply moved out of the jurisdiction. And thus, the suburbs exploded. And this gave employers more options as well. They too could relocate out of oppressive jurisdictions with ease because their employees were mobile.
And attempts at social engineering will fail if the lab rats are allowed to escape.
That is why the Progressives and the urban political machines (those are not mutually exclusive terms) hate the car and the suburbs. Its not about saving the planet, its about control. Its also why Federal Solutions are touted rather than state or local measures. The afflicted can’t simply escape by moving across the county line.
There are a lot of unknown things that can happen to wreck the economy. But there is one known thing that the DOE predicts will wreck the economy in 2112. That’s high oil prices.
See:
Meeting the World’s Demand for Liquid Fuels A Roundtable Discussion
The relevant graph is here: World’s Liquid Fuel Supply
I mention this in the context of a piece I write here that argues for the fast implementation of a recent Princeton math solution that will speed up computer modeling for materials research by up to 100,000 times.
The scam that was and is Fannie Mae and Freddie Mac was the root cause of the financial meltdown of 2008, and the root cause of the Fannie and Freddie scam was liberal congressmen like Bahney Fwank, who routinely assured everyone that everything was going swimmingly. While the Democrats in charge of the program were voting themselves tens of millions of dollars in bonuses based on phony claims of profits, and banks were selling packages of worthless mortgages to all and sundry, Barney and friends assuredly knew what was up. How could they not? Fannie and Freddie were giving mortgages to people who could not afford them, and so the crisis was built in. Not that it mattered. The important thing was that it wasn’t fair that some people could afford a house and others couldn’t. I talked this over with a five year old I know and she said, “I love Barney.”
She said if I were a designer kid
I’d want Barney for a daddy
I’d love him for the things he did
Though some say he’s a baddy
So what he’s played the Congress game
‘Cause so do many others
What ever he’s done it’s just the same
As his Congressional brothers
I love him for his winning smile
I love him for his color
You can see purple for a mile
It never gets no duller
When I pointed out we weren’t talking about Barney the purple dinosaur but Barney the congressperson, a man who wants to help President Obama turn the country into a socialist paradise, a man who somehow forgot to declare all his income come tax time, a man who never saw a socialist program he didn’t like, she thought a moment before replying.
She said they’re just like robbers who
Just want to steal our freedom
There is no difference ‘tween the two
Just tweedledee and deedum
I like my country like it is
Why do they have to change it
They want to take away the fizz
And really re-arrange it
You say that Barney’s not a star?
He’s not what people think?
He’s not a purple dinosaur
He looks so cute in pink?
Well just for that I take it back
We’ll fit him for some nooses
If I’da known he’s just a hack
From lib’ral Massachoosses
Moral: You can fool some of the people all of the time, you can fool all of the people some of the time, but you can only fool a five year old once.
Leo Linbeck III,
there’s a wee bit of space between “Nothing” and “public floggings and beheadings”
Today on Fox Bill Kristol was pointing out that Senator Levin’s release of the embarrassing Goldman Sachs emails was a dangerous violation of the rule of law. Juan Williams was yelling that means nothing and the Boss gets to read your emails, and presumably show them to anybody. Kristol pointed out to Williams that we do not all work for Senator Levin, he is not America’s Boss.
This reminds me of the “Give the Devil the Benefit of Law” passage in Robert Bolt’s “A Man For All Seasons.” Seeking to strengthen the rule of the law and the markets and the heritage of the Constitution is not a defeat but a victory weakness. Our inheritance is not a weakness but a strength. If we raise that standard and stand by it, if we keep pointing out that it is what made America the world wants to flock to, then we will win.
On issue after issue, Unlawful Enemy Combatants, Bankrupt auto companies, Colluding Conspiracies of Commercial Kleptocrats in Fannie Freddie and Finance, foreign despots flouting civilized standards to bully and seek power through the threat of genocide, and the effective invasion of America by illegal aliens that are bankrupting State and local governments while being often linked to drug cartels and networks of Marxist and Islamic terrorists, the two extremes propose to deny the rule of law that shields us. The answer of the Democrats is to abandon the law and preemptively surrender to our enemies while transforming us into a defenseless regulated satrapy in a polyglot authoritarian system. To many who claim to be conservatives also have abandoned all hope and preach a retreat into atavistic isolation that would trample the law underfoot and exclude potential allies in the long struggle.
475 years ago Sir Thomas More was in the Tower awaiting his trial. The Robin Hood of poetry and the movies had 300 years earlier retreated into Sherwood Forest not as a goal but only as a last resort means to hide from the usurper until he could lead the people back to support lawful government. The idea that we there is a legitimate law and we can rally to it even if we need to fear arbitrary government is part of our heritage. There is a mighty forest that our civilization has planted, we should not chop it down.
To be blogged under the title “Sherwood.”
I think the financial system has to be constrained in some way. Recent events have demonstrated it can out-run its information base. It can get away with activities whose consequences escape market penalties and perhaps regulatory effects until they build up into a monster displacement. Broadly speaking this was also the problem in Greece, where Athens did things which it “hid” from the bond market and Eurostat. Even now, in both Europe and America, both the market and regulators are still “finding out” what happened and this is being reflected in asset pricing and official discovery.
One way to to fix or narrow this knowledge gap is to rein financial actors in until the scope of their activity matches what we know or believe can be matched by the market and regulatory information. Reining in the actors is the intellectual underpinning of the Volcker rule. The other approach is to narrow the gap by beefing up the regulatory and information systems so that we let the dog run further only because the dog has a longer leash.
So far so good. But systems are not independent of men. That’s because we always put men in the ultimate position of control. Since there’s always manual override people matter. System corruption is often due to “social hacking” rather than some technical exploit. The Washington Post reports on how the Senate is approaching this problem.
They’re still debating the “Volcker Rule”.
Now if past performance is a good predictor of future performance can one be confident that the problem has been solved? Now what are the best empirical indicators for knowing whether we are getting it right? Well one obvious way is whether or not the market and regulators punish behavior that it previously rewarded. In other words, if the system behaves differently after being rearchitectured, and in a better way too, then some kind of fix has happened. Look out,not just Goldman Sachs, but all the Goldman Sachs-like firms out there! Look out California! Look out Fannie and Freddie! Because Tim and Barney and Chris and Barack are going to get you. Or if not then the same old faceless Republicans are going to form a posse to end your marauding days!
Well I’m not so sure. My guess is that the problem is far from solved and it is unclear to me that the problems won’t get even worse, given who’s doing the fixing. Let’s see what happens.
LOTM @ 44,
That scene from “A Man For All Seasons” is one of my all-time favorites. I show that movie in my MBA class, and that scene always is a guaranteed discussion-starter.
One of the most infuriating things as a businessdude is that the law is so complex, tangled, and convoluted that it can be impossible to comply even if you want to. Those who want to comply often can’t, while those who have no plans to comply are able to use the complexity of the legal system to get away with it. Moreover, when it is impossible for people to comply with the law, the law becomes arbitrary – if 300 million people are “guilty,” the question is simply who the state decides to prosecute. Throw in the perverse incentive of high-profile prosecutions (think Giuliani, Spitzer, et. al.), and you have the trappings of tyranny, if not the thing itself.
This is one of the many reasons why the Federal Leviathan must be cut down to size (aka brought into compliance with the Constitution). Complexity is a diseconomy of scale. Shrink the scale, and there is the opportunity to simplify – and competition between the states will create the incentive to get there.
Cheers,
L3
Just lost a long reply to L3. So it goes. See if this posts.
That’s only a problem, if politicians’ goal is to actually fix the financial industry without getting involved in it.
The Dems’ goal is not only to be involved with the industry but to control it for their, and their cronies’, benefit.
I’m beginning to understand the phrase… “You’re joshing me”!
PJM just coughed up into my mailbox, like an electronic hairball, comment #246 that buddy larsen placed on the Smolensk thread two weeks ago. But don’t worry you can trust the superior technocrats of the government to take care of your health records when they are placed online, just as they do such a fine job of guarding the border with a virtual fence.
Just saw the typo with the extra “weakness” in my last that needs to be edited out. Also weird typo intrusion of “we” in my last paragraph, must have been tired.
One of the most interesting things about money is that it is a kind of power. A financial education teaches one to understand how money can be transformed — across time, across instruments — it allows the construction of equivalent instruments. But it is the information linkage which allows them to be traded. Money then is a powerful changeling. It’s your ultimate genie. Or your epic monster.
Through long experience people have learned the real social engineering limits of human exposure to weakness. This takes the form of the management of temptation. One of the most useful things ever said is repeated by many of us each Sunday when we say “and lead us not into temptation, but deliver us from evil.” And lead us not into temptation. Most people should never leave themselves alone in a room with ten million dollars lying loose on the table or a six food blonde bombshell who shows an interest. You can’t win. Whatever happens you’ll kick yourself on leaving the room.
Whole industries have sprung up to protect us from ourselves. They’re so ubiquitous we don’t even notice. Locks on doors, dress codes, pin numbers, credit limits, etc.
The way politics has dealt with temptation is separation of powers and mutual watchfulness. In the American case the separation is not just between the three federal branches of government, but between the states and Washington. Everybody wants the Ring just where everyone can see it. Now if we applied the same principle to finance what would happen?
One is the acceptance of the principle that efficiency is not the only, and perhaps not the fundamental desiderata of performance. Two: it’s probably necessary to either limit temptation to what regulators and government can reliably watch or increase the number of watchers. Three: everything should be a in a glass room.
That’s not going to be easily achieved. Until very recently, perhaps until this day, the concentration of state power has been the rule rather than the exception. And even the US may slip back into a world where power is once again exercised out of a closed chamber, and exercised in the name of keeping us safe from predators. Power promises to protect us from itself.
Why should we expect better with that changeling, money, which is also a form of power?
I’ve remarked elsewhere that a revolution for power eats its children. All totalitarianisms consume themselves because once temptation gets a hold of them, then Evil enters stage right. Then its every man for himself. That’s why there’s a curious circularity about victims and perps in a financial crash or a purge. In a revolution the Bolsheviks are the jailors and eventually the jailed, sometimes alternating positions. In finance men complain the system they ran bankrupted them; and people who bought homes they couldn’t afford complain they were took. Look at Greece! They hired people like Goldman Sachs to corrupt the information. GS was in the business of screwing the books, but doing so at the behest of those who now complain they must tighten their belts, how could you have let me do it? Why didn’t you stop me from cheating myself?
The problem is they got what they paid for. GS was rotten, but it was paid to do rotten things by the very people who are now rending their robes and gnashing their teeth. But if you had read Raymond Chandler, you would have guessed it already. What happens after the hour with the pile of money and the blonde in a closed room is a .32 slug in the gut. “And lead us not into temptation but deliver us from evil.” We ought to know our limits, as we do in government, and stay away from sauce we can’t handle.
The elephant in the room is when the (bad, evil, and so on) Bush Tax Cuts expire at the end of this year.
The Speaker has pretty much promised to “let ‘em expire.” This has not only the effect of raising taxes, or perhaps I shall say “raise tax rates” to be more politically correct in present company, not only on the “wealthy” but on the vast “middle class”, many, I am told, don’t pay any income tax at all (although they still pay hefty Social Security and Medicare tax).
The President had promised, repeatedly, not to “raises taxes on anyone making less than $200,000″ a year, perhaps adjusted for single instead of married tax payers. I think where that one comes from is that pre book and pre US Senate seat, the Obamas were making about that much and barely making ends meet. When your children are in private school to escape the depredations of the Chicago Public School system, when husband and wife are in high profile jobs requiring spending on expensive clothes (I pretty much wear hand-me-downs), you don’t make ends meet of 200K a year. Oh, and they probably had student load debt.
How do I know the Obamas “barely made ends meet.” I looked at their public disclosure of income tax returns, and although I am a “dumb electrical engineer”, I can pretty much tell. There was nothing to speak of on Schedule B, and I doubt they had all their savings in munis.
Anyway, the reasons you can’t raise tax revenue by “taxing wealthy people making more than $200,000/year” is that the wealthier people are, the more they are able to avail themselves of legal tax avoidance, and you better believe that Congress gets lobbied and lobbied hard to preserve all of the fine points of the non-flat tax tax code. The Speaker is poised to let the people get the government they deserve in the form of new taxes they haven’t seen in years, and get it hard, simply by letting the Bush tax cuts “roll over.”
Leo – The ineffable (effing?) compexity is a feature, not a bug.
As with everything that seems, on the surface, to be insanely lacking in rhyme or reason, one needs to ask, Qui bono?
In this case, it is a consortium of (to borrow a word from another BC commenter) poltroons: (1) lawyers, (2) regulators & bureaucrats, (3) businesses that are able and willing to game the system to their advantage by getting laws & tax code written to favor them over their competitors, (4) lobbyists, and last but not least, (5) politicians.
IOW, most of these laws are enacted not because there is a genuine need for them, in the sense of benefiting the public interest, but because they grow the power and wealth of the state & the state’s enforcement-harrassment apparatus.
The reason they have been able to get away with it for so long is that the costs remain largely invisible to the average American. Imagine the sticker shock that would ensue if every loaf of bread, every lawn mower, every gallon of paint, every computer, every diaper and light bulb and Olive Garden meal you bought came with a line item on the receipt detailing how much of the cost of the product or service was due to compliance costs & taxes on the business.
The nimrods in Congress want to have every food product labeled with minutely detailed calorie, protein & fat counts. Obama accuses doctors of gouging patients by performing unnecessary procedures. And yet … the Consortium of Poltroons gouges us unnecessarily repeatedly and daily, and they exempt themselves from the disclosures they force on others.
Anyone else wonder why we never hear the term “legal industry”? Because it is. Alas, it is the one industry that will never, ever be strangled to death with laws and regulations … because they are the ones writing the laws and regulations. Sweet gig, that.
More’s argument in “A Man for All Seasons” was a reply to Will Roper’s brash remark that he would strike down every law in England in order to get the Devil. More wanted to know what would be standing in between Roper and the Devil when the Devil turned on him. More was using the law to try to save his life (he was under persecution for not having signed the loyalty oath, and for not saying why he would not sign it); his legal argument was that they could not construe his *dissent* from his silence, since silence implies *consent.*
The view of law in the play is largely a very positive and sympathetic one due to the situation and person of the main character: an honorable man turns to it, attempts to shield himself within it, in order to defend his life.
And the hypothetical situation that More criticized was that of anarchy: the state of “no law” and the arbitrary deconstruction of it per Roper’s assertion.
So, yeah, compared to anarchy, More’s state of law looks pretty good, even if there are some laws (like the requirement to sign the loyalty oath, and whatever it was that “Parliament hath not the power” that Parliament did – it has been a while since I saw the movie) that are bad.
But the situation they never discuss in AMFAS is, what if the law is assisting the Devil against the honorable man? What if the laws of a country, on balance, are advancing evil rather than good? Or let’s just say that they are constricting individual liberty instead of promoting it?
I’m not really disagreeing with your point, BTW; in fact I agree that the arbitrary use & abuse of the law is a hallmark of the statist personality (passing a bad law to hinder an opponent; ignoring any law that is inconvenient to one’s plans), for whom power & control are like food and water, to be fed off of daily.
I guess what I’m saying is that More’s defense of the law should be a discussion starter, not a discussion ender. What is the law for? Is there a relationship between the quantity of a nation’s laws and their quality? (I would argue, yes.) Roper made an extreme claim that most people don’t make; More was defending the raison d’etre of law against that particular extreme claim. I think he would be as aghast at our current actual situation (the sheer tonnage of laws, bad & unnecessary, doing the Devil’s work for him) as he was at Roper’s hypothetical suggestion (no law at all between man and Devil).
BTW, AMFAS and the Errol Flynn Robin Hood are two of my longtime favorite movies. Back when I used to teach AMFAS in a literature class, I posed it to the students as a story about “Thomas More, conscientious objector.”
Several of my comments in the last week have evaporated… flashed away into the ether when I hit the “submit” button.
(I know some of the readers are muttering, “…and good riddance…”
Just a quick good news/bad news thought:
Public trials and beheadings (h.t. Josh@18) could serve as a great source of revenue, from ticket sales and advertising – tv, internet, live attendance (festival seating? No way!) and DVD distribution.
On the other hand, the people most likely for the chop will be from the productive types who got fed up, stood up, and spoke up.
The Financial Times noted recently that financial systems exist to raise capital or spread/lay-off risk. Much of the current mess has been doing neither. With of course rather stupid assumptions based in diversity and PC. I.E. subprime loans would be paid off because to think otherwise was “racist.”
Diversity Recession.
That being said, the political response by Dems and Obama is far, far worse, designed to wreck the nation.
Likely, Germany will just dump the Euro, since Merkel cannot make too many more concessions without being defeated. The Deutschmark would be strong, the Euro, heavily exposed to the PIIGS, will not be. A common currency among strong and weak nations was never going to work, and we see that now.
For the US, likely silver coins and silver-backed currency will be the result of monetary collapse. Massive repudiation of debts, “new” silver dollars for old, at a very favorable rate, that has value based on the silver content of the coins. Providing a floor beyond which the currency cannot go. Not to mention the psychological aspect of a precious metal currency vs. one of mere paper fiat. The full faith and trust of the US once broken cannot be restored. See Humpty Dumpty.
But clearly, the elites must be purged from all institutions and life. The attitudes of Obama or Goldman Sachs (screw the customer, because you are powerful) even when shown to be long-term bad, continue in the attitudes described by Michael Lewis in Liar’s Poker.
How can the elites be purged?
Fear and terror. Not by anything violent and illegal, not only is that course counter productive but middle class people are neither violent nor criminal — it is why they are middle class in the first place.
The elites have a great weakness. A hideous one. They and particularly the media cover for each other so much that all their dirty secrets are not even hidden. They are out in the open for anyone to see. John Edwards, Eliot Spitzer, Blago, Mayor Tony Villaraigosa, Gavin Newsome, John Ensign, Dennis Hastert, Chris Dodd, Barney Frank, and the rest all had their scandals widely known. EVERYONE in the elite knew about them, and never uttered them publicly. The people involved did not try to hide it.
What we need is an army of Luke Fords. Bloggers, who have some traffic, no ambition for politics, who don’t mind personal attacks, publishing the ugly, sordid, nasty, and often illegal details of the lives of political, cultural, economic, and bureaucratic elite. Plus their friends, families, and supporters. Simply being around, soaking up the open secrets, and publishing their ugly details, would be enough to push a purging frenzy. Particularly if one could jigger the job as being motivated by insider enemies. For example, unflattering and true details about Rahm Emmanuel being ascribed to people around Bill Clinton. To use a hypothetical. Elite infighting is another weakness.
The strength of the people is that they don’t make good Alinsky targets. Joe the Plumber is just a guy. So too, Luke Ford, or Mickey Kaus, or anyone else. It is the logical culmination of asymmetric political warfare.
It is NOT enough just to vote, organize voting efforts, and self-organization. Elites must be DESTROYED. That means patently illegal acts exposed to public scrutiny, every dirty scandal shown out in the open, every ugly deed revealed, and so on. To create fear and terror among the elites, who can then be curbed by seeing many of their fellows thrown out in to being … an ordinary person. Not a big shot riding in a limo lording it over everyone else.
Lindsay Graham walked out on the Cap and Trade. Why? Because of “immigration reform?” “We’re going to tell the bigots to shut up!” PLEASE. He walked out because he got the message. Bloggers (reviled by Rick Moran here at PJM) have discussed if Graham is secretly gay, and if that has influenced his RINO votes and tendencies.
MESSAGE RECEIVED. Over and out! Politics ain’t beanbag. To quote Mr. Dooley. Fear, intimidation, making examples, and the rest are required by the people to make the elites like Graham, or McCain, or the rest, fall in line with what the people want — which is a rollback on the overweening lordship and absolute power of the elites to run people’s lives.
Mark Steyn has a column up “Please Behead Me Last” about the reaction to South Park. Fear works. Muslims and Islam and Mohammed are off limits for criticism, and provoke unconditional and pre-emptive surrender. No one is suggesting violence. Why? Middle class people are repelled by it, and would be no good even if they tried it. But the violence wielded by Muslims world-wide can be matched by fear induced by exposing open secrets.
Ironically, Andrew Sullivan and Tina Fey are the models. Destroy a few people among the elites the way Sarah Palin was destroyed, and you get their attention and respect.
Whole industries have sprung up to protect us from ourselves. They’re so ubiquitous we don’t even notice. Locks on doors, dress codes, pin numbers, credit limits, etc.
A few mushy lines in anotherwise great post, Wretchard.
Locks on doors & pin numbers are to protect me from the criminal. Credit limit is supposed to protect me from myself. Two different things.
Reagan used to say that government should not be in the business of protecting a person from himself; only protecting one person from another. (I think your use of the word “ourselves” was where some of the mushiness crept in … this could be read as both singular and plural.)
Only when Citizen A and Citizen B are treated as equal before the law can government justly protect A from B, or vice versa. Government’s role as a trusted arbiter rests entirely on that perception of equality before the law. When the majority of citizens perceive that the goverment has its thumb on the scale of justice, however, es ist nicht gut. Geithner, Rangel, Dodd ….
Dodd’s father was a prosecutor at Nuremberg, BTW.
What a fall-off there has been.
Imagine the sticker shock that would ensue if every loaf of bread, every lawn mower, every gallon of paint, every computer, every diaper and light bulb and Olive Garden meal you bought came with a line item on the receipt detailing how much of the cost of the product or service was due to compliance costs & taxes on the business.
Not to toot my own horn, Leo, but what if businesses *did* start doing this? Is it feasible? Surely the businessdudes and the businessdudes’ accountants have a pretty good percentage figure of cost added due to regulatory compliance & taxes. Why not make this transparent to the consumer? “This is what your government is costing you.”
I, for one, would cheer this small act of rebellion by the businessdudes. And express my support by patronizing their businesses.
Wondering again if anyone has investigated Swiss insurance annuities as avehicle to protect assets from the collapse of the US dollar.
It’s amazing how little is the honesty required of us. Society doesn’t really expect us to resist the temptation of not taking stacks of money in plain view. Things are locked up to keep us from that temptation. A really honest man could sit in front a pile of diamonds, gold and ten thousand dollar bills and, knowing he would never be found out, never take a dime. Some people will meet this standard. Most will not and are not expected to.
The standard expected of us is not to attempt armed robbery, hijacking, kidnap for ransom, willful fraud and the like. The amazing thing is that so many of us can’t meet this level of honesty. We’ve just got to have it. And this sentiment is expressed even by, or especially by the most “progressive”. Over at the Daily Mail is a list of British billionaires, including some Indians and Russians who have made it big. One businessman made 22 billion pounds. Here’s what one commenter, whose remarks have been seconded by many says. ‘Give it over’.
No one should have a right to have more than a million pounds. So the idea is that these Indians are going to work to get this multi billion pound fortune and then give it all away to the British state for “decent health care” and to “feed the hungry of the world” and give them “clean water” and keep a million pounds — on which they will still presumably be taxed. Well leaving the rights and wrongs of it aside, they won’t do it.
But the psychological point is that the Daily Mail commenter would never have wanted the 21.999 billion pounds if it wasn’t there. If they didn’t see it, they wouldn’t want it. The fact that it was there, even though there is no allegation it was earned dishonestly, means that it has to be redistributed, because ‘no one has a right to so much money’. Part of what’s driving the financial “reform” impetus is that very sentiment. ‘Nobody has a right to so much money’. It should of course be ‘nobody has a right to money that he stole’, but from a psychological point of view that is less powerful than appealing to sheer envy. And the bureaucrat’s answer to the problem is nearly always, ‘here, let me hold on to the 21.999 billion pounds. I will keep it safe.’ Sure. I could go on about the pile of cash and the six foot blonde in the room again, but I won’t. Because they are bureaucrats, you see, and so we get to trust them. And so it goes.
Wretchard wrote:
“One of the most interesting things about money is that it is a kind of power.”
This is one of the things that gives people and businesses in capitalist societies power way beyond the vote, Wretchard.
The ability to purchase goods and services not only based upon things like quality and conveneience but to also withold a purchase from a vendor whose politics disgust you is REAL power.
Witness the hue and cry from the leftist blogs when it was suggested that employers fire Obama supporters to recoup losses from increased taxes or increased regulatory costs. Hysterical, palpable fear, from employers who after all are only boycotting leftists in the labor market. The leftists wail, but how different is that from them boycotting Florida orange producers for advertising on Limbaugh? Sauce for the goose, and all that.
THAT is the sort of power that money gives. THAT is the sort of power that could be brought to bear to make things happen. Whiskey and all the others on this board who realize that politics ain’t beanbag have got it right. Retribution, on whatever scale is necessary, is something that the power of private sector money can exact. And we need it right now.
O/T- headline on Drudge- “Chomsky Warns of the Spread of the Far Right in USA”. You go to the link and its an article in Pravda, English version. You can’t make this stuff up. Gee a home grown Marxist quoted in Pravda, who’d a thunk it?
On cities, they certainly are largely leftist bastions, but they are interesting places with cultural marvels and funky neighborhoods and sports teams and lots of other phenomena. Suburbia on the other hand is pretty white bread. I remember a bumper sticker in Madison, Alabama, a suburb of Huntsville that read “Madison, come for a day, stay for a lifetime” Unless you like sub-divisions and strip malls, your eyes glaze over in a couple hours. Just a plug for city life from a lifetime urbanite.
It should of course be ‘nobody has a right to money that he stole’, but from a psychological point of view that is less powerful than appealing to sheer envy.
As you are fond of recounting the saying, Wretchard, “The greatest trick the devil ever played was to convince people he did not exist.”
I would add: “The greatest trick progressives ever played was to convince people that government is staffed entirely by angels.”
The Founding Fathers knew better. And drafted the Constitution accordingly.
Progressivism feeds on the average citizen’s envy and ignorance. The more uneducated citizens are, the more they are stoked with class hatred, the more they will will cry for Gubmint, The Great Leveleler (ht Jimmy Stewart), to come Make Things Right.
The Constitution assumes that no one is beyond succombing to the temptations of power, and so it distributes it as much as possible. The Constitution, not the Gubmint, is The Great Leveler. The Constitution’s greatest insight is to treat the Gubmint as a sinner, capable, in its concentrated power, of far greater evil than the individual, and therefore deserving of far greater restraints.
Moving from the Shadows
So where are we heading? Hard to say at the moment since we have significant noise with the federal tax credit ending and with the $10,000 California tax credit starting, we’ll have to wait a few more months to see if the market can stand on its own two feet.
People think that the markets can continue to have unlimited funding backed by the government.
This is not true. Just look at Greece (or even at our own state budget issues). At a certain point, an event takes place and borrowing is no longer as cheap as it once was.
This will happen and it is only a matter of time.
Too much debt is out in the system but for the moment, Southern California has fallen into a trend.
The above data helps put things in perspective and also shows that the market can only stabilize with massive government support.
Will that support continue indefinitely?
I wish I could be an optimist like Wretchard.
But the game is over. It’s done, except for the shouting. We all know, deep down, that one way or another The Collapse is coming. The ruling elites are the passengers on The Ship of Fools. The ship’s mast has snapped, but the fools still tug this way and that at the rudder, thinking that they are in control. But they are not. The ship is now carried by the raging winds towards the rocks. It will go down. And the fools will never understand what they have done until they all have drown.
O’bama, begorra AlMoh.
…-
“Obama to beam message to Irish Muslim entrepreneurs
US president Barack Obama will address Irish-Muslim businesspeople and community leaders during a two-day entrepreneurship event this week.
Obama’s message on the benefits and opportunities of enterprise will be broadcast over the internet from Washington to a gathering in Dublin of Irish Muslims from the worlds of trade, investments and markets.
During the presidential entrepreneurship summit, the president will speak about developing closer links between the Muslim community and providing the capability and funds to develop new business and co-operative networks.
(Excerpt) Read more at sbpost.ie …”
http://www.freerepublic.com/focus/f-news/2500304/posts
“But the psychological point is that the Daily Mail commenter would never have wanted the 21.999 billion pounds if it wasn’t there.”
The unspoken reality is that the commenter actually believes the 21.99 billion would still be there, just distributed more fairly among, say, Mom and Pop shops selling water taffy and sitar music. Similarly, if Ford had not made the Model T the buggy whip makers would constitute a major industry employing millions. If the Wright Brothers had stuck to bicycles then the steamship companies would doing a brisk business and the railroads would employ many times as many people – think of all those presently unemployed black men who could have been leading happy lives as porters. If Farnsworth had not invented TV then things would be so much better for local musicians and actors.
Such beliefs really do abound. Back around 1980 I recall AT&T saying that if the phone system used in 1910 was still in use today it would require the entire female population of the USA to operate it. I recall a caller to one talk show a few years ago saying computers caused unemployment, since without them the banks would employ many more people to do all those sums.
Of course, none of this is true. We would not require all our women to operate the phone system because most people would not be able to afford a phone, and certainly not use long distance very much. Cellphones would not exist. Without air travel intercontinental business simply would not have developed. Nor would tourism exist except for the very rich. And there would be far less money, so the banks would not have to hire legions of people running mechanical adding machines, like the Manhattan Project
The alternative to people who make 21.99 billion is not simply a more just world but a poorer one. It would be the justice of the desert.
Society doesn’t really expect us to resist the temptation of not taking stacks of money in plain view. Things are locked up to keep us from that temptation.
Hi, I’m back!
Y’know wretchard, on this point, maybe and maybe not. I sort of grew up with the idea that you had very nearly an obligation, to run off with a pile of money if you happened to find it lying unguarded in plain sight. Big-city ethics, maybe. It slowly dawned on me that many people thought otherwise. When I started a little software business some years ago, I was all ready for all sorts of dishonesty by my mail-order customers. In fact, there was very little, very nearly none. Changed my opinion of what one could expect of the mass of the public. Of course, that was going on twenty years ago now, I wonder if things have changed.
But really, we trust our neighbors and thousands of strangers we never meet to drive their four thousand pound lethal weapons according to convention, and most of them do. Don’t underestimate public morality, when it comes to things that matter. Much of the battle is really over just what matters and how much.
I suggest much of the difference of opinion on the financial issues comes to that as well. What really happened, and why, and just how much does it matter? Agreement on the facts would probably deliver substantial agreement on the actions to be taken. Otherwise, it gets treated as a political issue, not a mathematical one, and not a matter of simple (or not so simple) criminality. Madoff is locked up because we all (mostly) understand the dynamics of a Ponzi schema, and will not put up with it. Goldman Sachs executives, much less Citibank executives, are still walking free because the general public does NOT understand the criminality of what they did. For that matter, I don’t doubt that many of the perps themselves do not understand it, but the prisons are full of people who consider themselves innocent, or at least to have had a good excuse.
OK, I will now save a copy of this message aside before I dare to hit the submit comment button. Submit? Hey. How about the Surrender Dorothy button.
A citizen’s divorce from our government on an epic scale (i.e. going Galt) won’t be enough to staunch this evil dread.
The good news?
Most people want to LIVE (truly and really).
When the dying starts, the wheat will quickly be separated from the chaff.
Rather than 1500 page palliatives, why not address the fundamental issue that Wretchard outlines, humans outrunning their (information) headlights and not being held accountable for the consequences? How ’bout 1000 states? A new constitution that enshrines regulatory and tax competition, and freedom to vote with your feet. Few, if any, central government dicta, constraints clearly stated in the constitution, with a mechanism for measuring and rewarding subsidiarity – that is governance by those closest to an issue (including governance that says “we don’t care”), a neighborhood, parents of students at a school, a town, a city, a political & physical boundary of 300K mostly like-minded people.
If one or more of these new states wants to rescue a company, so be it, they’ll reap the benefits, pay the costs, and the others can observe and learn. Odds of any catastrophe taking down half of these states (of the size of one of the larger 13 original states, but with the wealth and power of the entire Nation at it’s founding) is small and nil.
So we’ll then have lots of (good) diversity and few, if any, universal failures, and an opportunity to learn by doing v. “death by precautionary principle.” Granted, it’s not the libertarian nirvana, but it’s a compromise that will get us most of the way there and free us from the King George we’ve created (enabled and abetted by both parties and our current constitution as written and interpreted, a form of soft-corruption of otherwise good people driven to try to do good but having uniformly bad results). Perhaps a place where laws that can’t be written as a one page formula or equation require two-thirds of the local legislature to pass. Freidman observed the Fed could be reduced to an equation. Note a lot of regulation could be reduced to insuring the actor faces the local consequences (e.g. if your immediate family lives near your coal mine, or works in the chemical plant alongside the lowest paid worker, there is no regulation, nor lawsuit awared beyond recovering actual loss).
Call it governance by positives rather than by negatives. Something that a child understands.
Ari @ 70:
First off – unequivocally, No New Constitution. No, no, no, no, no!!! This is an invitation to the most monumental evil. We don’t need a new one, just enforce the one we’ve got.
Second – I don’t think we should make a fetish of the 300K number. That number was likely settled on practically since communications & travel in the 18th c., and the geographical distances involved with the population density of the time, made it much more difficult to govern single units beyond that.
What I will wager is that if we can ever get the boot of the federal government off the necks of the states, momentum might carry the citizens of some states to go even further and force a sub-divide at the state level. California, by economy, culture and demographics, is about three or four states. Pennsylvania, where I live, is about two, East & West. There’s a metropolis anchoring each (Philly & Pittsburgh) but Philly is a very different beast than Pittsburgh (think Eastern city vs Midwestern) and holds all the political power due to its overwhelming size. “Where Pittsburgh’s Tax Dollars Go to Die” is us yinzers’ other name for Philly. (Sorry PA Cat. But don’t feel too bad. To people in the suburbs of Allegheny County, the City of Pittsburgh is where *their* tax dollars go to die.) Then again we may decide that a Pennsylvanian is a Pennsylvanian is a Pennsylvanian, and since the Stillers and Iggles are in different conferences maybe we can get along after all, no need to be at each other’s throats (“troats”) and split this commonwealth of pierogies and cheesesteak.
The point is to let this kind of thing happen naturally, instead of imposing it as a 300K-size-fits-all mandate from a “new constitution” (which states would never ratify if THAT were a requirement, in the first place).
71. bogie wheel,
Seriously! When do we start making ‘amendments’ to the ten commandments?
CHIT!
Charles @ 43: “The relevant graph is here: World’s Liquid Fuel Supply”
That chart can be summed up in the words an Exxon executive used about 10 years ago — half the oil & gas the world will be using in 10 years time will have to come from projects which don’t exist today.
Well, here we are 10 years later — and guess what? People built those projects, and the world’s demands are being met. No surprise there. That chart could have been drawn any time in the last 150 years. Known resources developed with known technologies run out; new ones have to be brought on line continuously.
The link to Wretchard’s article is — excessive counter-productive regulation. Today, it is increasingly difficult to apply new technologies and develop new resources to meet the human demand for oil & gas. Gas from shales might cause problems for water supplies, so that’s out. Canadian tar sands produce CO2, so that’s out. Excessive regulation is preventing us from meeting our future needs.
An analogous situation is developing in the financial industry. Sarbanes-Oxley drove a lot of business from New York to other global financial centers, and made it harder to raise capital in the US for job-creating business expansion. Obamacare for the financial industry will just turn the tourniquet tighter, further constricting the real economy which creates jobs & tax revenue.
But the Best & Brightest will continue to saw away at the high branch upon which they sit so happily — until they find themselves on the ground with some severe injuries. I don’t see any non-painful way out of our current situation.
RWE #67
Never, ever, ever underestimate the power of the church of the worship of perfect income stream security.
Your arguments are compelling, and are ideas that I share. You present a sober, mature, dispassionate analysis. Yes it’s true that you cannot help the poor by tearing down the needy. But those callers that phoned the radio show to bitch about computers taking jobs etc? That’s a real and powerful force, one not necessarliy influenced by reason.
Having spent some time in Boston during my life, I saw firsthand the “machine” and how unions, public sector and otherwise, could combine with leftis politicians to hold back real progress, all for the pursuit of bulletproof job and pension security. They would do literally anything to stop anyone or anything who threatened the income stream status quo, regardless of whether or not the alternative was better or represented real progress. I figured that phenomenon – urban labor supplies – was the only domain of the demon. It wasn’t until much later in life that I realized the impulse exists in many quarters, often unlikely ones. Sadly, it has come to dominate many people’s lives everywhere – academia, financial companies, high tech. A couple years ago I got into a comment thread on the Rantburg site where the commenters – otherwise sober, rational, and wise commenters of the center right – went pon far, and literally threatened my family and me with violence for even suggesting certain things with regard to job security vis a vis global labor markets.
And this was before the collapse and Obama’s election, it may be even worse out there now.
#71 bogie wheel
I think you’ve confused my baseball loyalties with home base (okay, bad pun). For a Lancastrian, Philly was where NL pennant hopes [usually] went to die as well as Lancaster County tax dollars. Forget cheese steaks– homemade shoofly pie from the Farmers’ Market was my folks’ idea of a treat.
Anyway, I’m still glad the Pirates were moved into the NL Central. As you say, no reason for Pennsylvanians to start their own civil war– one Gettysburg was enough.
Any suggestions about cleaning up Harrisburg, though?
Should read “tearing down the rich”.
The Financial Times reports that Team Obama is aiming for nothing less than a regulatory structure for the whole world.
This is really interesting. Two things are happening here. One is a huge implicit delegation of power to an international system which which is accountable to whom? The other thing is how the markets will react to the new system. It will price it for sure. In the previous comments there was discussion about compliance costs:
That effect is going to be felt among financial products as well. But in what direction will it price it? If the new regulatory regime helps in the net then it should yield real economic benefits which can be measured in increases in output. If not it will be one more millstone round the world’s collective neck. As I argued above, there’s a real question about the relative benefits of returning the unleashed dog to his original tether versus attaching it to a longer leash? You can either return to a simpler system or expand the regulatory environment. In both cases the object is the same, to realign the information in a system which has outrun its boundaries. It seems like they regulators are tending towards adding complexity rather than reducing it, although it will depend on whether the constraints they add will take more degrees of freedom away from the system than are added by going to grand regulatory scheme.
Do the regulators understand the system well enough to fix it? Or are they like newly hired programmers, who asked to fix a vast, ramshackle system dating all the way back to 50s, littered with poorly documented functions, microcode and what have you, think that by writing a few patches they can fix the beast? Or are they adding one more layer of complexity to a system already tied up with spaghetti code? My fear is they’re going to wind up with a system of such monumental complexity that it’s going to start generating its own emergent phenomenon, like a building so vast that clouds start forming inside it with poorly understood thunder and lightning running across the edifice.
This ought to be interesting.
#24 L3
How will cities survive in a brave new world? They won’t, at least not in their current form. They’ll look like Detroit: depopulating to the point of implosion.
and
#41 Kinuachdrach
Change is coming. If that change results (for example) in a breakdown in reliable electric supply, then modern communication systems will be shot. Similarly, the costs of transportation may increase from a variety of causes.
Thus it may be that when change comes, it will result in revitalized cities. Globe-spanning supply networks may simply no longer be reliable enough, and global distribution of production from Chinese factories may no longer be feasible. Instead, the city may again become the locus of manufacturing.
Assuming that there is a recovery from the Long Night, both of these projections can be true. As the organic waste impacts the rotating airfoil, cities are not viable constructs. Their existence is absolutely dependent on a vast, delicate, and inter-related web of supplies and activities by others.
Take the supply of clean water. If that goes south, things become untenable real quick, even quicker than the loss of cheap abundent power. Similarly, most cities have a 3 day supply of food in stores and warehouses and depend absolutely on a continuous stream of provisions from the hated flyover country and other cities. If rail/road communications even hiccups; long pork is going to be on someone’s menu.
When it happens, it is going to happen quickly. And those who are now part of the urban masses who support the current regime are going to try to get out just as quickly. Having no skills, nothing to barter, and to be honest an entirely different mind set than the mass of Americans; we are looking at a swarm of locusts that will steal, loot, pillage, rape, and murder as they fan out from the cities, especially Leftist controlled cities.
Things are going to happen quickly. Those trying to protect their homes and families, and some semblance of society are going to have to make some decisions right smartly. Do they resist? Do they try to divert the flow? How do they do that? Do they leave the roadways and railroads intact coming out of the cities [In the absence of roads, most vehicles will not go far, thinning the herd considerably. In the absence of vehicles the herd will be reduced to foot pace and range and will attrite naturally at a much higher rate.] Irrevocable decisions are going to be made on the spot, with the full realization that higher levels of government will value the survival of urban populations more than they will value rural populations. Because urban populations are the source of the power of the political elites.
It is something that needs to be pondered. L3, are any of your confreres thinking beyond the financial collapse to the physical collapse?
However, after things settle, and any stable areas of the country begin expanding again; cities will [as Kinuachdrach notes] become viable again and the advantages of location that led to their initial founding will reassert themselves. But the re-occupation will be gradual and dependent once again on the ability and willingness of the surrounding hinterland to support it. The re-homesteading process may be ….. interesting … in a number of senses.
Both of you may well be right, but we have a lot to get through from point A [now as things teeter on the edge] to point B [when things go Tango Uniform] to C [getting past the collapse] to D [re-establishing society and trade networks]. And that is the easy chain of probabilities. We may have the “Canticle for Liebowitz” scenario.
Subotai Bahadur
Irrespective of the next move – which lies this weekend with the International Monetary Fund and the ministers of finance meeting in Washington for the Fund’s spring meetings – this looks like the moment when the Greek problems really start to generate contagion across the eurozone region. … And this is the heart of the problem: Will Germany and other European nations be prepared to provide the large sums needed to refinance several peripheral nations? Will these nations then take the painful austerity measures needed in the midst of recessions in order to get out of this? …”
“The fuss made over Greece by the English and US media in particular tried to hide from the majority of the economic, financial and political players the fact that the Greek problem wasn’t a sign of an upcoming Eurozone crisis (2) but, in fact, an early warning of the next big shock of the global systemic crisis, that is to say a collision between, on the one hand, the virtual British and US economies founded on untenable levels of public and private debt and, on the other hand, the double wall of borrowing, maturing from 2011 onwards, combined with a global shortage of available funds for refinancing at low rates.”
http://tinyurl.com/y2cjwhc
So, we rather can foresee the end of the 1945 world organisation, the Greek debt scenario is blurring the whole play
A regulatory structure for the whole world?
Good luck getting the Swiss, Chinese, Indians, Russians, Japanese, Australians, Gulf Arabs, and Canadians to go along with that one.
Obama is astoundingly stupid.
PA Cat @ 75:
Okay, I don’t feel so bad. You’re on the wrong side of the Alleghenies but at least you’re not in the Devil’s Den (*rim shot* – in keeping with your Gettysburgh ref).
Harrisburg? It’s late and my head hurts. All I will say is that Mike Veon is a one-man argument against repealing the 17th Amendment.
Will the Chicago financial centers be gifted by Obama and friends? First the Chicago Climate Exchange and now derivatives trading? Will Israel be the trade? Imagine the fraud if financial transactions move to communist Chicago?
Just listened to Hewitt in Ohio:
Teacher’s union there turned down a 10 to 20 dollar co-pay, as a result, 800 teacher’s will be laid off!
I tried to post this earlier, but it seems to have been eaten by PJM. However, it is even more relevant with Wretchard’s comment #77…what many don’t realize is that the Basel accords were largely what not only created the financial crisis, but what made it a global one.
Original post:
L3,
Although I am a rare commenter here, let me say that I appreciate your comments (and many other commenters, LOTM, Subotai, as well as many others) almost as much as I appreciate Richard’s writing. I have gained much knowledge, insight and enlightenment from this community, and I hope to contribute more back it in the future.
With regard to the regulatory framework, and regulatory capture, I would like to highlight the importance of the regulators in creating the global bubble, which is the ultimate cause of our present difficulties. And although not exactly global, it is certainly not firm specific or country specific…it affects most of the global banks. And the reason is regulatory.
Regulators are usually experts within their very narrow field of expertise. However, there are usually large gaps between different regulators responsibilities and in places where multiple regulators overlap. However, their expertise is often dwarfed by those paid very well to identify and exploit regulatory arbitrage.
The Basel II accords were updates of earlier accords meant as recommendations for national regulators about all aspects of regulation to try to level the regulatory playing field between countries. They are not regulations, but guidance for national regulators. One of the small aspects of the Basel II accords was lowering the reserve requirements on real estate backed debt if it was collateralized. Everyone knows (conventional wisdom alert) that diversification reduces risk. So owning 1% of a pool of mortgages 100 times as big is much safer than owning an individual mortgage. Even more so if there were other subordinate tranches that would be absorb the first layer of losses. So the Basel II accords recommended a significantly reduced the amount of collateral (reserves) necessary to hold AAA or AA collateralized real estate debt. And most countries aligned their regulations with Basel II, including the U.S.
So if you were a bank with $1mm in reserves available, you faced two choices: (made up numbers, but proportionately representative)
A) You could keep your $1mm in reserves, borrow $25mm at 4% and make $25mm in mortgages at 5%, and the spread provides a return on your reserves. In this case, it would (assuming no loan losses) make $250k/year (25%) on your 4% reserve requirement. If you assume 0.5% loan losses/year, your returns would be $125k/year, or 12.5%.
B) You could keep your $1mm in reserves, borrow $62.5mm at 4.2% (you are more levered, and riskier) and buy $62.5mm of AAA rated RMBS collateralized debt at 4.8% (Wall Street always gets their cut, and the yield is reduced by the presence of lower rated tranches). Your earning spread (no losses) would be $375k/year (37.5%) on your 1.6% required reserves. And if there were 0.5% loan losses/year, they would be eaten by the lower rated tranches so your returns would still be 37.5% on your reserves.
Given that regulatory structure reserve choice, is there any doubt why almost every major player in banking, from Citigroup, to Deutsche Bank, to Royal Bank of Scotland, to the Icelandic banks all chose option B? The only ones who didn’t were either very philosophically opposed (BB&T) or too small to play in the big leagues (credit unions, small local banks). So the regulators, with an almost unnoticeably small change to an obscure rule created an almost insatiable demand for AAA real estate backed collateralized debt. So much demand that it did not matter what kind of junk was in it. They wanted AAA rated real estate backed debt. They didn’t care if it was full of NINJA liar loans from Countrywide as long as they could lever it up and the ratings agencies slapped AA or better on it.
The CRA also incented originators to create junk, but it was the fact of an insatiable demand for the junk that really inflated the bubble. And the regulators caused it by creating an incentive structure demanding it. The crisis did not come from a lack of regulation, it came from bad regulation. Whether as a result of not understanding all of the consequences of changed incentive structures, or rule makers being influenced by parties who stand to benefit is almost irrelevant.
Beware regulators who think they can understand and ‘fix’ truly complex structures. Especially regulators that have screwed up catastrophically, and not admitted it.
whiskey @ 80
I take second to no one in my low opinion of Obama’s policy chops, but I do think any serious financial regulation has to be part of a worldwide framework, because money just knows no boundaries anymore.
That said, I think they are totally going the wrong way with yet another primitive 1930s style command and control approach when waht is needed is a very few absolute limits and much more careful crafting of incentives.
Any regulatory scheme has to start from the premise that if it can be manipulated or corrupted, it will be. The shiny suit guys working for the big banks and hedge funds are much smarter and much better financed than their regulators ever will be, and if they ever run into an honest and smart regulator they just go over his head and find a greedy pol to buy.
So the only solution is some very simple rules, cast in iron. Not sure exactltly what they are, but probably something including:
All financial transactions except financing the purchase of a tangible item for consumption or personal use (e.g., a car loan) must be recorded in a public database or take place in a regulated exchange
Any transaction that has the characteristics of insurance must have one party owning a beneficial interest in teh underlying item (i.e., no more naked CDS)
No financial transaction can be made on margin of less than ___%.
Probably revise and reinstall son of Glass Steagall. Any bank that sells equyity to teh public is limited to pretty much what a Glass-Steagall commercial bank could do. If you want to be a cowboy in a less regulated market, you cannot be a joint stock company, you are a sole proprietorship, or partnership and your ass is the one on the line. You cannot take deposits of less than, say $1M, and you and your depositors accept all the risk.
FDIC remains in place for the commercial side. The cowboy side has no govt protection and in fact the law, even teh Constitutrion is written/amenmded to absolutely prohibit any govt “bailout” whether by purchase of debt or equity or providing liquidity beyond “normal” amounts.
Obviously, tons of details, but something along those lines.
Oh, and criminal liability including RICO and asset forfeiture for any significant violations. Asset forfeiture is a great motivator to get the regulators to do their jobs.
As I understand it, many traders actually support Obama’s suggestion to codify the Volcker Rule. Simply put, Volcker suggest that bank holding companies be prohibited from trading on the market for their own accounts. This is designed to prevent the banks from competing against their own customers who are buying and selling financial instruments. This is a throwback to the 1930′s when the Glass-Steagall Act was implemented to do much the same thing.
When and if that gets by the Congress, you can expect Timothy Geithner to be gone and Paul Volcker installed as Treasury Secretary. Well, at least Volcker wasn’t caught cheating on his taxes and he didn’t suspiciously arrange to get Goldman Sachs all the funds required to bail them out of their credit-default swap counterparty obligations when AIG was threatening to go belly-up.
So after Glass-Steagall was killed off in 1990 to facilitate sub-prime lending, Obama wants to return to its former glory. This whole direction, of course, is designed to point the finger at Wall Street for the financial bubble. We of course know that Chris Dodd, Bawney Fwank, Chuck U. Schumer and the Dems forced the quasi-government mortgage agencies and the nation’s banks into the sub-prime mortgage fiasco.
Like all other good capitalists, I think we need to let the markets find their own levels and get government the Hell out of the financial markets. My retirement will most certainly be more secure.
Daedulus @ 84: “So the regulators, with an almost unnoticeably small change to an obscure rule created an almost insatiable demand for AAA real estate backed collateralized debt.”
Very interesting, Daedulus. Assuming your explanation is correct, it still does not put the blame entirely on the Basel II regulators. The failure mode also includes the ratings agencies that went about collecting big fees for sticking the AAA label on everything in sight.
With the wisdom of hindsight, we all know that those debts were not AAA. If the ratings agencies had done a better job, the Basel II regulation would not have had such dire effects. How do we change the rules to get more realism from the ratings agencies — especially since the first thing that an honest rating agency would have to do is downrate the debt of most governments?
So after Glass-Steagall was killed off in 1990
Glass-Steagall was repealed in 1999 (Gramm Leach Bliley Act).
Kinuachdrach,
While the ratings agencies screwed up, again I think one of the key problems was regulatory. The regulators ‘recognized’ only the big three ratings agencies. There was no competition…no ‘other’ rating agency could go out, start rating paper, and advertise that their ratings were better. How accurate the ratings were was irrelevant…the regulators mandated which agencies were acceptable.
While the failure in hindsite is obvious, the method of the ratings agencies was not THAT crazy. Tranching the debt does increase the safety of the higher tranches. Where they screwed up was focusing so much on sizing the tranches to the exclusion of the underlying credits. The top 70% of a normal pool of mortgages in normal times with 20% down payments is really AAA. They could model back over 100 years of history and it would never have defaulted, even during the great depression. What they missed (along with almost everyone else) was that the regulatory environment had shifted and times were no longer normal. These junk mortgages were junk in a way that had never happened before. All that historical record was made when someone with money on the line made a decision to extend that credit to that buyer. In the bubble, a ‘normal’ direct loan recognizable to a small banker in the 1970s was the radical exception, not the rule. Everyone was planning to lay the junk off onto the next sucker up the line, right up until it got to the last sucker…the taxpayer.
Daedalus Mugged
Daedalus @ 84: The CRA also incented originators to create junk, but it was the fact of an insatiable demand for the junk that really inflated the bubble. And the regulators caused it by creating an incentive structure demanding it. The crisis did not come from a lack of regulation, it came from bad regulation.
Daedalus, great post. But I ask you, why is this a problem for regulators? Say the regulators removed all restrictions – under their fiduciary duty, what should the heads of Citibank et al do with their institutions?
Daedalus @ 89: These junk mortgages were junk in a way that had never happened before.
Again great post, but again I want to take issue and push it one more step. The subprime stuff and related MBO went bad by 2007. Forget history, if there was any validity to the mathematical model of risk – qualitative, not quantitative – then hey, the C tranch guys would lose, and maybe all holders would lose a few percent. But that’s not what happened. There was a market collapse. An instrument that was probably worth 80% or even 50% of face value, couldn’t be moved at those prices, could barely be moved at 10% of face. The capital structure of everyone, collapsed, especially under the ill-timed move to mark to market.
The real problem, I assert, is that the idea of completely separating risk from principle, is invalid. 95% of the rocket scientists were wrong, wrong, wrong. This thing was going to collapse under any circumstances, because the economy does fluctuate. It’s all moral hazard, every last dime of it.
Eventually, if you borrow enough time on bended dime, the penniless TRUTH hurts:
Greece on borrowed time
Slow is the needle. Quick is the axe.
The crisis did not come from a lack of regulation, it came from bad regulation. — Daedalus
The real problem, I assert, is that the idea of completely separating risk from principle, is invalid. 95% of the rocket scientists were wrong, wrong, wrong. This thing was going to collapse under any circumstances, because the economy does fluctuate. It’s all moral hazard, every last dime of it. — Josh
This is kinda why I’m optimistic. But the game is over. It’s done, except for the shouting. We all know, deep down, that one way or another The Collapse is coming. is probably true but it’s not all bad news. Along with the bad news a collapse will make many previously impossible things possible. Provided a society does not go all to pieces, its glory days follow the collapse of dysfunctional elites. We are looking at a Golden Age, provided we’re still around to look.
The trick is to keep a semblance of order within the disorder. As I’ve often written here, revolts are as much about preserving things as they are changing them. Because ultimately, unless you’re Robespierre or Pol Pot, you want to keep 95% of things. One of the things that’s important is preserve continuity and legitimacy. And that’s going to be a problem.
I think the current system is doing an excellent demolition job on itself. They are blowing themselves up and nobody can stop them. They almost don’t need any help with their wrecking ball. If you had to choose a dream team to bring the current elite down for good and all, to drive a stake through the heart of liberal fantasy and probably end the race card forever you have hardly chosen anyone better than the current crew. When they finish the job we’ll be quits on everything. By the time they’re done we’ll see each other in our elemental humanity, made brothers by a shared experience. The danger is by that by the time they are done they will have left nothing for anyone to start with.
Daedalus and Josh may both be right in different ways. We have separated risk from principle. The “change” that these guys are foisting is precisely that, vanity bets without any regard for the society it imposes itself on; like betting your mother’s wedding dress and your dad’s Bronze Star for a beer. And what form does it take? Bad regulation, bad public policy. It is control, if a controlled flight into the ground is any sort of control.
At any rate there is no longer a choice. It’s brace for impact, handshakes all around and hope to see you again at the other end of our impending near-death experience.
there’s optimism in there somewhere…no sense being pessimistic, it wouldn’t do any good anyway!
“Because ultimately, unless you’re Robespierre or Pol Pot, you want to keep 95% of things.”
the difference that Robespierre and Pol Pot had, it’s their agendas, Robespierre wanted to divide the Nobles and the Church ownships into individual ownships, while Pol Pot wanted to make them common
Provided a society does not go all to pieces, its glory days follow the collapse of dysfunctional elites. We are looking at a Golden Age, provided we’re still around to look.
Well, Bruce Sterling made a comment years ago, that he expected all big institutions to self-destruct, but I don’t think even he thought that applied to the US government.
I really don’t follow your golden age logic, what are your historical references? Was the collapse of the Roman Empire a matter of dysfunctional elites? Or the collapse of the British Empire? Did a golden age follow either? Or are you embracing Cloward-Piven?
I don’t welcome any collapse. Anyway, an empire takes a lot of collapsing. The sun still shines, the wheat still grows, and people are still shopping at Target.
And I don’t think Daedalus said anything I disagree with, I just think it goes one more step. I’ll ask again, in a totally unregulated market, what should Citibank management have done – and is it not a total failure of fiduciary duty, for them to have put the whole enterprise at risk?
I really don’t follow your golden age logic, what are your historical references? Was the collapse of the Roman Empire a matter of dysfunctional elites? Or the collapse of the British Empire? Did a golden age follow either? Or are you embracing Cloward-Piven?
I think there are two kinds of collapses. In one case an artificial construct falls down. In the other, a natural construct frees itself. America, whatever the Left says, is not an Empire. It’s a robust nation of more than 300 million. Like China, like France it is robust beyond imagining. It can almost not be killed. But it can be freed to achieve its potential.
In the aftermath of a collapse, provided chaos does not ensue, the border problem might be solved; racial politics might be ameliorated and a lot of creativity may be unleashed. Put it this way: with the elite in charge it is unlikely anyone will be on Mars by 2050. With the elite gone, man will be on Mars in 2035. With the elite in charge by 2050 we’ll have windmills everywhere. With them gone we may have fusion.
Even in foreign affairs, a real change may actually strengthen world security. Many tyrants are embolded not because the West is weak, but because it is weak-willed. An America that renews itself, provided it doesn’t destruct, may actually be a stronger player than one which binds itself with all kinds of PC rules.
The practical importance of this idea, provided it is correct, is the idea that a crisis should be met. It’s probably going to happen, whether anyone wants it or not. But the character of the transition can be altered by the degree to which responsible people participate in it.
Mars? Fusion?
Who exactly are these elite you speak of, who are standing in the way of such easy and natural accomplishments? Aren’t you awfully close to the romantic idea that returning us to the state of nature will solve all problems?
I’d say offhand that we need an elite in charge to accomplish grand projects. I guess the question is just which elite that is. The democratic (small d) answer to the question is, we move it around, and hope to make good judgements, net of errors.
Daedalus:
They could model back over 100 years of history and it would never have defaulted, even during the great depression. What they missed (along with almost everyone else) was that the regulatory environment had shifted and times were no longer normal. These junk mortgages were junk in a way that had never happened before.
The history of financial risk is not one of events that conform to normal probability distributions. It’s a history of extremes and discontinuities that always exceed reasonable expectations. That’s why it’s dangerous to base risk models on odds distributions inferred from past events. Instead you have to ask what’s the worst that could happen — your longs go to zero and your shorts go up enough to bankrupt you — and use that as the basis of what you plan for. Quants, and also pols and bureaucrats, tend to get too clever and fool themselves about having everything figured out. Add in the pols’ temptation to increase central control to favor selected constituencies and you have a formula for recurrent financial breakdowns.
Jonathan…
What you’re referring to Soros calls reflexivity…
That is, our own thinking – itself – is changing the control state of the system.
All of these quant schemes ignore the very existence of THEMSELVES…
And the impact upon the market place by the math-faith they have propagated upon the ether.
F @ 34
It worked for me 1 minute ago. Are you selecting the text from the pdf, copying, and then pasting into your word processor? Can’t just “Save a Copy” of the pdf, of course.
Otherwise, I don’t know what to suggest—it’s all still there and the links still work and the copy/paste still removes the redactions as of right now.
Financial market behavior is not predictable in priciple. What theory of nonlinear dynamic systems has discovered, “black swan” events are inavoidable in any self-organized complex systems. What investors must realize is that any involvment at financial market is a casino, and behave accordingly.
The guys creating the regulations are making 80K a years. The guys figuring loopholes are making 2.5 mill per year. Who is going to win that one? Talent follows the money.
Regulations to prevent what happened date from the 30′s when this happened before. Those regulations were watered down or removed by crooked politicians. That will happen again unless something is done about the politicians.
The System is flawed. Unless it is re-worked no amount of regulation will matter.
System re-modeling starts with a Constitutional Convention.
Wretchard, after reading you occasionally from before your three conjectures post, (and always after) this was your first reply to an idea of mine (because I was a lurker). I finally understand the thrill of a teenie bopper in the crowd whose eyes locked momentarily with one of the ‘New Kids on the Block’ Thank you again for so much enlightenment over the years…even this little piece.
Josh,
I think we agree on most, and if I implied what you seem to think I did, I did not mean it. You are right that there is a fiduciary duty of the managers of the banks independent of the regulatory regime. However, investors expect (perhaps wrongly) for the regulators to set good rules. Almost all banks maximize themselves within the confines of those rule sets. Banks which chose option B saw their earnings (and size) grow massively through out the late nineties and oughts; it was the primary driver of the financial sector booming as proportion of the economy and market. And why the big banks choosing B could buy up and consolidate so many regional banks still choosing A. Any bank which chose not to drink from the poisoned punch bowl was punished for a decade…where is the fiduciary duty in that? A whole generation of senior management got ahead by doing so….do you think the banker making 12% or the banker making 35% got the nod for the top job? Who took over who?
I agree that the idea of seperating risk from principal is impossible. However, I am not quite prepared to say the mathematical models are complete junk. I think they were used inappropriately and badly…and they were used and trusted when their key premises did not hold. They were in ‘unknown unknowns’ territory, and even worse, didn’t realize it. The models work very well most of the time, the forgotten key is to understand that they don’t work very well all of the time. And they depend on their inputs…a 2004 mortgage was nothing like a 1983 mortgage.
I would also suggest that the market for the securities did not totally collapse. There were buyers at all times…there were just no willing sellers at the prices the buyers were willing to pay. And for, you guessed it, regulatory reasons. In the midst of the collapse Lehman found a buyer for its pool of junk. But it was at $0.18 on the dollar, with Lehman lending them $0.10 of that. The prices for the junk were bid way, way up by players who could lever it way, way up. Once it was ‘normal’ buyers for the collateralized securities, like private equity funds who were looking at it as a stand alone investment rather than an opportunity to get decent yield with next to no collateral/reserves the prices shifted in a way that no big player’s balance sheet could handle. Any bank could have sold their CDOs at any time. They would have been seized as insufficiently capitalized by the regulators the next day. Even if they only sold a small portion, they would have to recognize that is where prices were, mark the rest of their holdings accordingly, and then be siezed by the regulators the next day. The market froze, but not for lack of buyers. It froze for lack of sellers at the clearing price.
The security pricing was very similar to the perhaps more understandable housing market underlying the whole thing. Who set the transaction price for houses in the boom, the family who scrimped and saved the 20% downpayment for a modest house with a mortgage payment of 20% of earnings? Or the no money down guy who lied about how much he made on his mortgage application? Who set the transaction prices in the midst of the crash? Just like the securities, any house could have sold at any time…at the right price. But the market froze, because voluntary sellers’ expectations were well above the clearing price.
I didn’t use now as an example because the government agencies are still flooding the residential housing market with money and credit on absurd terms…the no money down guy is currently putting down 2.5% with an FHA guaranteed mortgage. And getting an $8k tax credit which makes the 2.5% down less than zero down (net equity out) on any house less than $320k. They limit the giveaway to one per customer…but that customer still sets the clearing prices.
Jonathan,
Actually, a great many financial instruments have nearly normal distributions…except at the tails. The quants’ (and regulators’) financial models really do work pretty well 98.5% of the time. But what they wrongly assume is that the 1.5% remaining is rare enough and small enough to be easily managed. That is where the non-linearities can (and did) eat their lunch. The key is understanding how useful what you have is, and still understand that you don’t have everything figured out.
I used to be in risk management (I escaped in 2007) and had a conversation with a former boss who is now a Chief Risk Officer in an S&P 500 firm who bemoaned “We had 3 ’1 in a thousand year’ events last year!” to which I replied, “Well, they obviously are not one in a thousand year events then, are they?” As glib as that is, it is extraordinarily difficult to understand and manage the extremely rare. Very nearly impossible. That is why Wretchard’s concept of design margin is so important. You can’t really manage the tail risks…you have to be able to absorb them. And that is what the bank regulator mandated reserves are about…they are the design margin in banking. They got reduced by two thirds. And that probably would have been OK…if the change in regulation did not cause a change in incentives, which caused a change in behavior, which fundamentally changed the risk parameters of the underlying regulated instrument. But it did. And regulators couldn’t see that. And we are all now paying for it.
All,
Sorry about the length of my posts…I will try to work on being pithy. Next time.
Daedalus Mugged
Obama channels Whiskey.
http://nalert.blogspot.com/2010/04/non-white-males-obama-and-democrats.html
White males officially not invited to the dance.
No mo uro #74:
I know exactly what you are talking about. The entire Space Shuttle program was created to save the jobs of the Apollo program people, who had accomplished something so wonderful that they just could NOT be laid off just because the mission had been accomplished.
And, incredibly enough, I evne encountered this same attitude in, of all places, the U.S. Military. I was the program manager for a small program that was coming to an end as a result of both long term National priorities and a simple lack of short term need. The people who had been operating that system for decades simply could not understand why they could not go right on doing it. And these were military people who would not be laid off but simply reassigned! After one meeting with them that did not go well at all, a sympathetic major came in and said that surely we could get together and “do something.” I presented him with the only possible alternatives, and he replied “Your problem is that you are trying to deal with this in a logical manner. These are people’s jobs we are talking about.” Jobs, yes, but we were not even talking about putting them out of work, just probably requiring that they would have to move! Imagine, having to move to another base when you are in the military? Who ever heard of such a thing!
Rosinante,
There is no way a Constitutional convention would produce anything remotely as good as what we have. And it can never achieve perfection. We need to abide by the Constitution we have. It is as good as it gets.
The key is limiting the Federal government. When states inevitably do stupid things (Romneycare, New Jersey) you can just move without giving up your citizenship. As Reagan said
We have lost a lot of freedom since he said that, but a Constitutional convention would kill whatever is still left.
Daedalus,
I’d take Barry, Harry, and Nancy over the founders anyday!
Get with the program!
O’commyssar: ukase my O.
“All without a single vote in Congress.”
…-
“Obama Abandons Climate Bill in Congress, will have EPA Regulate CO2 Instead
The recent announcement of the Democrat’s switch of focus from Cap and Trade energy legislation to immigration reform is simply an administrative slight of hand. Barack Obama and the rest of his co-conspirators in Washington including Rahm Emanuel, Nancy Pelosi, and Harry Reid know full well that a hard fought political battle in Congress over an energy bill was unnecessary. Instead they have given the EPA their blessing to unilaterally determine CO2 limits for the nation. Administrator Jackson’s decisions will mean the difference between prosperity or poverty for millions of Americans. All without a single vote in Congress.”
http://www.freerepublic.com/focus/f-news/2500585/posts
Kaczynski’s Twin to Run in Election: Polish opposition party leader Jaroslaw Kaczynski said he will run in sum… http://on.wsj.com/asP1X7
uh my prediction were right on the jokey !
Daedalus:
Thanks for your thoughtful response. I don’t think we disagree.
Ignoring the long-run odds that a fat-tail event will bankrupt you is what I was getting at with my remark about how quants, bureaucrats and pols tend to get too clever and fool themselves about having everything figured out. You have to look at the long run and factor in the outlier losses; you can’t pretend they don’t count. If your business makes money for years and then loses it all because of an unanticipated or “too rare to worry about” event, your business model is a failure. People who can’t handle fat tails shouldn’t play (or should open casinos or life-insurance companies, because there you are dealing with normally-distributed events and will never go broke as long as you have adequate initial capital — but you won’t make a huge rate of return either).
I agree on the importance of design margin but I’m not sure it can be mandated by government. Regulators will never understand the risks well enough, some risks (as you note) cannot be anticipated, and the political incentives of centralized regulation will tend to reward the taking of excessive risk and of the wrong kinds of risks. Eventually an outlier event will occur that takes down the system, as recently happened. Or the regulators are too restrictive about risk and economic growth and innovation get stifled. Perhaps the best that we can hope for is a decentralized, deregulated system in which businesses that take bad risks pay for their mistakes and aren’t bailed out, and the market learns from their failures. (This doesn’t mean that customers will be forced to risk their savings in a financial Wild West, but rather that risk-averse investors will keep their money in risk-averse institutions at the expense of some upside potential.)
Jonathan,
They thought they did. Where they (and many) were wrong is that you really can’t factor in the truly outlier events…you can go out to 95% probability or 99% or 99.999% or maybe even 99.999999% but you can never factor in all of the possibilities. To do so would require a quantum computer the size of the universe. There is uncertainty. And even healthy design margins are not always enough.
For example, were the World Trade Center’s design margins enough? They were enough to handle everything nature threw at them for decades, including hurricanes and at least one modest earthquake. They were enough to handle a poorly executed truck bomb in their basement parking. But the design margin was not enough to handle a large plane full of aviation fuel crashing directly into them. But at certain extremes, the problem is no longer the design margin. It obviously does not make sense to design buildings to handle large plane crashes…or else they would all look like nuclear reactor domes.
The regulations are supposed to establish how much design margin the system should have….so that the inevitable problems are outside what the system is expected to handle. The problem should be the situation, not the rules. The banking regulations should have the design margin to handle the changes in behavior caused by the incentive structures they create. And they didn’t. Banking regulations are not intended to handle the risk of an invisible dark matter black hole hurdling towards us on a collision course. And if that was happened, nobody would blame the regulations or regulators. But banking regulations are supposed to manage the behavior of the bankers…and regulators created incentives for them that was a large contributor to the whole system blowing up. Regulations are supposed to make banking safe and stable. They did the opposite, to all of our detriment. And the solution to bad government is, as always, more bad government.
Should the regulators powers be increased? They are. They had significant malfeasance and/or incompetence. And they are being rewarded with more power. And very few recognize how badly, and basically, they screwed up. But no banker is going to point it out….you don’t want to get on the wrong side of the Chicago Way (or your regulator).
Daedalus Mugged
Rosinante,
There is no way a Constitutional convention would produce anything remotely as good as what we have. And it can never achieve perfection. We need to abide by the Constitution we have. It is as good as it gets.
Agreed, Daedalus. A Constituional convention would be hijacked in nothing flat by leftists.
I find these frequent calls for such a convention by people on the right to be the height of foolishness. Such people should be really, really careful what they wish for.
R@103: Regulations to prevent what happened date from the 30’s when this happened before. Those regulations were watered down or removed
Exactly. The second and last salient point is that People.Saw.It.Coming. 2008 was not a Black Swan.
But the analysts were shocked to discover drinking in those Wall Street bars.
Glass-Steagall was little more than an artifact at the time it was formally repealed (1999). The Wall St investment houses had work-arounds so I am ambivalent about the G-S issue.
The Washington political class was – and is – part of the problem and deserves separate discussion – one that comes every two to four years – just need to bring more people to the debate.
Easy as it is to get side-tracked in outrage over the insidious and nefarious products developed through securitization of investment paper by people who were being paid to know better; easy as that is (and the diversionary rhetoric of the current debate demonstrates just that snake oil shrug of the shoulders “who knew?”); easy as that is, the buck could have been stopped or contained by the regulators.
Starting with the mortgage underwriters whose behavior was criminal and continuing with the rating agencies who were tasked with identifying risk for proper pricing by the markets, the failure of which, in my view, was overt and prosecutable fraud.
The Bush administration was absolutely right to take Enron, WorldCom et al to court and ultimately real jail time. Sent a strong message. That same message needs to be “communicated” to financial services. People much smarter and more knowledgeable than I know how to make this happen efficiently and effectively, but that’s where the focus should be.
Washington is “crooked” by definition, and I would advise that we not get lost in an imaginary sea of righteous purity, but we, the voting public, can increase the heat to help our political class choose more wisely and exercise greater judgement in their oversight responsibilities (the F/F warnings were repeated and numerous).
To ignore the warning signs – and there are always warning signs – “just don’t make no sense.”
[And No to a Constitutional Convention. Just No.]
Wretchard (93): “Along with the bad news a collapse will make many previously impossible things possible. Provided a society does not go all to pieces, its glory days follow the collapse of dysfunctional elites. We are looking at a Golden Age, provided we’re still around to look.”
I think the best hope lies in the individual state governments. It’s possible—excluding the basket cases like California—that most of the states might be able to function pretty much intact even if the Feds go bankrupt. The states can provide a minimal level of law and order, provided their legislatures and governors comprehend the situation and act decisively to provide for the common welfare. As one possible example of a state acting with a bit of foresight, here in Idaho where I live, the state recently provided for its citizens the option to pay the state income taxes using silver coinage or bullion. Now if the Fed Reserve Notes ever were to become toilet paper, individual states might be able to make provisions for keeping some sort of local economy intact, so that at least we are not entirely reduced to a “Mad Max” scenario.
By the way, your comment threads generally are one of the better ones in the Blogoverse.
Kinuachdrach (#16),
Well, Possony, Pournelle, and Kane not only saw it coming, the openly advocated for speeding the process up. Of course, they were part of the real “best and brightest”, not tenured members of the bien-pensant.
56. Whiskey,
That was your best post EVER! 200 proof my good man!
“We have lost a lot of freedom since he said that, but a Constitutional convention would kill whatever is still left.”
Evidence please! The LAST Constitutional Convention didn’t work out so bad, did it? Or do you think they found the Constitution under a rock?
I think that phrase doesn’t mean what you think it does;
http://en.wikipedia.org/wiki/Constitutional_convention_%28political_custom%29
You probably have it confused with this;
http://www.answers.com/topic/constitutional-convention
I’m talking about a blend, so to speak. A convention called by the states as allowed in the US Constitution for the express purpose of looking at the current constitution and seeing what needs to be overhauled.
Afterwards the new and improved Constitution would have to be ratified by all the states. So there would be no freedoms lost that are not already lost.
The only difference is that changes to the current Constitution would be done by a democratic process instead of Tyrants in black robes, AKA Judicial process.
You are probably not aware that the US Constitution gets changed quite often. That is done at the wish of Lawyers that are NOT elected, never face the voters and have not the slightest respect for the will of the citizens.
Charged with protecting the Constitution, the Judiciary alters it at will. Think I exaggerate? Find the word ‘expression’ in the 1st amendment. At the time of the creation of the US Constitution, The theory of expression as a part of free speech was about 2 generations old. The framers were too educated to have not heard of it. Yet they did not include it in the 1st amendment. The Supreme Court did that a couple of generations later.
“Agreed, Daedalus. A Constituional convention would be hijacked in nothing flat by leftists.”
Evidence please!
I think you are giving voice to your fear, not reason. I’m an optimist. I think the Leftest fear us hijacking the Convention. My point is that things HAVE to Change. They will change. That change will either be violent or non-violent. Binary. Yes/no. Is nonviolent change better then violent change?
The only non-violent change is evolution. It’s to late for the system to evolve back to stability. So when it falls apart, we will have a violent change.
Do you argue my points, or do you just refuse to face them? Do you see the current system surviving? Or do you think the Usurper, who has NEVER ran anything in his life and isn’t qualified to manage a dog trimming parlor is going to pull a rabbit out of his hat at the last minute?
OK, you have the right to believe in miracles. Don’t mind my laughter.
When you say no to a Constitutional Convention, you are saying yes to a Civil War. Maybe no wittingly, but nevertheless. Civil Wars have survivors, not winners.
If anyone sees a third way out besides surrender, lets hear it.
“”Gentlemen, you may be sure that of the three courses open to the enemy, he will always choose the fourth.”*
*
_Field Marshall Helmuth von Moltke to his staff
Re: 98. Josh – Mars? Fusion?
The problem is not that they are standing in the way of easy and natural accomplishments; is that they are in the way of non-elite solutions.
For example, Mars is within our reach right now. Today. As long as you don’t mind a one-way trip. There was a time that humanity did those sorts of things. Today the elites won’t tolerate it. And in answer to the obvious question: There was a long time in my life that I would have made such a trip. That time has passed.
As to energy: Fusion may be addressed via Bussard’s Polywell WiffleBall series of reactors. If you aren’t a fan of those devices, you might want to take a look at Thorium-based fission reactors like India is looking into. And for the real far out folks, cold fusion is still alive and well. It currently goes under the description of Low Energy Nuclear Reactions. URL: http://lenr-canr.org/
This one is particularly fun, as it sets up a food fight between the physicists and the chemists. The researchers think they are measuring something. Nobody has yet figured out what it is yet.
The regulatory and safety apparatus set up by the elite has managed to assume solutions top down, rather than embrace newer things bottom up. The marketplace always works – even with space and energy. Cheers -
The problem isn’t the Constitution as it currently stands. The problem is that too many elected officials and judges are contemptuous of it, and seem to regard it as an obstacle to their utopian dreams.
I could get behind a Constitutional amendment that expands the definition of treason to include violating the Constitution while holding public office, and stipulating the death penalty for doing so. That might help to concentrate their minds.
Daedalus,
Several great posts, btw. To me it’s kinda hard to argue that American regulators were all that concerned about design margins when they implemented the lesser reserve ratios in 2004, prompted by Basil accords. The CRA and the Fannie, Freddie cons were already in full swing, and there was almost no public debate of the issue at the time. I’ve googled the issue in the past, and there were almost no prominent articles or posts on the issue from 2004. That ‘s a dead giveaway.
Any fool knowing any sort of financial history should have know that lesser Bank reserve ratios is a recipe for big trouble. The S&L crisis was essentially brought about by the comparatively slight difference in reserve ratios between Banks and S&L’s, and that crisis was ending just a mere ten years before. It appears the change in the regulations was accomplished quickly with little fanfare by Wall Street insiders with a lot to gain mostly behind closed doors. When there is no accountability and no publicity of such a major change, something slimy is afoot.
The appalling lack of transparency the last few years in the financial regulatory system has just been unbelievable. The crash was only a Black Swan to many supposedly informed people, including myself, because the changes in the regulations and the extent of the CRA fiasco were kept fairly hidden until after the crash. Hell, Bernacke and Paulson both said in the spring of 2008, that Fannie/Freddie problem was only a $200 billion problem when they both had to know at that time that the situation was much, much worse, and that Lehman was already heavily underwater.
Daedalus Mugged,
Great comments! Welcome to the production side of the club. I look forward to reading more of your stuff as your time allows.
You are exactly right about Basel II. Unified regulatory systems make the inevitable failure global in scope. The thing about system failures is that they are always as broad in scope as the system that fails. Too often, “social engineers” focus on the efficiency of the system during “normal” operations. This pushes them toward larger and larger systems, which means toward larger and larger failures. Bad incentive structure.
The world is a hostile place. Engineers often forget this simple fact. But politicians rarely consider it.
Cheers,
L3
There are several folks who speak here of a Constitutional Convention (ConCon). Here’s some grist for that particular mill.
Congress is basically a sitting ConCon. It may pass amendments to the Constitution whenever it like. It could even re-write the whole thing if it wanted. The states have to ratify the changes, of course, but that’s true for ConCons as well.
States can call a Constitution Convention, but Congress has pretty much complete discretion as to when, where, how long, and for what purpose a ConCon is called. This gives Congress complete control over any ConCon – the only influence the states can wield is that changes must be ratified.
Now, I used to be a big fan of states calling a ConCon under Article V. But the more I’ve reflected on it, I’ve come to believe that – regardless whether it is a good or bad idea – it won’t be necessary. Two reasons:
1. If states are well-organized enough to call a ConCon, Congress will simply pass the amendments that the states demand. Better to acquiesce on the specific issues than open up the possibility of an uncontrollable ConCon.
2. Congress will not want to set the precedent of having states call a ConCon.
So, while states have the Constitutional right to call a ConCon, in reality it will never happen. Any movement powerful enough to control 2/3rds of the states will be powerful enough to get Congress to pass whatever they want.
L3
Subotai,
L3, are any of your confreres thinking beyond the financial collapse to the physical collapse?
Not as such. But my view is that should a financial collapse occur in the next few years, the physical collapse will not really be as catastrophic. The main reason is that people have the skills to run and maintain the physical infrastructure, and modes of exchange will emerge to allow the mechanics to feed, clothe, and house their families. In fact, it may be a much more efficient system, since the plethora of stupid regulations that have accumulated over the past 100 years will be tossed, and people just do what makes sense.
The people who will be screwed are the pure “knowledge workers,” who predominantly live in cities. They will have no skills to do stuff, and nothing to offer to the “mechanics” who keep things running. That’s why cities will flounder; the mechanics will flee to areas where folks have things they can offer. And without the mechanics, the city will shut down.
But this situation also provides for the incentive for renewal. Cities, in order to survive, will have to allow for alternative currencies to emerge.
Of course, I don’t really have any idea what will happen. But it is interesting to think about it…
Cheers,
L3
“will have to allow for alternative currencies to emerge.”
this work well out in the “broken” Argentina, and in some local rural communauties in UK and in France
As long as this country has people of the qualities of those posting on this topic, I do not despair of the Republic.
By the way, I second the motion of leaving the Constitution, except for tweaking, alone. It is really the primary cultural center we have, now that the America of my childhood has been diversified and pluralized out of existence. No, I am not a fan of Jim Crow or the juvenilization of women, but we have gotten into more trouble transgressing the Constitution than shaping our civil and economic life in accord with its outlines. Or so it seems to me.
Reasonable amendments are fine, but call a constitutional convention and anything can happen. Sow the wind, reap the whirlwind.
Best,
Richard