Lack of oversight caused the recession

[pendulum_jaw]

So now you want sources of what is stated in every economics book I have ever read.. classic denial.

Please dispense with the false accusations, as I've denied nothing. The reason I asked you for source material is simply because I wish to understand your perspective which you haven't yet articulated very well. I thought perhaps there was something I could read to better understand what you were talking about. If you cannot clearly communicate your arguments to others, there's really no point in discussing a complex topic such as economics in an academic forum, is there?

Forget government, we are talking about a transaction between two people.

Why on Earth would we forget the defining determinant of whether a market is free or not--government? If you have a society that transacts freely without government regulation, it is a free market. I don't understand your confusion. Perhaps you really mean that you believe free markets are bad for consumers and are just expressing it awkwardly? If your claim is that free markets are literally impossible, it's difficult to take you seriously.

The seller wants $500 dollars for a computer that cost him $200 dollars.

You dont know that the computer only cost $200 so you buy it for $500 dollars.

Had you known that the computer cost $200 only, would you have bought it or looked for another seller at a lower price or asked the present seller to sell it for less?

Because the seller knows more than you about the actual cost of the computer, then he is in an advantageous situation that he can exploit, and hence the equilibrium is skewed in his favour.

There's too many faulty assumptions here to count. You completely ignore market realities. If the market price is $200 I would obviously know that. After all, I communicate with other consumers, I have internet access, I have access to retail stores, I know what I've paid in the past for similar products. In what contortion of reality would I not know the general market price of the product? Was I buried underground for a decade, insulated from society?

Also, how is it that you would know that price and I wouldn't if we were in the same market?

This constant lamentation that consumers don't have all the "information" that sellers do is foolish and it's easy for anyone who understand markets to see why. Let's assume you're correct. That is, let's assume that there is some piece of valuable piece of information that consumers would like to have before buying something. Consumers would certainly pay for this information if it helped them save money (as you imply). This is clearly a service void in the market--inevitably some clever entrepreneur would start a company to track this information through time and sell it to consumers, thus eliminating the need for the information. That's just the nature of markets.

Another example.

Seller is selling a drug that you need to live.

Seller puts price at 1000 dollars. Cost is 2 dollars

You have a choice.. buy the drug at 1000 dollars, find an alternative if possible (not possible if a new drug) or die.

If it was public knowledge that the drug only cost 2 dollars to make, do you really think that the seller would have the balls to demand a 998 dollar profit margin?

Again, you don't even fully understand your own assumptions. What anybody is willing to pay for a given product is a subjective valuation. So much more goes into this valuation than just the market price of the product. Different people place different values on a given product based on the specific circumstances of their situation. To a dying person, I would submit the medicine is worth far more than $1000. Heck, the seller is only getting $1000 out of the deal, whereas the buyer is receiving the gift of life! To somebody who is not sick, the medicine is probably worth zero. The market price is a kind of average of everyone's valuations. To think there is some equilibrium market price that all should pay is a common economic fallacy.

Note it can also be inferred from your example that you believe that sellers determine prices. This is a fallacy. Supply and demand determine prices.

Cant have an academic debate if you dont know what equilibrium is in a discussion of a trade transaction.. what do you think it means.... /shrug

Nonsense. In an academic debate it perfectly common to ask your opponent to define his terms and clarify his position. It not only helps the questioner understand the speaker's argument, but it demonstrates that the speaker really understands those terms himself. I don't find this unreasonable.

Having knowledge of cost of the product would make the consumer able to see if they are getting taken for or not.. knowledge is power and the seller holds all the power due to the lack of knowledge.

Again, all necessary market information is built into the price. You have not described any information not accounted for by the price, nor have you demonstrated how the seller holds "all the power". Note the trend you have of utilizing meaningless, emotional terms in your arguments-- 'power', 'getting taken', 'protected', 'strong', 'weak', etc. This type of language is the hallmark of an ideologue, not somebody who is interested arguing substantively. In any case, it clouds understanding.

The seller is banking on that I living in Denmark am not able or dont want to do the calculations that my Coca Cola is 120% higher in price than a German one and demand that the prices are put down. It is a lack of knowledge by the consumer either by choice or by invention that results in the seller gaining an advantage and hence skewing the price upwards away from the true equilibrium.

This again reveals an ignorance of the price system. Are you actually claiming that the costs associated with delivering Coke to the market are the same in both Denmark and Germany, and the only difference is that sellers in Denmark are trying to improve their profits? If so, that is laughable. The price is 20% higher because the associated costs are higher, and that cost information is built into the price. The fact that the price is 20% higher doesn't mean the profit margin is higher--do you not understand that?

It is you and other free market people who claim it is possible lol, by promoting the free market with no regulation. Such a market would be so one lopsided in favour of the corporations that it would make the present situation look almost favourable.

Your beliefs seem to based more on emotion than economic analysis. Compare industries that are highly regulated with industries under little or no regulation. In America, the electronics industry has always had very little regulation. Through time it's provided better products for lower and lower prices compared to more highly regulated industries. The price of the personal computer has gone from millions of dollars to hundreds of dollars in a relatively short period of time. What very wealthy people only used to be able to afford, now everyone can afford. That is what the free market delivers. Now compare that with the cost history of the insurance industry, a highly regulated area. Costs continue to increase through time (note, not profits...costs). Insurance plan choice declines, competition shrinks...the insurance industry has basically become a system of wealth transfer as the government mandates that everyone purchase insurance options that they would not choose in a free market.

Perhaps a better comparison is to compare health care to a similar industry: that of corrective, laser eye surgery. Laser eye surgery has become a very successful industry in America in the last couple of decades. When laser eye surgery technology first arose, it was prohibitively expensive. But since there's been minimal regulation in the laser eye surgery industry relative to that which exists for medical care, today the price of having your vision corrected with laser eye surgery is on par with getting braces, very affordable. I encourage you to study the costs and qualities of these services through time. The differences are stark. You'll find that industries in regulated markets become less competitive, more costly through time, and that quality declines relative to unregulated industries. Don't take my word for it, look into it for yourself.

I have not stated that sellers "determine prices" anywhere. They do however have more information than the buyer often, and that means they are able to push up the price higher than it actually should be in a true free market.

Seriously, can't you see yourself that this is absurd? You claim that you don't believe that seller's determine prices and then--in the very next sentence--say that they "push up the price higher than it actually should be in a true free market". You have subscribed to an economic fallacy here. Prices can not be "pushed up" by sellers-- prices are determined by the market forces of supply and demand.

 

[gopman]

So, you don't think that the mortgage market should have been regulated to prevent the kinds of subprime mortgages that led in large part to the current recession?

How, then, are we to prevent a repeat of the current crisis?

The same way we prevent people from paying astronomical valuations for internet stocks without no revenue anymore. Let them decide themselves. If you managed a bank would you immediately go make the same mistakes that just cost you and all your competitors so much money? No. But you might do something else silly, like pay too much for investments in gold. The government will never be able to stop you from making poor decisions. At this point it can pretty much only make things worse with cumbersome regulation.

 

[Dittohead not!]

The same way we prevent people from paying astronomical valuations for internet stocks without no revenue anymore. Let them decide themselves. If you managed a bank would you immediately go make the same mistakes that just cost you and all your competitors so much money?

If I could sell the mortgages as good assets, then collect a fat bonus for improving the bottom line of the bank? You bet I would, and so would most of the management if they could get by with it.

Government regulation has to be viewed as a necessary evil, not as something to be done away with entirely. The government has to make sure that the financial institutions don't profit by gambling with other people's money, as they did with the subprime mortgages.

Remember what happened when the saving and loan institutions were deregulated back in the '80s? How about when California deregulated the power companies a few years back? Hint: $500 billion bailout, + Enron.

 

[phattonez]

If I could sell the mortgages as good assets, then collect a fat bonus for improving the bottom line of the bank? You bet I would, and so would most of the management if they could get by with it.

But if you were doing something unsustainable as this practice was discovered to be, then the company would fail (as it should) and you wouldn't have the possibility of future income.

 

[Dittohead not!]

But if you were doing something unsustainable as this practice was discovered to be, then the company would fail (as it should) and you wouldn't have the possibility of future income.

If I'd already made a few tens of millions gambling with other people's money, what would I care? I'd buy a ranch in Montana and spend the rest of my summers fishing for trout, then a place in San Diego to winter over. Who needs a job?

 

[gopman]

If I could sell the mortgages as good assets, then collect a fat bonus for improving the bottom line of the bank? You bet I would, and so would most of the management if they could get by with it.

Government regulation has to be viewed as a necessary evil, not as something to be done away with entirely. The government has to make sure that the financial institutions don't profit by gambling with other people's money, as they did with the subprime mortgages.

Remember what happened when the saving and loan institutions were deregulated back in the '80s? How about when California deregulated the power companies a few years back? Hint: $500 billion bailout, + Enron.

That's a fine point. If you could sell those mortgages in the marketplace it would be a great opportunity. Go see if you can find someone to buy them.

I don't see what Enron has to do with utility regulation. Enron was an electric utility company, but it was accounting in their power and commodity trading business that was fraudulent. That has nothing to do with the rates they charged customers for electricity.

But more importantly, what Enron did was already illegal, i.e. regulations against what they did already existed.. So saying that lack of regulation caused the Enron fraud is dumb. Authorities were simply unable to find the fraud. Actually that's a pretty good example of why the government is an incapable regulator.

 

[Dittohead not!]

That's a fine point. If you could sell those mortgages in the marketplace it would be a great opportunity. Go see if you can find someone to buy them.

They did sell subprime mortgages as good assets.

I don't see what Enron has to do with utility regulation. Enron was an electric utility company, but it was accounting in their power and commodity trading business that was fraudulent. That has nothing to do with the rates they charged customers for electricity.

ENRON was the direct result of the deregulation of the power industry in California. Before that was done, we had two government regulated monopolies that produced and delivered power efficiently and well. After, we had a mess. The failure of the saving and loan institutions was also the direct result of deregulation of that industry in the 1980s, and it cost the federal government half a trillion to bail them out. Bailouts of failing financial institutions due to failures as a result of lack of oversight is nothing new, and it most likely will happen again when ideology triumphs once again over reality and practicality.

But more importantly, what Enron did was already illegal, i.e. regulations against what they did already existed.. So saying that lack of regulation caused the Enron fraud is dumb. Authorities were simply unable to find the fraud. Actually that's a pretty good example of why the government is an incapable regulator.

Government did a good job of regulating the industry before the experiment in deregulation was tried.

 

[gopman]

They did sell subprime mortgages as good assets.

Of course, but that's not the question you asked. You asked how we are to prevent people from doing this again. I believe I made my point.

I will not respond to the rambling about Enron because it is nonsense. Utility deregulation didn't contribute to accounting fraud at Enron any more than it did at Worldcom or Tyco or anywhere else it occurred in that era immediately leading up to Sarbanes-Oxley. And Sarbanes-Oxley didn't prevent any of the fraud that occurred in the last recession, including the notable $50B example of Bernard Madoff's "hedge fund".

"But it was regulated then it wasn't regulated then Enron came so it's their faut. Wah wah wah."

 

[pendulum_jaw]

So, you don't think that the mortgage market should have been regulated to prevent the kinds of subprime mortgages that led in large part to the current recession?

So, you don't believe OJ Simpson should have called 911 after he stabbed Ron Goldman in the neck eleven times? Who cares whether he should have called 911--he shouldn't have stabbed him in the first place.

In the past two decades, the government has openly made it a mission to encourage subprime lending using it's regulatory power over the housing market (hell, we have senators and congressmen on video giggling over their success). And you're asking whether I believe they should have passed preventative regulation to counter the prescriptive regulation? Who cares? The point is you're focusing on the wrong thing. They should have never passed the prescriptive regulation.

How, then, are we to prevent a repeat of the current crisis?

I don't believe--under any practical scenario--that we can prevent a repeat with Bernanke's fingers on the interest rate dial.

 

[Kushinator]

I don't believe--under any practical scenario--that we can prevent a repeat with Bernanke's fingers on the interest rate dial.

And are you aware that Ben is probably the worlds for most expert on depressionary economics?

 

[pendulum_jaw]

And are you aware that Ben is probably the worlds for most expert on depressionary economics?

Oh, of course, and just admire his handiwork:

Let's not forget to thank Mr. Bernanke when his $1.1 trillion hyperinflation bomb hits the market!

 

[Kushinator]

Oh, of course, and just admire his handiwork:

Let's not forget to thank Mr. Bernanke when his $1.1 trillion hyperinflation bomb hits the market!

Monetary injections were a critical aspect of saving our financial system from implosion. Without such measures, asset prices would begin to take a mighty tumble as the world rushed into dollars. Once the demand for dollars becomes perfectly elastic (or as the slope approaches zero); banks would go broke in record numbers.

Thankfully we are not in that scenario. Kudos to Chairman Ben....:2wave:

 

[washunut]

And are you aware that Ben is probably the worlds for most expert on depressionary economics?

Ben is an expert on the depression. He is also someone who was a key player in the events that caused the crisis.

If I remember correctly he said that there was no bubble in housing prices which were helped along by very low interest rates.

He also could have voiced concern about the huge rise in leverage ratios that helped crater the big banks and done something about the shadow banking industry that created the securitization of any of the toxic loans, nor did he voice concern about how ratings agencies were scoring instruments no one really understood.

Finally I am not sure anyone knows how he will unwind the tremendous increase in the Feds balance sheet or get interest rates to a reasonable level without spending the economy into another dive.

 

[phattonez]

If I'd already made a few tens of millions gambling with other people's money, what would I care? I'd buy a ranch in Montana and spend the rest of my summers fishing for trout, then a place in San Diego to winter over. Who needs a job?

They had to earn that reputation somehow. You don't just automatically become a CEO right out of business school. They did a ton of work to get that opportunity. And let's be serious, the majority succeed at their jobs and that's why they have their positions.

 

[phattonez]

Monetary injections were a critical aspect of saving our financial system from implosion. Without such measures, asset prices would begin to take a mighty tumble as the world rushed into dollars. Once the demand for dollars becomes perfectly elastic (or as the slope approaches zero); banks would go broke in record numbers.

Thankfully we are not in that scenario. Kudos to Chairman Ben....:2wave:

Any reason to oppose deflation other than your unsubstantiated claims of animal spirits, or whatever it was?

 

[phattonez]

On deflation, this is a pretty good article.

Mankiw's Baseless Arguments - Robert P. Murphy - Mises Institute

Yes, Mises, the boogeyman. Anyway, the actual money supply would only decrease by the amount that banks limit their lending in response to the increase in defaults, if I follow this correctly. Admittedly, you know more about this than me, what do you think?

 

[Dittohead not!]

So, you don't believe OJ Simpson should have called 911 after he stabbed Ron Goldman in the neck eleven times? Who cares whether he should have called 911--he shouldn't have stabbed him in the first place.

In the past two decades, the government has openly made it a mission to encourage subprime lending using it's regulatory power over the housing market (hell, we have senators and congressmen on video giggling over their success). And you're asking whether I believe they should have passed preventative regulation to counter the prescriptive regulation? Who cares? The point is you're focusing on the wrong thing. They should have never passed the prescriptive regulation.



I don't believe--under any practical scenario--that we can prevent a repeat with Bernanke's fingers on the interest rate dial.

this is not the first time I've read a post saying that the government actually encouraged subprime mortgage lending, but never has anyone posted a link showing how it did so. I'm beginning to wonder if that is real, or if it is some kind of anti government talking point.

The fact is, the government fell down on its job of regulating the mortgage lenders. The allegation seems to be that they actually encouraged such lending.

Yes, they should have passed prescriptive regulations. That should be abundantly clear at this point.

 

[washunut]

this is not the first time I've read a post saying that the government actually encouraged subprime mortgage lending, but never has anyone posted a link showing how it did so. I'm beginning to wonder if that is real, or if it is some kind of anti government talking point.

The fact is, the government fell down on its job of regulating the mortgage lenders. The allegation seems to be that they actually encouraged such lending.

Yes, they should have passed prescriptive regulations. That should be abundantly clear at this point.

The fact is the government is still supporting sub prime lending. FHA provides loans with only 3% down payments. The administration just raised the cap on losses they will absorb from Freddie and Fannie Mac. The cap had been $200 billion each!

Perhaps the line that the administration about helping out wall street and ignoring main street is the big lie that will be exposed.

 

[Dittohead not!]

The fact is the government is still supporting sub prime lending. FHA provides loans with only 3% down payments. The administration just raised the cap on losses they will absorb from Freddie and Fannie Mac. The cap had been $200 billion each!

Perhaps the line that the administration about helping out wall street and ignoring main street is the big lie that will be exposed.

I'm not so sure that subprime loand helps Wall Street or Main Street. Those 3% down loans might, if the borrowers are able to make the mortgage payments. The problem comes when the borrowers have poor credit, and when there are balloon payments that borrower and lender alike know can't be paid.

 

[washunut]

I'm not so sure that subprime loand helps Wall Street or Main Street. Those 3% down loans might, if the borrowers are able to make the mortgage payments. The problem comes when the borrowers have poor credit, and when there are balloon payments that borrower and lender alike know can't be paid.

Loans made with only 3% down have historically been clasified as sub prime. In todays climate where housing prices continue to drop, it does not take much for the amount owed on a loan to be more than the value of the home. So it is cheaper for the new owner to stop paying the mortgage and if the foreclosure spiral continues to get worse.

Over 75% of new mortgages made today are from quasi government agencies, either Feddie, Fannie or FHA. Trying to artificially hold up prices rather than let them find their real value. The unfortunate folks who get fooled to buy at these " new low " prices get hosed as they find that prices have not bottomed.

In the meantime, the government continues to throw more money down this rat hole. Another statistic to consider is that the government has spent $ 75 BILLION to accomplish 35K refinancings.

I am not sure that people understand the long term impact to future generations that this prolific spending.

 

[Ethereal]

And are you aware that Ben is probably the worlds for most expert on depressionary economics?

[ame="http://www.youtube.com/watch?v=INmqvibv4UU"]YouTube- Bernanke in Denial 2005-2007[/ame]

 

[Kushinator]

YouTube- Bernanke in Denial 2005-2007

This is a very interesting aspect of the financial crisis, which has brought Chairman Ben more publicity than one could find manageable. So lets get right down to the nitty gritty, the basic question that is being asked by all skeptics: Why was the real estate bubble not recognized, and can we trust the central bankers to handle the problem?!?!

Let me start off by summarizing the specific duties that are expected to be carried out by the Federal reserve bank: Regulate the money supply and banking system.

Now surely we can all see the warning signs and call foul. I mean... it nearly fell apart under their watch. Or is this merely a matter of perspective? Considering the various tools available at the time (open market operations, reserve limit, discount window), what did the Fed necessarily do wrong? Some may argue that the massive purchasing and discounting following 9/11 as the traction required to induce bubbles :shrug:

But in the end... i think we are giving far too much credit. As money elasticity (let alone credit elasticity) is realized, US central banking authorities were virtually powerless (under such broad measures) to effectively cope . Make no mistake about it, mass liquidation is, and always was off the table; timing becomes an ever more sparse resource (and an evermore important consideration). Am i arguing for greater governmental authority? I guess that depends on how ill you view the Fed. Granting greater creative leniency has been shown effective has it not?

**** what the Fed knew.... What could they risk in disclosure statements???? "There is a real estate bubble, so everybody just exit quietly." Nope. No way. Ha ha. Again... **** what they knew, what could they do? Ben brought his bald solemness before Congress more than anyone should feel comfortable about, obtaining more and more authority of which was essential in combating the almost destined fate. We watched how banks behaved in these days.

So explain to me how another youtube video where BB identifies a real estate bubble matters much. We can debate the quality of macro policy till 2020... catastrophic instances are forever the destiny in economic systems. Deal with them by not dealing with them? Not anymore....

 

[phattonez]

Deal with them by not dealing with them? Not anymore....

What needs to be dealt with? A big problem that works against correction is uncertainty. There's a ton of uncertainty created by government right now. Why would anyone want to hire under those conditions?

 

[NoJingoLingo]

And he probably will. Those other countries aren't as bad as you think they are.

Did you miss the "(he said sardonically) part of that paragraph. Believe me, I have no illusions about the "greatness" of the USA.

Also, would this stop other forms of payment such as stock options and bonuses?

I didn't actually lay out a detailed plan. I'm quite sure all the holes that the greedy will try to use to get around the law can be plugged.

And what about non-publically-traded companies? They'll probably get that talent too. It means that the companies with the resources won't be able to be managed at maximum efficiency but the ones with the least resources will. That doesn't make any sense.

There are benefits and drawbacks with going public. *shrug*, besides aren't small businesses (and that's what you're talking about) the real engine of the economy? Oh, and history tells us that you don't need the outrageous compensation we see today in order to run a company at it's maximum efficiency nor does, as history also shows, getting outrageous compensation guarantee a company will be managed at maximum efficiency. So your argument is proven false.

Let's say though that you capped everyone's wages at 500k.

Who said to cap it at 500k? I think I said the cap should be a percentage of the average pay of those directly under the corporate officers authority. Are you building a strawman? Yes.

What then? Simple. Those jobs such as CEO and CFO require a ton of stress. The pay makes the investment and stress worthwhile. If you take away the pay, the only reason that some people will do it is for the prestige. You decrease the incentive, you decrease the demand. You'll have effectively lowered the number of people who were willing to train themselves for this. This means that management overall becomes worse and that efficiency falters. All in all it's a terrible idea.

Again, history defeats your premise, proving it false.

 

[NoJingoLingo]

You make no rational sense. Phattonez defined 'corporatism' as 'economic fascism', meaning that government regulatory behavior distorts the incentive structure that would be created by normal free market forces. You agreed with him, as do I. It is precisely government regulation that leads to this fascistic control of corporate behavior.

Furthermore, there is only one thing that can possibly lead to lack of competition in the market: government regulation. It is government that corporations petition to protect them against possible competitors (which it does so ultimately with coercive force). A corporation would have no protection against competitive forces in a free market.

On the one hand you're lamenting government regulation (corporatism) and on the other you're calling for more. Your entire case is self-defeating.



What?! You've claimed several times that government regulation was preferable to none, which anybody has to interpret as you believing that a market where government intervenes is preferable to a free market! This either intellectual dishonesty or an inability to form a coherent explanation of your own point of view.

I think you are incorrect. History provides us with the evidence that you are incorrect.

The free market will only correct itself AFTER disaster and if the opportunity that lead to that disaster presents itself, the free market will repeat the process because the people who benefit from the opportunity are generally not the people who suffer from the disaster.

The Corporatocracy prevents Congress from making worthwhile regulations which allow the Corpors to use their money to hire lawyers to take advantage of the poor regulation which leads to disasters which Congress tries to fix with more regulation, which is diseased by the Corpors.. rinse and repeat.