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But that's just a claim, and the claim relies on ignoring government underwriting (which we know from TARP is denying reality)
Because government is entangled so deeply with the general money markets you cannot ignore its effect on behavior, because people in those markets do not.
Everything is "just a claim". Regulation & deregulation are not the same thing.
The reason Glass-Steagal was first enacted was to separate commercial banking from investment banking. FDIC insurance was never meant to back Wall Street trading, or trading mortgage-backed securities, derivatives contracts, & other toxic financial products.
When Glass-Steagall was repealed, that 'wall' was brought down. Activities like derivatives dealing & other risky trading never should have been included in that safety net. The FIRE sector lobbied for decades to repeal what they considered to be an archaic remnant, why couldn't we trust them to do the right thing?
"Self-correcting” markets stemmed from ideology alone.
& the idea that banks knew better than regulators how to manage risk & regulate themselves came from ... the banks themselves. The Commodity Futures Modernization Act of 2000 essentially made derivatives markets out of bounds for any regulatory authority. Because of the innovation of developing financial products which relied on derivatives - hundreds of billions of losses on the underlying mortgages translated into trillions of losses on derivatives contracts.
So just who is gonna inform Wall Street that Main Steet is not gonna bail them out when things go South?
My guess it's not gonna be the free market fundamentalists; it's not gonna be the “self-correcting” marketeers; & it's not gonna be the 'get the government out of our way' folks.
My guess it's not gonna be the free market fundamentalists; it's not gonna be the “self-correcting” marketeers; & it's not gonna be the 'get the government out of our way' folks.
Regulation is not the same thing as deregulation.
In my instance you'd be wrong. I don't believe in 'too big to fail' and I strongly believe in taking responsibility for your actions and choices.
Corporate welfare is still welfare, its extorting money from one group to give to another.
You're just assuming that free market capitalists like me are not prepared to walk the walk.
No deregulation isn't the same thing, because there are always artifacts left. The law of unintended consequences, which applies equally to regulation and deregulation. That's why there should never be interference in markets.
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Quote:
Originally Posted by Gungnir
In my instance you'd be wrong. I don't believe in 'too big to fail' and I strongly believe in taking responsibility for your actions and choices.
Corporate welfare is still welfare, its extorting money from one group to give to another.
You're just assuming that free market capitalists like me are not prepared to walk the walk.
No deregulation isn't the same thing, because there are always artifacts left. The law of unintended consequences, which applies equally to regulation and deregulation. That's why there should never be interference in markets.
Quote:
No deregulation isn't the same thing, because there are always artifacts left.
Yep, just enough to get people caught up in a financial snare ...
In my instance you'd be wrong. I don't believe in 'too big to fail' and I strongly believe in taking responsibility for your actions and choices.
Corporate welfare is still welfare, its extorting money from one group to give to another.
You're just assuming that free market capitalists like me are not prepared to walk the walk.
No deregulation isn't the same thing, because there are always artifacts left. The law of unintended consequences, which applies equally to regulation and deregulation. That's why there should never be interference in markets.
Re bold: I just told my business associate the other day that if freedom (aka capitalism) ever broke out I'd have to get some real life skills, post haste.
Yep, just enough to get people caught up in a financial snare ...
True, applies both ways as well.
The real issue is that because of regulation and/or deregulation people incorporate their understanding of the regs, or what removing the regs did, and it doesn't always tally with the intent.
I'm pretty sure the CFMA never intended to provide public under writing of the derivatives market. However it did in fact result in that. So we can take one of two positions, either the CFMA should not have deregulated the derivatives markets, or, the derivatives markets should never have been regulated in the first place, thus the CFMA was inadequate in deregulation.
Like my plank analogy, a 3" plank over a 10' gap is easy on the ground, at 200' it's pretty difficult. If a market knows that its effectively crossing on that 3" plank at 200' it behaves far differently than if it knows it's actually at 3' height, because it's all people just the same and they base their decisions on risk vs. reward, some will accept the risk, and succeed or fail knowing there's no safety net, others will be more prudent and use other investment vehicles. However if there's knowledge (or even suspicion) that the risk will be covered by the public, then it's a feeding frenzy, since rewards are high and risk is irrelevant. Welcome to 2008 SPMC.
The real issue is that because of regulation and/or deregulation people incorporate their understanding of the regs, or what removing the regs did, and it doesn't always tally with the intent.
I'm pretty sure the CFMA never intended to provide public under writing of the derivatives market. However it did in fact result in that. So we can take one of two positions, either the CFMA should not have deregulated the derivatives markets, or, the derivatives markets should never have been regulated in the first place, thus the CFMA was inadequate in deregulation.
Like my plank analogy, a 3" plank over a 10' gap is easy on the ground, at 200' it's pretty difficult. If a market knows that its effectively crossing on that 3" plank at 200' it behaves far differently than if it knows it's actually at 3' height, because it's all people just the same and they base their decisions on risk vs. reward, some will accept the risk, and succeed or fail knowing there's no safety net, others will be more prudent and use other investment vehicles. However if there's knowledge (or even suspicion) that the risk will be covered by the public, then it's a feeding frenzy, since rewards are high and risk is irrelevant. Welcome to 2008 SPMC.
Re: bold: I think you're right here:
Quote:
Although few observers appreciated it at the time, the CFMA’s deregulation of financial derivatives was a novel legislative experiment. It’s almost as if the US Congress said to itself, “let’s see what happens if we suddenly removed centuries of law!” Now we know what happens. The experiment has not turned out well.
Why re-regulating derivatives can prevent another disaster
This piece also distinguishes between the uses of derivatives contracts for 'hedging' (as used in common law for centuries) as opposed to using them for pure 'speculation'.
"Unlike hedging, which reduces risk, speculation increases a speculator’s risk in the much same way that betting at the track increases a gambler’s risk. Highly-speculative markets are also historically associated with asset price bubbles, reduced returns, price manipulation schemes, and other economic ills."
& I suppose you could say I'm just as guilty as the free market fundamentalist in using the 'perfect solution' or 'nirvana fallacy'.
Quote:
By creating a false dichotomy that presents one option which is obviously advantageous—while at the same time being completely implausible—a person using the nirvana fallacy can attack any opposing idea because it is imperfect. Under this fallacy, the choice is not between real world solutions; it is, rather, a choice between one realistic achievable possibility and another unrealistic solution that could in some way be "better".
The enactment & implementation of Glass-Steagall provisions created a 'wall' between banking & the speculation of investment banking. It may not have been a 'perfect solution' however it was a realistic & plausible real world solution, i.e. it worked for decades.
Although, in the present day, it's no longer realistic to think that something like this is coming back. That's one of the reasons I think an alternative solution, while also imperfect, is to regulate the banks to prevent them from engaging in risky 'moral hazardous' behavior.
Free market fundamentalists are also guilty of using the 'nirvana fallacy' because their arguments for an ideal solution (an ideologically pure free market, particularly here in banking) also lacks any chance of happening. They reject an alternate imperfect solution.
This piece also distinguishes between the uses of derivatives contracts for 'hedging' (as used in common law for centuries) as opposed to using them for pure 'speculation'.
"Unlike hedging, which reduces risk, speculation increases a speculator’s risk in the much same way that betting at the track increases a gambler’s risk. Highly-speculative markets are also historically associated with asset price bubbles, reduced returns, price manipulation schemes, and other economic ills."
& I suppose you could say I'm just as guilty as the free market fundamentalist in using the 'perfect solution' or 'nirvana fallacy'.
The enactment & implementation of Glass-Steagall provisions created a 'wall' between banking & the speculation of investment banking. It may not have been a 'perfect solution' however it was a realistic & plausible real world solution, i.e. it worked for decades.
Although, in the present day, it's no longer realistic to think that something like this is coming back. That's one of the reasons I think an alternative solution, while also imperfect, is to regulate the banks to prevent them from engaging in risky 'moral hazardous' behavior.
Free market fundamentalists are also guilty of using the 'nirvana fallacy' because their arguments for an ideal solution (an ideologically pure free market, particularly here in banking) also lacks any chance of happening. They reject an alternate imperfect solution.
Well you may be guilty of the nirvana fallacy, however my solution is far more pragmatic.
Don't try to stop people doing stupid stuff, and don't bail them out when they do.
I don't care that someone is burning through their savings speculating in derivatives, that's their choice. I do care that I may be expected to provide a portion of income to cover their losses.
Now you may argue that banks and finance may burn through savings and investments of people entrusting those to them for growth, pensions, etc. There are a couple of important points...
1) Transparency of the corporation in how they invest (if its invested) with accurate risks and potential rewards.
2) Who covers losses.
From 1 we can derive a burden of responsibility, if say the saver/investor said after all risks were communicated, give me the biggest potential growth regardless of risk. They assume full responsibility. If the saver/investor drop their assets in a fixed interest long term savings account, they assume almost zero risk, they should at minimum receive their investment at the end of last financial year. Between those two points there's shared responsibility.
For 2 there are only two options, the financial institution or the investor. Clearly a solo investor directly investing bears all the risk, as does the high risk investor (as discussed above). After those the financial institution covers costs based on their share of responsibility.
Ok, now "what if"...
The financial institution isn't transparent, or intentionally providing false information they are still liable, if they cannot cover losses the directors cover losses, no hiding behind corporate veils. They're also committing fraud, and that's a crime. Or worse, theft or embezzlement, both crimes.
You'll notice though that at no time is anyone liable to cover losses but the investor, or, the financial institution. Further with company directors personally liable they're far less likely to be cavalier with how they invest the institutions assets.
But none of that's possible except in a free market, because regulation always brings an element of guarantee provided by neither the investor, nor the institution.
Well you may be guilty of the nirvana fallacy, however my solution is far more pragmatic.
Don't try to stop people doing stupid stuff, and don't bail them out when they do.
I don't care that someone is burning through their savings speculating in derivatives, that's their choice. I do care that I may be expected to provide a portion of income to cover their losses.
Now you may argue that banks and finance may burn through savings and investments of people entrusting those to them for growth, pensions, etc. There are a couple of important points...
1) Transparency of the corporation in how they invest (if its invested) with accurate risks and potential rewards.
2) Who covers losses.
From 1 we can derive a burden of responsibility, if say the saver/investor said after all risks were communicated, give me the biggest potential growth regardless of risk. They assume full responsibility. If the saver/investor drop their assets in a fixed interest long term savings account, they assume almost zero risk, they should at minimum receive their investment at the end of last financial year. Between those two points there's shared responsibility.
For 2 there are only two options, the financial institution or the investor. Clearly a solo investor directly investing bears all the risk, as does the high risk investor (as discussed above). After those the financial institution covers costs based on their share of responsibility.
Ok, now "what if"...
The financial institution isn't transparent, or intentionally providing false information they are still liable, if they cannot cover losses the directors cover losses, no hiding behind corporate veils. They're also committing fraud, and that's a crime. Or worse, theft or embezzlement, both crimes.
You'll notice though that at no time is anyone liable to cover losses but the investor, or, the financial institution. Further with company directors personally liable they're far less likely to be cavalier with how they invest the institutions assets.
But none of that's possible except in a free market, because regulation always brings an element of guarantee provided by neither the investor, nor the institution.
What are the chances of an ideologically pure free market happening?
As far as the Nirvana fallacy goes, our argument is not that a free market is perfect, at all. The argument is that allowing people to interact and trade freely is 1) morally superior and 2) leads to better results than someone imposing their master plan on society...as counterintuitive as that might sound.
Said another way...there is no utopia, and no person or group knows how best to “run” everyone’s lives. Central planners can never have the aggregate knowledge that the market does.
The market isn’t magical. It’s a massive web of people who work together using their particular expertise to create things of value, trade, etc. The top-down approach runs on the assumption that a person or committee has more knowledge and wisdom than the collective knowledge of everyone else.
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