What are you talking about?
Do the corporate execs who devise business plans ever admit that?
The OP has set up a false dichotomy that the only possible options are laissiz-faire capitalism or whatever it is they think the opposite of “free market” is.
There are regulations that make economic sense and regulations that do not make sense. Would anyone in their right mind argue that public corporations shouldn’t have to give a true and accurate accounting of their finances?
I don’t think you can paint with such an overly broad brush.
Yup. Along the lines of caps on permitted leverage and exposure ratios.
Nope. That’s your money, you own it, and as long as we have a PAYGO Social Security system in place to put at least some exiguous safety net under your old age if you make too many dumb-ass investment decisions, I don’t care what you choose to invest it in. However, I don’t want you being able to borrow more investment funds on no better security than a used piece of chewing gum.
Again, I’ve got no problem with people losing their own money in whatever harebrained ways they like. What I object to is exposing other investors to unwise and unacknowledged levels of risk by swapping massively leveraged debts around like hot potatoes while nobody’s really sure what they’re buying.
Any economic system with an axiom that all economic actors always act rationally is fundamentally flawed. Any system that rests on the assumption that all players are honorable is even more flawed. Sure, you can develop a theory based on this, but you’re in “assume a spherical chicken” territory.
That the sentries, asleep at their posts, allowed the enemy to raid doesn’t mean eliminate sentries. And how much of this dereliction of duty comes from a governing philosophy that says regulation is inherently evil? If someone is being paid to do a job that his bosses don’t care about, except to be able to claim it is being done, what kind of output do you expect?
Cite for free-market proponents holding as axiomatic that all economic actors always behave rationally? Cite that laissez-faire economics rests on the assumption that all players are honorable?
Hint: looking for these cites is a fool’s errand. You would be better served by conceding you constructed a bit of a strawman.
Um, isn’t that the bedrock assumption of the very influential economic school known as rational choice theory?
I don’t know how many “noted free market, deregulation advocates” explicitly subscribe to rational choice theory, but this article claims that rational choice theory has strongly encouraged deregulatory practices:
Actually, Sparkydog’s post, nonsensical as it might be, is a fair summation of what conservative economists have been saying for years. I agree, it makes no sense.
Not really, unless I misunderstand your complaint (or Spartydog’s point). For instance, the NYTimes article Taking Hard New Look at a Greenspan Legacy:
The way I read it, Greenspan thought the market players would self-regulate. If that’s not the definition of “let the market set the rules”, I’d be happy to be corrected.
Yep. It is hard to believe, but deregulation was considered such a good idea that eventually Wall Street was left to police itself.
What that meant was that broker-dealers got to make up their own valuations for assets and liabilities, and unsurprisingly they came up with ridiculous figures in their own favor. In addition they were allowed to assign (also ridiculous) creditworthiness ratings to counterparties.
Since money didn’t actually change hands, both parties to a contract can use their own differing, self-serving “estimates” to claim huge profits for themselves.
However, due to the nature of the derivatives market, their lies would not be discovered for many years.
This meant that they were free to obtain huge bonuses based on their lies during the considerable time before the lie is discovered.
So essentially, Wall Street was supposed to police itself, while at the same time there were enormous and easy immediate gains to be made by lying.
A recipe for disaster, as was predicted by many, including Warren Buffet (who expertly described the current crisis 6 years ago).
It gets worse: this crisis is barely getting started.
The completely unregulated, non-transparent, and dishonest derivatives market is the cause of the crisis. By now, everyone can see deregulation went way too far.
But mortgage debt is not the only type of debt that has been turned into derivatives like credit default swaps. We are just being hit with the first salvo right now. Next up, credit card debt.
I’m no expert on this, but looking around at other descriptions I’m not totally sure that “all economic actors always behave rationally,” taken literally, is a tenet of rational choice theory. Pending additional research, however, I’ll concede that I may have spoken hastily before.
It’s still worth pointing out that you can posit the existence of irrational and/or criminally inclined economic actors and still be a laissez-faire proponent.
A free market system is not based on any axiom that all economic actors always behave rationally nor on the assumption that all players are honorable. That is just BS you make up.
A free market syatem is based on the premise that each individual actor has more information than a central planner somewhere and is therefore better suited to deciding whether to buy or not buy or sell or not sell. That I as an undividual may sometimes act in a way which to you might seem irrational is irrelevant because when I make a decision I am satisfying my own needs, not yours and because if you take away from me the capacity to make that decision then you are only transferring it to someone else who knows less about my needs than I do and who may be just as irrational. Nobody is saying all decisions made are good, what I am saying is that a free market is the best system yet devised to produce the greatest amount of satisfaction in the greatest amount of people.
There is no one who knows what I want better than myself. I remember arguing with my girlfriend many years ago because she left all the lights in the house on and even slept with the lights on which I considered a waste. But She had some fear which to me was irrational but to her was real. She was happy to pay the electric bill and that is all that counts. Nobody can tell you whether you should turn off the lights or drive an SUV or play golf. If you pay the price you are free to do as you like. Nobody anywhere knows what you need better than you do whether you are rational or not.
Obviously the system is based on the assumption that some people are not honorable and that is why you have a legal and judicial system to protect those whose rights have not been respected.
Let’s try rephrasing this a bit, shall we?
“There is nothing involved in farmers guarding henhouses per se which makes it superior to foxes guarding henhouses.”
What has happened is that with the cost of political campaigns going up so drastically, politicians of both parties, but most especially the Republicans whose ideology runs toward being bought anyway, have been bought wholesale by the corporations they are supposed to regulate. The most blatant example of this is the way the credit card companies, which were making record profits at the time, were able to get legislation passed making it harder for ordinary Americans to declare bankruptcy.
In the case of the banking meltdown, people were viewing ARMS (adjustable rate mortgages, the main source of the bad loans that are fucking up the banks) with alarm since they first came out, since they relied upon an ever-improving economy to ensure that they got paid off. There was no certainty that this would happen. If the politicians had been doing their jobs they would have carefully regulated ARMs, but they didn’t, because they were getting all that money from bankers.
More subtly, and more to the point, they relied upon the middle-class people who signed on to the ARMs to make more money. This did not happen. Wages have been flat for middle class folks for decades, barely keeping pace with inflation, sometimes not even managing that. While corporate profits and the wealth of the upper class soared, the middle class did not share in the bounty.
Intelligent, committed legislators might have viewed this as a danger sign. But they didn’t, because the people they were getting their money from were rich people, and they had no motivation to care about the middle class, especially since a sizable percentage of middle class voters were complete dumbasses who could be persuaded to vote against their own economic self-interest repeatedly by getting them worked up about things like gay marriage and abortion.
The current crisis is just a symptom of the economic plunder that the upper class and large corporations have committied against the American economy, and especially the middle class. Maybe the crisis and the ability of the the Internet to funnel middle class money into politics will make a difference. I hope so, but I have not yet seen any overwhelming evidence to that effect.
A prediction worthy of Nostradamus this. How’d it work out?
(As to the OP…I think I’ll keep out of this one. Good luck)
-XT
Where did I mention the free market system? The free market system clearly allows for regulation. I was actually referring to laissez faire, which is the ideal of the people whose philosophies put us in this mess.
A centralized system has even worse problems with the assumption than a laissez faire system, since it assumes that the planners are selflessly working for the good of all, which we have plenty of evidence doesn’t happen.
Which is not to say that in certain instances a central regulatory authority doesn’t know more than the actors. A lender selling off a loan and getting a big commission, and a buyer getting a house without having to document his income are both getting an advantage out of the transaction. The government however might be able to see the long term impact, and forbid this transaction. The lender and borrower both delude themselves that this isn’t going to catch up with them. A rational borrower wouldn’t borrow what he can’t afford, and he has plenty of information to make this decision.
The free market with regulation is good. The free market without regulation oscillates into financial panic.
That’s fine when the consequences of your actions rebound only to you. Thaler showed that people irrationally don’t contribute to 401Ks when they are not made the default. That’s fine, until they reach retirement age and enough of them are in such bad shape there is mass clamor to bail them out. If we feared air raids, your gf would get a visit from the wardens, since her decision would have consequences beyond her bill.
Sometimes punishment after the fact is not good enough. While most airline passengers are honorable, would you want to stop screening and punish those who bring guns onto a plane after?
Sure, if you consider the damage they do less than the supposed damage of regulation. Thus, the many people saying let the banks fail and the foreclosures happen as punishment, while ignoring the impact on the innocent.
No, a borrower would borrow as much as he possibly can. What is the downside for him if he does not repay his loan? The bank can’t break his legs or sell his daughters to the whorehouse, if the borrower can’t pay back a loan and declares bankruptcy, the best they can do is not lend to him again. The banks are in the business of knowing whom to lend to. The ones that don’t, fail.
…unless, of course, the bank can make loans that are guaranteed by the government. In which case, of course, the rational LENDER will lend as much as he possibly could.
Who exactly is “innocent” here? Have you ever heard of the saying “A house is an investment”? Well, that particular house was a bad investment, wasn’t it? Maybe some more due diligence next time would have helped? Unless you are advocating a policy of bailing out all bad investments, the “innocent” here do not deserve a bailout any more than the banks do.
Thanks. Why I said theories like rational choice are flawed is that they do not make accurate predictions of the results of economic actions. Your cite, I notice, was from the very beginning of the behavioral (experimental) economics revolution, so I think the case against this is even stronger now.
As I mentioned, Greenspan particularly noted that his opposition to regulation came from the assumption that those on Wall Street would act honorably. That’s not a bad assumption assuming rational actors, since why would those with so much risk it for greater profit. But that is what happened.
I’m not aware of the predictions of laissez faire economics, if there are any. Does it fail to predict the turmoil we actually see, or does it just not care? Does it predict that in a democratic system the masses of people will happily accept the income imbalance you get from this system, or does it ignore this?
Given the failure of laissez faire, I don’t think my calling it flawed is incorrect.
(The above was addressed to those objecting to my insertion of behavioral economics into this.)
I believe there is a role for government in rational choice theory, as well. For example, suppose people are broadly rational, but are poor at assessing certain forms of risk, like long-term risk.* The odds of someone getting into an accident on any particular day are pretty small, but the odds of getting into an accident within, say, the life of a car loan are much higher. People, on their own, might still gamble to not get insurance, even if this is contrary to rational choice.** Thus, the government might compel people to buy car insurance. We don’t have rational actors, but we have strong approximations to rational actors, and where we don’t, we can attempt to compensate. Some may call this a “nanny state.” :shrug:
- Actually, we don’t have to suppose it, I’ve seen papers show that this is probably true, but it’s not worth debating to illustrate the point I was trying to make, so for the sake of argument let’s just pretent it is certainly true.
** Remember that “rational choice” isn’t about strict logic or accounting for tastes. The economist’s rational man might prefer lounging at the beach to earning millions of dollars; all we expect is that if this man with those tastes be given the choice to work for less than millions of dollars, that he would instead lounge at the beach, all else equal. In any case, this assumption of mine would be difficult to prove, probably there are people that would rationally choose not to get car insurance because they hate insurance companies for some reason so much that paying car insurance at any price would upset them, but it is only to illustrate the idea. I will not attempt to defend the example.