And I must add that the execs responsible for this disaster did not have to give back their years of bonuses, earning in no small part by setting the stage for catastrophe.
That’s personal responsibility in action, you betcha.
After Katrina, did any government officials give back their salaries/bonuses? What about after 35W bridge collapsed?
Why is it so different when one does it but not the other?
So you’re okay with locking CEO compensation to no more than the president?
Do you want everyone to vote for CEOs too? I imagine you’re okay with 4 year terms, right?
Oh shit, wait, maybe the two aren’t the same thing and drawing a comparison is useless.
This would have been great. A quick and simple fix. But nobody wanted it because that meant poor people couldn’t get mortgages. And moderately rich people couldn’t buy secondary properties. You know that no one was forced to get a zero-down mortgage right? And lots of people were happily getting 80/20 mortgages where they borrowed the down payment.
Having that one simple rule wouldn’t have just averted the bubble, it would have eliminated all of the increases over the past 20 decades.
Everyone here seems to have this misperception that it was libertarians caused it all. But both Democrats and Republicans loved the housing boom. No one wanted to stop it.
It also needs to be repeated once again that fraud is a crime, not a regulation. Fraudulent mortgages should not be allowed. Bundling them into toxic packages then selling them in a fraudulent manner should not be allowed. Any more than putting known toxins in dog food, or selling sprouts covered in e. coli.
Not regulate more, regulate properly. And enforce the regulations they have on the books.
No one is in favour of no regulations. Some regulations will always been necessary.
The problem in these threads is that finding one good regulation seems to justify any and all. We can say it’s good that the government regulates alcohol so no one goes blind. But then that means the government can also set ridiculous age limits and ban the sale of alcohol on Sunday.
The three major rating agencies developed a reputation that people trusted. You’ll notice that there are only a few, because people are less likely to trust Job Bob’s Discount Ratings. But if you look at the world of sports betting you’ll see all kinds of guys providing “ratings,” would you trust any of them? Because of this trust, people stopped bothering to question. They saw AAA and bought without looking further.
Think about the last time you bought eggs, did you open the box to see if any were broken? All eggs in the grocery store are certified Grade A, and then grouped by size. But that doesn’t remove your responsibility to check that none are broke, that the date hasn’t passed, and then to take them home and cook them properly.
So two questions for you: why do you suppose people continue to trust the three main rating agencies? You’d think their reputation would be shot.
What would be different if it had been a government rating agency that screwed up? I know that’s far fetched and unimaginable. But just for sake of argument, pretend it was a government rating agency that mislabeled all those assets.
Are you aware of how much the POTUS costs? Are you sure that’s the example you want to use?
The average term for a CEO is 30-40 months based on the limited research. Are you okay having CEOs that can’t be fired for 4 years?
A lot of CEOs lost their jobs after the crash. But I don’t remember many politicians getting fired after Katrina, or the 35W collapse. Bush Jr. got elected to a second term and that guy fucked up way worse than Fuld Jr.
Is it? This entire thread is about drawing comparisons to say how much better the government is than private enterprise.
Because just like in a lot of aspects of life, the short-term costs of doing all the legwork yourself are too high, the same with trying to establish the bona fides of every single provider of goods and services you have to interact with, and that means that the long-term cumulative costs are also extremely high. In order for a modern economy to function smoothly, market participants have to be able to trust that goods and services will be provided at a certain minimum level of quality, safety, etc., or else the economy simply will not function. Spending will be low, employment will be low, market developments and technological developments will move very slowly. A global economy as large and complex as ours depends on the swift, efficient, unimpeded circulation of money. That’s why we can’t afford for every individual transaction to be subject to a thorough process of establishing good will.
Interesting.
So how did EBay go from nothing to a multi-billion dollar enterprise in a very short time, with nameless, faceless avatars conducting business and selling products that the buyer can’t even touch?
That would seem to be impossible, given your assertion above.
Well, in this case the result was a financial melt down. Still think the costs are too high?
It’s that last part that people want to ignore. The financial meltdown was the result of nearly everyone wanting things to move fast, not just the evil bankers.
So maybe the lesson here is that we shouldn’t have such a large and complex economy. It is always going to require heavy amounts of regulation, and those regulations will always fail. Look at the e. coli outbreak in Europe to see how quickly shit can spread.
And what you should note here is that few people actually care. It’s printed right there in bold, but people don’t bother to look. NYC just regulated that calorie content be posted along with the price, do you think anyone cares? For decades cigarette packages have been labeled, and no Canada puts huge graphic images of diseased lungs, does anyone care? Nope. The package says, “contains cancer causing agents” and people still willingly buy 3 packs a day.
The point is that – in certain important market sectors – individuals will never independently come to the right decision, because they will give their personal, short-term interests greater weight than more global, long-term interests. Isn’t that a market failure?
Without a large and complex and technological economy, our economy will not be able to support large populations of people. So – population controls? mass starvation? constant warfare? What’s the libertarian solution?
No, why do you think that’s a market failure?
It’s hard to find a car for sale that can’t go over 100mpg, fast enough to kill people. If people decide to drive so fast they lose control is that a market failure?
What you are describing as a “market failure” is subsequently used to justify any and all regulations regardless of how stupid.
If we let people buy alcohol they’re get drunk and lose control. So let’s regulate alcohol, we’ll prohibit people under 21. We’ll prevent people from buying it on Sundays. We’ll sell it in grocery stores but only up to 3.1%. You can buy beer at the ball game but only two at a time.
Gay people are icky, we shouldn’t let people be gay, next they’ll want to marry, then our society will crumble.
I heard when black people smoke weed they rape white girls, we should ban weed.
Getting a mortgage used to be hard. Hell, getting any sort of credit used to be hard. You had to go to the bank, show proof, put up collateral, have someone vouch for you. Now they give them out at Walmart to anyone that wants one. The result was a great and expanding economy, just want you wanted. Everything happened faster. No one had to wait to make money, or wait to get cash from the bank.
Once everyone that qualified for mortgages had one the economy moved very slowly. Foreclosures rates were consistently less than 1% for prime and around 2% for subprime. Buying mortgage backed securities were the standard way to earn a very low and steady return. They were so slow and steady that they were the basis for most pension funds.
But that’s no good, we want the economy to move fast, we want house prices to go up, and we want more people to buy mortgage backed securities. The only way for that to happen is make it easier to get a mortgage. If you want to sell more alcohol lower the drinking age to 20. Then 19, then 18…
That’s right. Should we have such a large population of people? Is that the goal? Do you have a target in mind?
Oddly enough that sounds like what we have now.
Ever watch Mad Men? That’s not far from what I remember as a kid. Cigarette smoking, thanks to government intervention in the form of keeping ads off TV, ad against smoking, and warnings on the label, has fallen tremendously. It always takes some time. Just some people buying a lower calorie alternative once they know will help, and, like smoking, people set in their ways are not going to change their behavior, but their kids might.
One good thing government does is to make information available, to allow consumers to make informed choices. Some will make what we think is the wrong choice, but that is fine.
Some people have reason to buy smaller, more expensive packages - it is not always stupidity. And while some people might not look, lots of people do, and a lot more people make informed choices than would if the information was not there. Our supermarkets make it easier by having unit pricing on the shelf tag, allowing people who can’t do division in their heads the same level of knowledge as those of us who can.
I hate to break it to you, but government people don’t get bonuses. They don’t get stock options either.
And I’m hardly arguing that being in government makes you perfect. Bush appointed an incompetent for purely political reasons, while Clinton had appointed people who knew what they are doing, as has Obama. If you think government is useless, and appoint nitwits, and they screw up, that is not evidence for your position.
This particular straw man just won’t die.
Do you currently establish the bona fides of every single provider of goods and services you use now? When you go to the store do you check out the background of every manufacturer of every product you buy? Do you personally inspect the supply chain of every complex good you purchase? Just how much effort do you currently undertake, in total, to personally assure yourself of the quality of everything you buy?
If the number of hours you come up with is less than say, every waking hour of your life, and if the quality of the stuff you buy is about average, then somehow you’re either the luckiest person alive, or some other forces and signals are ensuring the quality of the things you buy. A little reflection into how that might happen might lead you to an education in how markets actually work.
This is just not true. The market has powerful regulating mechanisms that result in goods which generally have about as much quality as the market demands for the price. Failure to acknowledge or understand how this works is one of the biggest flaws in left-wing thinking.
So are you of the opinion that it’s currently the government that guarantees the quality of products? If not, explain why your scenario isn’t already true. For that matter, explain the vibrant economies in those countries that have smaller governments with fewer regulations. Or explain how the U.S economy worked before the 1960’s, before the large explosion in the regulatory state occurred.
That’s not what the term “straw man” means. Maybe you mean “canard”, or something similar?
How about a guaranteed pension…plenty of perks working for government. Question still stands, did any government officials go to jail after Katrina? After the 35W bridge collapse?
That is my position. The most important fact to remember is that regulations alter people’s behavior. Some times it’s good, like stopping people from littering, or getting them to buckle their seat belt.
But more often than not it makes people complacent. As Acsenray highlighted, regulations means he/she doesn’t have to bother checking the bona fides of anything. So in the case of Katrina, the government built levees and took responsibility for maintaining them. The result was a lot of people living below sea level, assuming the levees would hold. Ditto for interstate highway bridges.
Notice that once government gets involved it’s in forever, there was no choice to stop funding the levees, or to stop inspecting bridges. Except how often do issues like levees and bridges come up in elections? You have two parties to choose from, and frankly people care way more about blow jobs, abortion, and swiftboating. So what was important at one point becomes less and less important after each election.
Eventually, a politician will get elected and appoint a bunch of twits for purely political reasons. This fact is inevitable, as are the results.
So all those people relying on the government to inspect levees and bridges got used to not thinking about. All the people relying on rating agencies got used to blinding buying triple A rated securities. All the people relying on red lights to stop cross traffic blindly enter intersections. Once anything changes all of those complacencies cause repercussions.
This is what happens with any and all regulations.
If people went to jail for making mistakes, no one would do anything. Our pal Brownie got fired, finally, but even he did nothing remotely criminal. People knowingly selling bundles of mortgages that they know are junk without saying this might be another matter. Might, because I’m not a Wall Street lawyer.
Ever been to New Orleans? That place is below sea level, and has been long before there were any government regulations. When I lived in Louisiana, over 30 years ago, people were very concerned with the destruction of the islands and vegetation and sandbars which helped protect the actual coast. A few more regulations might have helped save New Orleans, but it would cost a lot of money, and there was a good chance there would never be a problem.
There is no way New Orleans was going to be abandoned. But I agree with your major point. Not all important issues are going to come up, and even if they do you have to extract the real positions of some politicians from the lies. That’s why it is important to vote for the whole person.
But enforced regulations work a lot better. People pay taxes in the US, and don’t evade them as much as in Italy, because we actually check. The red light camera near my house has cut down the number of red light runners by a lot. And regulations to make it not in the financial interest of a rating agency to overrate a bond would help a lot also. And things are still a lot better than they would be without regulations. Seat belts and other safety measures have cut down on traffic fatalities, even though they might encourage riskier behavior. When I was a kid the news always reported on the number of traffic deaths expected on Memorial Day weekend, in fact Mad ran a parody in which there was a telethon with Jerry Lewis encouraging drivers to get out there and crash to make the numbers. Did you hear this prediction two weeks ago? Thought not. Thank regulations for that.
Firstly, it would have been great if SAM had answered this post instead of continuing to run away in the face of facts and evidence. But I suppose I should be used to it by now.
- As far as point one goes, having that rule for the last 20 years wouldn’t have prevented house price rises. Canada has had that rule for a long time and their house prices have continued to increase. They did avoid a catastrphic housing bubble however. It’s true that both Republicans and Democrats supported policies which created the bubble. Scrapping regulations, not enforcing the ones that were left, not doing anything (OK, next to nothing for nitpickers) about fraud in the financial industry, etc. etc. But that’s irrelevant. What’s relevant is that regulation which would have prevented the bubble, manufacture of toxic securities and consequent meltdown had been scrapped over a period of decades or not enforced, and it should have been. Both sides bear responsibility for this. While libertarians didn’t do this,a libertarian mindset in both parties was responsible for it.
Fraud is a crime, and fraud in the financial industry is as a rule policed, investigated and hopefully prevented by regulators such as the SEC.
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Regulating properly would necessarily involve more regulating and regulation than we’ve seen over the past few years, right?
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There are people who are in favour of no effective regulations. There are people who believe that financial regulators are there to serve the banks, not to actually do anything that might get in the way of them pursuing profits. And even after the 2008 meltdown these people exist. Occasionally you even find them in government :
- Ratings agencies are there to provide accurate ratings of financial instruments. And if the ratings process has been so corrupted that the agencies will rate anything for a paycheck then surely the agencies need to be re-regulated, no? If they’ve become so corrupted that they no longer fulfil their opriginal function then the free market had failed quite dramatically, no?
I’m not sure how much people continue to trust the ratings agencies. They’re not paid by investors, they’re paid by banks and financial firms, who were working hand-in-hand with them to produce the toxic securities. i’m not sure how much people trust financial firms now either.
If a government agency had misrated all those securities then it would show that the system had become so corrupted that the banks were able to manipulate government agencies to do their bidding. If the ratings agencies involved in the 2008 meltdown had been government agencies then this would be a failure of government to discharge its function correctly, at the very least. Instead they were private operations that the government failed to regulate properly.
Hey, and why not make it 100%? Then you’re absolutely guaranteed to never have a mortgage default, because no one would have mortgages.
The problem is finding the right balance between safety and economic growth. Is 20% the right number? Hell if I know. You don’t know either. Certainly it would be safer than not requiring any money down at all, but it would also mean fewer mortgages and slower growth.
The point is that government has no way of knowing either. And again, government was instrumental in pushing down standards. That they would do this is obvious if you look at their incentives - a politician who campaigns for an easing of mortgage requirements gets an immediate boost from everyone who wanted to get a mortgage and now can. The added systemic risk? Well, who knows? And in any event, gaining short term benefit at the expense of long-term risk is right in a politician’s wheelhouse (see: The U.S. debt).
Every time government fails, people like you claim that it’s not the fault of big government per-se, but the fault of specific individuals. You pull out the magic regulation that would have fixed everything, and use that as proof of the necessity of government - conveniently avoiding the fact that you HAD a government, and it DIDN’T do what you think it should have.
In the meantime, when a private ratings agency makes a mistake, you instantly use that to condemn all of capitalism.
It’s easy to defend big government when you are always arguing for government as an abstract ideal, while pitting it against only the failures of the market. You never acknowledge the systemic flaws of government that make it incapable of acting as the pure agent of wisdom that you believe it is.
The stimulus? A perfect Keynesian solution as presented by its proponents. The reality? A giant slush fund used to pay off constituents regardless of whether the constituents could make the most stimulative use of it. The result? More debt, and higher unemployment. The Obama health care plan? A needed mechanism to cover the health needs of everyone and to level the playing field. The reality? 2,000 pages of confusing, contradictory policies wrapped as much in politics as in responsible effective legislation, and a president throwing out hundreds of waivers to favored constituents.
How about debating what the government actually did, and comparing that to what the market actually did, rather than comparing the market to some idealized, hypothetical set of perfect government responses that you believe would have solved the problem - but which no one in government actually proposed?
I never said that. My point was that there WAS a government, there WERE regulatory agencies charged with preventing this kind of thing, and they FAILED. If you could show me that the Democrats were charging hard to stop the chaos and the evil Republicans stopped them, or even that some politicians had warned the public of exactly what was going to happen and had proposed remedies, but couldn’t get traction because the public wasn’t interested, then maybe you could make the case that government just needed some more teeth or leeway to do the ‘right’ thing that was so obvious to them.
But in fact, the government was a full-throated cheerleader for what was going on. Fannie and Freddie were major clearinghouses for Mortgage-Backed Securities, and helped trade on the faith and credit of the U.S. government to legitimize those investment vehicles to a wider market. The government pushed lenders hard to lower lending standards. When some concerns were weakly raised by some politicians, leading Democrats like Barney Frank and Chris Dodd issued statements that everything was solvent, nothing was at risk, nothing to see here, move along.
And of course, one of the main factors that drove all this money to seek new returns was the artificially low interests rates being held by the fed under the mistaken belief that the lessons of the past were no longer operative in the internet era, and that sustained loose money could be absorbed by an economy that would grow indefinitely. Oops.
Until you come to grips with the complete complicity of governments around the world in the lead-up to the economic crash, your complaint that the free market was at fault and your pleas for more government intervention just aren’t going to convince me or anyone else who understands that the failures that led to the crash were failures of the entire system, which was incapable of handling the rapid increase in complexity of the financial markets.
I’m not convinced that the ratings agencies are any more at fault here than was the government. Did they under-state the risk? Yep. But so did everyone else. Can you show me that they were corrupt? Were they getting kickbacks and lying? Or did they give it their best shot and just get it wrong? A lot of people got things wrong in the last ten years. Including the U.S. Congress.
And now let’s look at the future - the government is swimming in debt, and doing nothing about it. Warning flares are firing off all over the place - China divesting itself of dollars, Moody’s and S&P issuing debt warnings, the economy stalling out, the BRIC countries working to set up their own alternative basket of currencies to the U.S. dollar… The market is sending numerous signals to the government that it is on the verge of crashing the economy due to a debt spiral, and yet the clowns in Washington can’t even pass a budget, let alone come to any kind of agreement to do anything but put a fig leaf on the problem.
That’s the reality of government. It’s not your vision of a perfect socratic council carefully weighing the options and acting in pure scientific logic to steer the ship of state down the best path. The reality is that the government is comprised of small men operating way out of their depth, and therefore ceding their power to special interests and partisans and rent-seekers.
I want to make one more point about the ‘proper’ size of a down payment: In a free market, a bank would have to assess the risk of default, and it would also have to look at its own capital and decide if the added return on investment from tying it up in a mortage was worth the risk of default. The down payment it then requires would be set to whatever amount they felt balanced risk vs reward. Money they invested in a mortgage would be money that couldn’t be used to invest elsewhere.
What happened in this case was that a new type of security was created, which allowed mortgages to be packaged and sold as if they were stocks. Now, the bank’s risk was pretty much eliminated. Who cares whether the home buyer might default? The bank’s not on the hook, because it’s going to package that mortgage and sell it off. And, it’s not going to have its capital tied up, either, because it gets its money back right away.
But who would buy such instruments? Who’s going to buy a security with an unknown amount of risk in it? To get around that, two things happened - one was that these mortgages were pooled together into baskets of mortgages, on the theory that by pooling you can average the risk down to the traditional default rate, and since the risk is now known, it can be priced. But as the housing bubble grew and ALL the mortgages in a basket were highly risky, the risk became under-priced.
The other major factor was that the government started buying up those securities. Fannie and Freddie had a hell of a game going - they could buy up MBS’s at a lower price because of the high risk, then trade on their status as quasi-government agencies to sell them at a higher price because the buyers assumed they had the full faith and credit of the U.S. government behind them. Fannie and Freddie were basically engaged in arbitrage made possible by their ‘special’ quasi-government status.
In th meantime, FDIC insurance protects depositors so no one bothers to check to see whether their bank is actually solvent or engaging in reasonable practices.
So this wasn’t a free market. It was a market filled with both private and public actors. It spanned multiple countries and multiple regulatory regimes. As those baskets of mortgages got sliced and diced and resold, the risk information was completely lost. They became ‘toxic’ securities.
Were there market failures? Yep. I would argue that the hiding of risk by packaging the mortgages into securities created information asymmetries that prevented the market from pricing things well or from recognizing and responding to the rapid increase in systemic risk.
But there were also government failures. Allowing Fannie and Freddie to behave the way they did was a major failure in oversight. There were plenty of warning signals that Fannie and Freddie were taking on huge amounts of risk, but no one did a damned thing about it, because all the politicians in question had a vested interest in seeing the shell game continue. Some for ideological reasons, such as the desire to see more poor people buy houses. Some for corruption reasons - Chris Dodd’s ‘Friends of Angelo’ loan is but one example. The revolving door between Fannie and Freddie executives, political office, and other financial firms is yet another.
Because the financial markets are already heavily distorted by government, I would argue that perhaps the regulatory structure does have to be changed. Ending the practice of securitizing mortgages and bundling them together to hide risk is one of them. But I would also disband Fannie and Freddie and get them out of the business completely.