Again, you’re attempting to draw a straight line from “Glass Steagal Repealed - therefore lack of oversight - therefore global destruction - therefore capitalism bad.”
There is no agreement among financial experts or economists that Glass-Steagal repeal was the major factor or even a large minor factor. Some even feel that it acted as an escape valve and prevented the problems from being worse. This argument is more a liberal talking point than it is a serious, well-understood theory of what happened.
As for there being virtually no oversight, the fact is that the financial markets were STILL heavily regulated - but the regulators were no better at seeing what was happening than anyone else. And in fact, the government was a willing participant in the whole debacle. Fannie and Freddie were major clearing houses for securitizing mortgages and burying the risk inherent in them, and they managed to do it in large scale because their stock in trade was their role as quasi-government agencies. People accepted their risk arbitrage because they (rightly) assumed that the government would protect them from going under.
Ultimately, the real problem was that the world financial markets got so complex that no one understood them. Not private industry, not the government. There was no regulatory oversight to prevent the specific problems that caused the crash because no one was capable of seeing the problems in the first place.
Arguments like yours simply beg the question as to whether government is an effective regulator of these things. You’re starting with the assumption that it is, and therefore any systemic failure is obviously the result of lack of regulation. You have yet to make the case that the regulatory process is good enough to stay on top of this kind of thing.
And if it isn’t, might it not be better to not give people the impression that it is, so they don’t feel the need to be careful?
The failure of government regulation is not necessarily a matter of profits - it’s a matter of covering your ass. How did city, state, and federal governments do at maintaining the levees near New Orleans? Would you say they did a good job? That they acted appropriately given the risks, and that they responded appropriately to outside alarms and concern about the quality and sufficiency of the levees?
In government, what happens is that policy makers make bad decisions, and then when confronted with the possible consequences, they act to bury the problem or blame others.
I’ve always found it strange that the liberals on this board will make arguments basically assigning the government all sorts of credit for quality and efficacy and honesty in general, but when Bush was in office almost everything he did was supposedly a disaster. The argument is made that the mere existence of laws is proof that they were necessary, but every law Bush signed was derided. Government agencies are supposedly damned-near infallible, but FEMA under Bush was a total disaster. There’s a fundamental incoherence here.
Sam, I think some of us are trying to say there’s no reason to believe that the private sector is any more efficient than the public sector. And I didn’t find anything particularly liberal about the remarks either. And shouldn’t Libertarians be liberal?
Are you sure about that; private companies, with their brand reputations at stake, dared to risk their credibility by putting products up for sale that they themselves did not fully understand? Surely market forces would prevent such recklessness.
They did a damn sight better than any private levee-building company I’m aware of.
But I’m saying that there is plenty of reason to believe that the free market IS more efficient at regulation than is the government, and I’ve listed many reasons.
I can give you another reason we haven’t mentioned - when new regulations are put on the books of government, they rarely get taken off. But market requirements are constantly changing, so even if a regulation was efficient at the instant in time that it was written, it probably no longer is. Do you think accounting regulations written before the microcomputer era are likely to be efficient today? Building codes written before many modern materials even existed?
But the biggest problem with government regulation is that government does not have the information it needs to make efficient choices, and it can never have it. The reason it can’t have it is because it’s locked up in the minds of all the actors in the marketplace, and it’s only discovered through the process of negotiation in the marketplace. A collecton of smart people in government simply can’t know all the things required to make optimal decisions, and the coercive nature of government means that once it makes a decision, other options are precluded so we have no way to even test them to see if they are optimal.
I highly recommend reading this short essay by F.A. Hayek: The Use of Knowledge in Society. He won the Nobel prize largely because of the ideas in this essay.
Here’s a key statement from the essay:
As a quick example, let’s say that the government decides to regulate the use of hammers. How many hammers do people need? How would you find out? Let’s assume a market in hammers never existed, so we can’t just count the number of hammers currently purchased per year. We simply have to determine it. Are you going to ask people? Everyone will say they could use a hammer.
Let’s say everyone is a perfect social participant, and honestly only wants to take a hammer if he or she would make the most efficient use of it. How do they know? Answer: They can’t. No individual knows if he is the one who should get a hammer, because he doesn’t know what other people would do with it. The information just doesn’t exist. So government has to guess. Maybe it can make a reasonable guess by looking at the mix of capabilities and industries. But it doesn’t know who’s the most efficient hammerer, or where the marginal improvements in hammer distribution are, or how worn current hammers are, or who’s best capable of using a worn hammer vs a new one, or any of that kind of information, because it’s locked up in the heads of the public, and no mechanism exists to sort it out.
In the market, the process of bidding and setting prices extracts that information. You know the price of hammers, and you can make a decisions as to the relative value of a hammer to you compared to all the other things you could buy with your resources. And everyone else does the same. If not enough people are wlling to pay the price, the price comes down until the market clears. If not enough people are willing to pay the price of a hammer, the production of hammers will fall, and those resources will be diverted to products that are more in demand. But all these decisions in the marketplace are made with better information, because the price system acts as an information bus transmitting information about supply and demand and relative value to all participants.
Government doesn’t have that, so it can’t be optimally efficient. In some cases, markets can break down and be even less efficient, in which case there may be some room for government action. But the default should always be in favor of the market, with government only as a last resort.
The Soviet Union actually tried to be good at economic calculation. It had thousands of government accountants and functionaries maintaining databases of products and trying to calculate values and assign production to the goods and services it thought society needed. And it failed miserably. The Soviet Union’s economic history is one of shoddy goods, poor safety, inefficient distribution, gluts and shortages, and other signs of a very poor system of allocating the collective output of a nation.
Since that time (and since Hayek’s time), the problem has gotten even more complex. Just-in-time inventories, virtual factories, a more mobile work force, globalization, and increased specialization of labor causes even more fragmentation of information, and makes it even harder for government to act efficiently.
No, I think this was clearly a case of market failure. But it was a systemic failure that was also a failure of government. I’m not claiming that a world of private markets is a utopia - I’m just claiming that in general, markets are preferable to government, and should be assumed so until proven otherwise. Also, as a libertarian I believe that freedom to act should be the default state, and government should only intervene when a proven problem exists that cannot be solved through the market AND which government can demonstrably do better.
In the case of the financial system, we have zero evidence that more government involvement would have been better. In fact, we have plenty of evidence that government was a more-than-willing participant in the system that led to the crash. Not just Fannie and Freddie, but the loose monetary policy of the fed, the promotion of subprime mortgages by the government, the constant assurance by government officials like Barney Frank and Christopher Dodd that the system was sound and the risk was being overplayed, etc.
If you don’t think this is true, then please point to the specific list of reforms that people were advocating for government that would have prevented this.
Really? How many private levee companies are you aware of? How many of them had their levees fail and subsequently flooded a city?
Puh-leeze, capitalism is a great thing and I’m a strong believer in the invisible hand. You will note that Adam Smith did not call it the “invincible hand” although that appears to be a libertarian tenet.
I’m not quite sure how anyone with basic understanding of how the financial markets work can claim that repealing Glass-Stegal did not contribute to the melt down. I’ll agree there may not be agreement among “financial experts or economists” however you define them. But common sense says if you have one group of financial institutions limited to higher risk investment banking style business without government guarantees, and another group of financial institutions that are excluded from that high risk business with a broad deposit base commercial style bank business, that’s less risk than having only universal banks that do both. AIG didn’t implode because of it’s insurance business, rather it was the couple of hundred people at AIG FP doing extremely high risk derivatives business that at least the broad AIG organization did not understand. It’s basic risk management that hedges some of the risk of an investment bank with that of a commercial bank.
Yes, I’ll agree that most of the regulators are pretty clueless regarding high finance. Civil servants making less than 6 figures going up against the best and brightest that start at 6 figures and go up from there. Removing the structural impediments to getting into deep water in the first place, such as what Glass-Steagal did, was a good thing. Having structural impediments (capital adequacy ratios, market to market accounting, not allowing off balance sheet accounting, size limits, government guarantees and lack thereof, income requirements for loans, downpayment % requirements, etc) are all a good thing for keeping a safe financial system.
There used to be non regulatory inhibitors too that limited risk. Previously all the buldge bracket firms were partnerships and not nearly the size they are now, Swiss Bank Corporation in it’s quest to keep the AAA rating had very serious risk management controls in place and simply didn’t do a lot of business that Lehman’s did (too bad they got pushed out in the merger with UBS), etc.
Relaxation of the non regulatory inhibitors, removal of structural impediments such as Glass Steagal and weak oversight materially contributed to the greatest ponzi scheme in the history of mankind.
Oh, and “no one could have seen it coming” is the most pathetic line uttered. The exact timing and the magnitude of the crash may not have been but anyone throwing up “no one could have seen it coming” should not be taken seriously.
Private industry didn’t even attempt to take this on. The government did a lousy job, in this case, but the private sector did no job at all.
As bad as New Orleans was, it’s not fair to take it in isolation without considering the federal levees as a whole. How many lives and how much property have been saved by levees over the decades? And when a debacle does happen, the people in charge answer to the citizens, not the shareholders.
How many lives and how much property have been saved by levees over the decades?
And how bad would the NOLA disaster have had to be to negate all that?
And to your last point, you said the people in charge answer to the citizens. Did they? Who was in charge? Are they currently in jail?
Five investigations (three major and two minor) were conducted by civil engineers and other experts, in an attempt to identify the underlying reasons for the failure of the federal flood protection system. All concur that the primary cause of the flooding was inadequate design and construction by the United States Army Corps of Engineers.
These were failures the Corps knew about as early as 1986!
The government failed in New Orleans, and to make it up to people they use tax money to save people, and tax money to compensate people.
BP, RIG, and Haliburton fucked up in the gulf oil spill. It was their shareholders that paid the billion dollar settlements.
The government acted as a rating agency for federal interstate bridges. In 2007 an eight-lane span in downtown Minneapolis failed, sending motorists failing to their death. Only AFTER the incident did the government admit it hadn’t been inspecting bridges as required. And only after did they bother going around to the hundreds of other bridges, closing dozens as unsafe.
Seriously Robot Arm, what is the difference between a private rating agency failure, and a government rating agency failure? Why is one preferential to the other?
We’ve got people on this message board freaking out about hypothetical poisoned toothpaste, when in reality the government is doing much worse.
Can I use that hand wave away all failures of private industry?
There are hundreds of gulf oil wells, you have to consider how much better off we are for having all that oil.
Sure various airlines have fucked up, but think about all the times they don’t.
S&P et al. fucked up in 2007, but think about all the things they rated that weren’t fucked up. Not really fair to take that one case in isolation, how many lives and how much money has been saved by all the things they rate over the past decades?
It isn’t if you are the CEO. It is if you are part of the society which has to deal with the long term consequences.
If you are in business, 4 years is an eternity. A new president also has to plan for 8. Plus, a president knows that if he screws up too badly, his party will suffer after he gets the boot. There is of course short term planning in government, but there is long term work also. Apollo was pretty long term, after all.
Major private construction projects are pretty long term, as are microprocessor design projects, so I’m not saying industry never thinks of anything more than a year out. But a president has a four year term in part to have that somewhat longer perspective, just as senators have 6.
sputtersnort Who says there isn’t any conservative humor. Fidel Castro had exactly as many opponents on his ballot as directors do on theirs.
I’m sorry, this is something I doubt there is quantifiable data for, and I’m not about to generate it. Why do you think the banks fell into the pit? Long term thinking, or short term?
You and I aren’t pinching pennies. You and I aren’t living in Panama. And that poor putz who did buy the Crest toothpaste will surely feel better now that we can switch to Colgate.
Where did I say the government could keep us 100% safe? In any case, traceability requirements don’t prevent poisoning (remember the scallions?) but help the source of the problem be traced back to its root cause, and helps recalls target at risk products, not all of them in the market. That not only protects people, and reduces disruption of the supply chain, but it also saves money.
J&J is acknowledged in crisis management literature as doing a particularly good job with this. There are plenty of cases where companies stonewalled and claimed that their products were not to blame when they were. By the way, IIRC J&J had to shut down a factory in Puerto Rico for being out of control. So even they screw up sometimes.
In that case the problem was introduced in one place, so the sales drop was an over-reaction, and hardly an example of consumers reacting rationally. Plus, a slow acting poison that gets out into the field is going to have a lot more impact than a few tampered capsules with a fast-acting poison.
Now, you might say that no company would let this happen, even without government supervision - but the Chinese companies did, and so did American companies before regulation.
Do you really think the market will belong exclusively to big companies who can afford J&Js response, and whose market is so big that a reputation problem from Tylenol might spread to other, unaffected, products? if all companies were as quality driven as J&J (back then at least) all would be fine, but if all people were as law-abiding as me and you, we wouldn’t need police either.
Let’s see if I can dismiss this as easily as Robot Arm:
As bad as [the situation in Panama] was, it’s not fair to take it in isolation without considering the [toothpaste industry] as a whole. How many lives and how many teeth have been saved by [tooth paste] over the decades?
Crest and Colgate both realize they don’t need to sell poisonous toothpaste to make more money, the real answer is even simpler. Market research told them that people like to squeeze a little strip along the top of their tooth brush. So if they make the hole bigger, people will still make a strip across the top, but now they’ll use twice as much.
Likewise, yogurt manufactures don’t need to use poison. They realized they can gradually shrink the container size and people won’t notice. Potato chip companies realized they can keep putting fewer and fewer chips in each bag and people will happily pay more.
Neither case is fraud when the quantity is labeled right there on the front of the bag.
Again, you discount the other regulatory forces at work in the marketplace. Wal-Mart’s neck is on the line if they sell tainted products, and that’s where penny-pinching people go. So Wal-Mart’s buyers are going to make sure that the products they buy meet minimum safety standards.
And let me repeat that while these incentives to self-regulate exist, they would be even stronger if the government stopped being our safety nanny. People are more complacent today in many areas because they just assume that a product must be must be safe or the government wouldn’t allow it to be sold. Take that assumption away, and the market share of the companies with a reputation for safe products will increase overnight.
I can give you yet another example: SCUBA gear. SCUBA is a dangerous activity. The government has virtually no oversight of the SCUBA industry, other than DOT certification for pressure vessels. The diving industry is heavily self-regulated, with organizations like NAUI and PADI maintaining strict requirements. Dive operators have their own certifying bodies and associations, and they keep their member operators in line because they recognize that a lapse in safety hurts everyone. The Diver’s Alert Network (DAN) acts as a statistics gathering service and information clearinghouse for safety concerns.
You’d think that diving would be ripe for exploitation by greedy capitalists putting divers at risk by cutting corners - especially since a lot of it takes place in 3rd world countries and far away from any kind of government oversight. But it’s not the case.
There have been movements by activists to have diving gear regulated by the FDA as medical devices. You can even see the rationale for it - unregulated dive operators can fill tanks of air, and you’re breathing the stuff. There are lots of ways for it to be contaminated. Why should an air tank in a hospital be regulated, but not a SCUBA tank? Dive regulators have oil in them that could be toxic, and this equipment is forcing gases into your lungs under pressure.
In fact, SCUBA equipment is incredibly safe. Major failures of gear resulting in injury or death are almost unheard of, despite the equipment being used in harsh environments with little margin for error.
The result of self-regulation means that the industry has undergone a tremendous amount of innovation. SCUBA gear is incredibly cheap for what it provides: You can buy an entire package of equipment for under $700. Recreational divers are now breathing advanced Nitrox air mixtures, and using sophisticated dive computers. They’re doing it safely, in an unregulated market.
How do you explain this, if markets aren’t capable of self-regulation?
If it saves money, you don’t need the government mandating it. And no, I don’t expect government to keep people 100% safe. The question is whether the government keeps people safer than does the marketplace, and if it does, does the added cost of government regulation and the loss of freedom inherent in it justify whatever increase in safety we might get?
Right. And those companies got punished in the market, and that’s why J&J is now used as the benchmark for how to deal with these crises. But I work in industry, and I can tell you that strict attention to safety and quality is the norm, not the exception. And the amount of effort I see being put into quality and safety goes FAR beyond what government typically requires.
Did the government didn’t tell them to do that, or did they chose to do themselves to maintain their reputation for quality?
Yes, but that can happen with government or without it. Maybe it would be better then to not have government issuing nationwide blanket approvals of products. If they screw up, the consequences could be far worse.
China is a poor example. It’s a heavily state-controlled country filled with corruption and still lacking the well-developed market forces we have in the west. It also has much lower standards of living. And again, American companies ‘before regulation’ existed in a time where we were much poorer and our lack of wealth necessarily meant lower safety standards. We got safer as we got richer, not necessarily because government made things safer. It just takes the credit.
This is why I prefer to compare unregulated industries today to regulated industries today. It makes for a better comparison.
No, I think there will be a mix of big and small companies. I think that brand value will go up. I think that there will be more profit to be had by acting as an intermediary to ensure safety, and companies like Wal-Mart and the big drug stores would take on that role. I think the internet would do a great job of spreading information about risk and safety, and organizations like JD Power and Consumer’s Reports would gain in stature.
I think some risk would go up in some areas, and some would come down, but I think we’d see a big increase in economic growth, dynamism, and innovation, and ultimately it’s wealth that allows you to get good health care and live safely.
When you have a government that is risk-averse loading down your economy with regulations and restrictions, the result is a slowing of economic growth and a reduction in innovation. And that’s ultimately more harmful than allowing people to just make choices for themselves.
There are no WalMarts in Manhattan. There are lots of relatively small drug stores and grocery stores. It is unlikely that all of them can test every SKU they stock. In any case, what is cheaper for the economy as a whole - one entity doing the testing, or hundreds? I’ve already discussed why lots of competitive standards organizations won’t work.
When you first were allowed to buy your own telephones, the market rushed away from AT&T phones to cheap junk, because people were used to their phones never failing. They eventually all rushed back. No big deal for telephones - potentially a big deal for drugs. And it wasn’t overnight. I also fail to see the problem with people pretty much correctly assuming things they buy are safe. When this isn’t true, when the number of people who die in car accidents in the US in one hour die from the effects of tainted food or drugs, it becomes headline news. Sounds to me like a system which is not broken. Can you demonstrate some sort of major cost savings from a change, or is your opposition to the current system purely ideological? How many people can die from this change before it becomes not okay. If the victims were all libertarians. volunteering to take the risk for principle, that would be one thing.
I can give you another - parachutes. My brother sky dives, and no government regulator watches him pack his chute or watches a professional chute packer. It is a pretty save sport.
Easy - both markets consist of people who have had training and relatively speaking are experts in the sport. No one selects themselves for taking medicine or eating, and no one trains them on it. If you wanted to make all drugs prescription, so that experts would control access to them, you might be able to keep the government away, but this would be a lot more expensive than free access to government regulated OTC medication.
It saves money for the market as a whole. For most companies, these requirements cost money in most years. Under competitive pricing pressure, how do you justify these costs when nothing ever goes wrong? Your competitors, who take more risks than you, underprice you and take away market share. A CEO knows that they are not trying to make bad product, has QC people telling him that everything is fine (though they are cost centers also) and is often willing to bet that nothing will go wrong before he retires or changes jobs. This is exactly what happened during the crash. Any bank stepping away from high yield supposedly low risk mortgage securities would see their profits reduced versus their competitors. Sure they should have figured out that the housing market wouldn’t ever go up, but if they pulled out too early their stock price (and bonuses) would be punished. As I have said before, if the bankers led us to the brink of the abyss because they were evil people, the problem would be easy to fix. They led us there by making very rational decisions based on current market forces. Changing market forces - by making it expensive to cut corners or take these kinds of risks - is what regulation is all about.
Sure - that is why a problem is headline news. But the government doesn’t tell you how much to spend on quality, right? I suspect it says what tests to do, and perhaps puts process limits on the results? And it makes it very expensive to screw up, in terms of the cost of a recall and the bad publicity.
In any case, the companies in the quality niche of the market are going to do a better job than the ones in the value niche. Studies of unregulated supplements show that their active contents vary all over the place. Are you sure this wouldn’t happen if medicine were deregulated?
Most of the industries causing the problems are not really state controlled, and they are certainly not regulated.
I’m sure Mr. Vanderbilt’s beef was of the highest quality, even 120 years ago. I can afford to not set foot in WalMart unless I absolutely have to, once every 3 years or so. Lots of people are not so lucky, even today. The poor and unemployed are not going to be able to afford products in the quality niche. Supermarkets have been introducing cheaper cuts of meat, all safe of course. How do you keep companies from selling not so safe products in an unregulated market, taking their money, and then vanishing?
After all, we are told the reason airplane flights are getting nastier and nastier is that the market is voting for the apparently lowest cost supplier, since they are pretty sure low cost does not mean a safety risk, (thanks to regulation) and so what if the experience is hellish?
He who forgets the past … We were told that a risk adverse government onerously regulating the banks would reduce economic activity and hurt US competitiveness, and that nothing could go wrong because which banker would be stupid enough to take excessive risks. They’ve got extensive risk management departments, after all, and algorithms and models to make sure that risks were held down to an acceptable level. And these guys were all brilliant by any measure. Nothing could ever go wrong.
Your stuff doesn’t work for long periods in the real world. it makes all sorts of assumptions about human nature which just aren’t true. Greenspan at least admitted he was wrong (not that it did a lot of good.) Were the very much increased profits and revenues from the financial sector, which rolled in just as promised, good for the economy in the long run? I think not.
Sam, do you remember that Merrill Lynch lost 18 years worth of profit in the great reset, begged to be acquired by another bank, possibly grossly understated their risk, and then had to be bailed out by Uncle Sugar? Not a shining example of efficient capitalism was it? And that was just one of the big banks dominos starting to fall.
How about a simple regulation that mandated a 20% minimum deposit before a mortgage could be OK’d? There you go! Problem solved, no bad mortgages, no housing bubble, no huge market derivatives speculation/purchase of toxic securities.
And you say :
*Why didn’t they step in and regulate more? *
Does this mean that you’re actually in favour of regulation? Do you agree that if the government had stepped in then there wouldn’t have been a problem?
And do you have any comment on your claims about ratings agencies and their competitive market self-regulation versus what actually happened or are you going to continue ignoring and dodging the facts?
Indeed it is not. The kind of thing you mentioned happened a lot as companies tried to reduce prices. It is not fraud exactly because of the government mandated quantity information on the front of the package.