Thoughts on Friday's Market

You all know I have been an extreme economic skeptic since I started the blog. But today’s market felt something like the classic capitulation than only comes when the stupid players are selling everything. Stupid people come in two classes. First, those who are not paying any attention and wake up to a quarterly retirement account statement and realize they are down 40% for the quarter! Like this idiot from Hollywood who just started selling his banking stocks.

Michael Cerenzie, a film producer, told The Times he had been selling out of his million-dollar position in banking stocks and was looking to invest in companies specializing in natural gas and energy.

“This isn’t going to come back,” he said of the recent stock market losses. “This is going to be a long one. We are not going to see returns like we did in the past.”

And second group is the over-leveraged hedge funds who have $billions of redemption demands and $billions of margin calls. That’s why Chevron can be bought at a P/E of 6.3 and a yield of 3.6%. (It’s not like the oil business is going away next year). The mutual funds and hedge funds have sell stocks to raise cash. But at a certain point that oversold condition ends. I feel like we’re close to that end in that hedge fund investors had to inform the funds of redemption amounts by last week.

Finally at the end of the day they managed to close out all the Lehmann Bros. Credit Default Swaps. And they were successful in clearing $300 Billion of CDS and all the insurers put up the necessary collateral. So a defacto date certain clearing systems can happen. One last thing, my guess is that more than $200 billion are in offsetting pairs of CDS that can just cancel eachother out.

If the G-7 ( Wy is this not a G8 Meeting?) can come up with some coordinated promises under the Gordon Brown (What a comeback!) plan for government investment in Banks for preferred shares, then I think a healing can begin.

The market in the States has decided Obama will be president (look at David Brooks column today on how the Sarah PalinRepublicans have driven all the smart people out of the Republican Party). The market is going to be pleased with a Barack victory, because it will represent a chance for a total makeover of Brand America, which has so been trashed by the Bush Era. Warren Buffett, being so strongly for Obama helps Mr. Market follow the Sage of Omaha.

Barack has just got to continue the positive–“We can solve this together.” message. The market is just about ready to help him in the close.

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0 Responses to Thoughts on Friday's Market

  1. omgdidisaythat says:

    “Gordon Brown (What a comeback!) “- You must be bloody joking!!!

  2. omgdidisaythat says:

    “Gordon Brown (What a comeback!) “- You must be bloody joking!!!

  3. The Bush Era and the Obama Era will be virtually indistinguishable from an economic standpoint. Bush is more of an economic Democrat than anything else. His policies prove it. If nothing else, this bailout proves it.

    Anyone fooled into thinking Bush is or was a libertarian in practice (despite the lip service he paid to those ideas when he actually ran for office) is deluding themselves.

    I’ll hand it to Obama, at least he doesn’t sugarcoat his economic plans, at least he has the guts to tell it like it is. The sad reality is that his plans will not improve the economy unless he miraculously adopts some more free market ideas.

  4. The Bush Era and the Obama Era will be virtually indistinguishable from an economic standpoint. Bush is more of an economic Democrat than anything else. His policies prove it. If nothing else, this bailout proves it.

    Anyone fooled into thinking Bush is or was a libertarian in practice (despite the lip service he paid to those ideas when he actually ran for office) is deluding themselves.

    I’ll hand it to Obama, at least he doesn’t sugarcoat his economic plans, at least he has the guts to tell it like it is. The sad reality is that his plans will not improve the economy unless he miraculously adopts some more free market ideas.

  5. Jon Taplin says:

    Milena- I can see were going to a fun few months after the election.

    OMG-Read the link I put up (after made your point) to the article about the Brown Plan. It is by far the smartest plan from a taxpayers point of view.

  6. Jon Taplin says:

    Milena- I can see were going to a fun few months after the election.

    OMG-Read the link I put up (after made your point) to the article about the Brown Plan. It is by far the smartest plan from a taxpayers point of view.

  7. Jon Munger says:

    Milena-
    I’m curious. Hypothetically, what evidence would you need to see to disprove the theory that Free Markets lead to the greatest good for the greatest number of people?

  8. Jon Munger says:

    Milena-
    I’m curious. Hypothetically, what evidence would you need to see to disprove the theory that Free Markets lead to the greatest good for the greatest number of people?

  9. Rick Turner says:

    She’s waiting until all the golden parachutists are proven murderers.

  10. Rick Turner says:

    She’s waiting until all the golden parachutists are proven murderers.

  11. Jesse C says:

    Anyone who has the gall to call for more ‘free markets’ after the last year is either in deep denial or just looking to piss people off.

    The bailout is/was a last ditch attempt to save the proverbial ‘free market’ from its own excesses over the last three decades.

    The sad reality is that without government intervention to ensure transparency, honesty, and structure, markets don’t work. Or at least don’t work in the somewhat dependable manner that we seem to prefer.

  12. Jesse C says:

    Anyone who has the gall to call for more ‘free markets’ after the last year is either in deep denial or just looking to piss people off.

    The bailout is/was a last ditch attempt to save the proverbial ‘free market’ from its own excesses over the last three decades.

    The sad reality is that without government intervention to ensure transparency, honesty, and structure, markets don’t work. Or at least don’t work in the somewhat dependable manner that we seem to prefer.

  13. Jon Taplin says:

    Milena is in the bunker and can’t come out to play right now.

  14. Jon Taplin says:

    Milena is in the bunker and can’t come out to play right now.

  15. Alex Bowles says:

    Jesse,

    You may have just underscored the most significant accomplishment of Bush-era Doublespeak when you note that ‘free-markets’ – in the now common conception – are not only only unregulated (i.e. participants aren’t subject to government-imposed standards of any kind), they are also free from any kind of government involvement whatsoever, even when crimes against the state have been committed, and clearly demand severe criminal retribution.

    Clear markets support good accounting, and, by extension, accountability. Right there, you have a clear role for law and order. Dark markets, on the other hand, are contrived to evade as much accountability as possible, and to circumvent the rule of law whenever practical.

    And of course, it’s only a slight shift from dark markets into black markets, where the law is openly violated. In other words, the ‘high ideal’ advanced by those who have cynically advocated for ‘free markets’ turns out to be just one stop short of pure black – which is just enough to avoid criminal convictions, or, at the very least, to offer the kind of plausible deniability that will lead to a reduced sentence, lowered fines, early parole, and extra time off for good behavior.

    What I find so despicable about these guys is that they’ve perverted the language itself. Those words have, in turn, become so negatively charged that they cannot be used in any objective, rational conversations. We are, quite literally, unable to talk clearly about what’s happened – at least to the extent that we accept the previsions of meaning tat have occurred.

    There’s a parallel in their handling of the word ‘torture’, where an attempt was made to simply redefine its meaning in order to make a legal dodge that was beyond reprehensible. However, if we acquiesce to the new meaning for this word, then there’s a good chance that Cheney, Addington, Gonzales, and, yes, Bush, will escape criminal sanction.

  16. Alex Bowles says:

    Jesse,

    You may have just underscored the most significant accomplishment of Bush-era Doublespeak when you note that ‘free-markets’ – in the now common conception – are not only only unregulated (i.e. participants aren’t subject to government-imposed standards of any kind), they are also free from any kind of government involvement whatsoever, even when crimes against the state have been committed, and clearly demand severe criminal retribution.

    Clear markets support good accounting, and, by extension, accountability. Right there, you have a clear role for law and order. Dark markets, on the other hand, are contrived to evade as much accountability as possible, and to circumvent the rule of law whenever practical.

    And of course, it’s only a slight shift from dark markets into black markets, where the law is openly violated. In other words, the ‘high ideal’ advanced by those who have cynically advocated for ‘free markets’ turns out to be just one stop short of pure black – which is just enough to avoid criminal convictions, or, at the very least, to offer the kind of plausible deniability that will lead to a reduced sentence, lowered fines, early parole, and extra time off for good behavior.

    What I find so despicable about these guys is that they’ve perverted the language itself. Those words have, in turn, become so negatively charged that they cannot be used in any objective, rational conversations. We are, quite literally, unable to talk clearly about what’s happened – at least to the extent that we accept the previsions of meaning tat have occurred.

    There’s a parallel in their handling of the word ‘torture’, where an attempt was made to simply redefine its meaning in order to make a legal dodge that was beyond reprehensible. However, if we acquiesce to the new meaning for this word, then there’s a good chance that Cheney, Addington, Gonzales, and, yes, Bush, will escape criminal sanction.

  17. douglas newhouse says:

    Jon–today was the bottom or close to it–anyone with the courage to buy now will see out sized returns in the next month–selling now is for the lamest of the lame–

  18. douglas newhouse says:

    Jon–today was the bottom or close to it–anyone with the courage to buy now will see out sized returns in the next month–selling now is for the lamest of the lame–

  19. omgdidisaythat says:

    Jon – The plan Brown has put forward is cosiderably better than the Bush plan, however, that does not make it any good at all.

    Brown’s plan, if it works at all; will simply delay the inevitable. A new system of matching liquidity is clearly needed.

  20. omgdidisaythat says:

    Jon – The plan Brown has put forward is cosiderably better than the Bush plan, however, that does not make it any good at all.

    Brown’s plan, if it works at all; will simply delay the inevitable. A new system of matching liquidity is clearly needed.

  21. Jesse C says:

    Alex,

    To me, the very definition of a free market is one absent any sort of government involvement. It is hard to come up with a form of government involvement in a market that would have an effect on it that wouldn’t be considered regulation. Whether they are regulations relating to transparency, accounting, intellectual property, etc., all forms of government involvement have strong effects on how markets function.

    “Free market” is a frame that essentially corrupt conservatives/libertarians use to argue that it should be legal for corporations to behave in anti-social manners. Arguing that free markets ought to mean something different (and I confess to be unable to parse the semantics difference that you seem to be making) is still playing right into the frame that some how a market without government intervention is better.

    “Clear markets” or “fair markets” are much better frames for the discussion. “Honest markets” is another good one.

  22. Jesse C says:

    Alex,

    To me, the very definition of a free market is one absent any sort of government involvement. It is hard to come up with a form of government involvement in a market that would have an effect on it that wouldn’t be considered regulation. Whether they are regulations relating to transparency, accounting, intellectual property, etc., all forms of government involvement have strong effects on how markets function.

    “Free market” is a frame that essentially corrupt conservatives/libertarians use to argue that it should be legal for corporations to behave in anti-social manners. Arguing that free markets ought to mean something different (and I confess to be unable to parse the semantics difference that you seem to be making) is still playing right into the frame that some how a market without government intervention is better.

    “Clear markets” or “fair markets” are much better frames for the discussion. “Honest markets” is another good one.

  23. @Jon – the Brown plan is marginally better, but still a short-term band-aid.

    @JesseC – I’m not in denial, and I promise you, I am not out to piss people off. I am out to have logical and rational discussions. The way I see it, the free market hasn’t caused this failure, therefore, there is no reason for me to have lost any faith in the free market.

    I’m in the bunker for sure. Not hiding from you guys, but the flying ant infestation outside my home. As the Michigan weather cools and warms alternately, the creepy-crawlies come out. Had to take care of a few things. Plus I’m about to watch Double Indemnity so I’m not sticking around long.

    How I see it: bottom line, Bush’s policies were not free market. (I’d be fascinated by anyone who could prove they were, that would be the real feat before us.) Yet, some assert that Bush’s policies caused this collapse. Therefore, something other than the free market caused this collapse.

  24. @Jon – the Brown plan is marginally better, but still a short-term band-aid.

    @JesseC – I’m not in denial, and I promise you, I am not out to piss people off. I am out to have logical and rational discussions. The way I see it, the free market hasn’t caused this failure, therefore, there is no reason for me to have lost any faith in the free market.

    I’m in the bunker for sure. Not hiding from you guys, but the flying ant infestation outside my home. As the Michigan weather cools and warms alternately, the creepy-crawlies come out. Had to take care of a few things. Plus I’m about to watch Double Indemnity so I’m not sticking around long.

    How I see it: bottom line, Bush’s policies were not free market. (I’d be fascinated by anyone who could prove they were, that would be the real feat before us.) Yet, some assert that Bush’s policies caused this collapse. Therefore, something other than the free market caused this collapse.

  25. @JesseC – I can see your frustration and misunderstanding. Your premise is false.

    You say, ““Free market” is a frame that essentially corrupt conservatives/libertarians use to argue that it should be legal for corporations to behave in anti-social manners. ”

    I think I need to qualify that the “Free Market” can indeed exist within a framework of Rule of Law. There is nothing about free market ideas that indicates men should be able to run amok with no checks and balances. That is why any libertarian you should take seriously would advocate for “free markets” along with a highly-developed legal structure in order to punish those who do wrong, but still encourage the freedom of those who do not do wrong.

    A great illustration of this idea is how “free speech” functions. Free speech is encouraged, but libel, slander, and threats are illegal, for good reason! If Bob calls Amy with threatening calls, he may argue (wrongly) he is exercising his free speech. No, he’d be harming Amy and infringing on her freedoms. Just because Bob abuses the privelage is not an argument for taking it away from everyone. It is a just argument for punishing Bob.

    Similarly, the free market should not tolerate those who take advantage of people, but punish them through the legal system. Likewise, just becaue free market abuses occur is not a reason to revoke the ability for businesses and men to function within a free market.

  26. @JesseC – I can see your frustration and misunderstanding. Your premise is false.

    You say, ““Free market” is a frame that essentially corrupt conservatives/libertarians use to argue that it should be legal for corporations to behave in anti-social manners. ”

    I think I need to qualify that the “Free Market” can indeed exist within a framework of Rule of Law. There is nothing about free market ideas that indicates men should be able to run amok with no checks and balances. That is why any libertarian you should take seriously would advocate for “free markets” along with a highly-developed legal structure in order to punish those who do wrong, but still encourage the freedom of those who do not do wrong.

    A great illustration of this idea is how “free speech” functions. Free speech is encouraged, but libel, slander, and threats are illegal, for good reason! If Bob calls Amy with threatening calls, he may argue (wrongly) he is exercising his free speech. No, he’d be harming Amy and infringing on her freedoms. Just because Bob abuses the privelage is not an argument for taking it away from everyone. It is a just argument for punishing Bob.

    Similarly, the free market should not tolerate those who take advantage of people, but punish them through the legal system. Likewise, just becaue free market abuses occur is not a reason to revoke the ability for businesses and men to function within a free market.

  27. Jon Taplin says:

    Milena- Now we’re getting to common ground. You are open to “regulating” libel, slander and threats. We want to regulate that same “over the line activity” in the markets. But if we are not able to even have visibilty into the activity of these market players (like hedge funds) we cannot perform that regulation.

  28. Jon Taplin says:

    Milena- Now we’re getting to common ground. You are open to “regulating” libel, slander and threats. We want to regulate that same “over the line activity” in the markets. But if we are not able to even have visibilty into the activity of these market players (like hedge funds) we cannot perform that regulation.

  29. Jesse C says:

    Milena. Seriously? Okay, as a brief intellectual exercise, lets go over this. A ‘free market’ is one in which the government has no involvement in setting prices or demand. All prices and production are driven by an ‘invisible hand’ which is supposed to lead to the most efficient allocation of available resources. Depending on who you talk to, there are various levels of government intervention allowable to prevent fraud, but at least some true free marketers I’ve talked to think that fraud should be handle by the invisible hand as well (e.g., a fraudulent company will eventually be found out leading to its demise in the market). Patents are another thing that some free marketers rail against, since they are the government stifling competition, essentially helping to set the price of the patented good. Anyway, to sum up, a free market is one with as little government intervention as possible.

    So lets look at the basic elements that went into this whole crash.

    Unverified, potentially fraudulent, mortgage loans: In a true free market there wouldn’t have been an restrictions on who could get loans. It would have been up to the individual loan companies to accurate judge their risk and hedge acceptably. Given that we know that many mortgage companies did exactly this, mortgage lending was essentially following a free market path.

    Rating companies gave false AAA rating to mortgage backed securities: Nothing wrong with this in a free market. In a true free market, eventually the companies giving out the bad ratings would suffer a loss of trust and a loss of business. It is clearly not the government’s job to be setting values on securities.

    Extreme Leveraging among the investment banks: And since when should the federal government make rules about how leveraged a company can be? In a true free market, even the commercial banks could have upped their leveraging to the extent the market would support it.

    Unregulated CDS market: One of the closest things to a truly free market we’ve had, since there was pretty much no government regulation involving the swaps. Market players were able to set their own prices and the law of supply and demand governed everything.

    How did all these things work out? In every case, the lack of government regulation or violation of the government regulation helped lead to this problem. In every case, the market proved inadequate to actually efficiently set prices without requiring a massive correction. In every case, this crash could have been avoided with a suitable application of restrictions.

  30. Jesse C says:

    Milena. Seriously? Okay, as a brief intellectual exercise, lets go over this. A ‘free market’ is one in which the government has no involvement in setting prices or demand. All prices and production are driven by an ‘invisible hand’ which is supposed to lead to the most efficient allocation of available resources. Depending on who you talk to, there are various levels of government intervention allowable to prevent fraud, but at least some true free marketers I’ve talked to think that fraud should be handle by the invisible hand as well (e.g., a fraudulent company will eventually be found out leading to its demise in the market). Patents are another thing that some free marketers rail against, since they are the government stifling competition, essentially helping to set the price of the patented good. Anyway, to sum up, a free market is one with as little government intervention as possible.

    So lets look at the basic elements that went into this whole crash.

    Unverified, potentially fraudulent, mortgage loans: In a true free market there wouldn’t have been an restrictions on who could get loans. It would have been up to the individual loan companies to accurate judge their risk and hedge acceptably. Given that we know that many mortgage companies did exactly this, mortgage lending was essentially following a free market path.

    Rating companies gave false AAA rating to mortgage backed securities: Nothing wrong with this in a free market. In a true free market, eventually the companies giving out the bad ratings would suffer a loss of trust and a loss of business. It is clearly not the government’s job to be setting values on securities.

    Extreme Leveraging among the investment banks: And since when should the federal government make rules about how leveraged a company can be? In a true free market, even the commercial banks could have upped their leveraging to the extent the market would support it.

    Unregulated CDS market: One of the closest things to a truly free market we’ve had, since there was pretty much no government regulation involving the swaps. Market players were able to set their own prices and the law of supply and demand governed everything.

    How did all these things work out? In every case, the lack of government regulation or violation of the government regulation helped lead to this problem. In every case, the market proved inadequate to actually efficiently set prices without requiring a massive correction. In every case, this crash could have been avoided with a suitable application of restrictions.

  31. Rick Turner says:

    The problem with the “free market” as advocated by libs is that too many people get badly hurt in the corrections. It’s incredibly cruel and inhumane as the pendulum (remember the Pit and the Pendulum) swings back and forth making gross corrections and wiping out people…real, alive, non-theoretical human beings…along the wild swings. And it still favors those with massive amounts of capital. Oh, the big bad company dumped a bunch of unpronounceable chemicals into the river? Well, sue them. Sure…after you find an anomalous cluster of breast cancer or six toed babies or mental retardation. And then said company has megabucks with Armani lawyers. Did anyone here see “Erin Brockovich”? And then the lawsuits don’t seem to hurt the company or its execs very much… What about the Bhopal, India disaster? That was brought to the world by the free market.

    The trouble is that the free market kills and maims people without balance.

  32. Rick Turner says:

    The problem with the “free market” as advocated by libs is that too many people get badly hurt in the corrections. It’s incredibly cruel and inhumane as the pendulum (remember the Pit and the Pendulum) swings back and forth making gross corrections and wiping out people…real, alive, non-theoretical human beings…along the wild swings. And it still favors those with massive amounts of capital. Oh, the big bad company dumped a bunch of unpronounceable chemicals into the river? Well, sue them. Sure…after you find an anomalous cluster of breast cancer or six toed babies or mental retardation. And then said company has megabucks with Armani lawyers. Did anyone here see “Erin Brockovich”? And then the lawsuits don’t seem to hurt the company or its execs very much… What about the Bhopal, India disaster? That was brought to the world by the free market.

    The trouble is that the free market kills and maims people without balance.

  33. Dan says:

    To extend your metaphor: The government announces that certain press organizations can say anything they want about anyone, without restrictions. That is now law. Those press organizations proceed to destroy the reputations and lives of several prominent and blameless people.

    Then a free speech advocate steps up and says, “The government was anti-free-speech in allowing those press organizations to use completely unrestricted speech. This proves that free speech is always good.” What it proves is that “free speech” is a nuanced thing, not a matter of black-and-white ideology, and not a matter of the literal meanings of the words “free” and “speech.”

    If you’re willing to grant that “free markets” should not mean “totally unrestricted, ungoverned markets,” then you’ve already established that there must be a legal framework within which businesses must operate. There are disagreements about just what a framework should look like. The slogan “free markets” doesn’t make one particular version of the framework necessarily the best one.

    Personally I believe that time and experience are important criteria. What looks like it’s too free and easy at one point may prove to be necessary in another. What looks too restrictive at one point may be necessary in another. Government, business, the economy and society are evolving things. We can veer too far one way or the other.

    But if we get the depression I think we will, I can say that, ideals and free markets and philosophy don’t matter a hill of beans compared to the long-term human suffering we’ll go through. I’d gladly have some Wall Street traders somewhat unfairly restrained in their practices if it means they can’t wipe out the savings, investments and well-being of people all over the world.

    One other comment, in connection with what you’ve said elsewhere, that to you, George W. Bush looks like a Democrat: Your lenses are blurred, you might want to clean them. That is about as simplistic a statement as saying that “free speech” means that you can yell “Fire!” in a crowded theater.

  34. Dan says:

    To extend your metaphor: The government announces that certain press organizations can say anything they want about anyone, without restrictions. That is now law. Those press organizations proceed to destroy the reputations and lives of several prominent and blameless people.

    Then a free speech advocate steps up and says, “The government was anti-free-speech in allowing those press organizations to use completely unrestricted speech. This proves that free speech is always good.” What it proves is that “free speech” is a nuanced thing, not a matter of black-and-white ideology, and not a matter of the literal meanings of the words “free” and “speech.”

    If you’re willing to grant that “free markets” should not mean “totally unrestricted, ungoverned markets,” then you’ve already established that there must be a legal framework within which businesses must operate. There are disagreements about just what a framework should look like. The slogan “free markets” doesn’t make one particular version of the framework necessarily the best one.

    Personally I believe that time and experience are important criteria. What looks like it’s too free and easy at one point may prove to be necessary in another. What looks too restrictive at one point may be necessary in another. Government, business, the economy and society are evolving things. We can veer too far one way or the other.

    But if we get the depression I think we will, I can say that, ideals and free markets and philosophy don’t matter a hill of beans compared to the long-term human suffering we’ll go through. I’d gladly have some Wall Street traders somewhat unfairly restrained in their practices if it means they can’t wipe out the savings, investments and well-being of people all over the world.

    One other comment, in connection with what you’ve said elsewhere, that to you, George W. Bush looks like a Democrat: Your lenses are blurred, you might want to clean them. That is about as simplistic a statement as saying that “free speech” means that you can yell “Fire!” in a crowded theater.

  35. Alex Bowles says:

    Jesse,

    How does this theoretical world of your handle the classic situation where a manufacturing plant dumps toxic waste into a river, causing cancer in those downstream?

    Yes, behavior like this could obviously damage the company’s brand, and that may lead to negative market reactions, and, eventually, maybe, a correction. But is going out of business is really the worst they can expect in this utopia of yours?

    At what point to you start to account for the more fundamental principle that your right to swing your fist ends at my nose? At what point do you acknowledge that lasting harm done to one human by another is not simply ‘collateral damage’, but an actual crime?

    And what allowance would you make fir a group of downstream people who get together, arm themselves heavily, and bulldoze the polluting plant into oblivion? Would you chalk that us as a simple ‘market correction’?

    Or would you admit that there’s an issue of property rights in play, and that these rights merit a level of protection that extends beyond what the market can offer, and can only be provided – in a civilized country – by the rule of law?

  36. Alex Bowles says:

    Jesse,

    How does this theoretical world of your handle the classic situation where a manufacturing plant dumps toxic waste into a river, causing cancer in those downstream?

    Yes, behavior like this could obviously damage the company’s brand, and that may lead to negative market reactions, and, eventually, maybe, a correction. But is going out of business is really the worst they can expect in this utopia of yours?

    At what point to you start to account for the more fundamental principle that your right to swing your fist ends at my nose? At what point do you acknowledge that lasting harm done to one human by another is not simply ‘collateral damage’, but an actual crime?

    And what allowance would you make fir a group of downstream people who get together, arm themselves heavily, and bulldoze the polluting plant into oblivion? Would you chalk that us as a simple ‘market correction’?

    Or would you admit that there’s an issue of property rights in play, and that these rights merit a level of protection that extends beyond what the market can offer, and can only be provided – in a civilized country – by the rule of law?

  37. Jesse C says:

    Alex,

    It ain’t my theoretical world. I think ‘free markets’ are a ridiculous and anti-societal concept. You might want to redirect those questions to Milena.

    Milena,
    Come on, that’s really straining the limits of my credulity. You’re all in favor of a free market, except for any regulations that you think are necessary to make it work.

    I approach this from a completely different tack. Truly free markets are inherently destructive. They can feature violent corrections and swings, which are supposed to lead to maximum efficiency, but have little regard for who gets screwed in the process.

    Also, pretty much every proof that I’ve seen of why free markets are the most efficient is premised on purely rational (or limitedly rational) actors. Humans are not purely rational. In fact, biologically, we’re the exact opposite. Which basically makes all the elegant proofs and conclusion that traditional economists love to wave around a load of hooey.

    So I haven’t drunk the koolaid. Essentially, I think that markets need to be highly regulated in order to provide a meaningful service to society. I think that regulations needs to come in two flavors. Regulations relating to transparency and regulations relating to behavior. Transparency I think we agree on, at least somewhat. At least your last post makes me think you are not completely opposed to requiring transparency. For a market to work in a smooth fashion, people need to have information about what they are investing in.

    Behavior, I think we differ on. I think there should be strong regulations on things like how much a company can be leveraged and on monopolies, and on price-fixing and the like. Regulations which exist to prevent massive corrections of the markets. Things which probably limit immediate growth, but do so to build sustainable growth.

    But you also need to regulate externalities. Things like pollution and carbon emissions. Currently all those costs are essentially thrust onto society at large, with no real negative consequences for the people who create them. These are behavioral issues. They definitely limit economic growth. But they seek to do so for the greater good of the society that is supposed to benefit from the economic growth. The government’s role has to be to determine how much it is worth for all people to breath clean air and drink clean water, and factor those costs into the market. A rising GDP doesn’t do you much good if you can’t breath the air.

    Along the same lines, I think governments need to bias markets to make correct decisions. This means doing things like creating financial incentives for energy-efficient cars, while financially penalizing companies which sell fuel-inefficient vehicles.

    And finally, I think the government needs to ensure that the market structure is such that the failure of any company or even group of companies isn’t enough to bring down the entire system. I’m less sure on how to do this. I think a lot of the post Great-Depression measures were good steps and worked admirably, until we started relaxing them recently (and until financial companies started creating new asset classes to escape the regulations).

  38. Jesse C says:

    Alex,

    It ain’t my theoretical world. I think ‘free markets’ are a ridiculous and anti-societal concept. You might want to redirect those questions to Milena.

    Milena,
    Come on, that’s really straining the limits of my credulity. You’re all in favor of a free market, except for any regulations that you think are necessary to make it work.

    I approach this from a completely different tack. Truly free markets are inherently destructive. They can feature violent corrections and swings, which are supposed to lead to maximum efficiency, but have little regard for who gets screwed in the process.

    Also, pretty much every proof that I’ve seen of why free markets are the most efficient is premised on purely rational (or limitedly rational) actors. Humans are not purely rational. In fact, biologically, we’re the exact opposite. Which basically makes all the elegant proofs and conclusion that traditional economists love to wave around a load of hooey.

    So I haven’t drunk the koolaid. Essentially, I think that markets need to be highly regulated in order to provide a meaningful service to society. I think that regulations needs to come in two flavors. Regulations relating to transparency and regulations relating to behavior. Transparency I think we agree on, at least somewhat. At least your last post makes me think you are not completely opposed to requiring transparency. For a market to work in a smooth fashion, people need to have information about what they are investing in.

    Behavior, I think we differ on. I think there should be strong regulations on things like how much a company can be leveraged and on monopolies, and on price-fixing and the like. Regulations which exist to prevent massive corrections of the markets. Things which probably limit immediate growth, but do so to build sustainable growth.

    But you also need to regulate externalities. Things like pollution and carbon emissions. Currently all those costs are essentially thrust onto society at large, with no real negative consequences for the people who create them. These are behavioral issues. They definitely limit economic growth. But they seek to do so for the greater good of the society that is supposed to benefit from the economic growth. The government’s role has to be to determine how much it is worth for all people to breath clean air and drink clean water, and factor those costs into the market. A rising GDP doesn’t do you much good if you can’t breath the air.

    Along the same lines, I think governments need to bias markets to make correct decisions. This means doing things like creating financial incentives for energy-efficient cars, while financially penalizing companies which sell fuel-inefficient vehicles.

    And finally, I think the government needs to ensure that the market structure is such that the failure of any company or even group of companies isn’t enough to bring down the entire system. I’m less sure on how to do this. I think a lot of the post Great-Depression measures were good steps and worked admirably, until we started relaxing them recently (and until financial companies started creating new asset classes to escape the regulations).

  39. Rick Turner says:

    I’m with Jesse on this. Until we’re all Spock and Data, rational behaviour is not going to rule the day…or the “markets”.

  40. Rick Turner says:

    I’m with Jesse on this. Until we’re all Spock and Data, rational behaviour is not going to rule the day…or the “markets”.

  41. Seth says:

    Fun debate. Jesse:

    …I think that markets need to be highly regulated in order to provide a meaningful service to society.

    I would propose the wording be adjusted to: “intelligently regulated.” The hard thing is to devise the simplest, most logical, most understandable and enforceable rules possible. Such rules will yield the greatest liberty consistent with an orderly society.

  42. Seth says:

    Fun debate. Jesse:

    …I think that markets need to be highly regulated in order to provide a meaningful service to society.

    I would propose the wording be adjusted to: “intelligently regulated.” The hard thing is to devise the simplest, most logical, most understandable and enforceable rules possible. Such rules will yield the greatest liberty consistent with an orderly society.

  43. Chris Weekly says:

    @Jesse: Right on, especially about the externalities you mentioned. Absent explicit defense, the tragedy of the commons will continue unabated.

  44. Chris Weekly says:

    @Jesse: Right on, especially about the externalities you mentioned. Absent explicit defense, the tragedy of the commons will continue unabated.

  45. @Jon – I think we are getting somewhere.

    @Jesse – I am serious. You bring a ton of great points. However, a lot of your arguments are based on false premises of what libertarians think and what free markets are. It sounds more like you are talking about anarchy, which I’m not a proponent of.

    But your comments are great in that you’ve really inspired me to dispel a lot of the myths and misconceptions about libertarianism, the free market, and how to address externalities, so I’ll probably be referencing these comments on my own blog in the coming weeks.

    A few of my thoughts for now:

    Unfortunately, a lot of your premises are straw men.

    When you say, “In a true free market there wouldn’t have been any restrictions on who could get loans.” False. Then you negate yourself when you say, “It would have been up to the individual loan companies to accurate judge their risk and hedge acceptably.” Correct.

    Or, “Nothing wrong with this [giving false AAA ratings] in a free market.” No, there is something dramatically wrong with that in a free market. In a free market, prices are to find their normal levels, not their fraudulent levels. I’m assuming you agree, yet you are accusing those of us who believe in the free market think fraud is somehow acceptable? Absolutely false. That would be like saying free speech means I get to call myself a Doctor with no training. No, that’s fraud.

    Then again, you say, “In every case, the lack of government regulation or violation of the government regulation helped lead to this problem.” No. Not in every case. In many cases government regulation was precisely the problem. Furthermore, all regulation is not created equal. Some regulation is good, other kinds are bad. Yes, that does require ferreting out which is which, in particular which kinds can work with the free market, and which can work against it, or distort it and even encourage fraud!

    If you want to read a concise account of how this is so, read this article. It also addresses that leverage problem you mention. http://www.theaustralian.news.com.au/story/0,,24456786-30538,00.html

    Also, the CDSs did exacerbate the problem, but were not the cause, you have to look at the underlying asset, er, non-asset. CDSs are just like any other type of insurance. But in and of themselves, they are not fraudulent nor do they inherently increase the chances of default. Just like buying a life insurance contract does not increase your chances of dying.

    You also bring up externalities and how effective the government can be in punishing violators. You might guess, I disagree for the most part. The Coase Theorem (in short, enforcing private property rights) is very effective for things like protecting rivers, animals, etc. The tragedy of the commons won’t occur if you or I own the property. A great example is in Kenya, who banned elephant hunting and shortly saw its elephant population drop from 167,000 to 16,000 over 12 years. Zimbabwe granted private property rights and saw elephant populations increase from 40,000 to 68,000 over 13 years. I think this shows that with relatively small, controllable situations, private property rights can be extremely effective.

    Reducing emissions are far trickier because it is harder to punish individuals and measure who is doing what pollution. To be clear, I oppose most regulation, but I understand it’s happening whether I like it or not. So, like I said, all regulations is not created equal – command and control regulation of auto companies is dismal. Emissions fee & Cap and trade is slightly better.

    The bottom line is that much of today’s regulation is actually keeping auto companies from innovating to reduce emissions precisely because legislators (not scientists) are telling people how to build cars that are “good” for the environment. I’m baffled anyone can take that seriously. Auto makers spend so much time retro-fitting old cars to fit government standards, they cannot think about the future, which is most certainly not in ethanol! But the government thinks so, so that’s where they are told to focus their efforts by law. Can you see how not all regulation is helpful? It can actually hurt the planet.

    So, those are a few of my thoughts, and otherwise I’m going to retreat to my own blog to post about some of the great things brought up here.

  46. @Jon – I think we are getting somewhere.

    @Jesse – I am serious. You bring a ton of great points. However, a lot of your arguments are based on false premises of what libertarians think and what free markets are. It sounds more like you are talking about anarchy, which I’m not a proponent of.

    But your comments are great in that you’ve really inspired me to dispel a lot of the myths and misconceptions about libertarianism, the free market, and how to address externalities, so I’ll probably be referencing these comments on my own blog in the coming weeks.

    A few of my thoughts for now:

    Unfortunately, a lot of your premises are straw men.

    When you say, “In a true free market there wouldn’t have been any restrictions on who could get loans.” False. Then you negate yourself when you say, “It would have been up to the individual loan companies to accurate judge their risk and hedge acceptably.” Correct.

    Or, “Nothing wrong with this [giving false AAA ratings] in a free market.” No, there is something dramatically wrong with that in a free market. In a free market, prices are to find their normal levels, not their fraudulent levels. I’m assuming you agree, yet you are accusing those of us who believe in the free market think fraud is somehow acceptable? Absolutely false. That would be like saying free speech means I get to call myself a Doctor with no training. No, that’s fraud.

    Then again, you say, “In every case, the lack of government regulation or violation of the government regulation helped lead to this problem.” No. Not in every case. In many cases government regulation was precisely the problem. Furthermore, all regulation is not created equal. Some regulation is good, other kinds are bad. Yes, that does require ferreting out which is which, in particular which kinds can work with the free market, and which can work against it, or distort it and even encourage fraud!

    If you want to read a concise account of how this is so, read this article. It also addresses that leverage problem you mention. http://www.theaustralian.news.com.au/story/0,,24456786-30538,00.html

    Also, the CDSs did exacerbate the problem, but were not the cause, you have to look at the underlying asset, er, non-asset. CDSs are just like any other type of insurance. But in and of themselves, they are not fraudulent nor do they inherently increase the chances of default. Just like buying a life insurance contract does not increase your chances of dying.

    You also bring up externalities and how effective the government can be in punishing violators. You might guess, I disagree for the most part. The Coase Theorem (in short, enforcing private property rights) is very effective for things like protecting rivers, animals, etc. The tragedy of the commons won’t occur if you or I own the property. A great example is in Kenya, who banned elephant hunting and shortly saw its elephant population drop from 167,000 to 16,000 over 12 years. Zimbabwe granted private property rights and saw elephant populations increase from 40,000 to 68,000 over 13 years. I think this shows that with relatively small, controllable situations, private property rights can be extremely effective.

    Reducing emissions are far trickier because it is harder to punish individuals and measure who is doing what pollution. To be clear, I oppose most regulation, but I understand it’s happening whether I like it or not. So, like I said, all regulations is not created equal – command and control regulation of auto companies is dismal. Emissions fee & Cap and trade is slightly better.

    The bottom line is that much of today’s regulation is actually keeping auto companies from innovating to reduce emissions precisely because legislators (not scientists) are telling people how to build cars that are “good” for the environment. I’m baffled anyone can take that seriously. Auto makers spend so much time retro-fitting old cars to fit government standards, they cannot think about the future, which is most certainly not in ethanol! But the government thinks so, so that’s where they are told to focus their efforts by law. Can you see how not all regulation is helpful? It can actually hurt the planet.

    So, those are a few of my thoughts, and otherwise I’m going to retreat to my own blog to post about some of the great things brought up here.

  47. Jon Taplin says:

    Milena- You are the one raising the straw men. You and Jesse both are saying that S & P and Moody’s , having been paid by Lehman Bros. fraudently rated Lehman’s CDS as AAA . Then I assume you would have no problem with the regulator (in this case the SEC) sanctioning both the ratings agencies and Lehman for the fraud.

    As to you closing straw man of regulators telling car companies how to build cars–it just doesn’t fit the facts. Car companies and their bought and sold politicians have fought mileage standards and gasoline taxes, either of which would have made our cars more efficient, like those of the Europeans and Asians. No one was telling them how to acheive the standard.

  48. Jon Taplin says:

    Milena- You are the one raising the straw men. You and Jesse both are saying that S & P and Moody’s , having been paid by Lehman Bros. fraudently rated Lehman’s CDS as AAA . Then I assume you would have no problem with the regulator (in this case the SEC) sanctioning both the ratings agencies and Lehman for the fraud.

    As to you closing straw man of regulators telling car companies how to build cars–it just doesn’t fit the facts. Car companies and their bought and sold politicians have fought mileage standards and gasoline taxes, either of which would have made our cars more efficient, like those of the Europeans and Asians. No one was telling them how to acheive the standard.

  49. Dan says:

    “CDSs are just like any other type of insurance. But in and of themselves, they are not fraudulent nor do they inherently increase the chances of default. Just like buying a life insurance contract does not increase your chances of dying.”

    I think you are in error here. A CDS does not, by itself, increase the chance of default. Packaging CDSs into synthetic CDOs, then slicing those synthetic CDOs into tranches, repackaging them, and so on, further obfuscating the value of the underlying mortgages, creates the spiral of a credit bubble that does most definitely increase the chances that the whole thing will collapse.

    If you package life insurance policies in the same way, and continue to re-package and re-sell CDSs based on the life insurance policies, you will not drive up the odds that individuals will die, but you will eventually create a credit bubble that will collapse, and the life insurance policies will become worthless.

    Especially if you get to rate the value of the CDOs that implies that you’re insuring a pool of only young, healthy 20 year olds when in fact you’re insuring a whole bunch of people in their 80’s.

  50. Dan says:

    “CDSs are just like any other type of insurance. But in and of themselves, they are not fraudulent nor do they inherently increase the chances of default. Just like buying a life insurance contract does not increase your chances of dying.”

    I think you are in error here. A CDS does not, by itself, increase the chance of default. Packaging CDSs into synthetic CDOs, then slicing those synthetic CDOs into tranches, repackaging them, and so on, further obfuscating the value of the underlying mortgages, creates the spiral of a credit bubble that does most definitely increase the chances that the whole thing will collapse.

    If you package life insurance policies in the same way, and continue to re-package and re-sell CDSs based on the life insurance policies, you will not drive up the odds that individuals will die, but you will eventually create a credit bubble that will collapse, and the life insurance policies will become worthless.

    Especially if you get to rate the value of the CDOs that implies that you’re insuring a pool of only young, healthy 20 year olds when in fact you’re insuring a whole bunch of people in their 80’s.

  51. Rick Turner says:

    Using Zimbabwe as any kind of example of anything other than ruin is just nuts. And, Milena, your example of “owning the property” doesn’t cut it. As far as I’m concerned, we do own the property when it comes to the water we all share in common, the air we breath in common, and even the sights we see in common. The air on my acre is not independent from that next door. The water table, poisoned by whomever, is the commons, not the private dump. And private ownership rights will not bring back a dead child.

    You libertarians get all up in the head and self-righteous and backpedal and dance skittish little moves trying to get out of being a part of a larger community when you think your precious rights are being infringed upon. You want us to go around suing one another to maintain our little fiefdoms. You imagine the deck to be fairly shuffled and that the rights of one individual are going to be equal to the rights of a large corporation under the eyes of the law. You seem to think that rights can be maintained in fair fights. I think you’re dangerously wrong, and that the examples I’ve seen of individuals going up against corporations that have infringed upon their rights have all pulled the individual down into a rat hole of hellish proportions. It’s too easy for the big guys to just bury the little guys in your libertarian world. And they do it and will continue to do it.

  52. Rick Turner says:

    Using Zimbabwe as any kind of example of anything other than ruin is just nuts. And, Milena, your example of “owning the property” doesn’t cut it. As far as I’m concerned, we do own the property when it comes to the water we all share in common, the air we breath in common, and even the sights we see in common. The air on my acre is not independent from that next door. The water table, poisoned by whomever, is the commons, not the private dump. And private ownership rights will not bring back a dead child.

    You libertarians get all up in the head and self-righteous and backpedal and dance skittish little moves trying to get out of being a part of a larger community when you think your precious rights are being infringed upon. You want us to go around suing one another to maintain our little fiefdoms. You imagine the deck to be fairly shuffled and that the rights of one individual are going to be equal to the rights of a large corporation under the eyes of the law. You seem to think that rights can be maintained in fair fights. I think you’re dangerously wrong, and that the examples I’ve seen of individuals going up against corporations that have infringed upon their rights have all pulled the individual down into a rat hole of hellish proportions. It’s too easy for the big guys to just bury the little guys in your libertarian world. And they do it and will continue to do it.

  53. Pete Wolf says:

    I know I’m kind of jumping on the Milena-bashing bandwagon here, but I find it impossible to resist pointing out some errors in reasoning.

    Milena – In your response to Jesse on what is acceptable in a free market, you seem to be getting confused between the causal and the normative (the difference between ‘will’ and ‘ought’).
    Jesse’s point wasn’t that Libertarians such as yourself were automatically in favor of fraud. Of course, like most people, you think it ought not to happen this way. The problem is that you haven’t explained how your free market ideology translates this ‘ought’ into a ‘will’, i.e., you haven’t explained how a more free market system would have actually _caused_ the economic actors to behave differently.

    The second point is about the whole CDS issue. True, some government policy might have exacerbated the real estate bubble and faciliated the mortage crisis (personally, I don’t think there was much active responsibility as much as a passive failure to act, but I’ll let you have this). The complex web of CDS’s forming the backbone of what Jon has been calling the Shadow Banking System are entirely free from any kind of government influence. Your position seems to be to accept this, but to lay the blame at the feet of the government for causing the mortgage crisis which ignited the CDS web.
    Again, this doesn’t fly. If you fill your house with canisters of gasoline, then you can of cause put some of the blame on the guy who carelessly lights up a cigarette when it goes up in flames, but it wouldn’t do to place all of the blame at his feet. Similarly, the fact that the mortgage crisis sparked off this creditstorm doesn’t mean that all the blame for it lies at the feet of those responsible for it (even assuming that the government could take sole responsibility). Only seriously pro-active financial regulators could have prevented the relatively new CDS instruments spinning out of control in the way they have, and it seems that such pro-active regulation is at odds with your free market philosophy.

  54. Pete Wolf says:

    I know I’m kind of jumping on the Milena-bashing bandwagon here, but I find it impossible to resist pointing out some errors in reasoning.

    Milena – In your response to Jesse on what is acceptable in a free market, you seem to be getting confused between the causal and the normative (the difference between ‘will’ and ‘ought’).
    Jesse’s point wasn’t that Libertarians such as yourself were automatically in favor of fraud. Of course, like most people, you think it ought not to happen this way. The problem is that you haven’t explained how your free market ideology translates this ‘ought’ into a ‘will’, i.e., you haven’t explained how a more free market system would have actually _caused_ the economic actors to behave differently.

    The second point is about the whole CDS issue. True, some government policy might have exacerbated the real estate bubble and faciliated the mortage crisis (personally, I don’t think there was much active responsibility as much as a passive failure to act, but I’ll let you have this). The complex web of CDS’s forming the backbone of what Jon has been calling the Shadow Banking System are entirely free from any kind of government influence. Your position seems to be to accept this, but to lay the blame at the feet of the government for causing the mortgage crisis which ignited the CDS web.
    Again, this doesn’t fly. If you fill your house with canisters of gasoline, then you can of cause put some of the blame on the guy who carelessly lights up a cigarette when it goes up in flames, but it wouldn’t do to place all of the blame at his feet. Similarly, the fact that the mortgage crisis sparked off this creditstorm doesn’t mean that all the blame for it lies at the feet of those responsible for it (even assuming that the government could take sole responsibility). Only seriously pro-active financial regulators could have prevented the relatively new CDS instruments spinning out of control in the way they have, and it seems that such pro-active regulation is at odds with your free market philosophy.

  55. Dan says:

    By the way, the Xanax tent is now open. Repeat, the Xanax tent is now open. I’m heading over myself.

  56. Dan says:

    By the way, the Xanax tent is now open. Repeat, the Xanax tent is now open. I’m heading over myself.

  57. Don says:

    Free markets work: when mistakes occur the market corrects itself from it’s errors and grow from there. Unfortunately that error can be so grievous as to completely take down an entire system. A new system can then be built up after the collapse of the old one sure, but what about the dead?
    It’s nature, right? The strongest will survive, screw the rest.
    Many a creature became extinct – without the help of man – because it didn’t “regulate” itself (by eating all of it’s food supply etc) but that is fine because LIFE went on (not the extinct creatures life but LIFE).
    Is it for us to protect life and if so ALL life, or just life?
    Free markets work but they leave a lot of death and misery in their wake. Is that what we want?
    Just wondering.

  58. Don says:

    Free markets work: when mistakes occur the market corrects itself from it’s errors and grow from there. Unfortunately that error can be so grievous as to completely take down an entire system. A new system can then be built up after the collapse of the old one sure, but what about the dead?
    It’s nature, right? The strongest will survive, screw the rest.
    Many a creature became extinct – without the help of man – because it didn’t “regulate” itself (by eating all of it’s food supply etc) but that is fine because LIFE went on (not the extinct creatures life but LIFE).
    Is it for us to protect life and if so ALL life, or just life?
    Free markets work but they leave a lot of death and misery in their wake. Is that what we want?
    Just wondering.

  59. Don says:

    Free markets work: when mistakes occur the market corrects itself from it’s errors and grow from there. Unfortunately that error can be so grievous as to completely take down an entire system. A new system can then be built up after the collapse of the old one sure, but what about the dead?
    It’s nature, right? The strongest will survive, screw the rest.
    Many a creature became extinct – without the help of man – because it didn’t “regulate” itself (by eating all of it’s food supply etc) but that is fine because LIFE went on (not the extinct creatures life but LIFE).
    Is it for us to protect life and if so ALL life, or just life?
    Free markets work but they leave a lot of death and misery in their wake. Is that what we want?
    Just wondering.

  60. Dan says:

    So, any comments on the Treasury decision late on Friday to start buying ownership in US banks? They snuck yet another major decision in on the weekend. Democracy at work.

    And yet another sign that things are unraveling and they’re lurching around in panic mode.

  61. Dan says:

    So, any comments on the Treasury decision late on Friday to start buying ownership in US banks? They snuck yet another major decision in on the weekend. Democracy at work.

    And yet another sign that things are unraveling and they’re lurching around in panic mode.

  62. Jesse C says:

    Seth, I agree. The best regulations (or laws period) are those that are simple and easy to understand. The US tax code is perfect example. I doubt there is a single person who actually understands how it all works. How is that beneficial to society? There are so many exemptions, exceptions, credits, loopholes, and deductions (plus all the rules change for federal vs. state and state vs. state) that I strongly suspect that everyone messes up on their taxes at least once in their life and never realizes it.

    Milena,

    Okay, on mortgages. The lack of restrictions I was referring to was on the government side. We just saw what happened when we leave the decisions about who to lend to up to the market, it ends in disaster. The lure of profits lead mortgage companies to make terrible decisions which has now lead to the complete collapse of the lending market.

    What is a AAA rating? Is that something the government should be setting or something that is up to the individual companies? If the rating companies are defining what a AAA bond is, then there isn’t necessarily any fraud in rating something AAA. Obviously you might not trust one company’s AAA vs. another’s, but that is what the free market is about. Fraud only really exists when there are regulations prohibiting certain types of behavior.

    “Furthermore, all regulation is not created equal. Some regulation is good, other kinds are bad. Yes, that does require ferreting out which is which, in particular which kinds can work with the free market, and which can work against it, or distort it and even encourage fraud!”

    Again, you completely fail to qualify what constitutes good or bad regulation. You admit that there is such a thing as good regulation, but you then go on to say later that you oppose almost all regulation. You’re essentially trying to having it both ways. I think at some level you recognize that a lack of regulation is a problem, but you’re so committed to your ideology you can’t bring yourself to accept that.

    I read the article you linked. About what I’d expect from someone from CATO. One of the more useless think-tanks around. I’m not going to waste time taking apart the entire thing, but a couple key points.

    “Mark to Market” wasn’t the problem. The problem was that lots of these so-called good assets were basically worthless. Lehmans just unwound for less than 10 cents on the dollar. Sure, Lehman could have kept them on their books at full value Level 3 assets if we didn’t have mark to market, but that wouldn’t have made them any more financially solvent. I find it laughable than anyone who claims to believe in markets thinks that “Mark to Market” accounting is bad. The only value an asset has is what someone will pay for it or what someone will lend you against those assets. If no one will buy your assets or lend you money, then your assets are worthless. That is basic market dynamics. To argue we should suspend them basically means you don’t think markets are good at valuing assets and that companies should be allowed to make up their own values for their assets.

    On the leverage issue.The only investment banks that failed were the ones allowed to suspend the restrictions on leveraging. It is not that they lacked a commercial banking base, it was that they were leveraged 50:1 on their assets. If they had been a commercial bank AND been that leveraged, they still would have failed and would have just brought down the FDIC with them as well. The only reason the commercial banks are solvent enough to acquire them is BECAUSE they were not allowed to leverage themselves. So your precious author is disingenuously trying to have it both ways. But the truth remains that the only banks still standing, are the ones whose leverage-levels were regulated by the government.

    I think private property is the worst possible decision for commons. At that point, they cease to be commons. I don’t want my right to breath clean air to be subject to corporate bidding. Communal goods are about moral responsibilities, and corporations are not moral organizations. They are profit-generating organizations and there is nothing wrong with them. But putting profit-generating organizations in charge of moral goods and the results will be dismal.

    I completely miss the point of your car examples. I’m not really sure what amazing future car development plans are being stifled. There are almost no requirements on new cars being built in this country, except the ridiculous CAFE standards. Car makers have been able to build whatever sorts of cars they want and so, witness the glut of SUV’s from the American car makers. I don’t think legislators should tell automakers what sort of cars they should make. I think they should provide significant financial benefits to companies who make more efficient cars (be they ethanol, diesel, flexfuel, battery-powered, hydrogen, etc.) and penalize consumers who buy inefficient cars. And make the company benefits competitive. The company with the highest sale volumes of efficient cars gets the biggest tax breaks (or maybe the companies who sell the highest percentage of efficient cars, but that is easier to game). So it is up to the companies to make cars that consumers want to buy. And consumers are encouraged to not buy inefficient cars (or they pay a ridiculous premium to get them). It is not a command economy, but rather a market with externalities factored in. The government is setting a global price (in terms of tax incentives) on how much people are willing to pay to lower emission and fight global warming.

    Dan,

    I think this is actually a really positive development. The US is following the lead of Great Britain in this, and this is what a lot of the smart people were recommending from the beginning. Equity stakes are good and help to recapitalize the banks as well. Which I do not trust Paulson completely, I feel he is taking something of an FDR approach to this. Throw a lot of of stuff at the wall and see what sticks. Considering how hard it is to figure out how to fix massive financial problems, we need to be flexible in our approaches. While you could look at it as an example of cluelessness, I think it is just a symptom of the situation being too complex to figure out quickly. With that said, I do think Paulson should have tried this from the beginning. I am not sold on him guiding us through this crisis.

  63. Jesse C says:

    Seth, I agree. The best regulations (or laws period) are those that are simple and easy to understand. The US tax code is perfect example. I doubt there is a single person who actually understands how it all works. How is that beneficial to society? There are so many exemptions, exceptions, credits, loopholes, and deductions (plus all the rules change for federal vs. state and state vs. state) that I strongly suspect that everyone messes up on their taxes at least once in their life and never realizes it.

    Milena,

    Okay, on mortgages. The lack of restrictions I was referring to was on the government side. We just saw what happened when we leave the decisions about who to lend to up to the market, it ends in disaster. The lure of profits lead mortgage companies to make terrible decisions which has now lead to the complete collapse of the lending market.

    What is a AAA rating? Is that something the government should be setting or something that is up to the individual companies? If the rating companies are defining what a AAA bond is, then there isn’t necessarily any fraud in rating something AAA. Obviously you might not trust one company’s AAA vs. another’s, but that is what the free market is about. Fraud only really exists when there are regulations prohibiting certain types of behavior.

    “Furthermore, all regulation is not created equal. Some regulation is good, other kinds are bad. Yes, that does require ferreting out which is which, in particular which kinds can work with the free market, and which can work against it, or distort it and even encourage fraud!”

    Again, you completely fail to qualify what constitutes good or bad regulation. You admit that there is such a thing as good regulation, but you then go on to say later that you oppose almost all regulation. You’re essentially trying to having it both ways. I think at some level you recognize that a lack of regulation is a problem, but you’re so committed to your ideology you can’t bring yourself to accept that.

    I read the article you linked. About what I’d expect from someone from CATO. One of the more useless think-tanks around. I’m not going to waste time taking apart the entire thing, but a couple key points.

    “Mark to Market” wasn’t the problem. The problem was that lots of these so-called good assets were basically worthless. Lehmans just unwound for less than 10 cents on the dollar. Sure, Lehman could have kept them on their books at full value Level 3 assets if we didn’t have mark to market, but that wouldn’t have made them any more financially solvent. I find it laughable than anyone who claims to believe in markets thinks that “Mark to Market” accounting is bad. The only value an asset has is what someone will pay for it or what someone will lend you against those assets. If no one will buy your assets or lend you money, then your assets are worthless. That is basic market dynamics. To argue we should suspend them basically means you don’t think markets are good at valuing assets and that companies should be allowed to make up their own values for their assets.

    On the leverage issue.The only investment banks that failed were the ones allowed to suspend the restrictions on leveraging. It is not that they lacked a commercial banking base, it was that they were leveraged 50:1 on their assets. If they had been a commercial bank AND been that leveraged, they still would have failed and would have just brought down the FDIC with them as well. The only reason the commercial banks are solvent enough to acquire them is BECAUSE they were not allowed to leverage themselves. So your precious author is disingenuously trying to have it both ways. But the truth remains that the only banks still standing, are the ones whose leverage-levels were regulated by the government.

    I think private property is the worst possible decision for commons. At that point, they cease to be commons. I don’t want my right to breath clean air to be subject to corporate bidding. Communal goods are about moral responsibilities, and corporations are not moral organizations. They are profit-generating organizations and there is nothing wrong with them. But putting profit-generating organizations in charge of moral goods and the results will be dismal.

    I completely miss the point of your car examples. I’m not really sure what amazing future car development plans are being stifled. There are almost no requirements on new cars being built in this country, except the ridiculous CAFE standards. Car makers have been able to build whatever sorts of cars they want and so, witness the glut of SUV’s from the American car makers. I don’t think legislators should tell automakers what sort of cars they should make. I think they should provide significant financial benefits to companies who make more efficient cars (be they ethanol, diesel, flexfuel, battery-powered, hydrogen, etc.) and penalize consumers who buy inefficient cars. And make the company benefits competitive. The company with the highest sale volumes of efficient cars gets the biggest tax breaks (or maybe the companies who sell the highest percentage of efficient cars, but that is easier to game). So it is up to the companies to make cars that consumers want to buy. And consumers are encouraged to not buy inefficient cars (or they pay a ridiculous premium to get them). It is not a command economy, but rather a market with externalities factored in. The government is setting a global price (in terms of tax incentives) on how much people are willing to pay to lower emission and fight global warming.

    Dan,

    I think this is actually a really positive development. The US is following the lead of Great Britain in this, and this is what a lot of the smart people were recommending from the beginning. Equity stakes are good and help to recapitalize the banks as well. Which I do not trust Paulson completely, I feel he is taking something of an FDR approach to this. Throw a lot of of stuff at the wall and see what sticks. Considering how hard it is to figure out how to fix massive financial problems, we need to be flexible in our approaches. While you could look at it as an example of cluelessness, I think it is just a symptom of the situation being too complex to figure out quickly. With that said, I do think Paulson should have tried this from the beginning. I am not sold on him guiding us through this crisis.

  64. Greg G says:

    There is also lying, cheating, fraud, error, best-intentions, etc. happening in every system and at every level. Whatever theory or model we come up with has to continue to deal with those very real, practical inputs. Any model that doesn’t protect the crack-baby and the investment banker, equally?, is just unworkable theory.

    It’s all a series of chaotic systems bumping into each other keeping each other honest.

  65. Greg G says:

    There is also lying, cheating, fraud, error, best-intentions, etc. happening in every system and at every level. Whatever theory or model we come up with has to continue to deal with those very real, practical inputs. Any model that doesn’t protect the crack-baby and the investment banker, equally?, is just unworkable theory.

    It’s all a series of chaotic systems bumping into each other keeping each other honest.

  66. len says:

    Not chaotic in the sense of stochastic. They are noisy systems therefore tunable and filterable. It’s second order controls with faulty third order filters. Not really hard to understand this.

    If by bump you mean, hidden couplers, yes, there are likely business rules in conflict, but it seems the problem is much simpler if you take out the political BS.

    You can’t fix greed unless you apply behavioral sciene, and you can get that affect without going after individuals. You can tune it out of the system by filtering the value of the transaction. That’s done at the system or organizational level. You have no choice there but to pursue legislative reform.

    Then it is a matter of verification. If you want transparency, you define a set of open interfaces and message transactions for the banking systems designed to expose outward facing exchanges of value-laden instruments (XML messages. See EBXML).

    Then you apply business rules for bounds or constraint-tests. See Schematron.

    If you want a solution, step away and look at the rules and authorities over the transactions, the business instruments.

    Explicitly, if you put the politics aside and examine it coldly, overvalued assets were used as collateral. That transactions are well-formed but invalid because the feed back into the coupled values. It is as if you fed an organic system pure sugar.

    You might say, our economic systems have full blown adult onset type II diabetes.

    A computer scientist will yawn at this discourse, wait until the shouting stops, and then ask questions that reveal the business rules.

    The last challenge is authority. Who has the right to inspect and change the business rules and the constraints of the value ranges?

    That puts you back at the conflicts among the hierarchical political systems from individual, local, state and federal organizations.

    Cast that back into Jon’s New Federalism Model. Frankly I think it’s a crock because it will cause the economic manifold to become lumpy creating local gaps in coverage annealed at the federal level. Tuning here is critical.

    Unless Federal standards pre-empt State standards for these transactions, you will have a weak confederation of states. I’m resisting historical comparisons here because they color the perception of the model with emotional baggage unnecessary for predicting the results.

  67. len says:

    Not chaotic in the sense of stochastic. They are noisy systems therefore tunable and filterable. It’s second order controls with faulty third order filters. Not really hard to understand this.

    If by bump you mean, hidden couplers, yes, there are likely business rules in conflict, but it seems the problem is much simpler if you take out the political BS.

    You can’t fix greed unless you apply behavioral sciene, and you can get that affect without going after individuals. You can tune it out of the system by filtering the value of the transaction. That’s done at the system or organizational level. You have no choice there but to pursue legislative reform.

    Then it is a matter of verification. If you want transparency, you define a set of open interfaces and message transactions for the banking systems designed to expose outward facing exchanges of value-laden instruments (XML messages. See EBXML).

    Then you apply business rules for bounds or constraint-tests. See Schematron.

    If you want a solution, step away and look at the rules and authorities over the transactions, the business instruments.

    Explicitly, if you put the politics aside and examine it coldly, overvalued assets were used as collateral. That transactions are well-formed but invalid because the feed back into the coupled values. It is as if you fed an organic system pure sugar.

    You might say, our economic systems have full blown adult onset type II diabetes.

    A computer scientist will yawn at this discourse, wait until the shouting stops, and then ask questions that reveal the business rules.

    The last challenge is authority. Who has the right to inspect and change the business rules and the constraints of the value ranges?

    That puts you back at the conflicts among the hierarchical political systems from individual, local, state and federal organizations.

    Cast that back into Jon’s New Federalism Model. Frankly I think it’s a crock because it will cause the economic manifold to become lumpy creating local gaps in coverage annealed at the federal level. Tuning here is critical.

    Unless Federal standards pre-empt State standards for these transactions, you will have a weak confederation of states. I’m resisting historical comparisons here because they color the perception of the model with emotional baggage unnecessary for predicting the results.

  68. Jon Taplin says:

    Len- I really appreciate your critique of the question of Regulation and the New Federalism. I know this is the trickiest part of the idea. I think you agree that on things like designing k-12 education plans there might be real innovation if we devolved the decisions to the state or city level.

    But regulation is problematic. I have used the California auto emmisions battle as my example. California represents 22% of the domestic auto market. If it had the right to set it’s own higher smog standards, all car companies would comply because of our market power. Obviously, Alabama does not have the same market power.

    So the question then becomes, if a progressive group of states want to make laws that go beyond a Federal statute, how do we deal with that? Now this all may be somewhat moot after Nov. 4, if Obama wins and has a 60 seat majority in the Senate. Then some of my fears of living in a Tom Delay World will be mitigated.

  69. Jon Taplin says:

    Len- I really appreciate your critique of the question of Regulation and the New Federalism. I know this is the trickiest part of the idea. I think you agree that on things like designing k-12 education plans there might be real innovation if we devolved the decisions to the state or city level.

    But regulation is problematic. I have used the California auto emmisions battle as my example. California represents 22% of the domestic auto market. If it had the right to set it’s own higher smog standards, all car companies would comply because of our market power. Obviously, Alabama does not have the same market power.

    So the question then becomes, if a progressive group of states want to make laws that go beyond a Federal statute, how do we deal with that? Now this all may be somewhat moot after Nov. 4, if Obama wins and has a 60 seat majority in the Senate. Then some of my fears of living in a Tom Delay World will be mitigated.

  70. bernard says:

    JT.

    I agree with you 100% . The other factor is that you cant sell freedom at gun point … there is something really wrong with this… B

  71. bernard says:

    JT.

    I agree with you 100% . The other factor is that you cant sell freedom at gun point … there is something really wrong with this… B

  72. bernard says:

    JT.

    I agree with you 100% . The other factor is that you cant sell freedom at gun point … there is something really wrong with this… B

  73. len says:

    We have the Mercedes plant, but I agree, that the model is not one specifically of weakening the Federal power but creating a self-adjusting dynamic system. California’s market power is also a reason it needs tougher emission laws because it has more cars. If one left out the local environmental factors, it would be a simple formula where more cars create more emissions. California is defending its own consumption by demanding higher restrictions.

    Alabama has Mercedes, Toyota, etc. manufacturing here. If you wanted a tighter loop, you’d route your emissions to our restrictions on local product manufacturing. Realistically, the Federal government is the place to do that, but structures aside, the model that I think could make a dramatic difference would be one that coupled the values measured to the controls in a way that the system became self-adjusting.

    We have the technology to modify the behaviors. We need a model that we can trust.

    The taxation problem is different. In the New Bear Flag paper, you suggest that more taxes be kept under local control. It’s a popular position but it does expose one weakness of States rights approaches. In Alabama, exactly four cities make up the largest part of the tax base. If we didn’t use a distribution formula that pushes some of that back to the lower income base counties, the local education systems among others would collapse in a single budget cycle.

    At this time we have to recognize the problems of the rust belt states and others dependent on manufacturing who are the losers in the digital economy and work out the revitalization efforts. Further, we need a way to do that which doesn’t recreate the same problems of the revitalization efforts in housing that led to the subprimes. The problem was once set, the CRA had no means to dynamically tune it back to balance. This is why I come again to the third order controls.

    Our models should be self-regulating dynamic models. How to do that? I understand these abstractly but my knowledge stops there. I’m not an economist.

  74. len says:

    We have the Mercedes plant, but I agree, that the model is not one specifically of weakening the Federal power but creating a self-adjusting dynamic system. California’s market power is also a reason it needs tougher emission laws because it has more cars. If one left out the local environmental factors, it would be a simple formula where more cars create more emissions. California is defending its own consumption by demanding higher restrictions.

    Alabama has Mercedes, Toyota, etc. manufacturing here. If you wanted a tighter loop, you’d route your emissions to our restrictions on local product manufacturing. Realistically, the Federal government is the place to do that, but structures aside, the model that I think could make a dramatic difference would be one that coupled the values measured to the controls in a way that the system became self-adjusting.

    We have the technology to modify the behaviors. We need a model that we can trust.

    The taxation problem is different. In the New Bear Flag paper, you suggest that more taxes be kept under local control. It’s a popular position but it does expose one weakness of States rights approaches. In Alabama, exactly four cities make up the largest part of the tax base. If we didn’t use a distribution formula that pushes some of that back to the lower income base counties, the local education systems among others would collapse in a single budget cycle.

    At this time we have to recognize the problems of the rust belt states and others dependent on manufacturing who are the losers in the digital economy and work out the revitalization efforts. Further, we need a way to do that which doesn’t recreate the same problems of the revitalization efforts in housing that led to the subprimes. The problem was once set, the CRA had no means to dynamically tune it back to balance. This is why I come again to the third order controls.

    Our models should be self-regulating dynamic models. How to do that? I understand these abstractly but my knowledge stops there. I’m not an economist.

  75. @Jon – I’m not raising straw men. Re: Lehman – show evidence of fraud and then try those who are guilty, that is how courts work. I have no objections.

    The only aspect you mention that I agree with is raising the gas tax to curb consumption. (@Jesse – here’s an example of the good vs. bad regulation. While I philosophically oppose regulation, I realistically accept it’s here to stay, and attempt to discern the types of regulation that are going to be most effective, efficient, and least costly to administrate.) The reality is, the mileage standards don’t work, the technology doesn’t actually reduce consumption overall, even if on a per car output they do. Since the CAFE standards were introduced, consumption of oil has increased overall. The best thing to effectively discourage consumption (for those who think it’s necessary) is a gas tax.

    @Dan – I disagree with you up until this, “Especially if you get to rate the value of the CDOs that implies that you’re insuring a pool of only young, healthy 20 year olds when in fact you’re insuring a whole bunch of people in their 80’s.” The ratings and the under-lying assets were the problem, not the vehicles themselves.

    @Rick – You say, “Using Zimbabwe as any kind of example of anything other than ruin is just nuts.” No it’s not. Ignoring a statistic because it occurred in Zimbabwe is irrational. My original point stands: private property, in this case (doesn’t matter the country, I had to mention it because that’s where elephants happen to live), led to an increase in the number of an endangered species over time, indicating that when someone is a steward to their land, they care more about its condition.

    I’m saddened anyone concerned about the environment wants to ignore this.

    “As far as I’m concerned, we do own the property when it comes to the water we all share in common, the air we breathe in common, and even the sights we see in common. The air on my acre is not independent from that next door. The water table, poisoned by whomever, is the commons, not the private dump. And private ownership rights will not bring back a dead child.” Being concerned, as far as you are, doesn’t lead to people taking care of property. In fact, you highlight the sad tragedy of the commons perfectly. When people own something in common, it is far less likely to be kept up. Without protection of property rights, it is difficult to prevent someone from dumping. If you owned the river that a plant was located off of, you would be able to keep them from dumping.

    You say, “You imagine the deck to be fairly shuffled and that the rights of one individual are going to be equal to the rights of a large corporation under the eyes of the law.” Never said that and don’t believe that. I don’t imagine the deck is fairly shuffled. I accept that it’s not. But everyone gets a fair shot at playing their cards, no matter what the outcome.

    Listen, I’m a woman scraping by like most of the people in this country, so I’m not speaking from privilege. Life is terribly unfair, some people lose. Some people die. But at least give everyone equal opportunity. Far more people die under socialism than capitalism. Free men are not equal, equal men are not free. If you show me a place where all men are equal and “cannot take advantage of each other,” all that means is that the group in charge is far more powerful and there is a chasm in classes.

    Just look at Cambodia under Khmer Rouge. 2 million dead in 4 years. But hey, at least everyone was treated equally, right?

    @Pete Wolf – I’m not confused.

  76. @Jon – I’m not raising straw men. Re: Lehman – show evidence of fraud and then try those who are guilty, that is how courts work. I have no objections.

    The only aspect you mention that I agree with is raising the gas tax to curb consumption. (@Jesse – here’s an example of the good vs. bad regulation. While I philosophically oppose regulation, I realistically accept it’s here to stay, and attempt to discern the types of regulation that are going to be most effective, efficient, and least costly to administrate.) The reality is, the mileage standards don’t work, the technology doesn’t actually reduce consumption overall, even if on a per car output they do. Since the CAFE standards were introduced, consumption of oil has increased overall. The best thing to effectively discourage consumption (for those who think it’s necessary) is a gas tax.

    @Dan – I disagree with you up until this, “Especially if you get to rate the value of the CDOs that implies that you’re insuring a pool of only young, healthy 20 year olds when in fact you’re insuring a whole bunch of people in their 80’s.” The ratings and the under-lying assets were the problem, not the vehicles themselves.

    @Rick – You say, “Using Zimbabwe as any kind of example of anything other than ruin is just nuts.” No it’s not. Ignoring a statistic because it occurred in Zimbabwe is irrational. My original point stands: private property, in this case (doesn’t matter the country, I had to mention it because that’s where elephants happen to live), led to an increase in the number of an endangered species over time, indicating that when someone is a steward to their land, they care more about its condition.

    I’m saddened anyone concerned about the environment wants to ignore this.

    “As far as I’m concerned, we do own the property when it comes to the water we all share in common, the air we breathe in common, and even the sights we see in common. The air on my acre is not independent from that next door. The water table, poisoned by whomever, is the commons, not the private dump. And private ownership rights will not bring back a dead child.” Being concerned, as far as you are, doesn’t lead to people taking care of property. In fact, you highlight the sad tragedy of the commons perfectly. When people own something in common, it is far less likely to be kept up. Without protection of property rights, it is difficult to prevent someone from dumping. If you owned the river that a plant was located off of, you would be able to keep them from dumping.

    You say, “You imagine the deck to be fairly shuffled and that the rights of one individual are going to be equal to the rights of a large corporation under the eyes of the law.” Never said that and don’t believe that. I don’t imagine the deck is fairly shuffled. I accept that it’s not. But everyone gets a fair shot at playing their cards, no matter what the outcome.

    Listen, I’m a woman scraping by like most of the people in this country, so I’m not speaking from privilege. Life is terribly unfair, some people lose. Some people die. But at least give everyone equal opportunity. Far more people die under socialism than capitalism. Free men are not equal, equal men are not free. If you show me a place where all men are equal and “cannot take advantage of each other,” all that means is that the group in charge is far more powerful and there is a chasm in classes.

    Just look at Cambodia under Khmer Rouge. 2 million dead in 4 years. But hey, at least everyone was treated equally, right?

    @Pete Wolf – I’m not confused.

  77. @Jesse –

    Re: AAA ratings. Does government backing deserve a AAA?

    You say, “Again, you completely fail to qualify what constitutes good or bad regulation.” I never intended to, so I didn’t fail to do so. If you are asking me to, I’m happy to offer my thoughts.

    You say, “You’re essentially trying to having it both ways.” Nope. I’m not trying to have it both ways, but I do depart from some libertarians because I do believe in things like collecting a flat tax, for example. That is an example of “good regulation” because it doesn’t single out a group for a harsher tax, everyone is treated equally. (Though I think anyone making under $40K should have zero tax, and the entry levels should have a graded introduction, so those making $40,001 aren’t blindsided the year they make a dollar too much. Something like 5%, then maybe 10% at $50,K, and 15% for $60K and over across the board. Furthermore, I’m not an idiot. I realize that most people call for regulation, which I accept, and therefore have the ability to discern between a variety of regulations, some are better than others.

    You also say, “I think at some level you recognize that a lack of regulation is a problem, but you’re so committed to your ideology you can’t bring yourself to accept that.” I think it’s funny that people who do not know me, nor have they had more than a brief encounter on a blog will psycho-analyze me. But I can see how you came to that conclusion. The word “regulation” needs some clear definition if we are going to understand each other. Do I believe in Rule of Law based on equal rights and protections of them? Yes. Do I believe in government regulations that favor certain groups over others, redistribute wealth, etc.? No. I think you could call the former “regulation” as well, and in that regard, I support that kind of “regulation” or Rule of Law. Furthermore, that poses no internal conflict. One is holistic, the other atomistic.

    Re: Mark-to-Market. Fair enough. Worthless assets were the problem.

    Re: leverage. I think the point is that if they had a base, they wouldn’t have been that leveraged. But what grabbed me about your comment was: there were I-banks that didn’t fail?? What’s their ticker? : )

    You say, “I think private property is the worst possible decision for commons. At that point, they cease to be commons. I don’t want my right to breath clean air to be subject to corporate bidding. Communal goods are about moral responsibilities, and corporations are not moral organizations.” They do cease to be commons, which is the point. Otherwise people are free to ruin and exploit it. There is so much evidence to show that private property rights protect endangered land, animals, lead to reduced pollution, and better stewardship I shouldn’t have to spell it out. Do you trash the things you own? Probably not. You care for them.

    You say, “But putting profit-generating organizations in charge of moral goods and the results will be dismal.” Try pitching your thesis to these successful companies: Patagonia. REI. Domini Funds. Whole Foods. Gaiam. American Apparel. And those are just the ones I can think of off the top of my head. Google “social investing” “green companies” “climate change strategies” etc. And you will see companies jumping on the green bandwagon. The effect of supply and demand (free market works, who knew!) creates incentives for companies to supply what consumers demand. Consumers want enviro-friendly products…they are getting them increasingly.

    Re: auto industry. Do you work for an auto-maker? If you do, perhaps you know more than me. At least we agree the CAFE standards haven’t helped. But there are considerable “amazing developments” (that you mention) that cannot be fully developed. For example, let’s say a way to run cars on hydrogen looked promising, but the government says, “Develop corn-based fuels and systems.” Do you think much R&D is going to go into the new technology when they will be fined, jailed, or shut down for not pursuing the government-mandated technology standards?

    You say, “I think they should provide significant financial benefits to companies who make more efficient cars (be they ethanol, diesel, flexfuel, battery-powered, hydrogen, etc.) and penalize consumers who buy inefficient cars.” Consumers will reward those who make the best cars by buying them, the government doesn’t have to. But your next plan is even better, penalize people like me who can’t afford a Prius or Volt by government mandate. Anyways, I’m going to do better: getting rid of my car altogether.

  78. @Jesse –

    Re: AAA ratings. Does government backing deserve a AAA?

    You say, “Again, you completely fail to qualify what constitutes good or bad regulation.” I never intended to, so I didn’t fail to do so. If you are asking me to, I’m happy to offer my thoughts.

    You say, “You’re essentially trying to having it both ways.” Nope. I’m not trying to have it both ways, but I do depart from some libertarians because I do believe in things like collecting a flat tax, for example. That is an example of “good regulation” because it doesn’t single out a group for a harsher tax, everyone is treated equally. (Though I think anyone making under $40K should have zero tax, and the entry levels should have a graded introduction, so those making $40,001 aren’t blindsided the year they make a dollar too much. Something like 5%, then maybe 10% at $50,K, and 15% for $60K and over across the board. Furthermore, I’m not an idiot. I realize that most people call for regulation, which I accept, and therefore have the ability to discern between a variety of regulations, some are better than others.

    You also say, “I think at some level you recognize that a lack of regulation is a problem, but you’re so committed to your ideology you can’t bring yourself to accept that.” I think it’s funny that people who do not know me, nor have they had more than a brief encounter on a blog will psycho-analyze me. But I can see how you came to that conclusion. The word “regulation” needs some clear definition if we are going to understand each other. Do I believe in Rule of Law based on equal rights and protections of them? Yes. Do I believe in government regulations that favor certain groups over others, redistribute wealth, etc.? No. I think you could call the former “regulation” as well, and in that regard, I support that kind of “regulation” or Rule of Law. Furthermore, that poses no internal conflict. One is holistic, the other atomistic.

    Re: Mark-to-Market. Fair enough. Worthless assets were the problem.

    Re: leverage. I think the point is that if they had a base, they wouldn’t have been that leveraged. But what grabbed me about your comment was: there were I-banks that didn’t fail?? What’s their ticker? : )

    You say, “I think private property is the worst possible decision for commons. At that point, they cease to be commons. I don’t want my right to breath clean air to be subject to corporate bidding. Communal goods are about moral responsibilities, and corporations are not moral organizations.” They do cease to be commons, which is the point. Otherwise people are free to ruin and exploit it. There is so much evidence to show that private property rights protect endangered land, animals, lead to reduced pollution, and better stewardship I shouldn’t have to spell it out. Do you trash the things you own? Probably not. You care for them.

    You say, “But putting profit-generating organizations in charge of moral goods and the results will be dismal.” Try pitching your thesis to these successful companies: Patagonia. REI. Domini Funds. Whole Foods. Gaiam. American Apparel. And those are just the ones I can think of off the top of my head. Google “social investing” “green companies” “climate change strategies” etc. And you will see companies jumping on the green bandwagon. The effect of supply and demand (free market works, who knew!) creates incentives for companies to supply what consumers demand. Consumers want enviro-friendly products…they are getting them increasingly.

    Re: auto industry. Do you work for an auto-maker? If you do, perhaps you know more than me. At least we agree the CAFE standards haven’t helped. But there are considerable “amazing developments” (that you mention) that cannot be fully developed. For example, let’s say a way to run cars on hydrogen looked promising, but the government says, “Develop corn-based fuels and systems.” Do you think much R&D is going to go into the new technology when they will be fined, jailed, or shut down for not pursuing the government-mandated technology standards?

    You say, “I think they should provide significant financial benefits to companies who make more efficient cars (be they ethanol, diesel, flexfuel, battery-powered, hydrogen, etc.) and penalize consumers who buy inefficient cars.” Consumers will reward those who make the best cars by buying them, the government doesn’t have to. But your next plan is even better, penalize people like me who can’t afford a Prius or Volt by government mandate. Anyways, I’m going to do better: getting rid of my car altogether.

  79. Greg G says:

    @douglas – in your earlier post you said:

    …today was the bottom or close to it–anyone with the courage to buy now will see out sized returns in the next month…

    Here’s a quote from “MCR” on the rgemonitor blog:

    There is no bottom until there is CAPITULATION. Today’s volatility was anything but CAPITULATION. It looks to me like the violent, last-gasp throes before death which I have seen before in real life.

    Capitulation is when the market hits a bottom and just stays there…for days and weeks. When there are no signs of struggle or life. No heartbeat. No thrashing.

    Personally, I have no idea, but what do you think about this idea of capitulation… not valid or have we just seen it?

  80. Greg G says:

    @douglas – in your earlier post you said:

    …today was the bottom or close to it–anyone with the courage to buy now will see out sized returns in the next month…

    Here’s a quote from “MCR” on the rgemonitor blog:

    There is no bottom until there is CAPITULATION. Today’s volatility was anything but CAPITULATION. It looks to me like the violent, last-gasp throes before death which I have seen before in real life.

    Capitulation is when the market hits a bottom and just stays there…for days and weeks. When there are no signs of struggle or life. No heartbeat. No thrashing.

    Personally, I have no idea, but what do you think about this idea of capitulation… not valid or have we just seen it?

  81. len says:

    @m:

    “Free men are not equal, equal men are not free. ”

    Polarities are not resolved; they are managed.

    Scalars. (interpolators are good here).

    And thanks for being the one who provides algorithms for her rules instead of only competing classes. More math; less Spy vs Spy.

    Imagine a free online game that matched a model of our economies (many). Instead of argument in English, a dynamic model where you can enter the values you think work best, and see if it evolves.

    An economy is not unlike Spore.

    If the models are faithful, what works in the game is likely to work in meatspace.

  82. len says:

    @m:

    “Free men are not equal, equal men are not free. ”

    Polarities are not resolved; they are managed.

    Scalars. (interpolators are good here).

    And thanks for being the one who provides algorithms for her rules instead of only competing classes. More math; less Spy vs Spy.

    Imagine a free online game that matched a model of our economies (many). Instead of argument in English, a dynamic model where you can enter the values you think work best, and see if it evolves.

    An economy is not unlike Spore.

    If the models are faithful, what works in the game is likely to work in meatspace.

  83. Ptrk says:

    Jon,

    Long time no post–I was shooting on location in beautiful New Mexico and didn’t have the time. Thank you for your wonderful blog though–when I only had a few minutes a day to keep up with the news this site came in handy.

    This doesn’t have too much to do with the conversation at hand in the comments, but moreso the original post. I saw a very disturbing graphic supposedly from Credit Suisse while reading http://www.creditslips.org/creditslips/2007/12/is-this-just-a.html

    It seems that while we’re almost through the subprime debacle, we’re heading into another pile of toxicity over the next few years. So called Alt-A mortgages and Option ARMs are valued about the same as the subprime markets, and will really just begin to kick in mid-2009.

    From what I understand, Alt-A mortgages allows for negative amortization–people can pay less than the interest accrued and increase the principle each month. The option ARMs (adjustible rate mortgages) have low rates for a term, and then jump to much higher rates later on. Also, the option ARMs were given to people with credit rating just surpassing that of subprime. Neither of these can be assumed to be very reliable–they were murky loans in the first place, and with the economy tanking, they are more likely to default.

    Do you think these banks can survive another ~$700 billion in writedowns? Can the US taxpayers afford another $700 billion? I find this all very disturbing…

    Thoughts?

  84. Ptrk says:

    Jon,

    Long time no post–I was shooting on location in beautiful New Mexico and didn’t have the time. Thank you for your wonderful blog though–when I only had a few minutes a day to keep up with the news this site came in handy.

    This doesn’t have too much to do with the conversation at hand in the comments, but moreso the original post. I saw a very disturbing graphic supposedly from Credit Suisse while reading http://www.creditslips.org/creditslips/2007/12/is-this-just-a.html

    It seems that while we’re almost through the subprime debacle, we’re heading into another pile of toxicity over the next few years. So called Alt-A mortgages and Option ARMs are valued about the same as the subprime markets, and will really just begin to kick in mid-2009.

    From what I understand, Alt-A mortgages allows for negative amortization–people can pay less than the interest accrued and increase the principle each month. The option ARMs (adjustible rate mortgages) have low rates for a term, and then jump to much higher rates later on. Also, the option ARMs were given to people with credit rating just surpassing that of subprime. Neither of these can be assumed to be very reliable–they were murky loans in the first place, and with the economy tanking, they are more likely to default.

    Do you think these banks can survive another ~$700 billion in writedowns? Can the US taxpayers afford another $700 billion? I find this all very disturbing…

    Thoughts?

  85. Ptrk says:

    Jon,

    Long time no post–I was shooting on location in beautiful New Mexico and didn’t have the time. Thank you for your wonderful blog though–when I only had a few minutes a day to keep up with the news this site came in handy.

    This doesn’t have too much to do with the conversation at hand in the comments, but moreso the original post. I saw a very disturbing graphic supposedly from Credit Suisse while reading http://www.creditslips.org/creditslips/2007/12/is-this-just-a.html

    It seems that while we’re almost through the subprime debacle, we’re heading into another pile of toxicity over the next few years. So called Alt-A mortgages and Option ARMs are valued about the same as the subprime markets, and will really just begin to kick in mid-2009.

    From what I understand, Alt-A mortgages allows for negative amortization–people can pay less than the interest accrued and increase the principle each month. The option ARMs (adjustible rate mortgages) have low rates for a term, and then jump to much higher rates later on. Also, the option ARMs were given to people with credit rating just surpassing that of subprime. Neither of these can be assumed to be very reliable–they were murky loans in the first place, and with the economy tanking, they are more likely to default.

    Do you think these banks can survive another ~$700 billion in writedowns? Can the US taxpayers afford another $700 billion? I find this all very disturbing…

    Thoughts?

  86. Jesse C says:

    Len,

    If you haven’t already, it is worth checking out “Origins of Wealth” by Eric D. Beinhocker. It is a great survey of current research into building better models. Models that learn from the behavioral and game sciences, and also from biological systems. I highly recommend it.

    Milena,

    Sorry about the delay. My weekend was eaten building render racks.

    I’m not a fan of regressive taxes like the flat tax. You probably already figured that out. I’m being gradually won over to the idea of a global consumption tax. Basically, the more you spend, the more you pay in taxes, with the first x,000 a year being exempt (a floating target, designed to prevent people on the low end of the income scale from being hurt). Plus an income tax on people earning over half-a-million or so.

    I like the fact that it rewards the virtuous (people who actually save and invest) while discouraging excess consumption. However, it would be quite difficult to collect. It would require all transactions to be wired into a nationwide network (which essentially they are already with credit cards) that would be used to determine how much people had spent. You’d have to be really careful to preserve privacy and the like.

    But given that something like that doesn’t appear to be in the offering, I have no real quarrels with a graduated income tax. And I have no problems raising the tax rates on the higher brackets rather significantly. But I do think we should do away with stuff like the AMT and a lot of the other complexity. And the marriage penalty, which hasn’t made sense in decades.

    In regards to the concept of ‘regulation’, you say that you are in favor of things that guarantee equal rights but nothing that favors one group over another. So I am curious how you feel about things like education. Education is a major determiner in how successful people are in their lives, both in quality of jobs that are attainable, but also in prestige and networking. Obviously going to better secondary schools makes it much easier to get into a good college, which can have profound impacts on earning. But which secondary schools you can go to is in many ways determined before you’re born by your parents income level. While there are occasionally people who can rise from the bottom to the top, it doesn’t happen often (and is happening a lot less in the US these days). To me, that isn’t fair. I’m more than happy supporting increased taxes on the wealthy to provide comprehensive education for everyone. That is more fair than taxing everyone the same.

    On leveraging. That is missing the point. The big-5 were capitalized, even without a deposit base. But they were leveraged at 50:1. If BoA or JPM had been leveraged at 50:1, the deposit base would not have saved them. It was not the actually dollar amounts of capitalization that brought down the big-5, but the ratio. And there are lots of I-Banks left: http://en.wikipedia.org/wiki/List_of_investment_banks

    Lets talk about Whole Foods. I live 4 blocks from one and shop there. Whole Foods isn’t about saving the environment. They’re about selling a lifestyle in an attempt to make a profit. They are a publicly traded company: their first responsibility is earning that profit. The fact that they are selling a lifestyle that appeals to a certain group of the upper-crust enables them to be more environmentally responsible. And to a certain extent, they need to spend more on good causes than other grocery stores because some part of their customer base will vanish if people don’t think they are pure enough. But if you think that Whole Foods is doing more than the minimum amount of extra stuff to keep their revenues up, you’re just deluding themselves. They are a public company, they want to make money. Being ‘green’ is a great way for them to keep revenues up, but they are only just green enough to keep ahead of other stores. I do not ascribe any sorts of moral values to them and neither should you. Corporations are not moral entities. There is balance between profits and doing good. And corporations always fall on the profits side. In fact, corporations are legally required to fall on that side or they are liable to shareholder lawsuits.

    The effects of supply and demand have also led to lots of green-washing from companies. Companies which package goods which are not environmentally friendly in ways that make consumers think they are environmentally friendly. Having consumers think you’re ‘green’ is worth ‘green’, but if it is cheaper to essentially lie about it then companies will do that. Companies will always for the least they possibly can and still make money. That is not the spirit that I want governing the commons.

    CAFE. Cafe worked great when it was actually raising the requirements. Up till about 88 or 90. After that the required Fuel Economy essentially flat-lined (thanks to lobbying from Detriot) and its effectiveness plunged. Also the fact that trucks and SUVs were essentially exempt from the parts of the regulations that had teeth made them essentially worthless in the last decade. I never said that the government should tell car-companies what sort of cars to require. I think they should say something like, “we’ll forgive the entire America tax liability of the company that sells the most vehicles getting more than 40mpg.” Obviously not quite that simplistic, but something along those lines. Don’t tell them HOW to do it, but provide the incentive for them to do it.

    Consumers have all sorts of reasons for buying cars. What is the definition of the ‘best car?’ For many it might a flashy status symbol or a fuck-off sized SUV. For others it might be cost or safety. Fuel-efficiency and the prevention of climate change facts into some peoples decisions, but it is not the core deciding factor for many people. My point is if the government makes it the concern of car companies, then it stops being a concern for individuals. If your choice is between a 40MGP SUV and a 55MGP sedan, rather than a 12MGP SUV and a 25MGP sedan, it isn’t an issue any more.

    Here is the problem with the market-only approach. If people were truly rationale, as in traditional models of markets, then they could factor in the long-term effects of buying a fuel-efficient car from now until the end of their life and also into their descendants lives, assuming they assign monetary value to their children’s survival. But no one thinks like that and even if they did, those calculations are impossible to make. So the market is massively imperfect and will often significantly deviate from its predicted results. Most importantly, any market transaction which involves humans will bias the short-term to the detriment of the long-term.

    To address your complaint about the cost of cars. Prius’s are a bit expensive. But a majority of the fuel efficient cars sold in this country aren’t hybrids or anything fancy. They are the smaller, lighter economy and compact cars, which are the cheapest cars on the market. No one makes a big deal out of them because they aren’t sexy, but there is no correlation between higher MPG and higher car costs, unless you’re aiming for a status symbol Prius. And the goal is not to punish people for buying what the market provides. But if you’re choosing to buy a 8mpg Hummer or Ferrari, then you should pay for the external costs that that purchase imposes on everyone else.

  87. Jesse C says:

    Len,

    If you haven’t already, it is worth checking out “Origins of Wealth” by Eric D. Beinhocker. It is a great survey of current research into building better models. Models that learn from the behavioral and game sciences, and also from biological systems. I highly recommend it.

    Milena,

    Sorry about the delay. My weekend was eaten building render racks.

    I’m not a fan of regressive taxes like the flat tax. You probably already figured that out. I’m being gradually won over to the idea of a global consumption tax. Basically, the more you spend, the more you pay in taxes, with the first x,000 a year being exempt (a floating target, designed to prevent people on the low end of the income scale from being hurt). Plus an income tax on people earning over half-a-million or so.

    I like the fact that it rewards the virtuous (people who actually save and invest) while discouraging excess consumption. However, it would be quite difficult to collect. It would require all transactions to be wired into a nationwide network (which essentially they are already with credit cards) that would be used to determine how much people had spent. You’d have to be really careful to preserve privacy and the like.

    But given that something like that doesn’t appear to be in the offering, I have no real quarrels with a graduated income tax. And I have no problems raising the tax rates on the higher brackets rather significantly. But I do think we should do away with stuff like the AMT and a lot of the other complexity. And the marriage penalty, which hasn’t made sense in decades.

    In regards to the concept of ‘regulation’, you say that you are in favor of things that guarantee equal rights but nothing that favors one group over another. So I am curious how you feel about things like education. Education is a major determiner in how successful people are in their lives, both in quality of jobs that are attainable, but also in prestige and networking. Obviously going to better secondary schools makes it much easier to get into a good college, which can have profound impacts on earning. But which secondary schools you can go to is in many ways determined before you’re born by your parents income level. While there are occasionally people who can rise from the bottom to the top, it doesn’t happen often (and is happening a lot less in the US these days). To me, that isn’t fair. I’m more than happy supporting increased taxes on the wealthy to provide comprehensive education for everyone. That is more fair than taxing everyone the same.

    On leveraging. That is missing the point. The big-5 were capitalized, even without a deposit base. But they were leveraged at 50:1. If BoA or JPM had been leveraged at 50:1, the deposit base would not have saved them. It was not the actually dollar amounts of capitalization that brought down the big-5, but the ratio. And there are lots of I-Banks left: http://en.wikipedia.org/wiki/List_of_investment_banks

    Lets talk about Whole Foods. I live 4 blocks from one and shop there. Whole Foods isn’t about saving the environment. They’re about selling a lifestyle in an attempt to make a profit. They are a publicly traded company: their first responsibility is earning that profit. The fact that they are selling a lifestyle that appeals to a certain group of the upper-crust enables them to be more environmentally responsible. And to a certain extent, they need to spend more on good causes than other grocery stores because some part of their customer base will vanish if people don’t think they are pure enough. But if you think that Whole Foods is doing more than the minimum amount of extra stuff to keep their revenues up, you’re just deluding themselves. They are a public company, they want to make money. Being ‘green’ is a great way for them to keep revenues up, but they are only just green enough to keep ahead of other stores. I do not ascribe any sorts of moral values to them and neither should you. Corporations are not moral entities. There is balance between profits and doing good. And corporations always fall on the profits side. In fact, corporations are legally required to fall on that side or they are liable to shareholder lawsuits.

    The effects of supply and demand have also led to lots of green-washing from companies. Companies which package goods which are not environmentally friendly in ways that make consumers think they are environmentally friendly. Having consumers think you’re ‘green’ is worth ‘green’, but if it is cheaper to essentially lie about it then companies will do that. Companies will always for the least they possibly can and still make money. That is not the spirit that I want governing the commons.

    CAFE. Cafe worked great when it was actually raising the requirements. Up till about 88 or 90. After that the required Fuel Economy essentially flat-lined (thanks to lobbying from Detriot) and its effectiveness plunged. Also the fact that trucks and SUVs were essentially exempt from the parts of the regulations that had teeth made them essentially worthless in the last decade. I never said that the government should tell car-companies what sort of cars to require. I think they should say something like, “we’ll forgive the entire America tax liability of the company that sells the most vehicles getting more than 40mpg.” Obviously not quite that simplistic, but something along those lines. Don’t tell them HOW to do it, but provide the incentive for them to do it.

    Consumers have all sorts of reasons for buying cars. What is the definition of the ‘best car?’ For many it might a flashy status symbol or a fuck-off sized SUV. For others it might be cost or safety. Fuel-efficiency and the prevention of climate change facts into some peoples decisions, but it is not the core deciding factor for many people. My point is if the government makes it the concern of car companies, then it stops being a concern for individuals. If your choice is between a 40MGP SUV and a 55MGP sedan, rather than a 12MGP SUV and a 25MGP sedan, it isn’t an issue any more.

    Here is the problem with the market-only approach. If people were truly rationale, as in traditional models of markets, then they could factor in the long-term effects of buying a fuel-efficient car from now until the end of their life and also into their descendants lives, assuming they assign monetary value to their children’s survival. But no one thinks like that and even if they did, those calculations are impossible to make. So the market is massively imperfect and will often significantly deviate from its predicted results. Most importantly, any market transaction which involves humans will bias the short-term to the detriment of the long-term.

    To address your complaint about the cost of cars. Prius’s are a bit expensive. But a majority of the fuel efficient cars sold in this country aren’t hybrids or anything fancy. They are the smaller, lighter economy and compact cars, which are the cheapest cars on the market. No one makes a big deal out of them because they aren’t sexy, but there is no correlation between higher MPG and higher car costs, unless you’re aiming for a status symbol Prius. And the goal is not to punish people for buying what the market provides. But if you’re choosing to buy a 8mpg Hummer or Ferrari, then you should pay for the external costs that that purchase imposes on everyone else.

  88. Jesse C says:

    Len,

    If you haven’t already, it is worth checking out “Origins of Wealth” by Eric D. Beinhocker. It is a great survey of current research into building better models. Models that learn from the behavioral and game sciences, and also from biological systems. I highly recommend it.

    Milena,

    Sorry about the delay. My weekend was eaten building render racks.

    I’m not a fan of regressive taxes like the flat tax. You probably already figured that out. I’m being gradually won over to the idea of a global consumption tax. Basically, the more you spend, the more you pay in taxes, with the first x,000 a year being exempt (a floating target, designed to prevent people on the low end of the income scale from being hurt). Plus an income tax on people earning over half-a-million or so.

    I like the fact that it rewards the virtuous (people who actually save and invest) while discouraging excess consumption. However, it would be quite difficult to collect. It would require all transactions to be wired into a nationwide network (which essentially they are already with credit cards) that would be used to determine how much people had spent. You’d have to be really careful to preserve privacy and the like.

    But given that something like that doesn’t appear to be in the offering, I have no real quarrels with a graduated income tax. And I have no problems raising the tax rates on the higher brackets rather significantly. But I do think we should do away with stuff like the AMT and a lot of the other complexity. And the marriage penalty, which hasn’t made sense in decades.

    In regards to the concept of ‘regulation’, you say that you are in favor of things that guarantee equal rights but nothing that favors one group over another. So I am curious how you feel about things like education. Education is a major determiner in how successful people are in their lives, both in quality of jobs that are attainable, but also in prestige and networking. Obviously going to better secondary schools makes it much easier to get into a good college, which can have profound impacts on earning. But which secondary schools you can go to is in many ways determined before you’re born by your parents income level. While there are occasionally people who can rise from the bottom to the top, it doesn’t happen often (and is happening a lot less in the US these days). To me, that isn’t fair. I’m more than happy supporting increased taxes on the wealthy to provide comprehensive education for everyone. That is more fair than taxing everyone the same.

    On leveraging. That is missing the point. The big-5 were capitalized, even without a deposit base. But they were leveraged at 50:1. If BoA or JPM had been leveraged at 50:1, the deposit base would not have saved them. It was not the actually dollar amounts of capitalization that brought down the big-5, but the ratio. And there are lots of I-Banks left: http://en.wikipedia.org/wiki/List_of_investment_banks

    Lets talk about Whole Foods. I live 4 blocks from one and shop there. Whole Foods isn’t about saving the environment. They’re about selling a lifestyle in an attempt to make a profit. They are a publicly traded company: their first responsibility is earning that profit. The fact that they are selling a lifestyle that appeals to a certain group of the upper-crust enables them to be more environmentally responsible. And to a certain extent, they need to spend more on good causes than other grocery stores because some part of their customer base will vanish if people don’t think they are pure enough. But if you think that Whole Foods is doing more than the minimum amount of extra stuff to keep their revenues up, you’re just deluding themselves. They are a public company, they want to make money. Being ‘green’ is a great way for them to keep revenues up, but they are only just green enough to keep ahead of other stores. I do not ascribe any sorts of moral values to them and neither should you. Corporations are not moral entities. There is balance between profits and doing good. And corporations always fall on the profits side. In fact, corporations are legally required to fall on that side or they are liable to shareholder lawsuits.

    The effects of supply and demand have also led to lots of green-washing from companies. Companies which package goods which are not environmentally friendly in ways that make consumers think they are environmentally friendly. Having consumers think you’re ‘green’ is worth ‘green’, but if it is cheaper to essentially lie about it then companies will do that. Companies will always for the least they possibly can and still make money. That is not the spirit that I want governing the commons.

    CAFE. Cafe worked great when it was actually raising the requirements. Up till about 88 or 90. After that the required Fuel Economy essentially flat-lined (thanks to lobbying from Detriot) and its effectiveness plunged. Also the fact that trucks and SUVs were essentially exempt from the parts of the regulations that had teeth made them essentially worthless in the last decade. I never said that the government should tell car-companies what sort of cars to require. I think they should say something like, “we’ll forgive the entire America tax liability of the company that sells the most vehicles getting more than 40mpg.” Obviously not quite that simplistic, but something along those lines. Don’t tell them HOW to do it, but provide the incentive for them to do it.

    Consumers have all sorts of reasons for buying cars. What is the definition of the ‘best car?’ For many it might a flashy status symbol or a fuck-off sized SUV. For others it might be cost or safety. Fuel-efficiency and the prevention of climate change facts into some peoples decisions, but it is not the core deciding factor for many people. My point is if the government makes it the concern of car companies, then it stops being a concern for individuals. If your choice is between a 40MGP SUV and a 55MGP sedan, rather than a 12MGP SUV and a 25MGP sedan, it isn’t an issue any more.

    Here is the problem with the market-only approach. If people were truly rationale, as in traditional models of markets, then they could factor in the long-term effects of buying a fuel-efficient car from now until the end of their life and also into their descendants lives, assuming they assign monetary value to their children’s survival. But no one thinks like that and even if they did, those calculations are impossible to make. So the market is massively imperfect and will often significantly deviate from its predicted results. Most importantly, any market transaction which involves humans will bias the short-term to the detriment of the long-term.

    To address your complaint about the cost of cars. Prius’s are a bit expensive. But a majority of the fuel efficient cars sold in this country aren’t hybrids or anything fancy. They are the smaller, lighter economy and compact cars, which are the cheapest cars on the market. No one makes a big deal out of them because they aren’t sexy, but there is no correlation between higher MPG and higher car costs, unless you’re aiming for a status symbol Prius. And the goal is not to punish people for buying what the market provides. But if you’re choosing to buy a 8mpg Hummer or Ferrari, then you should pay for the external costs that that purchase imposes on everyone else.

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