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.
“Gordon Brown (What a comeback!) “- You must be bloody joking!!!
“Gordon Brown (What a comeback!) “- You must be bloody joking!!!
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.
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.
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.
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.
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?
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?
She’s waiting until all the golden parachutists are proven murderers.
She’s waiting until all the golden parachutists are proven murderers.
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.
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.
Milena is in the bunker and can’t come out to play right now.
Milena is in the bunker and can’t come out to play right now.
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.
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.
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–
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–
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.
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.
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.
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.
@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.
@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.
@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.
@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.
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.
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.
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.
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.
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.
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.
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.
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.
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?
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?
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).
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).
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”.
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”.
Fun debate. Jesse:
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.
Fun debate. Jesse:
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.
@Jesse: Right on, especially about the externalities you mentioned. Absent explicit defense, the tragedy of the commons will continue unabated.
@Jesse: Right on, especially about the externalities you mentioned. Absent explicit defense, the tragedy of the commons will continue unabated.
@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.
@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.
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.
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.
“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.
“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.