Now, here is another Nobel prize winning economist writing last September on the financial crisis, Joseph Stiglitz:
"Many seem taken aback by the depth and severity of the current financial turmoil. I was among several economists who saw it coming and warned about the risks.
"There is ample blame to be shared; but the purpose of parsing out blame is to figure out how to make a recurrence less likely.
"President Bush famously said, a little while ago, that the problem is simple: Too many houses were built. Yes, but the answer is too simplistic: Why did that happen?
"One can say the Fed failed twice, both as a regulator and in the conduct of monetary policy. Its flood of liquidity (money made available to borrow at low interest rates) and lax regulations led to a housing bubble. When the bubble broke, the excessively leveraged loans made on the basis of overvalued assets went sour.
"For all the new-fangled financial instruments, this was just another one of those financial crises based on excess leverage, or borrowing, and a pyramid scheme.
"The new "innovations" simply hid the extent of systemic leverage and made the risks less transparent; it is these innovations that have made this collapse so much more dramatic than earlier financial crises. But one needs to push further: Why did the Fed fail?
"First, key regulators like Alan Greenspan didn't really believe in regulation; when the excesses of the financial system were noted, they called for self-regulation -- an oxymoron.
"Second, the macro-economy was in bad shape with the collapse of the tech bubble. The tax cut of 2001 was not designed to stimulate the economy but to give a largesse to the wealthy -- the group that had been doing so well over the last quarter-century.
"The coup d'grace was the Iraq War, which contributed to soaring oil prices. Money that used to be spent on American goods now got diverted abroad. The Fed took seriously its responsibility to keep the economy going.
"It did this by replacing the tech bubble with a new bubble, a housing bubble. Household savings plummeted to zero, to the lowest level since the Great Depression. It managed to sustain the economy, but the way it did it was shortsighted: America was living on borrowed money and borrowed time.
"Finally, at the center of blame must be the financial institutions themselves. They -- and even more their executives -- had incentives that were not well aligned with the needs of our economy and our society.
"They were amply rewarded, presumably for managing risk and allocating capital, which was supposed to improve the efficiency of the economy so much that it justified their generous compensation. But they misallocated capital; they mismanaged risk -- they created risk.
"They did what their incentive structures were designed to do: focusing on short-term profits and encouraging excessive risk-taking.
"This is not the first crisis in our financial system, not the first time that those who believe in free and unregulated markets have come running to the government for bail-outs. There is a pattern here, one that suggests deep systemic problems -- and a variety of solutions:
"1. We need first to correct incentives for executives, reducing the scope for conflicts of interest and improving shareholder information about dilution in share value as a result of stock options. We should mitigate the incentives for excessive risk-taking and the short-term focus that has so long prevailed, for instance, by requiring bonuses to be paid on the basis of, say, five-year returns, rather than annual returns.
"2. Secondly, we need to create a financial product safety commission, to make sure that products bought and sold by banks, pension funds, etc. are safe for "human consumption." Consenting adults should be given great freedom to do whatever they want, but that does not mean they should gamble with other people's money. Some may worry that this may stifle innovation. But that may be a good thing considering the kind of innovation we had -- attempting to subvert accounting and regulations. What we need is more innovation addressing the needs of ordinary Americans, so they can stay in their homes when economic conditions change.
"3. We need to create a financial systems stability commission to take an overview of the entire financial system, recognizing the interrelations among the various parts, and to prevent the excessive systemic leveraging that we have just experienced.
"4. We need to impose other regulations to improve the safety and soundness of our financial system, such as "speed bumps" to limit borrowing. Historically, rapid expansion of lending has been responsible for a large fraction of crises and this crisis is no exception.
"5. We need better consumer protection laws, including laws that prevent predatory lending.
"6. We need better competition laws. The financial institutions have been able to prey on consumers through credit cards partly because of the absence of competition. But even more importantly, we should not be in situations where a firm is "too big to fail." If it is that big, it should be broken up.
"These reforms will not guarantee that we will not have another crisis.
"The ingenuity of those in the financial markets is impressive.
"Eventually, they will figure out how to circumvent whatever regulations are imposed. But these reforms will make another crisis of this kind less likely, and, should it occur, make it less severe than it otherwise would be."
I posed the question. provided my own views, then cited the views of two Nobel Prize winning economists.
Now, if we really want to discuss (and I don't think any of us really want to debate issues so complex we cannot possibly, any of us, truly be certain of how correct our view may be) rather than debate, there is no more pressing or urgent global matter on the table.
Why not put our minds to it in a neutral sort of way -- asking questions, seeking answers?
Originally posted by ScriabinI think the issues highlighted in some of the earlier articles posted which outlined the rise of the indices, also underline a changed market that has been flagged as a casino capitalism. If Casinonomics has indeed become the driver that companies employ to judge their short and long term strategic positions, then what does that say about rational thought and process? No amount of transparency can ultimately burst through the obfuscation and give boardrooms clear guidance as to the best course of action going forward when at every turn their market position and viability no longer is a function of its performance as a company, but is hung in the balance of the markets worst fears fuelled on by the predatory actions of indice betting ghouls who have no other criteria other than the rates in which other indices change. In short choas rules the roost and the good people of gotham are victims to its logic.
I posed the question. provided my own views, then cited the views of two Nobel Prize winning economists.
Now, if we really want to discuss (and I don't think any of us really want to debate issues so complex we cannot possibly, any of us, truly be certain of how correct our view is.....
If perception driven by speculation around the rise and fall of indices can deny an otherwise sound company much needed financing from the banking sector then surely thats where you have to start fixing the problem. The response to that might be there's too much money invested that way already its impossible to unwind that aspect of the market, then all I can posit is an analogy of a surgeon telling their patient that the cancer is inoperable and offer pain management until death overtakes them.
Indices strike me a bit like a professional punter throwing away the form guide choosing instead to use astrological charts and numerological methods to divine winners.
As to the greed thing, I dont see it as greed. I see it as people frantically searching for oportunities to maintain a competitive advantage and evryone else playing catchup when a clear advantage using a particular strategy is found. Its all real time scrambling much like a war on Wall St. The time for introspection and reflection only occurs when a crash happens. Noone has time otherwise to think about it. Its do or die, fortune favoring the brave type of stuff while the bulls are running.
Can regulation ever normalize and flatten out these cycles? Not unless everyone does business through the same umpires' transaction network. Not unless hedging strategies that potentially undermine the value of otherwise sound companies are outlawed, period. Not unless investment returns to the real economy and the derivative markets and all those other wonderfull c** products and all that wonderfull tranching gets firewalled into being a nights entertainment at the casino. The belief that the money generated in fourex markets were the best insurance against market stagnation and downturn due to this high volume band of funds that wrapped the real economy may have outlived its usefullness. When a cray super computer needs 48 hrs to work out the cash flows of a simple cdo then Houston we have trouble.
Originally posted by kmax87we have trouble, indeed.
I think the issues highlighted in some of the earlier articles posted which outlined the rise of the indices, also underline a changed market that has been flagged as a casino capitalism. If Casinonomics has indeed become the driver that companies employ to judge their short and long term strategic positions, then what does that say about rational thought an ...[text shortened]... computer needs 48 hrs to work out the cash flows of a simple cdo then Houston we have trouble.
I was amazed to find out that the Office of Thrift Supervision established an onsite office at AIG -- this means full time government regulators occupy office space at AIG HQ in New York City.
Apparently this wasn't close enough ...
Originally posted by ScriabinWhat an oddly self-absorbed fellow you are. Run this FMF-is-jealous-of-me theory you have past me again.
FMF doesn't engage on the issues, he just gets surly. He never shows he's even got a sense of humor! He's so oversensitive that it is just too hard to refrain from jerking his chain -- he's so easy. He can't or won't make jokes on himself -- He calls me some character out of a TV show I never watched, so I looked it up and so its a "knowitall" character - ...[text shortened]... r -- he's got to be perfect, you know. Seems really insecure -- more than I may be.
Originally posted by FMFhey, can we just drop this whole thing, me vs. you and vice versa? It's old, cold, etc.
What an oddly self-absorbed fellow you are. Run this FMF-is-jealous-of-me theory you have past me again.
I'd rather focus on what Sen. Dodd says and whether he postures theatrically in his hearing today on the AIG collapse. Someone I know well wrote the testimony for one of the witnesses, and I expect that witness to be taken to the woodshed big time for show purposes.
It's strange, disorienting, for often as I pass throught the doors of the (shudder to even write the name) Reagan Building on the way to the food court, I go by a segment of the former Berlin Wall. I recall growing up reading Orwell, reading texts that recounted the Stalin show trials. It's strange because I never until now saw as clearly the complete identity with those show trials that persist down the street from me on Capitol Hill. I mean, Sen. Dodd took money from the head of Countrywide Mortgage for his personal use -- got a special mortgage rate, etc. How much do you want to bet he has no shame and gets all indignant over the failure of regulators to head off the collapse of AIG?
some of the most exculpatory stuff for the witness to which I've referred was taken out of the final testimony at his direction. He won't offer excuses, such as the fact the company lied and concealed its exposure, the fact that the products that brought AIG down were unregulated and Congress knew that, the fact that previous administrations and Mr. Greenspan of sainted memory blessed these derivatives and repeatedly directed regulators to just forget about them, etc.
Nope, because, I suppose, the Justice Dept and the SEC have active, open criminal investigations going -- so some folks are definitely going down -- the regulator, as per usual, must respect the Chinese Wall and avoid treading on DOJ and SEC toes.
So as he sees it, his job is to serve as the cannon fodder for Sen Dodd and let him do his theatrical worst. It might be unpleasant, but it won't result in any tangible harm in all likelihood.
Been witness to that before when a guy I worked for many years ago was called up before then Sen. Alphonse Damato, a most unpleasant extraordinarily sleazy bottom feeder of a Senator. Damato, while in the same party as my guy, nevertheless worked himself up into a red faced ranting lather and my boss had to sit there and take it.
It is just the way the stage play is done. Afterwards, my boss just shrugged it off and we went on with what we had to do as though nothing had happened.
I expect something of the same here today. But one can never be sure, for there is always the possilbility of some real drama unfolding during one of these things.
Originally posted by Sleepyguygoing to try to see it, but these new EPA-issue laptops are designed to prevent us from streaming video -- even if it is a congressional hearing. bandwidth, they say, but I suspect content, more likely.
This hearing is streaming live from C-Span here.
http://www.c-span.org/Watch/C-SPAN3_rm.aspx
Just getting under way now.
Originally posted by ScriabinWould it not be a fair point to concede that had AIG not been as big and widespread, that if a number of different companies had been in competition with AIG and perhaps had not entwined themselves so deeply as AIG did to this underwriting process for declines in the values of underlying securities, that when this all came apart, a failure of AIG would not have had catestrophic consequences for the global financial community?
Fortunately, or not, folks who do not rely on simple-minded, top of the head, ignorant generalizations make laws and implement them. The devil is in the details - but some folks can't be bothered to even scratch the surface. AIG's failure cannot be put simply and make sense. Oversimplification is a form of logical fallacy.
In the case of AIG, it will b ...[text shortened]... r at all. It insults our intelligence to weigh in with such an uneducated, worthless comment.
Is it not fair to suggest a smaller AIG could have fallen and therefore not required a taxpayer funded bailout?
I think the essence to the argument is that when the government competition bureau decides whether mergers between companies should be approved, the question of what happens if this merged giant of a company fails should be a question that is addressed in more detail. The precautionary principle may yet hold value in the modern day system.
Originally posted by uzlessthe result of the hearing was, in part, to point to the need to create a super-regulatory agency to oversee all aspects of "systemically" significant commercial organizations.
Would it not be a fair point to concede that had AIG not been as big and widespread, that if a number of different companies had been in competition with AIG and perhaps had not entwined themselves so deeply as AIG did to this underwriting process for declines in the values of underlying securities, that when this all came apart, a failure of AIG would not ha ...[text shortened]... ressed in more detail. The precautionary principle may yet hold value in the modern day system.
AIG did not become so large simply by mergers and aquisitions -- it launched subsidiaries as well. A lot of conglomerates do that.
So the question may be whether we should allow any enterprise to become systemically significant.
The answer will be -- yes, because not to do so in all probability will be judged an unwarranted restraint of commerce.
Yet, govenment seeks the authority and assumes the responsibility for preventing systemic failure of the sort we're living through.
The answer, really, is in the past: our government adopted bad policies, our regulators failed in their missions due to bad policy direction, our congress has been a waste of time for a long time, and so on.
Anything the congress or this Administration does now is merely to put a bandaid on the wounds now bleeding.
There is probably no fix that will prevent a future event like this, for so long as people behave as they do, they will find a way to circumvent any regulation or legal scheme you can devise in order to do the wrong thing in as spectacularly a fashion as can be.
a lot of companies were in competition with AIG -- but all of them decided to take what only now we look back on and say were unacceptable risks.
well, I've been at this for the 2 hours of the hearing already - I've had a belly full of it for now.
Originally posted by ScriabinYou mean didn't find that hearing encouraging? Jeebus, what a mess.
well, I've been at this for the 2 hours of the hearing already - I've had a belly full of it for now.
That was a lot to take in but four things really stood out to me...
1. The failure of regulators that allowed this debacle was not strictly due to a lack of authority by the regulators. It was instead a lack of knowledge, foresight, coordination, and will by the regulators. As Polakoff bravely admitted, he is the guy who could have done something about it. Interesting that he fell on his sword in that way, but that most of the committee's ire was directed at Kohn and Dinallo.
2. It was clear from Kohn's comments that AIG is now basically an empty husk whose main purpose, as the Fed sees it anyway, is to act as a conduit for transferring taxpayer money to undisclosed third parties. That's not going to stand. The Fed's refusal to divulge the identities of the couterparties is pretty damned scary. What do they know that we don't? And what's going to happen in the markets when it finally comes out?
3. There was some discussion of the rating agencies, but not nearly enough. Their A ratings of those CDO's was, I think, fraud.
4. The Treasury was a no show? WTF? That was weak.
Originally posted by ScriabinI would agree to a large extent with what you've put forth. However, allowing M & A's does have an impact on the future competitive structure of the industry. When a merger occurs, it eliminates any potential for the merged company to create their own subsidiaries. These (hypothetical) subsidiaries would have competed directly against AIG. I view M & A's as lost future competition in the same sense that 3 cells mulitipying every hour will create more cells in the long run than a dish that started out with 3 cells but had 1 cell removed.
the result of the hearing was, in part, to point to the need to create a super-regulatory agency to oversee all aspects of "systemically" significant commercial organizations.
AIG did not become so large simply by mergers and aquisitions -- it launched subsidiaries as well. A lot of conglomerates do that.
So the question may be whether we should allow been at this for the 2 hours of the hearing already - I've had a belly full of it for now.
So the question may be whether we should allow any enterprise to become systemically significant.
The answer will be -- yes, because not to do so in all probability will be judged an unwarranted restraint of commerce
To this i suggest that the result of not restraining commerce when, as you said, humans are not to be trusted in this system, is in fact WARRANTED. I think as proof, we only need to look at at current situation.
Regardless I suppose, is that this is all irrelevant in that it seems unlikely such an event like this will occur again soon in the magnitude that is currently unfolding. Lessons will be learned. But those lessons will no doubt be forgotten in time.