Greenspan Says Mortgages Should Have Been More Regulated

[Pangloss]

And how do you think it got to be so "diversified and flexible"?

[npts2020]

And how do you think it got to be so "diversified and flexible"?

 

Basically by going from an agrarian dependent economy to an industrial dependent economy, which is usually more diversified. We are about to undergo a similar change. Three of the biggest components of our economy are in need of major overhaul, namely defense spending, automobile manufacturing, and financial services. The problem is how far can you leverage the financial service sector to prop up the other two and for how long?

[iNow]

You seem to have forgotten "energy" in your list of the three biggest components of our economy (unless your intent was to overlap that into defense and automotive like a Venn diagram).

[ecoli]

Weren't there business cycles before there was a Fed?

Yes, but as far as I'm aware, the creation of a central bank generally preceeds particularly nasty business cycles. Granted, I haven't seen all the data on this, so definitely don't take my word on that.

 

You guys may also be interested to know that I'm currently plodding through this book which gives an empirical approach to studying business cycles (something that the Austrians didn't like very much, prefering a more philisophical approach).

 

I'm no economist, so this is a hefty read, but the jist is that the author is revising Austrian models of how business cycles are created using a more modern notion of risk.

 

Not saying that this book is 'more correct' than other economists, but he seems to take an appropriate middle ground approach supported by research.

 

What it seems to say is that sometimes the increase in the growth rate of nominal money causes unsustaneable investment, and sometimes causes economic booms, without the bust. However, it is impossible to predict which outcome will come about (because we can't predict which areas will be sustanable or not).

 

It seems to me therefore, that forcing the growth of nominal money for the sake of promoting investment is riskier than its worth. Risk exists naturally in the market, but interest rates set by the market should have a better predictive value than a federal reserve board can. It seems obvious to me that a free market, because market prices take into account all known information in the market. Surely, the free market is a better predictor of risk than Ben Bernanke (even though he has a fancy pHd in economics).

 

 

I understand your concern and it's not an entirely unreasonable one -- we do have to remember that too much regulation is a bad thing. But that's exactly what Obama has been talking about, for example -- the importance of balance in regulation, finding the right amount of it. If the left takes that to mean "socialism, yay!" and the right takes that to mean "socialism, oh no!", is that really our problem? Let's take the man at his word.

 

My two bits on it, anyway.

 

My problem is not with regulation, in general. Markets need to be regulated so entrepenuers can enter and exit markets freely, and well to protect consumers from direct fraud, etc.

 

However, my problem with Obama, is that he's ready and willing to pen new regulations that give government more oversight, without considering how government policy of increase regulation can hurt markets.

 

I see this as a kneejerk reaction so politicians can give themselves more power at a time when people are scared about their pocketbooks. We don't consider if bailing out wall street is actually good for long term economic growth.

 

I've seen some editorials of how post-Enron regulation, which forced businesses to value their assets using "fair-value modelling" as opposed to market value. The problem was that fair-value accounting neglected to consider the historic market strength of an asset. So, when the stock market bottomed out, instead of being stabilized by historic strength, prices continued to drop, and those assetts were sold off way below market value to recoup some losses.

 

This was regulation to stop accounting scams, but made the current situation that much worse.

 

Economists and politicians are very bad at predicting market behavior. So creating regulation in response to a regulation seems like a very poor idea. Firstly, we may be creating future problems with current regulation, secondly, we're not considering how things like the Austrian notion of capital theory causes business cycles in the first place.

 

The embrace of neo-Keynesian economics is coming at a time when politicians and their friends can increase their power over the economy, whether it's to stroke their own egos or if there are more malevolent goals in mind, I don't know which.

 

All I know is that, this country is moving in a direction where individual people think they can police and manage trade and markets better than the natural interactions of people engaging in trade. However, aside from protecting basic rights, I think governments are pretty bad at doing this. I don't think the founding fathers really wanted a single person to be able to manage the economy so easily (except Alexander Hamilton, maybe). Even though Bernanke does have to testify in front of congress from time to time, the Fed Reserve Board can set interest rates indepently of what is best or "natural" but to possibly best serve the interest of his banking buddies.

 

I'm not trying to reveal a conspiracy (there is none, I'm sure), but just point out a trend where government politicians are increasing spending, increasing their own authority and decreasing personal economic freedoms by manipulating our economy.

 

So yeah, maybe some economists are disregarding free market principles, but many are not. If you'll notice that you rarely see free market (Chicago, Austrian, etc) economists in positions of high power. That, in an of itself, should tell us that the proper debate is not going on in those high places.

Edited November 1, 2008 by ecoli
multiple post merged

[Pangloss]

Basically by going from an agrarian dependent economy to an industrial dependent economy, which is usually more diversified. We are about to undergo a similar change. Three of the biggest components of our economy are in need of major overhaul, namely defense spending, automobile manufacturing, and financial services. The problem is how far can you leverage the financial service sector to prop up the other two and for how long?

 

You've gone off on a tangent. The reason why the economy is so "diversified and flexible" is because of the enabling aspect of regulation. If that were NOT the case then we would have had a far larger economy far earlier in time. Bear in mind that what happened with the financial crisis has happened before due to lack of regulation, with side-betting on stocks and so forth that contributed to the 1929 collapse. Regulation controlled the market in such a manner as to avoid "tragedy of the commons" scenarios and provide avenues for the kinds of massive gains that ultimately became possible.

 

We understand now that a managed economy is preferable to a controlled economy OR a completely uncontrolled economy. That careful balance between control and freedom is what allows the economy to become "diversified and flexible" without collapsing under its own bad-behavior pressures.

 

That's the answer to my question, not the transition from agrarianism to industrialism, which was completed more than half a century ago.

Edited November 1, 2008 by Pangloss

[ecoli]

Basically by going from an agrarian dependent economy to an industrial dependent economy, which is usually more diversified. We are about to undergo a similar change. Three of the biggest components of our economy are in need of major overhaul, namely defense spending, automobile manufacturing, and financial services. The problem is how far can you leverage the financial service sector to prop up the other two and for how long?

It's interesting that you bring this up. The book I was talking about above also mentioned that in real business cycle theory, sectoral shifts can also be caused by monetary policy and, as a result, business cycles according to the Austrian notion.

 

I'll have to read about that in greater detail to comment further, however.

 

Basically by going from an agrarian dependent economy to an industrial dependent economy, which is usually more diversified. We are about to undergo a similar change. Three of the biggest components of our economy are in need of major overhaul, namely defense spending, automobile manufacturing, and financial services. The problem is how far can you leverage the financial service sector to prop up the other two and for how long?

Here's a somewhat lengthy critique of the causes of the American depression from the austrian standpoint, by Murray Rothbard.

 

http://mises.org/rothbard/agd.pdf

 

It's too long and I don't know enough to comment specific points, I figured I would drop the link though if anyone is interested. (besides, it would probably take the thread way off track).

[npts2020]

Well, a large number of derivitives are mortgage and property value based........need I explain the bearing that has on the discussion at hand? The similarities between financial institution leveraging now and in the 1920,s is pretty amazing to me. Does it bother anyone else that in one financial instrument (derivitives) there is supposedly $500 trillion? That is something like 8 times the annual world GDP, quite a hefty sum of debt I think.

[iNow]

Looks like we should have done more to regulate Bernie Madoff and now also Allen Stanford. While the regulators may have missed the red flags, the absence of regulation would hardly have made the situation any better.

 

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahaUscXNr5wY&refer=home

Clients of Stanford Group were told their funds would be placed mainly in easily sellable financial instruments, monitored by more than 20 analysts and audited by Antiguan regulators, according to the SEC.

 

Instead, the “vast majority” of the portfolio was managed by Stanford himself and James Davis, the chief financial officer of the Antiguan subsidiary, the SEC said.

[npts2020]

One of the problems IMO is that people work pretty hard for their money (in general) but don't realize they have to work almost as hard to do anything worthwhile with it (i.e. take the time to understand exactly what you are investing in instead of giving it to a surrogate).