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bean spout
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Big banks are fine if the regulators are on top of everything. Government is the weakness in any system run from top down by the government. That is what we have, and what heavy bank regulation is. It is not a market system, by which individual small bank failures convey information about optimal firm practice, hurting only those who deal with banks that fail, rather than the whole nation. We have a socialized system that now happens to too complex for the government to manage. Krugman's main problem is that he is not a lawyer. He is only an economist, and he is therefore blinkered. Plus he gives too much credit to government with his lefty-liberal bias. This is somewhat excusable since it is equally true that ideological anti-government rhetoric on the right led regulators to drop what the very, very heavy ball they assumed, after letting banking cartelize, and eliminating Glass Steagall so that trading profits could subsidize commercial bank weakness. They have now built incompetent behemoths packed with free-riders.
Demand for the credential has increased, bolstered by government subsidy. Universities are charging what the market will bear.
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The country seems to believe that if we write up a ton of rules, the more the byzantine the better, all that is bad in the world can be prevented. A Deist clockworks. The Emperor's Mechanical Nightingale. We already had all the rules we needed—the Securities Act of 1933. The regulators failed to see that the privatization for resale of a large national insurance scheme for mortgages needed them to set up just a few simple rules for that security type, about loan quality in any resold pool. The complexity of the rules we are constantly writing and adding to, just invites hordes of con artists and manipulation by special interests.
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The difference between rules and discretion, is the difference in role between the judiciary and the executive. In a business context it would be the distinction between the "business model" or the firm or industry's habits or custom, versus actions that are taken. Which might change those habits or customs.
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Friedman suggested a rule to limit what he saw as the growing agency problem of irresponsibility and politicization of the Fed—rising agency self-serving in an unaccountable, too big Government. All rules have to be drafted broadly enough to allow the management enough flexibility to accommodate changing circumstances. Some will be ill drafted, and fail to foresee exceptions. Rules that are too lengthy or mechanical, or seek to control everything in advance, may be well-intentioned but are often unwise. Rules only work when matters are fairly routine and predictable. To me, standards verge onto moral territory, "principles."
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"Why do I rob banks? Because that's where the money is." --Willie Sutton (the original "Slick Willie")
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Taxation enriches the government, which wastes it, not the poor.
Toggle Commented Jul 19, 2012 on Chris Sims on Monetary Policy at Economist's View
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The bad law I am referring to is the exemption from securities law oversight of the entire mortgage backed securities field, a tic that began because mortgage backed securitization was originally an exclusive government racket. By remaining just the same, except privatized, you turned white into black. Government regulators made that "law" with their eyes wide open. Like so much regulatory frou-frou which comprise the gigantic, dysfunctional government and its maddening, competition throttling complexity, it is THAT which must be "deregulated."
Toggle Commented Jul 18, 2012 on Chris Sims on Monetary Policy at Economist's View
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Government gives the banks its easy money rackets. Government has to stop doing this, stop interfering with the market on behalf of Gucci shoed cronies, break up the banks, let them compete, and let them fail. It must also stop the lobbying racket that manufactures "laws" and "rules" in bulk which are nothing but special favors for the few, and start enforcing the BASIC PRINCIPLES of the law of the land. Financial services forced to compete will be cut down to size. It is the very complexity of their regulatory fiefs that props them up while also encouraging their absurdly over-sized compensations based on nothing but the notion of a commission on their government-dictated excessive size. It is this corporate oversize which also makes them unmanageable and protects the captains of these overlarge ships with multitudes of corporate veils. They have evolved now into an aristocratic class that actually feels themselves to be superior and entitled to their cushy, government-granted fiefs.
Toggle Commented Jul 18, 2012 on Chris Sims on Monetary Policy at Economist's View
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Deregulation in general is a good goal. None of the basic securities laws, the simple enforcement of which would have readily prevented all the MBS dark pools which collapsed the economy, were repealed. (Saving, Glass Steagall, whose warnings concerning industry structure and conflicts of interest should have been better heeded before simply abandoning it to the wind.) The government failed to prevent and indeed strongly urged the financial industry to merge and to cartelize, from the 1980s to the present, completely neglecting its legal mandate under the antitrust laws to maintain proper market competition. Most consequentially, the government totally failed to apply the rudimentary securities law of the US, which covers ALL securities, to MBS. A dark pool in the hands of FDR, so they remained forever, even in the hands of the private sector. But this was ALWAYS illegal. What happened was, the regulators INTERVENED with bad regulation—exemption from the securities law. A regulatory exemption IS a regulation, it has the force of law. It is this type of regulation that must be "deregulated" -- bad law, made by lobbying, on the fly, by regulators who are utterly clueless, and captured by their charges. If our government is so incompetent as not to understand the basic tenets of the securities laws, then it is time for some very serious creative destruction to be visited upon them all.
Toggle Commented Jul 18, 2012 on Chris Sims on Monetary Policy at Economist's View
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If you don't think the top execs of very large firms, like big banks, are worth their pay (and I would tend to agree) then you need rules limiting that pay to a ratio to median. Say, 60 to 1, to pick a number out of a hat, rather than the current 531 to 1, which is obscene, itself a clear indicator of market failure. This is a simple rule, justified by the functional public utility status of big banks. The government has allowed the banks to cartelize themselves ever since the 80s and in theory regulates them pervasively except that it is clear that it has little competence to do so. The crony process by which boards deal with managers is not a "free market" process in the roseate sense in which that word "free market" is most commonly used, i.e., as identical to the way the stock market works. The stock market is one kind of market. A one on one negotiation between "friends," overseen by envious government cronies, is something else again. Simple rules for a complex world.
Toggle Commented Jul 18, 2012 on Chris Sims on Monetary Policy at Economist's View
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You get bad law whenever you let idiots write the laws unobserved. There are idiot liberal Democrats, and idiot conservative Republicans. They're ALL for laws that self-deal. The problem of government is the agency problem of economics. Government has forgotten all of the BASIC rules of law -- which have all been pretty much known since the time of the Romans -- to cover it up with their massive Tammany Hall economic twiddlings, all to benefit themselves and their pals. Meaning, the Gucci shoe contingent. Who is in love with itself thinking not that they are dumb schmoes with one single meaningless service that happens to be massively overpriced, due to government-engineered smoke and mirrors, but, actual "masters of the universe."
Toggle Commented Jul 18, 2012 on Chris Sims on Monetary Policy at Economist's View
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The only reason the financial sector is so large, is because government policy and law has chosen to favor that sector. Primarily by allowing it to operate as a cartel. And the cronies of politicians and regulators themselves. Let finance compete for their capital without special protections for some, and the financial industry will right size itself.
Toggle Commented Jul 18, 2012 on Chris Sims on Monetary Policy at Economist's View
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It's not about bad "fiscal policy." (As of today, when we do in fact know more.) It's about bad, existing law. It's about too big, too dysfunctional government acting as an albatross around the economy's neck and not doing its basic job because it has been looked to, to do everything.
Toggle Commented Jul 18, 2012 on Chris Sims on Monetary Policy at Economist's View
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You cannot now bar asset classes from the investments that banks are allowed to invest in. That would only make them more risky. Not less. Allowing banks to mingle what was once their separate functions by bank type, was consciously encouraged by government, beginning in the early 80s, when real estate and "safe" savings and loan banks imploded, due to Volcker's otherwise beneficial inflation-quelling tight money. The only thing you CAN do is to, once again, enforce the antitrust law to diffuse the risk into comprehensible entities. And remove the government guarantee from all large cartelized entities. There no longer IS such a thing as a "safe" asset class, such as government guaranteed mortgages. What is risky is whatever is extremely large. Whatever is large by definition creates big damage when it goes down. You need diffusion of risk through enforcement of antitrust law and the maintainence of a diverse, diffuse economy of relatively small entities.
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FDR created the problem when he invented Fannie to securitize mortgages in the 30s. Though at the time it was a brilliant solution to the problem of the Great Depression, and loosened finance for the masses and propped up the banks. These props should have been gradually withdrawn over the years. Completely. Because they were not, they restructured banks into volume sales operations entirely dependent upon scale, and powerful enough to exempt themselves from antitrust enforcement (as well as able to capture their regulators and dictate their regulation, the design of which our legislators are not intellectually up to arranging properly). The problem with the big banks is the problem of socialism. The banks and the government are one. This is not a natural or real economic system, it is a highly rigged, artificial, constructed one. Our democracy now lacks the (centered) intellectual or ethical capacity with the power to take charge and to change this system to put it on a footing that will be sound and capitalist long term. We are suffering the flaws of both democracy (the inability to get anything coherent done) and communism (overcentralization).
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Vuk, regulators can't run things. No bank can be too big to fail. The regulators are all faking it. Changes to the rules brings instability. You have to have simple, fair rules, a level playing field, capitalist competition, meaning small diverse banks, not big banks posing as "self-insured" out of diversity, which is really only conglomerate unmanageability, and NO GOVERNMENT GUARANTEES.
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Thanks! I wrote another summary at www.dotcommie.com if you're interested.
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That too.
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Adam Smith wasn't wrong about the invisible hand. But neither was Keynes when he said "the market can stay irrational longer than you can stay solvent." The Chicago School is and continues to be a great movement. But its tagline slogans have been misused by its epigones, who turned it into a fad. Efficient Market Hypothesis (EMH) is absolutely true -- but only stated as what it is, a theoretical, mathematical abstraction. The epigones wanted to treat it instead as a magic formula, an empirical "fact" to be presumed into every situation. EMH by definition presupposes zero friction. It does not deal with realities, it assumes them all away. But the epigones saw it as "system" -- a "rule" or a "presumption" or worse, "philosophical/political principle," universally applicable in all situations and all market situations. Most disastrously, they turned it into an all-around prescription of public policy! The slow-moving heavily legalized nature of the elements that built this crisis meant that no one was noticing the tautology of assuming one's own benighted conclusions. This is a conceptual error that has occurred quite a lot in the history of philosophy and the philosophy of science. Swift and Voltaire made mockery of it, among others. Even Bernard de Mandeville's Fable of the Bees must be understood as a work of irony and wit, not of literal-minded policy prescription! Unfortunately, we are governed by blockheads. And Big Finance gets their license to steal from this crew, who are their good buddies in politics. Of course in the real world in which everyone actually lives, there are many situations in which one or another market does not obey the efficiency or accurate pricing rule. In fact, mostly it does the precise opposite -- particularly when, as is most often the case, the market is rigged, opaque, and/or non-liquid. In those conditions, of course, prices are NOT accurate nor are markets efficient. Markets controlled by monopolies or cartels are also not "efficient" markets. Markets operating under opaque, ill-constructed rules also are not. Mortgage backed securities required legal rules to be enforced that assured loan quality in all loan packagings. It got none. The regulators found it in their interest to go along with the current trend for assuming "the market" (personified by the financial sector) could always be just assumed virtuous and correct. This was simple stupidity, that cannot be laid at the feet of the Austrians or the Chicago School. But it can be laid at the feet of their hyper-politicized, foaming at the mouth epigones, and the grinning lobbyists who love pulling one over on them for fun and profit. We should really revive the stocks for this crew, so that they might be pelted with rotten tomatoes, jeered at, and urinated upon by passersby. MBS were only safe back in the olden days when the only packager was the government, operating under wooden loan quality rules, guaranteed by the taxpayer. Not when packaged by Wall St. craftily exempted from all securities law scrutiny as to the nature of that packaging. Securities law is the system we created in the 1930's as a substitute for anti-fraud principles of the common law. Corporate veils make it too hard to litigate simple fraud cases against those packages we call corporate enterprises, so we set up a casino game to trade shares them. This game makes as sure as we humanly can, that all material facts are made transparent under Generally Accepted Accounting Principles, and is filled with as many stops and incentives to do due diligence and act in good faith, using things like arms' length transactions by well informed principals or their fiduciary agents, as is humanly possible. It is also assumed to work only if swiftly enforced by the strict operation of well enforced, technical rules. This today has gone all to hell in a handbasket, because the regulators are largely asleep, corrupt, and looking out for their second act in the private sector. That is because the entire society, having profited by this intelligently constructed system, has gone slack. The biggest sense of entitlement however is displayed by those putative rocket scientist masters of the universe, Big Finance.
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Derivatives failed to signal the markets that something was rotten in Denmark in credit default risk. A few smart value type hedge fund traders had figured out the debacle in mortgage securitization that loomed. Through their activity they tipped off broker dealers privy to their accounts. There was no proper market signalling, because this private activity wasn't reported out, or exchange traded, or monitored under any well thought through regulatory mechanics. So, the broad public was deprived of the data. A handful of privileged insiders were able to use it exclusively, and secretively, for their own private advantage. In the classic sense this is market manipulation, insider trading on non-public information — because the regulators who purport to keep our markets honest and transparent, having not been commanded by Congress to do anything about it, at least, not since the 1930's, had ignored it.
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Lobbyists gamed the many accreted banking, securities, insurance, commodities and housing laws. These had grown overcomplicated over the years, stovepiping their related agencies into fiefdoms that by nature cannot cooperate. Industry has learned how to play agencies adroitly off against one another. By law agencies operate under their own rulebooks, rules that often are inconsistent—because Congress operates on impulse, and takes little care with the coherence of its lawmaking or its dictates. Wall Street knew mortgage securitization and resales in their hands were regulable securities. Unlike the regulators, it was in a position to understand the economic implications in full. Wall St exploited the popularity of deregulation to avoid its duty under the broad principles of the securities laws, to submit mortgage securitizations created for resale to deep regulatory scrutiny and independent rulemaking. (Deregulation is a critique of legal clutter, not a blank check to ignore settled principles of law.) In Wall St.'s hands, securitization is enterprise packaging, but of a sort that lacks any real arms-length buy-sell transactional protection, nor the entity diversity inherent in companies that seek out a sales agent-investment banker to represent them to issue new shares to the public. Wall St. walked off with Fannie and Freddie's government process, a golden goose — for Wall St. it was fees as far as the eye could see — automatic enterprise creation and share resales at the touch of a button. The regulators should have caught this and exercised their broad legal mandate under the securities laws. But they have little capacity — little budget to do their existing petit busy-work, and little ability or insight into what they must do to protect the public when new conditions put the old rules in a new light. The ethic of the post Depression and the pre-WWII years is also gone. Securitization was a post-Depression FDR national development program for the government to provide American homeowners, via the banks, national mortgage insurance. It was government monopoly, and a big subsidy to both homeowners and the banks. But it created a situation in which the banks post 1936 operated under simple mechanical rules. Loan resale was made infinitely easier with the new USG guarantee. Banks turned from sharp, competitive, numerous lenders with high standards of loan quality, into bureaucrats. They also grew very large, goosed by computers, and into cartels, with the diminution of interest in or understanding of antitrust enforcement. Banks now crave and rely upon government subsidy, a teat it has suckled since 1936. It has learned how to game sentiments on the Hill and the stovepiped complexity of the regulatory agency system. Banks other than hedge funds can be viewed as nothing but an extension of government.
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