Government, Not Free Market, Caused Subprime Crisis

[BBSA]

You will still have asymmetrical information.

Please explain, I'm not sure I follow you.

 

[BrrIan]

Freddie Mac and Fannie Mae are not government, they were at most parastatals created by Roosevelt toward the end of the great depression.

Correct, they are for profit businesses.

It was not the lack of banking regulations but government involvement in the market that caused the problem.

The government's only major involvement was interest rates. Lending to high risk clients was driven primarily by greed. Of course there are now attempts to blame the government.

Socialism is a horror. It is unjust, inhuman, cruel, and irrational. It is one of the greatest evils ever inflicted on humankind. Even in its 'soft' form, it kills human beings, saps social and individual vitality, and ultimately destroys the very things that make us human.

So just like capitalism then.

Please explain, I'm not sure I follow you.

No amount of financial education can overcome asymmetrical information. So you think you're making a sound investment based on the information available, but really the financial institution has a vast team dedicated to separating you from your money, typically by siphoning it off in a manner that is not obvious. More savvy people get the more complicated will become the products to maintain the asymmetry.

 

[unsecluded]

Arthur

Quote:
Originally Posted by unsecluded View Post
hehe...That's called, dare i say it, Socialism...

but without Capitalism, there would be no more 'war on terror'

True. We'd all be slaves to the State, living in our padded prisons, with token pocket money to spend on titillating the nerves. And freedom would be dead.

Excuse me before i'm misunderstood, i was actually being sarcsatic in that post. There are issues with Socialism but on the whole it's not that bad, and probably better than Capitalism. What people generally here are debating towards is that we probably need something that integrates.
So i actually dont have a problem with 'socialism', sorry for the misunderstanding, i was trying to emphasize the taboo of mentioning a word like it...

Socialism is a horror. It is unjust, inhuman, cruel, and irrational. It is one of the greatest evils ever inflicted on humankind. Even in its 'soft' form, it kills human beings, saps social and individual vitality, and ultimately destroys the very things that make us human.

I think that's the US definition
In fact that description could very well fit 'Capitalism'

/hands out Che Guevara hats

 

[unsecluded]

BrrIan

Quote:

Originally Posted by Arthur View Post
Socialism is a horror. It is unjust, inhuman, cruel, and irrational. It is one of the greatest evils ever inflicted on humankind. Even in its 'soft' form, it kills human beings, saps social and individual vitality, and ultimately destroys the very things that make us human.

So just like capitalism then.

unsecluded

Quote:

Socialism is a horror. It is unjust, inhuman, cruel, and irrational. It is one of the greatest evils ever inflicted on humankind. Even in its 'soft' form, it kills human beings, saps social and individual vitality, and ultimately destroys the very things that make us human.

I think that's the US definition
In fact that description could very well fit 'Capitalism'

d@mn u Brrian
you beat me to it

 

[Xarog]

As stated it was NOT the free market that created the mess.

I think you missed this post, BBSA.

To blame the current crisis on a lack of regulation is not only inaccurate, it's dishonest. The true failure of the meltdown in the financial sector lies with the institutions of government that are now attempting to regulate themselves out of the mess they made of the economy. After years of interest rate manipulation, the government's micromanagers of the economy-the Federal Reserve and the Treasury Department-are now gaining greater power through the subprime crisis they helped to create.

That micromanagement with additional regulation would have also prevented the crisis, though.

The problem is that the financial industry lobbied to get those very regulations (glass-steagal act, anyone?) repealed. They knew what they were doing and wanted to do. I think thus it's fair to give part of the blame to them. (And when many if not most of the people running the fed/treasury and the monetary policies come from the banking background, then the whole picture starts to become downright sinister.)

 

[BBSA]

No amount of financial education can overcome asymmetrical information. So you think you're making a sound investment based on the information available, but really the financial institution has a vast team dedicated to separating you from your money, typically by siphoning it off in a manner that is not obvious. More savvy people get the more complicated will become the products to maintain the asymmetry.

Execly, if you had financial intelligence you would not invest with financial institution

 

[BBSA]

Correct, they are for profit businesses.

Not really

Freddie Mac and Fannie Mae is government sponsored enterprise.

Created by government as a socialised mechanisms for financing houses.

 

[Xarog]

Because it seems like my point has been ignored :

http://en.wikipedia.org/wiki/Glass-Steagall_Act

Repeal of the Act

See also Depository Institutions Deregulation and Monetary Control Act passed in 1980, the Garn-St. Germain Depository Institutions Act deregulating the Savings and Loan industry in 1982, and the Gramm-Leach-Bliley Act in 1999.

The bill that ultimately repealed the Act was introduced in the Senate by Phil Gramm (R-TX) and in the House of Representatives by James Leach (R-IA) in 1999. The bills were passed by a 54-44 vote along party lines with Republican support in the Senate[9] and by a 343-86 vote in the House of Representatives[10]. Nov 4, 1999: After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bipartisan bill resolving the differences was passed in the Senate 90-8-1 and in the House: 362-57-15. Without forcing a veto vote, this bipartisan, veto proof legislation was signed into law by President Bill Clinton on November 12, 1999. [11]

The banking industry had been seeking the repeal of Glass-Steagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act.[12]

The argument for preserving Glass-Steagall (as written in 1987):

1. Conflicts of interest characterize the granting of credit – lending – and the use of credit – investing – by the same entity, which led to abuses that originally produced the Act

2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.

3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).

The argument against preserving the Act (as written in 1987):

1. Depository institutions will now operate in “deregulated” financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.

2. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.

3. The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them – by diversification.

4. In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation.[13]


The repeal enabled commercial lenders such as Citigroup, the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities. [14]

(my bold)

Repeal of the Glass-Steagall act (that regulated the activities of financial corporations) was a fundamental condition for the propagation of the current crisis we are facing. Without repealing the act, the financial institutions that had behaved so irresponsibly would not have been ABLE to do so in the first place.

But the lobbyists were greedy and felt they were missing an opportunity to make a fat wad of cash by doing very little, so they lobbied until they got what they wanted. Then they went about with their dodgy behaviour that should frankly see most of them chucked in jail for fraud.

 

[BBSA]

Because it seems like my point has been ignored :

http://en.wikipedia.org/wiki/Glass-Steagall_Act


(my bold)

Repeal of the Glass-Steagall act (that regulated the activities of financial corporations) was a fundamental condition for the propagation of the current crisis we are facing. Without repealing the act, the financial institutions that had behaved so irresponsibly would not have been ABLE to do so in the first place.

But the lobbyists were greedy and felt they were missing an opportunity to make a fat wad of cash by doing very little, so they lobbied until they got what they wanted. Then they went about with their dodgy behaviour that should frankly see most of them chucked in jail for fraud.

The SIV's was not really the problem. The Governments interference in the free market created the housing market bubble. The SIV's was fueled by the housing market bubble. Once the bubble bust the SIV's also tanked with a ripple effect through the whole financial system. Yes there was problems with the SIV's but the market would have sorted that out.

The bottom line is that if the Government did not interfere in the free market in the first place we would not have the housing bubble which created all the problems.

 

[Xarog]

The SIV's was not really the problem. The Governments interference in the free market created the housing market bubble. The SIV's was fueled by the housing market bubble. Once the bubble bust the SIV's also tanked with a ripple effect through the whole financial system. Yes there was problems with the SIV's but the market would have sorted that out.

The bottom line is that if the Government did not interfere in the free market in the first place we would not have the housing bubble which created all the problems.

You can't, in the same thread, bemoan the fact that the Dollar has depreceated 96% in the last 100 years AND then complain about low interest loans (high interest loans are what spark inflation, among other things). It's highly hypocritical and a fatal flaw in your argument.

 

[BBSA]

You can't, in the same thread, bemoan the fact that the Dollar has depreceated 96% in the last 100 years AND then complain about low interest loans (high interest loans are what spark inflation, among other things). It's highly hypocritical and a fatal flaw in your argument.

When did I bemoan the fact that the Dollar has depreceated 96%.

 

[Xarog]

The simple fact that money is created with interest attached to it is the fundamental flaw in the US Banking System as this interest can only be repaid with more money creation, thus debasing the currency (money becomes worth less over time) to the point that the US Dollar has lost 96% of it's value since the inception of the Federal Reserve in 1913.

Post #6 of this thread.

 

[BBSA]

Post #6 of this thread.

No man. The author of that quote was BTTB.

 

[Vrotappel]

Just out of curiosity, what do you think socialism is?

misery equally shared.

Capitalism is not perfect but it is way better than any other system.

 

[Xarog]

No man. The author of that quote was BTTB.

Sorry, my mistake. (I'll get back to responding to you soon enough )

misery equally shared.

Capitalism is not perfect but it is way better than any other system.

Your name isn't Arthur. That was a question levelled directly at him.

 

[Xarog]

The SIV's was not really the problem. The Governments interference in the free market created the housing market bubble. The SIV's was fueled by the housing market bubble. Once the bubble bust the SIV's also tanked with a ripple effect through the whole financial system. Yes there was problems with the SIV's but the market would have sorted that out.

The bottom line is that if the Government did not interfere in the free market in the first place we would not have the housing bubble which created all the problems.

OK, the thrust of the article you posted suggests first of all that the US govt shouldn't be bailing anyone out. The results of them *not* doing that would make the great depression look like a mere blip on the screen. The resulting run on the markets would be nothing short of catastrophic (and no, this is not hyperbole).

It is fair to say that Greenspan and his ilk were irresponsible to lower the interest rates the way they did. And maybe if the interest rates were higher, there wouldn't have been an abundance of money lying around which could be lent out to average citizens to refinance their house, make cheap loans, etc. etc. However, under normal circumstances the after-effects of this would have been a "normal" slowdown somewhat like the dotcom bubble bursting.

But the very core of what the various financial institutions in the US did was this : They would take several loans, bundle them together and then sell portions of these loans as investment assets to third parties. Because of the lack of proper regulation, there was absolutely NO oversight as to the creditworthiness of the people taking out the loans, and there was NO oversight on the riskiness of the loans themselves. The banks were thus able to falsely claim that they were AAA bonds in order to attract investors and to make themselves tons of money. In short, they lied.

Now, do I think that it is wrong for a system of power to allow any company to lie to potential customers about what they are buying? Yes I do. Thus, I think it fair to say that there should be oversight and that there should be regulation, and that the government should be allowed to check the fundamental worth of securities in order to make sure that financial institutions are not lying and committing fraud. Until now, that has been missing from the system and it has to change.

So you can point to Greenspan's policies and say they helped create the problem. But you can just as easily point to the lack of regulation, or the irresponsible behaviour of the banks (no one forced them to give out loans to people who didn't have a worthy credit history; no one forced them to create adjustable rate mortgages which became unpayable for hundreds of thousands if not millions when the rates went up). We need watchdogs to make sure that corporations behave. Whether its making sure that industry doesn't pollute our land or our water, Whether it's making sure that agriculture is not injecting harmful substances into our foods, or whether it's making sure that the markets don't lie about what they're selling or the real value of what they're selling, it doesn't matter. The bottom line is we need regulation and this mantra about the "free market" is not in the interest of the common good.

 

[alloytoo]

No please, I never argued that.

Here is my argument:

And your argument is flawed, as I've pointed out to you:

Federal Reserve = Monetary Policy

US Treasury = Fiscal policy

Regulation should control the actions various classes of finanical service providers can take and the levels of risk they can assume.

If decent banking regulations existed then poor Monetary and fiscal policy wouldn't have mattered, NINJA type loans simply couldn't have been made.

As someone pointed out earlier, Greed is to blame, facilitated by a lack of regulation.

Solution? Greed is a human condition, regulation with stiff penalties is reasonable deterant. (so reasonable in fact that many countries including our own have them)

Arguing that regulation shouldn't be introduced because the Fed and the Treasury exercised poor judgement is just plain stupid.

It's like arguing against grooved tyres because the driver chose slick tyres which skidded in the rain.

 

[alloytoo]

The SIV's was not really the problem. The Governments interference in the free market created the housing market bubble. The SIV's was fueled by the housing market bubble. Once the bubble bust the SIV's also tanked with a ripple effect through the whole financial system. Yes there was problems with the SIV's but the market would have sorted that out.

The bottom line is that if the Government did not interfere in the free market in the first place we would not have the housing bubble which created all the problems.

The bottom line is that the Fed & The Treasury couldn't have fueled the extremes of the bubble had the regulation been in place.

 

[alloytoo]

OK, the thrust of the article you posted suggests first of all that the US govt shouldn't be bailing anyone out. The results of them *not* doing that would make the great depression look like a mere blip on the screen. The resulting run on the markets would be nothing short of catastrophic (and no, this is not hyperbole).

It is fair to say that Greenspan and his ilk were irresponsible to lower the interest rates the way they did. And maybe if the interest rates were higher, there wouldn't have been an abundance of money lying around which could be lent out to average citizens to refinance their house, make cheap loans, etc. etc. However, under normal circumstances the after-effects of this would have been a "normal" slowdown somewhat like the dotcom bubble bursting.

But the very core of what the various financial institutions in the US did was this : They would take several loans, bundle them together and then sell portions of these loans as investment assets to third parties. Because of the lack of proper regulation, there was absolutely NO oversight as to the creditworthiness of the people taking out the loans, and there was NO oversight on the riskiness of the loans themselves. The banks were thus able to falsely claim that they were AAA bonds in order to attract investors and to make themselves tons of money. In short, they lied.

Now, do I think that it is wrong for a system of power to allow any company to lie to potential customers about what they are buying? Yes I do. Thus, I think it fair to say that there should be oversight and that there should be regulation, and that the government should be allowed to check the fundamental worth of securities in order to make sure that financial institutions are not lying and committing fraud. Until now, that has been missing from the system and it has to change.

So you can point to Greenspan's policies and say they helped create the problem. But you can just as easily point to the lack of regulation, or the irresponsible behaviour of the banks (no one forced them to give out loans to people who didn't have a worthy credit history; no one forced them to create adjustable rate mortgages which became unpayable for hundreds of thousands if not millions when the rates went up). We need watchdogs to make sure that corporations behave. Whether its making sure that industry doesn't pollute our land or our water, Whether it's making sure that agriculture is not injecting harmful substances into our foods, or whether it's making sure that the markets don't lie about what they're selling or the real value of what they're selling, it doesn't matter. The bottom line is we need regulation and this mantra about the "free market" is not in the interest of the common good.

+1 Thank you

Some common sense at last.

 

[BBSA]

The bottom line is that the Fed & The Treasury couldn't have fueled the extremes of the bubble had the regulation been in place.

So you must regulate to compensate for governments mistakes? Would it not be better if Government stay out of the market in the first place?