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Author Topic: Is Deregulation to Blame?  (Read 1045 times)
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Moliere
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« on: December 08, 2008, 06:50:30 PM »

Well, is it?

Can we stop blaming Ayn Rand, Mises, Hayek, libertarians and the free market for the current economic mess. We haven't been living in a state of free market bliss for the last 8 years. In fact regulations continue to increase. The question is how are the rule changes affecting the financial market. This article covers four common arguments about "deregulation":

1) The partial repeal of the Glass-Steagall Act in 1999 allowed commercial banks to get involved in risky investments, such as mortgage-backed securities.

2) The Commodity Futures Modernization Act of 2000 guaranteed that high-risk tools such as credit default swaps remained unregulated, opting instead to encourage a “self-regulation” that neverhappened.

3) A 2004 rule change by the SEC permitted big firms to keep too much debt on their balance sheets.

4) Through all this time, Fannie Mae and Freddie Mac were allowed to run wild.
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Blackadar
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« Reply #1 on: December 08, 2008, 10:06:24 PM »

First, let's get the obvious out of the way.  The source is extremely biased.  It's mission is to make a "principled case for liberty and individual choice in all areas of human activity".  You're certainly not going to find an article talking positively about any regulation on such a site.

I don't feel like taking apart the article on a point-by-point basis (though I could), because it's not worth the time.  For example, when you try to argue that standardizing the proper valuation of assets in an effort to prevent the next ENRON is a bad thing, you've hit an epic failure point.  There's a real lack of any hard factual evidence presented and a whole lot of generic opinion. 

So I'll take apart their main premise, which is found in their last paragraph.  They say it wasn't deregulation, it was "bad governance".  Yes, they're attributing it to only Fannie and Freddie, but is there any question that "bad governance" of these major Wall Street firms is the cause of this mess?  None whatsoever.  It was bad governance.  But "bad governance" can only take you so far because that's looking at the problem at a micro level, not a macro one.

On a micro-economic level, it certainly was bad governance that caused these institutions to fail.  I've posted numerous articles detailing how absurd these investments were (like Goldman Sachs investing in a company that sells WoW gold) and how "aggressive" turned into "opportunistic" and "fraudulent".  It was poor decision-making on the part of the management of those companies that caused it.

However, on a macro level, the free market (yea, right) let these institutions run rampant without regard to the health of other market segments and the economy as a whole.  If you view the government as having a role in the free market in preventing an economic collapse (and I'm not sure the site you got this article from would agree with that premise), then regulation is entirely necessary in an era when a company has so much power it becomes To Big To Fail.  How many times have we heard that phrase over the last year?

So "better governance" of these companies is their solution?  And what happens when, as Greenspan said, the companies don't protect shareholder equity?  We have another collapse.  And another.  And another.  Because you're not going to change human nature.  As long as Wall Street looks no further than the next quarterly earning report and executives are primarily interested in pushing the stock price higher to inflate their enormous compensation packages, that's what you'd get.  In the meanwhile, the economy would yo-yo so violently that our currency would be worthless and our economy wrecked.

What that article fails to mention is that if the deregulation had not happened, we would not be in this mess today.  That is an indisputable fact.  You could argue that we'd be in a different mess, but not this one.  You could argue that the regulations that were removed were not as helpful as they could have been, and you'd be right.  But the simple fact is that deregulation IS to blame. 

Now is "reregulation" the fix?  Yes, if you're going to have the kind of interconnected, "too big to fail" financial system that exists today.  In these credit markets, there aren't winners and losers.  With credit swaps, mortage selling and buying, stock swaps and hundreds of other ways Wall Street shifts money around, they're all interconnected.  If one loses, they all lose.  And we lose with them unless the only other institution big enough - the Government - creates a set of boundaries to prevent such failures.  That's a premise that this website might disagree with.  But ask the millions of unemployed, the homeowners who have lost huge amounts of home equity or their houses outright and the thousands of small business owners who are closing up shop if they disagree with that premise...because they're feeling the effects of an unsupervised market right now.
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Doopri
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« Reply #2 on: December 08, 2008, 11:42:09 PM »

ill be honest even that article seems to suggest points 2) and 3) alone warrented more regulation (or at least not the loosening of regulation).  there was really no reason given as to why there shouldnt have been regulation in those cases except for one quote from greenspan, when after the fact he said "it wouldnt have helped" - overleveraging makes for exaggerated profit gains - guess what the flip side of that is?  of course it would have helped

and the author also makes the point that mark to market originated in 2007, which is just flat out untrue - its been in practice for a while now and was one of those things that i always thought was near flat out corrupt (or at least it had the potential to be so).  i also thought it was absolutely hilarious (in a cynical, my god the entire financial sector is collapsing sort of way) when financial and accounting firms were PLEADING for mark to market to go away because their asset prices were plummeting overnight.  this after years of FIGHTING FOR IT when they wanted to INFLATE their balance sheets.  seriously people.

the bottom line is they wanted to value assets at whatever price suited them, when it suited them whether that was reflected by reality or not.  it was basically the exact OPPOSITE of what cost accounting should be.  it was one of the reasons why no one knew who was worth what, and why firms went down basically overnight.  if "accounting" were going on, it would have been a much more clear field - what was going on was wishful thinking at best, intentional overinflation of asset values during good times at worst (not to mention putting off devaluation of asset prices during bad times solely to spruce up balance sheets)

the glass-steagall point might have some merit in that the commercial practices of some investment banks COULD have buoyed them up - but lets be honest that act wasnt repealed so investment banks could get in on commercial - it was repealed because commercials were getting KILLED by investments and wanted a piece of that action.  in that light (and this one im not 100% sure on) the usual knock is that were g-s still in effect, citi and boa wouldnt have had the hits they had and would have been more insulated.  the point of g-s was so consumers could choose to go to a risky investment bank and try for a better return, or they could go to a commercial bank for more standard loans and deposits.  but they would do that knowing that their commercial banks werent about to start dumping their money into say, internet stock or the pet rock craze smile  the pure investment firms that were heavily leveraged into poorly valued "fads" were going down one way or the other once the music stopped playing.  so i suppose the investments that were engaged in some of the commercial practices would have had that to fall back on when everything else went to hell
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Doopri
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« Reply #3 on: December 08, 2008, 11:42:57 PM »

holy s%$t that was a long post! hope everyone enjoyed it smile
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Moliere
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« Reply #4 on: December 09, 2008, 12:49:04 AM »

Quote from: Doopri on December 08, 2008, 11:42:57 PM

holy s%$t that was a long post! hope everyone enjoyed it smile

Is your Shift key not working?   slywink
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Brendan
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« Reply #5 on: December 09, 2008, 12:59:34 AM »

Quote from: Moliere on December 09, 2008, 12:49:04 AM

Quote from: Doopri on December 08, 2008, 11:42:57 PM

holy s%$t that was a long post! hope everyone enjoyed it smile

Is your Shift key not working?   slywink

The internet is not regulated for spelling or grammar.  WHAT HAS YOUR LIBERTARIANISM WROUGHT?!

slywink
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Doopri
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« Reply #6 on: December 09, 2008, 01:15:18 AM »

Quote
Is your Shift key not working?   

hehehe for some reason i really never use caps unless i want to BOLD something as the fancy strikes me

as someone else once pointed out, i never use " ' " in forum posts - weird, but true smile
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Doopri
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« Reply #7 on: December 09, 2008, 10:18:38 PM »

oh and to contribute to my already long winded posts - i should have mentioned this yesterday when moliere originally mentioned it...

but if anyone checking out this thread hasnt read the road to serfdom you really should.  i dont care what your political stance or policy opinions you WILL get something out of this book
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