The PD's are kaput

oscarBravo

donegalfella wrote: »

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That would be an apt analogy, if the global stock market was a game.

To the market fundamentalist, nothing is more important than what you dub "price discovery". Companies go bust; people's pensions are wiped out: who cares? All that matters is the sanctity of The Market. It will correct itself eventually, and some rich people will end up even richer. It's not zero-sum, true. Ultimately, it almost certainly ends up with more wealth in circulation than there was beforehand. If some of the proletariat get trampled in the process, tough.

a) A government "guarantee" of deposits is illusory, serving primarily as a psychological mechanism to prevent customers from engaging in panicked bank runs.

Two things: first, money is illusory. A fifty-euro note has no intrinsic value, and neither does a share certificate. For a market fundamentalist to scoff at a mechanism as "illusory" is ironic indeed. Second, what's wrong with preventing panicked bank runs? Just how blindly fundamentalist do you have to be to percieve a run on a bank as a good thing?

If a government actually had to cough up the dough, it couldn't. Ireland has "guaranteed" €400 billion in retail and commercial deposits—which works out to approximately €100,000 for every man, woman, and child in the nation. How would we make good on this "guarantee"? Send every family of five a bill for half a million euro?

If every shareholder in Microsoft sold all their shares right this minute, would they get $21 for every share? Where would Microsoft come up with the $188 billion dollars they owe their shareholders? Oops, they couldn't. Therefore, they shouldn't have issued those shares, right?

b) The public doesn't widely know or care how much of their deposits are guaranteed by the government. Up until recently, the Irish government guaranteed only the first €20,000 in a personal deposit account. If someone had €55,000 on deposit, was she lying awake at night worrying about the security of that extra €35,000? I don't think so. The converse is seen when thousands of people queue up to withdraw their money from Northern Rock, seemingly unaware that their savings were guaranteed by the government.

Without understanding the precise mechanisms, people have an underlying awareness that their bank deposits are "safe". You are advocating a framework where nothing is safe. You seem to think that removing the guarantees - illusory or not - would increase everyone's prosperity.

c) In all probability, neither of us knows anyone who has ever lost his or her life savings by placing them in a deposit account.

Nope. Why? Because deposits are guaranteed. Moreover, the financial well-being of banks is guaranteed. If you had your way, and governments were prevented from making such guarantees, it's entirely more likely that we would know people who had lost their savings in deposit accounts. The difference between us is that you believe this is a good thing.

However, we probably both know people who have lost their life savings through engaging in other kinds of speculative investment, or even in downright foolishness.

Sure - I've lost sums of money on gambles I've taken with investments. I've also profited handsomely from some risks I've taken. That's my choice, and I take the rough with the smooth.

But if I entrust my money to someone for safe keeping, and they gamble it away, I'm going to be pissed.

Financial instruments such as low interest rate deposit accounts, bonds, gilt-edged-stocks etc., are known for being very low risk. But "low risk" doesn't mean "no risk."

Nope, but that's not a compelling case for taking away such safeguards as are in place. Sure, crossing the road is risky, but that doesn't mean that pedestrian crossings and speed limits should be removed.

d) As I've repeatedly said, my problem is not so much with the government guaranteeing bank deposits as it is with the government acting as an underwriter for risky loans. In fact, I would argue that guaranteeing a risky loan in such a manner almost ensures that the borrow will have a higher likelihood of default. The bank can then shrug its shoulders and pass the burden on to the taxpayer.

As I've already said, only if guarantees are unconditional. If the guarantees come with heavy strings attached, the nature of the risk has changed, but there's still a risk - as it should be.

Frankly, I worry much less about the security of my deposit account than about trying to maintain a rate of return that offsets the impact of governments' lax monetary policy on my savings. It is a fact that people's savings are quietly being stolen out from under them—by the very government you see as their guarantor. Keep €1,000 on deposit for 25 years and see how much value you have remaining at the end of the day—even if, technically speaking, not a penny has been touched.

Basically, you're saying that you want higher risk in return for a higher return. If that's what you want, you have the option of choosing to move your money somewhere riskier and reaping the reward. But that's not good enough: you want everyone to have a higher risk.

I'm hardly the only one who believes that the "commoditisation of risk" occurred in response to government legislation such as the CRA.

Burglaries occur in response to people having valuables in their houses. That doesn't mean that owning valuables is wrong, or burglary is right. You can point to cause-and-effect until the cows come home, but you're still trying to squirrel the blame away from the burglars.

Are you suggesting that the position of the chairman of the Federal Reserve—who is also a distinguished Princeton economist—is also "laughable"?

I find it amusing that you'll castigate one Fed chairman, and laud another, according to how well their positions coincide with yours.

It's much too late for the current crisis—but I believe that reducing harmful regulation may well prevent the next financial crisis. If governments would focus more on the framework, per above, and less on regulating to whom banks are obliged to give loans in order to comply with politicians' social agendas, then I believe we would see a more transparent and ultimately more credible financial system.

We'd also see neighbourhoods continue to sink into the mire, and minorities discriminated against. But I suppose that's OK, as long as you're not one of the minority, or are lucky enough to have a good address.

This is what most of us were taught in school, I agree. But it is no longer the case in practice. Be aware that most banks are now hopelessly over-leveraged. The amount of money they have loaned or the amount of credit they have issued bears little relation to the sums they have on deposit.

Sounds like a lack of regulation to me. Of course, you'll try claim that banks are getting themselves into reckless and irresponsible positions as a result of over-regulation, which is akin to claiming that taking police off the streets will lead to a reduction in crime.

The point is, it's a small gamble. Like crossing the street is a small gamble. You could get hit by a bus. But you probably won't.

That's a compelling argument for removing traffic laws and standing down the traffic corps, right?

The crucial point here is that Ms. Barad was the CEO of a private company. I don't really care about Jill Barad's redundancy negotiations with her private employer any more than I care about what Jill Barad does in her private bedroom. It's frankly none of my business!

So when you talked about the market punishing executives who make stupid and reckless decisions, you were bluffing? Did you know then it wasn't true, or has a concrete example forced you to back-pedal?

Of course, you've glossed over the single most important point. As a direct result of Barad's actions, three thousand people lost their jobs. Of those three thousand, one got a fifty million dollar severance package.

But you don't care. The Market is infallible. You're not one of those three thousand. They're just cannon fodder; grist to the mill; necessary human sacrifices on the altar of market fundamentalism.

We can certainly discuss how the Act was used to bully banks into taking on risks that they otherwise would have declined as imprudent. You are smart enough to know that problems with legislation are not explicitly written into the legislation itself. They arise out of how the legislation is used and interpreted.

That's a double-edged sword. The legislation is interpreted by the banks to a much greater extent than it is by the legislators and courts: as soon as a regulation is passed, financial institutions start the process of trying to find out how they can circumvent it.

Pre-CRA, banks avoided making risky loans by simply redlining entire neighbourhoods, and discriminating against minorities. The idea of the CRA was that such practices were outlawed, and that banks would have to actually put some effort into actually determining the individual applicants' ability to pay. Naturally, this was far too much effort for the banks, so they found an alternative approach: commoditise the risks.

There is nothing in the CRA that requires a bank to make a risky loan; in fact - as I've pointed out earlier - the language in the CRA explicitly states that lending is required to be in line with secure practices.

If I get caught driving through the main street of a village at 120km/h, but manage to find a loophole in the traffic laws that means I avoid prosecution, does that mean I didn't do anything wrong? If I killed a pedestrian in the process, would you lay the blame at the feet of the lawmakers who introduced speed limits? Would you argue for the removal of speed limits?

A few posts ago, you were saying that banking executives had to "pay the price" for their mistakes, and that they should submit to even more regulation. Now you say that they managed to generate prosperity even though they were regulated. Is your point that they were regulated but not regulated enough?

Yup. I thought that was clear.

You might would go out of business if this happened. But if you had a good enough company, and a strong enough business model, you could probably find a way to recapitalize and continue.

Yeah, because recapitalising is a trivial prospect in the current economic climate. Gone looking for business capital in the last couple of months?

You could, however, sit down and list many other reasons—most of them more plausible and realistic than the sudden "disappearance" of all your cash reserves—for why your company might fail. You might also be able to think of burdensome taxes, cumbersome regulations, and other types of red tape that the government throws in the way of your business achieving even greater success. All the time you spend filling in forms, working out taxes, etc., is time that the government takes away from your productivity. So why focus so myopically on deposit guarantees? They are a minor part of a much bigger economic and political picture.

As tiresome as regulations and taxes are, they are at least built on a relatively stable framework. VAT, PRSI, corporation tax - none of these things are likely to suddenly kick the feet out from under my company.

If the bank where I keep accumulated cash to meet quarterly tax bills and annual expenses were to collapse and take that cash with it - that would be a fatal blow. Complain all you want about the government, but they at least offer me some measure of stability.

Permabear

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oscarBravo

Head. Desk.

I'm going to stop now, because I might as well be arguing with my copy of Atlas Shrugged. I'll pick up on one point, because while you're happy to argue from a pseudo-academic ivory tower, some of us have lived through the consequences of the free market at work.

donegalfella wrote: »

They lost their jobs. They found other jobs. Their lives went on.

Towards the end of this debacle, I flew to San Francisco for a weekend to interview for a promotion that would have involved a move to the US. When I got off the plane from the flight home, there was a message waiting for me: don't make any plans, all moves are off.

Others weren't so lucky. My counterpart in the UK had sold his house, having already accepted an offer in SF. He spent the next several months of his life trying to disentangle that particular financial and legal mess. Another colleague in Boston got a call while driving a U-Haul van full of his possessions cross-country, telling him that the job he was driving towards wasn't there anymore.

Several weeks later, I sat in an office in Paris, drawing lines through people's names. People I had worked with for the last several years, gone for dinner with, shared drinks with. People who would be informed the next day that, sorry, you're unemployed. Clear out your desk. The next day I called a hard-working, conscientious and talented young man into my office and told him I had to let him go. I would have had to let two people go from my small team, but I put my foot down and said that if a second person had to be let go, it would be me.

But that's OK: Jill got fifty million dollars, and the market "punished" Mattel.

I accept that there's no room in your worldview for human stories like this. I realise that to a market fundamentalist, these facts are utterly irrelevant and meaningless. But you need to understand that there's a reason why I utterly reject market fundamentalism. Sure, you can probably do some clever maths to show how the sum total of human wealth has ultimately profited from Jill Barad's mistakes - but the people I've talked about here don't care, any more than you care about them.

Permabear

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oscarBravo

donegalfella wrote: »

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Did you forget the bit where the chief executive took home fifty million dollars out of the deal?

You claim that the market will punish companies that make stupid mistakes - which it did; the share price never returned to its 1998 high. But talk of "punishing" a company is a pointless abstraction: who paid the price? The shareholders and employees. Who took the risks? The chief executive, who trousered an 8-figure sum.

That's precisely the sort of externalisation of risk that created the current economic crisis. No matter what Barad did, she was fifty million to the good. The risks associated with her gambles were borne by others. Therefore there was no downside for her. Similarly, when a bank can simply sell its risks as a packaged commodity to someone else, it can create all the dodgy loans it likes, and the risk is Someone Else's Problem.

Permabear

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oscarBravo

donegalfella wrote: »

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You're still missing my point. If her payoff had been conditional on her performance as an executive, she may have actually taken the due diligence process seriously when considering a takeover bid. In other words, she would have had an incentive to do her job properly. Had she done her job properly, people wouldn't have had to be laid off. She took risks; others paid the price.

Agreed. However, you've been arguing for legislation that would deny such golden handshakes to executives who made stupid or risky errors.

Nope. I've argued that if a bank has to be bailed out by a government, then the government - as a major stakeholder in the bank - has a mandate to financially punish the executives that got it into that state. The Mattel case study was in response to the idea that the market is self-regulating when it comes to the taking of stupid risks. It's not; the risks are externalised, as I've shown.

In my view, governments do have a mandate to investigate the processes by which these bonds were evaluated and rated, and have an obligation to tighten regulatory oversight so that rating agencies can't pull the wool over investors' eyes again.

I suspect the more fundamental problem is that the various instruments that were devised were so utterly convoluted that it became a mathematical near-impossibility to actually determine the level of risk. Ultimately it became a game of pass the parcel. That's market failure.

I'm curious, though: you feel that government isn't qualified to interfere in market operations. What makes you think they're better placed to evaluate the level of risk in packaged debt instruments than rating agencies?

Nodin

donegalfella wrote: »

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...because of Government intervention.

donegalfella wrote: »

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Are you trying to say that the whole trade in dervatives resulted from regulation?

donegalfella wrote: »

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Another attempted fish-kill......

donegalfella wrote: »

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...thus completely ignoring the social factor of products such as basic food stuffs and power. But screw them.

donegalfella wrote: »

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You read a lot of American material, I gather.

Permabear

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Permabear

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oscarBravo

donegalfella wrote: »

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What happens when they come to the conclusion that it's computationally infeasible to determine the risk associated with a given derivative? What's their next step?

Permabear

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