How does capitalism really work?

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feeqmatic:

I tried to explain to them that Capitalism, even in the distorted way it is implemented in America, requires "losers" who make up the serving class of the society, and that it is incumbent upon the ruling class to maintain the stability of that servile class or we end up with the Bolshevik revolution or any other major revolution of a great society due to the mistreatment of its poor (read= pretty much every great civilization ever)

Am i wrong.

Practically, all societies need people to do drudgery and will pay them very little for it. In pre-history, that meant everyone. Since then humans have been refining ways of arranging who does the drudgery and who doesn't, of which capitalism is just one of many.

ravenshrike:

2 decades, and at the insistence of government pressure. At least in the case of the US, if Fannie and Freddie had not encouraged Countrywide to start pushing really bad paper, the other banks never would have followed suit(threat of lawsuit for "discrimination" over loan terms is a great motivator). If they had never issued the initial horrible paper, they never would have looked for a mechanism to alleviate the strain, in this case credit default swaps. If CDS's had never become such a large area of the market, some idiot with a limited understanding of computers would never had come up with a GIGO computer model showing CDS's allowed the banks to figuratively print money. If the computer model had never been published, the sub prime loans would never had expanded into all strata of the housing market. Without that expansion the housing bubble would not have super inflated and popped like it did. So the moral of the story is the government needs to quit fucking around with markets to try and force a "desirable outcome" which in this case was single family housing for everybody.

Conservatives like to blame government for everything bad, including the housing bubble bust but the statistics don't support this argument. Most defaults were on non-minority contracts to middle income borrowers. Also, a large percentage were refinancing deals, ie loans to people who already owed a home.

Fact is the banks and investment companies wanted these loan and actively marketed for these loans because they were making huge profits bundling them and selling them as securities. They made even more money trading in credit default swops, and even shorting their own products. Typical Wall St. shenanigans. Sorry, you can't blame the government for this one.

Third-eye:

ravenshrike:

2 decades, and at the insistence of government pressure. At least in the case of the US, if Fannie and Freddie had not encouraged Countrywide to start pushing really bad paper, the other banks never would have followed suit(threat of lawsuit for "discrimination" over loan terms is a great motivator). If they had never issued the initial horrible paper, they never would have looked for a mechanism to alleviate the strain, in this case credit default swaps. If CDS's had never become such a large area of the market, some idiot with a limited understanding of computers would never had come up with a GIGO computer model showing CDS's allowed the banks to figuratively print money. If the computer model had never been published, the sub prime loans would never had expanded into all strata of the housing market. Without that expansion the housing bubble would not have super inflated and popped like it did. So the moral of the story is the government needs to quit fucking around with markets to try and force a "desirable outcome" which in this case was single family housing for everybody.

Conservatives like to blame government for everything bad, including the housing bubble bust but the statistics don't support this argument. Most defaults were on non-minority contracts to middle income borrowers. Also, a large percentage were refinancing deals, ie loans to people who already owed a home.

*HEADDESK* CAUSE EFFECT. It's a logical relationship. Fun fact, the sun causes most snow avalanches. Yet oddly enough, the sun is not the thing doing damage. It's the megatons of snow and rock falling down the side of the mountain.

ravenshrike:
*HEADDESK* CAUSE EFFECT. It's a logical relationship. Fun fact, the sun causes most snow avalanches. Yet oddly enough, the sun is not the thing doing damage. It's the megatons of snow and rock falling down the side of the mountain.

Government does something. Private interests screw up, Private interests screw up. Private interests screw up. Private interests screw up. Things go wrong. It's the government's fault! Er, right.

Hey, you know whose fault World War Two was? Charlemagne. He conquered Germany and then split his empire between his three sons which ultimately led to France and the Holy Roman Empire, the latter being a hopelessly disparate and politically ineffective organisation that crippled the ability of the German people to exert themselves leading to them missing out on colonialism and desperate to catch up ending with the world wars. CAUSE AND EFFECT. It's a logical relationship. Fucking Charlemagne.

I hate to break it to you, but any point private financial institutions didn't actually have to lend money unsafely, and they didn't have to package those toxic debts as safe, and the credit agencies could have done a better job of analysing them, and they didn't have to run their capital reserves down to the bone, and any number of other screw-ups. That's even missing the fact that the subprime explosion occurred in the private sector due to the credit boom of the early-mid 2000s long after government had facilitated house buying. But in the parallel reality of the American right shovelled by its innumerable, mutually-reinforcing, intellectually unaccountable think tanks, such analysis cannot be permitted to compute because it might provide evidence that the free market is not infallible.

Agema:
I hate to break it to you, but any point private financial institutions didn't actually have to lend money unsafely

BULLSHIT. With Countrywide offering just those types of unsafe loans at the urging of Fannie and Freddie, under the mid-90's revised CRA regulations everybody else was in danger of being massively sued for discriminatory loan practices. After all, if Countrywide was doing it CLEARLY the only reason no one else did it was because they hated poor people. Given the intelligence of your average jury that is exactly how the drama would have played out. So it was either go along with the game or get out.

ravenshrike:

Veylon:

Lilani:

Also, I keep hearing this "bribery and paying off politicians" argument but very little proof ever gets brought in. I understand it's something that's inherently difficult to prove, but that sort of terminology sets off my tinfoil hat alarm and makes me take the "problem" a lot less seriously.

It's more of a big picture thing. Remember Glass-Steagal being repealed? Or the big bail-out? That was the politicians paying back their banker friends. It's not like bank X is sending secret dollar-sign bags to Senator Y. The bribery is open, legal, and aboveboard.

Please explain EXACTLY how Glass-Steagal would have prevented the housing bubble. I'm going to assume that you mean the highly modified 90's version of Glass-Steagal and not earlier versions. Somehow I doubt you want to bring back Regulation Q. But anyway, lay out exactly how it would have stopped the housing bubble and subsequent bailout.

Note, given that all the banks which really NEEDED the bailout were the pure investment banks and not the mixed banks, saying that G-S would have kept mixed banks from existing is not an argument for stopping the bubble or subsequent crash.

Really, the argument that Glass-Steagal would have stopped anything has the decided whiff of Underpants Gnomes.

Glass-Steagal wouldn't have prevented the housing bubble and isn't connected to the bailout. What Glass-Steagal was for was to prevent mixed banks. Granted, we still have FDIC, so we haven't seen the run on, and subsequent collapse of, banks that used to be common before the Great Depression. I was using the repeal of Glass-Steagal as an example of banking power, not as the keystone that held up our economic arch.

Bubbles and business failures would exist even if all the safeguards I wanted were in place. What I object to is when those guilty for them escape without consequence while the innocent are crushed.

Comando96:

TheMatsjo:
snip

Free markets would be a means to lower... quite drastically lower inequality... if only the big corporations didn't have bribes already set up already prepared to stop any attempt at this >.>

Also Thank you, I love those TED video's :D

I think you put it well in your reply; "if only the big corporations didn't have bribes already set up already prepared to stop any attempt at this". Because that's the whole thing with free markets, they don't just come about without force because the most powerful agents (economically speaking) are the ones who will lose influence they'll resist any change in this direction. And I, for one, see no reason to assume that will continue to be the case even after this free market would come about. You get the old: "someone gets ahead through luck, skill or determination, and then uses this newfound power to tip the scales in their favor". Or am I missing something?

The reason I'm saying all this is I'm skeptical whether a free market system would ever be feasible and, more importantly, desirable. I mean, who is going to be holding that gun to their heads? And for how long?

And yeah, I love TED videos as well :D, every so often a gem finds its way into my subscription inbox.

ravenshrike:
*HEADDESK* CAUSE EFFECT. It's a logical relationship. Fun fact, the sun causes most snow avalanches. Yet oddly enough, the sun is not the thing doing damage. It's the megatons of snow and rock falling down the side of the mountain.

The only relevant "logical relationship" here is Wall St's greed and the equity in people's homes they needed to tap to cash in.

Are you honestly trying to argue that the banks, with all their high-priced lobbyists and politicians in their coat pocket, were actually forced to make all those loans against their will? Do you honestly believe that, but for these good intentioned but na´ve politicians, who forced the banks, with a gun to their head, to make those loans, that they would have never have package those loans up and market them as securities, and made billions in the process?

Common, get real.

Third-eye:

ravenshrike:
*HEADDESK* CAUSE EFFECT. It's a logical relationship. Fun fact, the sun causes most snow avalanches. Yet oddly enough, the sun is not the thing doing damage. It's the megatons of snow and rock falling down the side of the mountain.

Are you honestly trying to argue that the banks, with all their high-priced lobbyists and politicians in their coat pocket, were actually forced to make all those loans against their will? Do you honestly believe that, but for these good intentioned but na´ve politicians, who forced the banks, with a gun to their head, to make those loans, that they would have never have package those loans up and market them as securities, and made billions in the process?

Common, get real.

Yes. And by forced I mean took the path of least risk. Lawsuits are bad for business, especially as a bank. See, when large amount of people sue a bank, that makes everybody who puts money into a bank veeeery squirrely. And hey, there are other banks out there. So by and large they will follow the path of least likelihood to be sued. As for the banks being all-powerful, if that were the case the revisions to the CRA never would have occurred. Hell, that the original CRA passed in the first place is prima facie evidence that they are not the bogeymen you claim them to be. Powerful, yes, but by no means omnipotent and they swim in a sea with plenty of other large fish, and just as many schools of many small fish with very sharp teeth.

And again, they never would have changed their loan patterns in the first place, thus avoiding the escalation that occurred entirely, if it weren't for the government's interference. What you are arguing for is more government interference to fix the problems government interference set in motion in the first place.

ravenshrike:
*snip*

So if I take your premise as true, that the government should stay out of the market and just let the private sector have free rein, how do we explain China, Canada, and Iceland?

Canada has one of the most regulated banking industries in the world, and if it wasn't for the fact that they were so tied to trade with the US they probably would have avoided the recession all together. So we have a great example of a country whose government regulated to achieve a desirable outcome, and it worked quite effectively.

On the other side of the table is Iceland, where the government deregulated the hell out of everything and let capitalism go without restriction. The result is a bankrupt country due to an entire sector focused only on short term profits and immediate gain rather than a desirable final outcome.

I'm not arguing for government regulation; I'm only arguing against total deregulation. Regulation is like taxes and having to see the doctor; we would really rather not have to do these things, but since we have to we might as well make it efficient and effective so that we don't have to do a whole lot of it.

Lilani:

Comando96:
The problem is that, that is the basic version. The free market version, the one that works the best.

Eh, I dunno. A "true free market" is basically what we had in the US in the late 19th century during the industrial revolution, and at that time monopolies and political corruption were at all time highs. The government HAD to step in in order to keep things from getting more out of control, outlawing monopolies and trusts so they couldn't quite as easily take over a small town and overcharge for their services til they sucked it dry. And to keep one company from controlling the entire market. Railroads were especially bad for this, and oil coming in second with Rockefeller.

Also, I keep hearing this "bribery and paying off politicians" argument but very little proof ever gets brought in. I understand it's something that's inherently difficult to prove, but that sort of terminology sets off my tinfoil hat alarm and makes me take the "problem" a lot less seriously.

Yes but that is not the corporations fault that is the governments fault for the corruption The point of a corporation is to get as much profit as possible and if it can bribe government officials to get on board through bribery then it is the fault of the government. The point of government in a capitalists society is that of a referee making sure people in the competition that is capitalism play straight and fair. When the referee starts accepting bribes that is when problems and other bullshit start.

Istvan:
Capitalism doesn't require losers but it also makes no effort to prevent them. What it does require is the stability to trade goods and services at a profit.

Actually, it does. 5-7% unemployment is required for a market-based economy to maintain enough fluidity in the labour market that wages remain relatively stable.

And the glib answer to the OP's question is; it doesn't. It's a bloody awful system, it's just that we've not yet experienced a proper Corporatist-Fascist government to sour us on it. We've seen the worst that Feudalism, Monarchism, Theocracy, and Authoritarian Socialism/Communism can offer, but Democratic Capitalism has stuck around, largely because the people in charge had the sense to implement policies to mitigate the negative aspects of a capitalist economy, and knew they could only take so much of the pie without arousing ire among the proles.

But the 80's put paid to that attitude. Neo-Liberals are high on their own supply, they actually believe that capitalism has succeeded in-spite of welfare and regulation, rather than because of them, and now the cracks are beginning to show. Either the system will rebalance itself to a more equitable form as it did in the middle of the 20th Century, or -and going by the deluded political attitudes of the right-wing at the moment, more likely- we'll see the Democratic Capitalist equivalent of Gulags, purges, mad-Kings, and serfdom; the final-straws which will drive economic theory to a better system, or at least a substantially different one.

feeqmatic:
I had a conversation with some people who are... less than sympathetic about the state of America as it pertains to minorities and immigrants (read=don't like Blacks and Mexicans)

I tried to explain to them that Capitalism, even in the distorted way it is implemented in America, requires "losers" who make up the serving class of the society, and that it is incumbent upon the ruling class to maintain the stability of that servile class or we end up with the Bolshevik revolution or any other major revolution of a great society due to the mistreatment of its poor (read= pretty much every great civilization ever)

Am i wrong.

True capitalism is the ability to engage in commerce without government either in the determent or BENEFIT of any person, commodity, company, or anything else. Allow solely the market to control itself and don't allow anyone in power to touch it. You have the complete right to go after any crazy business idea you have without restraint, but without a safety net to catch you if you fail.

Now, America's economy is what is defined as a mixed economy, where the government does interfere with regulations, partial ownership of some companies, providing some services exclusively, and subsidizing some industries. This is NOT a true free market. You are restrained as to how you go about your business, blocked from taking certain paths in your business. It could also be argued that many economic policies are made for the benefit of big businesses to help them prevent competition. This also is NOT true capitalism, this makes monopolies and partial monopolies where those monopolies wouldn't be able to survive as monopolies for long in a truly free market.

Your friends are speaking of is a logical fallacy that "I can only be rich by making somebody else poor." This isn't true. The more money a company makes, the more jobs it creates, the more it can provide to it's customers and employees is increasing the size of the economic pie. While a rich man may have eaten 75% of the pie in the 1800's, and now they eat say... 80% of the pie now, the pie is so much bigger that even if you are eating a smaller percent of the pie, you got a much bigger slice.

However, ALL economic systems require somebody to be at the "bottom." From capitalism to communism and all economies inbetween, their has to be somebody cleaning the toilets. However, every year, that reality is becoming less and less true. We don't need people to do the grunt work, we have more and more machines. With the increasing deflation of the prices of technology, the places one can make money now is increasing in their genius at invention or their artistic vision.

Not G. Ivingname:

feeqmatic:
I had a conversation with some people who are... less than sympathetic about the state of America as it pertains to minorities and immigrants (read=don't like Blacks and Mexicans)

I tried to explain to them that Capitalism, even in the distorted way it is implemented in America, requires "losers" who make up the serving class of the society, and that it is incumbent upon the ruling class to maintain the stability of that servile class or we end up with the Bolshevik revolution or any other major revolution of a great society due to the mistreatment of its poor (read= pretty much every great civilization ever)

Am i wrong.

True capitalism is the ability to engage in commerce without government either in the determent or BENEFIT of any person, commodity, company, or anything else. Allow solely the market to control itself and don't allow anyone in power to touch it. You have the complete right to go after any crazy business idea you have without restraint, but without a safety net to catch you if you fail.

In no accepted definition of Capitalism does it say that Government cannot interfere. Free Market and Capitalism are different concepts.

In a nutshell Capitalism is private ownership of the means of production, creation of goods or services for profit, the accumulation of capital, competitive markets and wage labor. The Government can interfere as much as it wants, as long as these are met it is still Capitalism.

Agema:

ravenshrike:
*HEADDESK* CAUSE EFFECT. It's a logical relationship. Fun fact, the sun causes most snow avalanches. Yet oddly enough, the sun is not the thing doing damage. It's the megatons of snow and rock falling down the side of the mountain.

Government does something. Private interests screw up, Private interests screw up. Private interests screw up. Private interests screw up. Things go wrong. It's the government's fault! Er, right.

Hey, you know whose fault World War Two was? Charlemagne. He conquered Germany and then split his empire between his three sons which ultimately led to France and the Holy Roman Empire, the latter being a hopelessly disparate and politically ineffective organisation that crippled the ability of the German people to exert themselves leading to them missing out on colonialism and desperate to catch up ending with the world wars. CAUSE AND EFFECT. It's a logical relationship. Fucking Charlemagne.

I hate to break it to you, but any point private financial institutions didn't actually have to lend money unsafely, and they didn't have to package those toxic debts as safe, and the credit agencies could have done a better job of analysing them, and they didn't have to run their capital reserves down to the bone, and any number of other screw-ups. That's even missing the fact that the subprime explosion occurred in the private sector due to the credit boom of the early-mid 2000s long after government had facilitated house buying. But in the parallel reality of the American right shovelled by its innumerable, mutually-reinforcing, intellectually unaccountable think tanks, such analysis cannot be permitted to compute because it might provide evidence that the free market is not infallible.

We blame governments, we blame financial institutions. But yet we all seem to forget that to contract a loan you need someone to borrow the money who has just as much, no wait, even MORE to say to this issue than anyone else.
Want to blame someone? Blame the costumers. Selling toxic assets as safe is bad? What about buying a financial asset you don't understand ? Isn't that even more retarded. And at that time most people actually thought they were safe, hindsight is easy. but in no conceivable "doom scenario" did people expect what we got, it was a shock for everyone.

Everyone is to blame to a certain extend. Yes loans shouldn't have been given out that easily, but people shouldn't borrow money they won't be able to repay and rely on the potential resale of a house. And yes it's bad to sell complex financial assets you don't even understand but it is equally as stupid to buy a complex financial asset you don't understand. Everyone along every lines failed. The socialists will blame the ebil corporations , the american conservatives will blame the ebil government. But yet everyone is to blame.

The regulatory environment sucked, the oversight from specialized institutions such as rating agencies sucked, the behavior of financial institutions sucked, and the behavior of final consumers sucked. And now we , rightfully, have to pay for the consequences of our retarded behavior. Such is the way of life, we make mistakes and we learn from it.

And this is part of the free market cycle as well. Bubbles arise and collapse. The natural way of a living market. Men make mistake and as such the market , which consists of men, will make mistakes. Not a failure per se, more like the logical consequences of the market being driven by imperfect humans.

ravenshrike:

Agema:
I hate to break it to you, but any point private financial institutions didn't actually have to lend money unsafely

BULLSHIT. With Countrywide offering just those types of unsafe loans at the urging of Fannie and Freddie, under the mid-90's revised CRA regulations everybody else was in danger of being massively sued for discriminatory loan practices. After all, if Countrywide was doing it CLEARLY the only reason no one else did it was because they hated poor people. Given the intelligence of your average jury that is exactly how the drama would have played out. So it was either go along with the game or get out.

One can grant all that and still be perplexed by why these loans were rated, bundled, and sold as if they were much less risky assets than they were. Or do you think Moody's will be sued for discriminatory loan practices for accurately rating the risks of default for loans made by and to other people?

It's your interpretation that is bullshit, nothing else. Wishful bullshit.

Pingieking:

ravenshrike:
*snip*

So if I take your premise as true, that the government should stay out of the market and just let the private sector have free rein, how do we explain China, Canada, and Iceland?

Canada has one of the most regulated banking industries in the world, and if it wasn't for the fact that they were so tied to trade with the US they probably would have avoided the recession all together. So we have a great example of a country whose government regulated to achieve a desirable outcome, and it worked quite effectively.

On the other side of the table is Iceland, where the government deregulated the hell out of everything and let capitalism go without restriction. The result is a bankrupt country due to an entire sector focused only on short term profits and immediate gain rather than a desirable final outcome.

I'm not arguing for government regulation; I'm only arguing against total deregulation. Regulation is like taxes and having to see the doctor; we would really rather not have to do these things, but since we have to we might as well make it efficient and effective so that we don't have to do a whole lot of it.

Three examples, only two explanations. Which is good, since in citing China you'd have to note the entire towns that the government has ordered built which have remained empty for years because there is nobody who wants to move there.

But let's go over your examples. Your first example Canada. Fun fact about Canada, they did not try to force their loan system to garner a desirable outcome. Thus, no housing bubble. Or a very minor one, but not one that had anything to do with the banking system. You appear to be mistaking regulation in general with regulation designed to force a market into a favorable outcome. They're two different things. I did not say that all regulations will engender massive market changes, but they tend to when that is the express reason they were instituted in the first place. Also, the reason that Canada was almost not affected at all had nothing to do with their banking regulations, but their regulations and rules about where pension systems could be invested. Thus when the US markets crashed, there was not a large amount of Canadian money tied up anywhere.

On to the volcanic Scandis. Generally speaking guaranteeing ironclad government outlays as insurance if something bad happens will of course end bankrupting the country if something bad enough happens. This wasn't a mere 100,000 per account that they insured, it was their entire banking system. This is also a form of regulation. The pressures of a free market were absent from the Icelandic banks' investments. This means their investment patterns were SUBSTANTIALLY more risk heavy than any other country's banks. Those investments were thus centered solely in the highest return area, namely CDS's. Had Iceland never given their guarantees, the investment patterns of the banks would have been substantially more sane. Thus, when the housing crash hit in the US, the banks would not have completely lost their shirts over it. Which means the government would never have gone more or less bankrupt trying to make good its payouts.

Seanchaidh:

ravenshrike:

Agema:
I hate to break it to you, but any point private financial institutions didn't actually have to lend money unsafely

BULLSHIT. With Countrywide offering just those types of unsafe loans at the urging of Fannie and Freddie, under the mid-90's revised CRA regulations everybody else was in danger of being massively sued for discriminatory loan practices. After all, if Countrywide was doing it CLEARLY the only reason no one else did it was because they hated poor people. Given the intelligence of your average jury that is exactly how the drama would have played out. So it was either go along with the game or get out.

One can grant all that and still be perplexed by why these loans were rated, bundled, and sold as if they were much less risky assets than they were. Or do you think Moody's will be sued for discriminatory loan practices for accurately rating the risks of default for loans made by and to other people?

It's your interpretation that is bullshit, nothing else. Wishful bullshit.

The only people prior to about 2002-2004 who were concerned with CDSs were the Hayekian contingent. Which no government in the world listens to, not because Hayek is wrong, but because they would have no economic rationalization for their actions. It was around then that people started to notice by ones and twos the massive distortions that the housing market contained and just how bad things had gotten. But by then it was too late anyway.

As for the ratings agencies, they're not particularly Hayekian anyway, because they certainly would reduce the rating of almost every government, including the US, below AA if they were. The only real exception being the Swiss. Not to mention that until the crash the risk factor of CDSs was entirely theoretical(good theory, but ratings agencies like insurance companies go off of their own actuarial tables). Thus, until they crashed, they deserved the rating they had, whatever theory might say as to their risk factor.

ravenshrike:
Thus, until they crashed, they deserved the rating they had, whatever theory might say as to their risk factor.

But that would only mean the rating system itself is crap, because it fails to take risks into account.

Vegosiux:

ravenshrike:
Thus, until they crashed, they deserved the rating they had, whatever theory might say as to their risk factor.

But that would only mean the rating system itself is crap, because it fails to take risks into account.

And when did I say it wasn't? But government regulation of the ratings systems would work HOW exactly? The only remotely feasible way would be for the government to basically create its own rating system, which would be just as, if not more untrustworthy than the free market's. For instance, US debt would never have been downgraded at all.

ravenshrike:

And when did I say it wasn't? But government regulation of the ratings systems would work HOW exactly? The only remotely feasible way would be for the government to basically create its own rating system, which would be just as, if not more untrustworthy than the free market's. For instance, US debt would never have been downgraded at all.

See, that's the thing.

The ratings don't accomplish anything, aside from the fact that when someone's rating drops, they fall victim to a downward spiral, ergo, lower rating panics the investors, so the cash flow is reduced which caused additional problems...

The smart thing a government could do is to do away with the ratings altogether, in order to stop the emotional component from interfering where things should have been rational.w

Vegosiux:

ravenshrike:

And when did I say it wasn't? But government regulation of the ratings systems would work HOW exactly? The only remotely feasible way would be for the government to basically create its own rating system, which would be just as, if not more untrustworthy than the free market's. For instance, US debt would never have been downgraded at all.

See, that's the thing.

The ratings don't accomplish anything, aside from the fact that when someone's rating drops, they fall victim to a downward spiral, ergo, lower rating panics the investors, so the cash flow is reduced which caused additional problems...

The smart thing a government could do is to do away with the ratings altogether, in order to stop the emotional component from interfering where things should have been rational.w

For one, it would be unconstitutional for the US government to abolish the ratings system entirely. First amendment and all that. Oh they could make it difficult and annoying for the system to exist, but then it would just go underground. It's not that the ratings system is completely horrible, but with any relatively new financial mechanisms blindly trusting the ratings it gives would be considered to be ill advised.

It's certainly better than nothing. Your contention that doing away with the ratings system would do away with the the emotional component is absurd, it would merely create an entirely different set of them. Without a remotely objective system in place that has at least some capability to crunch all the data investments would be to a much larger extent be based entirely upon gut instinct.

ravenshrike:
Three examples, only two explanations. Which is good, since in citing China you'd have to note the entire towns that the government has ordered built which have remained empty for years because there is nobody who wants to move there.

I'd also have to note that China's government has presided over an economic miracle that even free market capitalism would have been hard pressed to achieve. Is it perfect? No. Can free markets do better? Unlikely. Are people there better off now than 40 years ago? Yes. Ultimately, I only care about the third question. I don't care what system they used to improve their lives (though I may want to utilize some of the methods they used), as long as they improved it.

ravenshrike:
Your first example Canada. Fun fact about Canada, they did not try to force their loan system to garner a desirable outcome. Thus, no housing bubble. Or a very minor one, but not one that had anything to do with the banking system. You appear to be mistaking regulation in general with regulation designed to force a market into a favorable outcome. They're two different things. I did not say that all regulations will engender massive market changes, but they tend to when that is the express reason they were instituted in the first place. Also, the reason that Canada was almost not affected at all had nothing to do with their banking regulations, but their regulations and rules about where pension systems could be invested. Thus when the US markets crashed, there was not a large amount of Canadian money tied up anywhere.

And here you are largely making my point for me.
I'm not in favor of having government tell the banks to make more mortgage loans than necessary (if fact, the very idea sounds incredibly stupid). I am not mistaking regulation in general with regulation designed to screw with the market. I think regulation is about consumer protection, not to promote some obscure unjustifiable "right" or a certain way of life (. Regulation is about making sure the big guys don't take advantage of the little guys. The way you wrote you post suggested to me that you are in favor of tearing down every regulation that has ever been in existence. If I am wrong on that, then I apologize and concede that we are mostly in agreement.

Ideally, a capitalistic society is not class-based. It's based on the concept that people like to be compensated for their labor, and that they like to be able to use said compensation to obtain things they want. No need for class in that.

ravenshrike:

Seanchaidh:

ravenshrike:
BULLSHIT. With Countrywide offering just those types of unsafe loans at the urging of Fannie and Freddie, under the mid-90's revised CRA regulations everybody else was in danger of being massively sued for discriminatory loan practices. After all, if Countrywide was doing it CLEARLY the only reason no one else did it was because they hated poor people. Given the intelligence of your average jury that is exactly how the drama would have played out. So it was either go along with the game or get out.

One can grant all that and still be perplexed by why these loans were rated, bundled, and sold as if they were much less risky assets than they were. Or do you think Moody's will be sued for discriminatory loan practices for accurately rating the risks of default for loans made by and to other people?

It's your interpretation that is bullshit, nothing else. Wishful bullshit.

The only people prior to about 2002-2004 who were concerned with CDSs were the Hayekian contingent. Which no government in the world listens to, not because Hayek is wrong, but because they would have no economic rationalization for their actions. It was around then that people started to notice by ones and twos the massive distortions that the housing market contained and just how bad things had gotten. But by then it was too late anyway.

As for the ratings agencies, they're not particularly Hayekian anyway, because they certainly would reduce the rating of almost every government, including the US, below AA if they were. The only real exception being the Swiss. Not to mention that until the crash the risk factor of CDSs was entirely theoretical(good theory, but ratings agencies like insurance companies go off of their own actuarial tables). Thus, until they crashed, they deserved the rating they had, whatever theory might say as to their risk factor.

So what you're saying is that it's not actually the government's fault. Private individuals and businesses were wrong in their estimates of risk and made bad decisions. But I guess that's all right if there is a way to twist it into making the Austrian perspective look like it was right about one thing. You are correct that a bunch of unscientific non-mainstream economists (the Austrian school) aren't listened to by the free market. So are you arguing for the free market, or are you arguing that "Hayekians" ought to be the ones in charge of risk assessment? The decisions were undertaken voluntarily by private companies. The market failed to correctly price the loans. The market failed to correctly assess the risk. Businesses failed to make good decisions.

Seanchaidh:
So what you're saying is that it's not actually the government's fault. Private individuals and businesses were wrong in their estimates of risk and made bad decisions. But I guess that's all right if there is a way to twist it into making the Austrian perspective look like it was right about one thing. You are correct that a bunch of unscientific non-mainstream economists (the Austrian school) aren't listened to by the free market. So are you arguing for the free market, or are you arguing that "Hayekians" ought to be the ones in charge of risk assessment? The decisions were undertaken voluntarily by private companies. The market failed to correctly price the loans. The market failed to correctly assess the risk. Businesses failed to make good decisions.

Humanity's ability to rationalize what they actually hear as what they want to hear never ceases to amaze me. What I'm saying is that government intervention caused the initial problems, which ballooned non-stop. The reason for Hayekian opposition to CDS's themselves is because basic fucking logic says that merely bundling good debt with the bad debt does not erase the bad debt. There was not a single fucking Neo-Keynesian economist out there who was concerned with CDSs until after 2003. Y'know, the "scientific" economists that the government employs. Unfortunately for econometricians economics CANNOT rationally be considered a science.

The free market never would have engendered the loans in the first place, is my point. The ONLY reason the entire system existed was because of government interference, and then all of the individual reactions to and attempts to mitigate the negative effects of that influence. Again, no government interference means no ballooning subprime market in the lowest economic strata. No ballooning subprime means that the banks don't start shoving all that horrible paper into CDSs. No explosion of CDSs means no shattastic mid 90's GIGO computer model, done by a two-bit econometrician. No computer model means the banks never see any profit motive in expanding the subprime strategy into ever goddamned sector of the housing market. This means that housing prices never hyperinflate and the crash never occurs. Think of the market's(By it's very fucking definition the government interference in housing levels would never have occurred in a free market) reaction to the government's interference in this case like a rather severe case of anaphylactic shock.

ravenshrike:
The free market never would have engendered the loans in the first place, is my point. The ONLY reason the entire system existed was because of government interference, and then all of the individual reactions to and attempts to mitigate the negative effects of that influence. Again, no government interference means no ballooning subprime market in the lowest economic strata. No ballooning subprime means that the banks don't start shoving all that horrible paper into CDSs. No explosion of CDSs means no shattastic mid 90's GIGO computer model, done by a two-bit econometrician. No computer model means the banks never see any profit motive in expanding the subprime strategy into ever goddamned sector of the housing market. This means that housing prices never hyperinflate and the crash never occurs. Think of the market's(By it's very fucking definition the government interference in housing levels would never have occurred in a free market) reaction to the government's interference in this case like a rather severe case of anaphylactic shock.

You said it yourself: there was a 'ballooning' subprime mortgage market. This does not suggest they were only done because of the 'interference' of the big bad government. Maybe, just maybe, businesses thought they were going to make a profit with their actions. Just maybe.

It's not like they couldn't afford lobbyists to change the law if it was just so awful for them.

ravenshrike:

Yes. And by forced I mean took the path of least risk. Lawsuits are bad for business, especially as a bank. See, when large amount of people sue a bank, that makes everybody who puts money into a bank veeeery squirrely. And hey, there are other banks out there. So by and large they will follow the path of least likelihood to be sued. As for the banks being all-powerful, if that were the case the revisions to the CRA never would have occurred. Hell, that the original CRA passed in the first place is prima facie evidence that they are not the bogeymen you claim them to be. Powerful, yes, but by no means omnipotent and they swim in a sea with plenty of other large fish, and just as many schools of many small fish with very sharp teeth.

And again, they never would have changed their loan patterns in the first place, thus avoiding the escalation that occurred entirely, if it weren't for the government's interference. What you are arguing for is more government interference to fix the problems government interference set in motion in the first place.

First of all, most the the "banks" involved with selling mortgage backed securities were Investment Banks and insurance companies. They were not Commercial Banks, they don't accept deposits and so didn't worry about depositors getting "veeeery squirrely". Second, if they were so worried about law suits they wouldn't be trading in toxic assets. Third, the CRA was necessary to stop the practice of "Red Lining". There's nothing in the law that forces a bank (Commercial Bank) to make a loan it doesn't want to make, and besides, the enforcement mechanisms are minimal.

Banks didn't change their loan practices. Traditional Commercial Banks weren't even involved. Most of the toxic loans were generated by newly formed mortgage companies, not Commercial Banks. Mortgage companies existed for the sole purpose of generating the loan and then selling it off. These loan were generally "pre-sold", and transferred the same day they were made. The sold loans were then packaged up with a bunch of other loans and sold again, and again. Typically they ended up in a trust owned by investors but managed by an Investment Bank through a loan servicing company. The servicing agreement generally prohibited debt forgiveness so loan modification programs such as HAMP were typically a waist of time.

Most importantly, as I said before, these loans were not CRA loans, they were loans to non-minority middle class people. Those are the facts. Conservatives trying to blame the CRA is BS.

Well, it's all very complicated, but it is a whole lot better than any of the modern alternatives (fascism and communism) that have been tried.

It needs to regulated better, but it is the best system we have under the circumstances.

Regards

Nightspore

Lilani:

Veylon:

Lilani:

Also, I keep hearing this "bribery and paying off politicians" argument but very little proof ever gets brought in. I understand it's something that's inherently difficult to prove, but that sort of terminology sets off my tinfoil hat alarm and makes me take the "problem" a lot less seriously.

It's more of a big picture thing. Remember Glass-Steagal being repealed? Or the big bail-out? That was the politicians paying back their banker friends. It's not like bank X is sending secret dollar-sign bags to Senator Y. The bribery is open, legal, and aboveboard.

That's purely based on speculation--and demonizing speculation at that. I just saw that as another insipid attempt at trickle-down economics. Sure it was irresponsible, idiotic, and couldn't have been pulled off any worse, but a conspiracy? Again, break out the tinfoil hats. Show me the documentation that shows the banks or any known affiliates giving contributions to the politicians, and show me how that correlates with who did and didn't vote for and advocate the bailouts and then we'll talk.

Really? You don't think there were any winks and/or nods when the government decided, "Hey banker-guys, you really screwed up this time, so here, take ALL this free money, no strings attached, and we'll make no attempts to increase regulation, prosecute the obvious cases of fraud, or control how these billions we are straight-up handing you are used".

Really?

I wonder how you feel about cases where people who regulate certain industries are, after retiring from their government positions, then hired into those industries with huge paychecks.

Crazy coincidence?

No, it's essentially legalized bribes. You scratch their back... They'll make sure your "valuable insight and experience" are rewarded VERY handsomely afterwards. That's why we don't have politicians prepared to hit people in power. Goldman Sachs aren't going to hire Elizabeth Warren to be a consultant or lobbyist; they'll hire whomever is willing to agree with everything they want.

Fawcks:

Lilani:
That's purely based on speculation--and demonizing speculation at that. I just saw that as another insipid attempt at trickle-down economics. Sure it was irresponsible, idiotic, and couldn't have been pulled off any worse, but a conspiracy? Again, break out the tinfoil hats. Show me the documentation that shows the banks or any known affiliates giving contributions to the politicians, and show me how that correlates with who did and didn't vote for and advocate the bailouts and then we'll talk.

Really? You don't think there were any winks and/or nods when the government decided, "Hey banker-guys, you really screwed up this time, so here, take ALL this free money, no strings attached, and we'll make no attempts to increase regulation, prosecute the obvious cases of fraud, or control how these billions we are straight-up handing you are used".

Really?

I wonder how you feel about cases where people who regulate certain industries are, after retiring from their government positions, then hired into those industries with huge paychecks.

Crazy coincidence?

No, it's essentially legalized bribes. You scratch their back... They'll make sure your "valuable insight and experience" are rewarded VERY handsomely afterwards. That's why we don't have politicians prepared to hit people in power. Goldman Sachs aren't going to hire Elizabeth Warren to be a consultant or lobbyist; they'll hire whomever is willing to agree with everything they want.

I told you how to convince me that it's true. So show me the money. Then I'll think about considering all of this as more than just tinfoil hat bait.

Lilani:

I told you how to convince me that it's true. So show me the money. Then I'll think about considering all of this as more than just tinfoil hat bait.

So you want me to show you a list of all the politicians who later got a job in the industry they were supposed to be regulating?

Wow, that list will only go on... Forever.

Fawcks:

Lilani:

I told you how to convince me that it's true. So show me the money. Then I'll think about considering all of this as more than just tinfoil hat bait.

So you want me to show you a list of all the politicians who later got a job in the industry they were supposed to be regulating?

Wow, that list will only go on... Forever.

Then show me. Quit beating around the bush. I am literally asking you to prove me wrong. You say you can do it, so go ahead. Do it.

From my understanding, Capitalism is an economic policy where there is three-point triangle to its success.

Wages, Prices, Taxes.

Now it works both ways: Wages goes into prices that goes into taxes and makes a circle in that direction. But it also goes wages into taxes into prices.

If say Taxes goes up, then Wages and Prices must go up. If Wages goes down, Prices and Taxes must go down. The moment someone or something starts to disrupt the money flow (ex. General Electric paying 0 taxes whatsoever and receiving a governmental refund), that causes economic instability (Depression, Recession, Inflation). And the only way for such an unstable economic system to work is for the government to put up laws and regulations to keep the money in circulation. You remove those rules and regulations, you get situations like the current financial collapse, or as history shown, the Great Depression.

ravenshrike:

Pingieking:

ravenshrike:
*snip*

So if I take your premise as true, that the government should stay out of the market and just let the private sector have free rein, how do we explain China, Canada, and Iceland?

Canada has one of the most regulated banking industries in the world, and if it wasn't for the fact that they were so tied to trade with the US they probably would have avoided the recession all together. So we have a great example of a country whose government regulated to achieve a desirable outcome, and it worked quite effectively.

On the other side of the table is Iceland, where the government deregulated the hell out of everything and let capitalism go without restriction. The result is a bankrupt country due to an entire sector focused only on short term profits and immediate gain rather than a desirable final outcome.

I'm not arguing for government regulation; I'm only arguing against total deregulation. Regulation is like taxes and having to see the doctor; we would really rather not have to do these things, but since we have to we might as well make it efficient and effective so that we don't have to do a whole lot of it.

Three examples, only two explanations. Which is good, since in citing China you'd have to note the entire towns that the government has ordered built which have remained empty for years because there is nobody who wants to move there.

But let's go over your examples. Your first example Canada. Fun fact about Canada, they did not try to force their loan system to garner a desirable outcome. Thus, no housing bubble. Or a very minor one, but not one that had anything to do with the banking system. You appear to be mistaking regulation in general with regulation designed to force a market into a favorable outcome. They're two different things. I did not say that all regulations will engender massive market changes, but they tend to when that is the express reason they were instituted in the first place. Also, the reason that Canada was almost not affected at all had nothing to do with their banking regulations, but their regulations and rules about where pension systems could be invested. Thus when the US markets crashed, there was not a large amount of Canadian money tied up anywhere.

On to the volcanic Scandis. Generally speaking guaranteeing ironclad government outlays as insurance if something bad happens will of course end bankrupting the country if something bad enough happens. This wasn't a mere 100,000 per account that they insured, it was their entire banking system. This is also a form of regulation. The pressures of a free market were absent from the Icelandic banks' investments. This means their investment patterns were SUBSTANTIALLY more risk heavy than any other country's banks. Those investments were thus centered solely in the highest return area, namely CDS's. Had Iceland never given their guarantees, the investment patterns of the banks would have been substantially more sane. Thus, when the housing crash hit in the US, the banks would not have completely lost their shirts over it. Which means the government would never have gone more or less bankrupt trying to make good its payouts.

Of course, the housing market was caused by government intervention here in the US. Fannie Mae was created in 1938 as part of the New Deal as a government sponsored business to help stimulate the housing market, the same happened with Freddiew Mac some time later. In 1992, the President signed the Housing and Community Development Act, which forced these companies to slash their prices down, and basically said to the banks they need to get more people into more homes. This easy credit created the housing bubble, it blew up, and the US government directly took over Fannie Mae and Freddiew Mac to try to stop the rescession. It has only drawn it out for four more years what might of ended rather quickly.

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