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Failure of free-market economics

  1. Sep 21, 2008 #1

    Ivan Seeking

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    With the failures of Freddie, Fannie, and now AIG, we have seen an earth-shaking failure of free-market economics. While the market would eventually correct itself, and though that should be allowed to happen, it had to be checked for fear of a complete US ecomomic collapse, which, according to a number of economists and members of Congress, very nearly happened this week! So instead of a free market, we have a government bail-out. Those who profited from the market go their merry way, and the taxpayer is left to absord the damage - close to 1 trillion dollars, and approximately the cost of yet another Iraq war. And we may not be done yet.

    At about $6600 for every US citizen, this and the Iraq war will have cost a family of four about $27,000. So why is it that Republicans are mythically associated with prosperity [I keep forgetting]? And a special thanks to John McCain who was instrumental in creating this disaster with his long history as Mr Deregulator. He wanted to bring change to America. Well, it looks like he succeeded: Change may be the only thing left in your pockets after our adventure with McCain's deregulation and Republican control of the government.

    What else could have been done with 2 trillion dollars? The Republicans and their policies have now brought the country to its knees. By all accounts, this is a national disaster.

    So is this the end of an era? Have the banking, insurance, and finance markets proven too dangerous to be allowed to operate freely? And what does this say about free-market theory generally?

    Also, this came out today.
    Last edited: Sep 21, 2008
  2. jcsd
  3. Sep 21, 2008 #2
    Re: Failure of free market economics

    Usually, when things get privatized either the government increases in other areas, regressive intellectual property or something similar, and/or the market drives the companies into the ground and since they're "too big to fail" the government bails them out.

    The amount the US spends even in good economic times on "corporate welfare" is astronomical.

    I also don't understand the idea that markets are simply the way things ought to be. Markets are indeed constructed by human beings, but current market rules might be set up in such a way to stall progress in several areas.

    I don't think it's natural that there needs to be huge, economic collapses in certain industries now and then. Who ever heard of other areas of a complete collapse in something being necessary to progress? This kind of stuff has happened before and you'd think people would learn that certain rules and regulations on the markets are necessary to prevent these things from occurring.

    I think what's happening is just proof that capitalism needs a lot of human oversight and rules in place to keep it functioning properly. So yes, indeed, another failure of free-market economics.
  4. Sep 21, 2008 #3
    Fannie and Freddie weren't totally privatized institutions.

    But remember, the financial industry is very unique in a free-market economic society, because if a big financial institution collapses, or a bank, the government has to "bailout" the customer's money in said institution, to keep the economy itself from completely reeling and going into an actual depression.

    If Nike shoes collapses, no government bailouts. If Mattel collapses, no bailouts. If Coca-Cola collapses, no bailouts. If any of these collapse, will a lot of folks lose their jobs? Yes. But will the financial system collapse? Very unlikely. The worst the customers of these companies get is the fact that the company is now gone.

    But if a major bank or insurance company collapses, it's different, because in addition to the institution itself collapsing, the customers themselves lose all their money. This leads to runs on the banking system, panic, etc...the Federal Reserve system exists to keep the financial system solvent in times of such crises.

    I'm not quite sure if "bailout" is the correct word for these institutions though; I don't think the government is actualy bailing them out per se, more just securing the money the institutions held.

    If you owned stock in AIG, I believe it's gone. Back when Bear Sterns collapsed, if you owned stock in it, it was gone. But the money of the customers is protected.

    I'm not totally sure HOW this works though, nor does the media I think; there is a lot of faulty information out there:

    For example: they say, "Bear Sterns was bailed out," but obviously Bear Sterns itself is history.

    Then you read or hear, "Lehman Brothers will not be bailed out," yet the customers of Lehman Brothers, their money is fine. The institution itself is failing.

    But that is the same thing that happened with Bear Sterns...so it's very confusing.

    I have to strongly disagree with this. John McCain saw this coming from a while back, and said Fannie and Freddie needed more oversight through the Federal Housing Enterprise Regulatory Reform Act of 2005, which was shot down both by Republicans and Democrats.

    Also, to call these institutions that have collapsed "de-regulated" is really kind of stretching it. They were very regulated, but by foolish, ill thought out and inneffective regulation.

    If you notice, most of the hedge funds, which are virtually unregulated, seem to be doing fine (KNOCK ON WOOD, hopefully I won't have to eat my words in the coming days, weeks, or months).

    What's very ironic is that some, such as Bill Gross, founder of PIMCO, have criticized hedge funds as being "unregulated banks" (http://blogs.wsj.com/economics/2007/12/20/gross-economy-in-recession-hedge-funds-a-con/). Yet we have thus far seen many of the very regulated investment banks collapse, while the "unregulated" banks seem to be doing okay for the moment.

    But to just blame this crises on "deregulation" I think isn't right. For one thing, because the economy and the financial markets didn't perform very well back with heavy regulation either.

    And this seems to be one problem: people either are for virtually no regulation of the financial markets, which wouldn't work, because the financial markets used to be crazy prior to any regulation, and others who argue for complete and total oversight of the financial markets, as if the government can somehow know what it's doing with this regulating when it can't handle its own finances properly, and when historically too much regulation also seems to be bad.

    There is a fine middle-ground.

    Remember, being for more government or being for less government are sometimes neither the answer; what we need right now is GOOD government.

    The blame for this crises is on the following, I'd say: investment banks, homeowners, lenders, credit rating agencies, underwriters, investors, real-estate developers, poorly thought-out regulation, and the Federal Reserve leaving interest rates too low, which in hindsight we see was a bad thing.

    To just blame one particular political party or person isn't right. Remember, bubbles occur. Under Ronald Reagan, we saw the 1987 stock market crash in which the markets lost around 23% that day; yet under Bill Clinton, we saw the stock market crash in 2000, losing over 50%. Were either of these the faults of those Presidents? Of course not.

    Under President Bush, we saw the housing bubble occur; it grew and grew, then popped, unfortunately real-estate crash is a far harder blow to an economy than a stock market crash. People don't use stocks as collateral for things like they do their homes.

    Banking and insurance don't operate freely.

    And what it shows is that the free-market is working: that if you lie, cheat, steal, cook the books, whatever, eventually the market gives you the boot; it kicks out the garbage.

    Unfortunately, with financial institutions, they're a special exception who must have their customers' money protected.

    The market is doing a very painful correction.

    Well collapses aren't necessary to progress, they're just a natural thing that seems to happen once in awhile.

    People do understand about rules and regulations, but the problem is that the regulators themselves oftentimes don't know what they're doing.
  5. Sep 21, 2008 #4
    I agree here; good government is needed. Big government versus small government arguments can be a false dichotomy when you're talking about minor changes in our economic system, esp in regards to regulation where "across the board" regulation, or in this case regulatory rules to prevent bad decisions in certain sectos of the economy, may lead to more economic freedom and choices, and less failure.

    That measurement of government should only be used when you're talking about huge cases of government intervention or minimalization.

    I still think regulation was a problem, though, such as the legislation authored by Grammm etc., who went on to become a lobbyist and then a member of the McCain campaign team ("nation of whiners" guy).

    But, extreme leftists, i.e. anarchists etc., will see any government intervention for the protection of property as big government and right-wing libertarians see somehow the reverse. Conservatives simply claim that protecting the finnancial institutions alone is "small government." The point is there are many ways to view the extent of a government in political science, including the people it is protecting and the economy it structures.
  6. Sep 21, 2008 #5


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    Lots and lots wrong here. For a start:
    The cost of the bailouts will come nowhere close to $1 trillion. The media is playing fast and loose with the numbers. That number is an estimate of the value of the investments to be covered, not the amount of money lost. We've discussed this before.
    Really? When are we going to start seeing this "national disaster" decrease economic activity? Ie, the GDP? The recession predicted for earlier this year didn't happen. There still could be one in the future, but economists are not predicting one. http://www.philadelphiafed.org/rese...of-professional-forecasters/2008/survq308.cfm
    We are certainly at the end of the era of the big independent investment banks. But you go much, much too far with your extensions. The crash is a result of a failure in the free market (meaning yes, more regulation is required), but the wild success that led up to it is also the result of the free market. You can't focus on the crash and ignore the boom that preceeded it. They obviously are two parts of the same thing. So the real question is: the downside worth the upside? And it is. Without question. Throughout the past 100 years, periods of expansion have gotten longer and recessions shorter and milder. The occasional flaw that manifests is bad at the time, but it doesn't come anywhere close to outweighing the vast prosperity of the recent past.
  7. Sep 21, 2008 #6


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    Re: Failure of free market economics

    It's Darwinian and it is most certainly natural. Evolution itself involves "complete collapse" (extinction).

    That said, it is quite a stretch to consider the current situation a "complete collapse". This isn't 1929 and the types of things that happened then are simply not on the table today.
  8. Sep 21, 2008 #7
    Investor's Business Daily (albeit a publication solidly supporting McCain) says a lot of blame for this ultimately goes back to the 1977 Community Reinvestment Act, enacted by the Democratic Congress and signed into law by President Carter; it also seems President Bush saw that Fannie and Freddie were at risk and tried to do something:

  9. Sep 21, 2008 #8
    Your source is grasping at straws and doing it by playing the race card.

    It wasn't poor black people who were flipping expensive houses with no money down in my area.:mad:
  10. Sep 21, 2008 #9


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    How so? IBD appears to have misrepresented some facts.

    I think the big problem was mortgage brokers awarding bad mortgages, and lenders over-extending themselves. Helping qualified lenders to obtain mortgages is not the problem - helping unqualified lenders is.

    That appears to be an unsubstantiated claim. An OFHEO report in 2003 indicated problems, so hopefully Bush caught that then. Seems Bush quickly forgot that while trying to defend the War in Iraq and getting re-elected in 2004.

    Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, 190th Congress, was introduced by Mr. Hagel (for himself, Mr. Sununu, and Mrs. Dole) introduced the following bill; which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs.

    The purpose of Federal Housing Enterprise Regulatory Reform Act of 2005 was to replace and amend sections of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992


    McCain appears to be a Johnny-come-lately to this effort in 2006. I'm looking for exactly when.

    According to Elizabeth Dole's site:

    Interesting the McCain is not mentioned.

    The reform and improved oversight of FNMA (Fannie Mae) and FHLMC (Freddie Mac) certainly should have happened back when it was learned that they had significant accounting problems - more than 5 years ago.

    Perhaps a concern over the bill was a provision to abolish OFHEO.
    Sec. 301. Abolishment of OFHEO.

    I'd like to know why it was defeated, and not passed with amendment. To my knowledge, it went down before the Democrats took control of the Senate in 2006, and Obama had only been Senator for 18 months, or so, so I'm not sure how he would have managed to defeat the bill.

    I'd like to know how the Bill got through the Banking Committee, and then who opposed it and why.

    McCain's Fannie and Freddie Connections :biggrin:
    Last edited: Sep 21, 2008
  11. Sep 21, 2008 #10

    Ivan Seeking

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    Apparently this is the inside joke this week: The People's Republic of Wall Street.
  12. Sep 21, 2008 #11


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    Press Release
    May 26, 2006
    Not quite 2005 as mentioned on many blogs.

    Apparently - On Apr 12, 2007, S.190 was re-introduced in the Senate (with a new bill number) as S.1100: Federal Housing Enterprise Regulatory Reform Act of 2007.

    Dodd (D) was Committee Chair in 2007.
  13. Sep 21, 2008 #12

    Ivan Seeking

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    Holy crap! Watch the clip with Sen. Chris Dodd, D-Conn., and Rep. John Boehner, R-Ohio.

    Boehner states that the ramifications of the crisis that we face, if left unchecked, are so bad that it can't be discussed. This really is unprecedented. I have NEVER seen so many powerful people so scared before. Dodd states that when congress was told, it was like the air was sucked out of the room.

    And there is no certainty that the bail-out will work. It is a confidence game.
  14. Sep 22, 2008 #13
    This I think was a big part of it.

    When I was watching the news a day or so back, there was a guy mentioning exactly this, that you can find Fannie/Freddie connections on both McCain and Obama, McCain the ones listed above, and Obama, who has Franklin Raines and Jim Johnson, former Fannie Mae CEOs, as economic advisors, and also being the second largest recipient (among Senators) in donations from Fannie and Freddie: http://www.foxnews.com/story/0,2933,423701,00.html

    Both candidates have dirt on each other in this it seems.
  15. Sep 22, 2008 #14

    Ivan Seeking

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    The important thing is that this is a failure of the essential Republican economic philosophy. Less the social agenda of the extreme right, the Republicans are now ideologically bankrupt. And we have McCain, his financial advisor, and the Republicans in general to thank for this crisis. It isn't about who has a friend at Fannie, it is about a failed philosophy - the philosophy that deregulation leads to efficient and profitable financial institutions. It is yet another example where the Democrats have been right all along: You can't trust the bastards! They will hang you every time. And this time they really hurt us: This is being described as THE largest financial crisis in history. This is a national catastrophe.

    In order to put this in perspective, it is even argued by some that we are now effectively socialists. George Will even cited one defintion that applies.
  16. Sep 22, 2008 #15


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    The current fiasco on Wall Street had roots in bipartisan support.

    Wall Street vs. The Democrats: Don't Hold Your Breath
    I have to wonder if these people even bother to read the bills.

    Also, I think Rubin is advising Obama. :rolleyes:
  17. Sep 22, 2008 #16


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    Last major investment banks change status


    Ya know, I have a sneaking suspicion that something went terribly wrong. :rolleyes:
  18. Sep 22, 2008 #17


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    Goldman, Morgan to become holding companies
    Companies get access to Fed lending in exchange for oversight


    • Oil futures hit daily limit for price move as cost of a barrel of crude leaps above $116 (partly related to decline of dollar).
    • Gold rallies 5% as dollar slides

    Short-sale ban list expanded to include GE, GM
    American Express also added; NYSE expands roster by another 30 stocks

  19. Sep 22, 2008 #18
  20. Sep 22, 2008 #19


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    $521,000: The average pay of Goldman Sachs employees and that includes secretaries
    So how many PFers got a 21% bonus in 2004, or any other year?
  21. Sep 22, 2008 #20
    In the passage that you quoted it says:
    It does not say what percentage his bonus was. For the record, I was paid $39m in salary, shares and options - a 20 per cent increase on 2004.
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