On Not Learning The Lessons Of Long-Term Capital's Failure

[Al68]

I have already answered this question. Read my previous posts and try to comprehend.

Well, it's hard to comprehend someone not believing that a person owns his own body, and the wealth created by his own labor. Your previous posts indicate that you disagree, but you provide no basis for anyone else to claim the right to make such decisions (own) the product of a person's labor.

 

[mheslep]

In a free market system without regulation, why should the companies reveal their actual debt leveraging instead of lying about it?

The idea is that lenders would not lend the company money unless it demonstrated the ability to pay it back.

Until a failure occurs (such as Madoff's fund), who would know?

Regulation and laws governing fraud, theft, etc are two different things. Every free market libertarian recognizes the need for a government to enforce these basic laws. Libertarians are not anarchists.

At least their operations involved real assets. A big part of the current problem is derivatives, which don't involve any real assets, just legalized gambling on the outcome of financial events.

Real? In what sense was guaranteeing mortgages on houses that had tripled in price in a few years real? In any case that's still gambling - the place a bet that the home buyer won't default, and even in good times they know that some percentage will default.

 

[misgfool]

Well, it's hard to comprehend someone not believing that a person owns his own body, and the wealth created by his own labor. Your previous posts indicate that you disagree, but you provide no basis for anyone else to claim the right to make such decisions (own) the product of a person's labor.

I think a few millennium of slavery in human societies has proven that it is a very natural state to own other peoples body and their labor. You should try to look at it from natural point of view instead of your liberalism view. There is no fundamental proof (that I know of) to indicate that liberalism is the rightest view, but it is a nice thought so some have adopted it. The key point is that one can choose any view and after that one doesn't have to follow the rules of other views.

 

[Brilliant!]

Al, remember:

Reason is not automatic. Those who deny it cannot be conquered by it. Do not count on them. Leave them alone.

 

[rcgldr]

Real? In what sense was guaranteeing mortgages on houses that had tripled in price in a few years real?

It's a tangible asset. There's some inherent value of the land and house, and it is more than zero. A derivative is simply a sidebet on the outcome of some other financial event; without any direct involvement with the financial event being wagered on.

 

[ThomasT]

This to is a rather large topic, with no short explanation. Thankfully, great minds have addressed this topic very well. The best article that I've ever read on the subject of monopolies, as it applies to the free market, is http://www.nathanielbranden.com/catalog/articles_essays/question_of_monopolies.html , written by Nathaniel Branden. It's a lengthy article, but will be incredibly interesting to anyone who is truly curious on the matter. It goes into great detail of the government interference I keep referring to (preferential treatment).

Thanks for the link. I read the article. Not sure if I understand everything Branden said. I'll ask several questions about it when I get more time. One thing that I'm curious about is that he says that "the market is ruled by a single moral principle: justice". I've always thought of free markets as being amoral or nonmoral. Sort of in the same sense that wild animals aren't constrained by moral considerations. The strong emerge as leaders and inevitable exploiters of the weak. So, in a certain sense, it seems that a totally free economic system would inevitably lead to the liberties of the weak being infinged by the strong. And so a government (ostensibly of, by, and for all the people), which has the monopoly on lawmaking and state sanctioned violence, sometimes steps into prevent abuses (such as inordinately low wages and salaries, dangerous working conditions, time requirements, etc., child labor, union busting, etc.}.

While I do believe that government intervention has screwed up a lot of things, it seems that in some ways it has acted as an instrument of big business. I mean, suppose that you start out with a more or less totally free market, captitalist system, then what's to prevent the owners and bosses of certain companies who emerge as powers from coercing the people in the government to pass laws and do other things that benefit their companies?

If you consider the government as just another player in the 'market', then a lot of what has happened makes sense -- ie., the government as a conglomarate corporation which has a monopoly on certain activities which make it the most powerful player, and a coercive force, in a free market which encompasses it and other so-called 'private' corporations.

The thing to do now is identify why purchasing power has weakened. Currency is just like any other product: it is effected by supply and demand. As more money is pumped into the system, demand for it goes up. All manner of service providers, producers, distributors, etc raise their prices because their is more money to be made. This isn't simply because they are greedy, however. Their costs are rising, because everyone involved in their supply chain wants more of the monetary pie.

It seems inevitable that prices will rise faster than the income of the mass of consumers. So, the standard of living for most people is, inevitably, being steadily eroded. It seems that this must inevitably have an adverse effect on the entire economy. So, how does it get corrected? I don't see it just correcting itself. Doesn't there have to be some sort of centalized manipulation?

 

[Al68]

I think a few millennium of slavery in human societies has proven that it is a very natural state to own other peoples body and their labor.

Even the act of enslaving a person is an acknowledgment by the master that the slave is the original owner of what the master wants. Why else use force to enslave them?

Libertarianism is just a belief that force should not be ever initiated against another person.

The obvious fact that a person is the original owner of his labor is just derived from the fact that a person's body responds to his mind, so he therefore has original control of it, and control is ownership by definition.

 

[Al68]

Al, remember:

Reason is not automatic. Those who deny it cannot be conquered by it. Do not count on them. Leave them alone.

That's the most timely quote I've seen in a long time.

 

[misgfool]

I'm sorry Al68, but despite my best efforts, apparently at the moment I don't have the skills to explain this fairly simple thing to you with any more clarity.

 

[misgfool]

It seems inevitable that prices will rise faster than the income of the mass of consumers. So, the standard of living for most people is, inevitably, being steadily eroded. It seems that this must inevitably have an adverse effect on the entire economy. So, how does it get corrected? I don't see it just correcting itself. Doesn't there have to be some sort of centalized manipulation?

Also in the past history wars leveled the differences. It had two effects: decimation of the population and changes in the aristocracy. Since we don't have wars anymore and the population is constantly increasing, there is less to give to more people.

 

[mheslep]

It's a tangible asset. There's some inherent value of the land and house, and it is more than zero. A derivative is simply a sidebet on the outcome of some other financial event; without any direct involvement with the financial event being wagered on.

Alright a side bet, instead of the main bet.

 

[Al68]

I'm sorry Al68, but despite my best efforts, apparently at the moment I don't have the skills to explain this fairly simple thing to you with any more clarity.

Well, I have a fairly good idea about your beliefs, but I don't want to be presumptuous and jump to conclusions.

Bottom line is, the only thing I have a problem with is people using force against other people to obtain ownership of wealth. If someone just doesn't recognize private property rights, but also doesn't want to use force against anyone else to claim ownership of their property, that's just as good in my book.

 

[russ_watters]

Sorry if I'm missing something here, I haven't been following the thread much, but this one jumped out at me:

It seems inevitable that prices will rise faster than the income of the mass of consumers. So, the standard of living for most people is, inevitably, being steadily eroded.

Where do you get that from? It has never been anywhere close to true for the US over the long term or for any income bracket.

Not only is it not true as an overall principle/average, it is even worse when applied to individuals. The fact that average incomes rise through history means odds are better than 50/50 that at age 40 you'll be better off than your parents were at age 40, at age 50 you'll be better off than your parents at age 50, etc. But due to learning and experience, it is almsot never true that a person is better off at age 40 than they will be at age 50.

There is a third level to the issue, an additional reason why what you said is wrong: we use a sliding scale to measure standard of living. Based on the scale we used, people say that the poverty level hasn't dropped much since the 1980s (for example), but the fact of the matter is that people living on on any point in the demographc curve (say, at the median point) have better houses, better cars, more toys, more money for entertainment, etc. than people who lived on the same point in the curve previously. Now 3a would be that average family size is decreasing, so in addition to being able to buy a bigger house than a median income earner did years ago, for example, you also fill it with fewer people today.

 

[russ_watters]

Alright a side bet, instead of the main bet.

There's still a big difference in risk, though, since one bet has a very real chance of losing all of the principle and the other doesn't have any chance whatsoever of losing all the principle (for all practical purposes).

Lumping all "bets" together is a major fallacy by which people misunderstand investing and even just risk in general. Packaged equities based directly on mortgages are not bets like a lottery ticket or 00 on the roulette wheel. They are fixed-income and extremely low risk - exactly what you want to base a stable, constantly in use retirement fund (for example) on. Short of an asteroid taking out half the country, it isn't possible for them to lose even a small fraction of their principle, even in the short term*.

The stock market is similar, though not as low risk (or limited return). Once companies are big and stable enough to be listed on an index, the odds of losing all of your principle are extrordinarily low and your investments should be structured in such a way that absorbing a short term 40% loss shouldn't be that big of a deal (ie, if you are two years into retirement, you shouldn't have much money in the stock market anymore)

Derivatives, on the other hand, are much more like a plain/ordinary casino gamble, easily possible to lose everything you put into it. [edit] Actually, it is more like a casino where they give you credit. It is actually possible to lose more than you put into it, via credit.

*Let me quantify that: the median home price in the US is down something like 15% from its peak (having trouble finding the exact, but here's a link that says 12.4% in 2008, where most of the loss was: http://www.inman.com/news/2009/02/12/median-us-home-price-falls-124 ). That means that a mortage-backed security has a hard asset backing 15% lower than when it was bought. And in order for that theoretical 15% loss to become real, people have to default on their mortgages.

 

[mheslep]

There's still a big difference in risk, though, since one bet has a very real chance of losing all of the principle and the other doesn't have any chance whatsoever of losing all the principle (for all practical purposes).

I agree, my point is there is risk on both, the difference being a matter of degree. I think it is not fair to call one evil and pretend there is no risk in the other.

Lumping all "bets" together is a major fallacy by which people misunderstand investing and even just risk in general. Packaged equities based directly on mortgages are not bets like a lottery ticket or 00 on the roulette wheel.

Well it depends on how many numbers one covers on the wheel - again its a matter of how great a risk you want to assume.

They are fixed-income and extremely low risk - exactly what you want to base a stable, constantly in use retirement fund (for example) on. Short of an asteroid taking out half the country, it isn't possible for them to lose even a small fraction of their principle, even in the short term*.

The stock market is similar, though not as low risk (or limited return). Once companies are big and stable enough to be listed on an index, the odds of losing all of your principle are extrordinarily low and your investments should be structured in such a way that absorbing a short term 40% loss shouldn't be that big of a deal (ie, if you are two years into retirement, you shouldn't have much money in the stock market anymore)

Derivatives, on the other hand, are much more like a plain/ordinary casino gamble, easily possible to lose everything you put into it. [edit] Actually, it is more like a casino where they give you credit. It is actually possible to lose more than you put into it, via credit.

*Let me quantify that: the median home price in the US is down something like 15% from its peak (having trouble finding the exact, but here's a link that says 12.4% in 2008, where most of the loss was: http://www.inman.com/news/2009/02/12/median-us-home-price-falls-124 ). That means that a mortage-backed security has a hard asset backing 15% lower than when it was bought. And in order for that theoretical 15% loss to become real, people have to default on their mortgages.

I believe you're underestimating the risk in MBS's, looking at this from more from a homeowners point of view, not the lender. The decline may be only on paper for the homeowner, and he/she can keep living in the house forever even if the market were to value it at zero. The lender does not have that luxury, the property has no value to the lender whatsoever other than its market value. The lender has to deal with 'mark to market' on a day to day basis when accounting to regulators or when borrowing money overnight. Recognize that the lender is itself borrowing near every dollar it lends from someone else (depositors, etc), and that it has to keep paying some nominal rate on every one of those borrowed dollars. The lending institution does not have the option of saying, in effect, 'we are not doing that bad, we only wiped out 15% of our investors, the rest of you are ok'. The bank itself is in default in such a case.

While the countrywide median home decline may not be that bad, in broad down turns like this property actually in default often declines in value to the lender by more than half. For one thing, the lender is almost certain to have its income stream on the defaulted and about to default properties go to zero for at least many months, and that income is gone forever.

 

[ThomasT]

Where do you get that from? It has never been anywhere close to true for the US over the long term or for any income bracket.

Thanks for the input. I was just guessing. Turns out I was wrong. However, there is a portion of the workforce for which prices do increase faster than income, ie., whose buying power is steadily eroded. I'm not sure where in the income spectrum this begins.

 

[mheslep]

Thanks for the input. I was just guessing. Turns out I was wrong. ...

I'm still curious: where would you say your information comes from that forms the background for that guess?

 

[ThomasT]

I'm still curious: where would you say your information comes from that forms the background for that guess?

I'm still curious too.

As I mentioned in one of my posts, I know very very little about the big economic picture -- just a lot of not fully explored or thought out ideas about things. I was just wondering about the implications of a truly or totally free market economy after the contributions by Brilliant!. These are considerations for another thread in the philosophy or economics forums I suppose, since I'm not sure how to relate it to the OP by Ivan Seeking. On one hand, taking things as they are (ie., we don't have truly free market capitalist economic system -- and it seems to be getting further away from that ideal with time), then regulating or constraining certain possible behaviors of financial sector participants seems to be the only answer to abuses that contribute to problems such as the current one. I was thinking that a significant influsion of currency into the mass, real market, consumer economy coupled with price capping might help things. But of course there are problems associated with that approach. On the other hand, we might, as has been suggested, begin a program of deregulating things to an extent that the current population has never experienced. And of course there are problems associated with that approach also. One of my questions on this was that if the buying power of a certain portion of workers (say, the bottom 10 to 20 per cent on the income spectrum) is inevitably, steadily eroded under the current system, then wouldn't an even larger percentage be similarly adversely affected in a free (or significantly freer) market system.

Regarding your question, I just Googled a lot of different queries about income, and inflation, etc. I'm just learning about the different indicators and indexes involved in macroeconomics. From my rather hasty scans of the databases that I discovered, and from a therefore necessarily shallow and narrow understanding of it all, I got the impression that the buying power of a significant portion of the nation's workforce was, more or less steadily, declining. How this relates to 'standard of living', I don't know exactly. What Russ said made sense to me. People in this country do, after I thought about it some more, generally seem to me to be better off in most ways that I would deem as being relevant to 'standard of living' than they were, say, 40 years ago, or 80 years ago. And, there doesn't seem to be any 'real' poverty of the destitute and hopeless sort that other, especially developing, countries have. If this is true, then I'm curious about whether or not this 'well being' would be as general under a truly free market system as it is (or at least as it seems to me to be) under the hybrid system that has characterized US economics since ... whenever (I don't know if we ever had a truly free market capitalist system, or, if we did, when it first changed toward the mix that it is now.).