One model in particular, designed as a parable for society and the economy, combines two classic games: one being The Prisoner’s dilemma and the other being a game known as The Game of Life.

Anyway the models have some very interesting conclusions: namely permanent social and economic stability are fundamentally impossible.

All systems eventually implode– but at least new systems always eventually emerge from this implosion.

The notion that stability can be permanently achieved thru ANY approach (free market Liertarian, Command economy highly regulated, hybrid economy “the third way”, etc…) is fundamenatlly wrong. All are the same in the end.

There is a very well written summary of this (an easy read) on page 226 of Eric Beinhocker’s The Origin of Wealth.

So while tightly coupled systems are more efficient (the prisoner’s dilemma analogy would be ‘always cooperates’ (as opposed to TIT FOR TAT), the benefit of that increased efficiency from ‘always cooperate’ (e.g. a tightly couupled system) IS ALWAYS 100% offset by the increased risk of destruction from a non-cooperator (known as ‘always defect’ in the language of prisoner’s dilemma competition).

Energy in the universe is ALWAYS conserved

So in other words, IBs and hedgies are in equally precarious positions. A loss of confidence of one by the other could be deadly, but since it works both ways, perhaps they’ll find some uneasy balance.

Since the New Deal. Well documented, academically, too.

http://www.ingentaconnect.com/ap/pa/2001/00000012/00000004/art00432

“… securities legislation can best be understood as an effort to reestablish the viability of what has been labeled the “American dream”…. as a response to a moral crisis of capitalism, generated by the “immoral behavior” of the capitalist elite…. to establish the moral legitimacy of capitalism by restoring trust in the existing system. … it would merely be symbolic and used as propaganda to maintain the status quo.
… examining the private correspondence and the actions of the regulators during the early years of the SEC act. We believe our analysis shows that the early SEC commissioners had a commitment to the private property rights paradigm, and were unwilling to confront the monied interests.”

That study is just one example.

Google Scholar will find many more studies.

What puzzles me more than anything, as a mere bystander reading everything available, is why the illusion is so strong.

Has anyone opened a betting pool on when everything will be back to normal, the markets will again have always had the answers to everything, and the government will once again have always been just a drag on the proper functioning of the markets?

I’d give it eight or ten months.

1. Bear Stearns died, in part, because hedge funds stampeded out the door, withdrawing their prime brokerage business.

2. Bear Stearns almost certainly would have survived if the TSLF had kicked in immediately instead of March 27, or if the emergency measure of allowing broker dealers to access the discount window had been introduced before its demise instead of in the immediate wake of its demise.

3. In some parallel universe where Bear Stearns survived instead of dying, Bear executives are right now plotting to kill off and plunder for collateral some of the very hedge funds that, in our universe, killed them off first.

In the words of Vladimir Lenin: кто кого? (kto kovo?). “Who to whom?”. Ie, who dominates/destroys whom? Who can do what to whom?

And by the way, aren’t hedge funds big writers of CDS protection? So after a bunch of hedgies get killed off, maybe Mr. Market will give the unintended consequences merry-go-round another hard whirl…

That said, Satyajit Das (again) has excellent game-theoretical analysis of markets and risk in his book.

And going back to a theme from last summer, remember that there is a real difference between risk and uncertainty (as first espoused by Frank Knight in 1921). Not to say there aren’t a lot of twists and turns in all this. Here’s a useful summary:

http://cepa.newschool.edu/het/essays/uncert/intrisk.htm

Your proposal is not dissimilar to what would have been achieved by the proposed changes in bankruptcy laws, which were not particularly well described in the popular press (which, captured by the opponents, generally simply said that “judges could rewrite mortgages’).

The changes would have put the treatment of residential mortgages on the same footing as those for investment properties and commercial mortgages in bankruptcy. The judge would write down the value of the mortgage to current market value (it’s a secured credit, so you are merely making sure the mortgage is no higher than the value of the security); the amount in excess would be added to the borrower’s other unsecured debts and paid whatever percentage the other unsecured creditors got. The judge would then set a payment schedule on the secured debt.

This has major advantages to the banks: they don’t need to worry about being sued by investors in securitized deals over loan mods; their servicers get paid their fees first (which is a better deal than they get now). People I know who work in affordable housing are mystified that the banks are fighting it.

And yes, you are right that the prospect of governmental intervention ought to make the banks more willing to do mods, which is the best of the bad outcomes open to them.

The one issue I have with your formulation is the five year requirement. Most of the mortgages that are in trouble are 2005 and later vintages. People who bought 5 years ago could have done a refi.

From a practical standpoint, it is hard to tell speculators from homeowners (a lot of the speculators lied and said their purchase was for a primary residence, so you’d need to spend hard dollars to do due diligence to determine otherwise).

The banks would lose, but seeing security now in the lender, might well be willing to loan. (Where necessary, the Feds would provide a soft second down payment at 20% loan amt – need to go back to old/wise rules).

The big losers would be the BS and alike. Ok by me. Much rather the Feds help the little guy, than BS.

Would appreciate a reply to this idea, thanks

Game theory and behavioural ecology strike again.