naked capitalism

mab says:

Yves,

I enjoy your blog. I rarely have time to read the comments so I apologize if the following has been stated or discussed here before. First an observation and then a question.

The observation: Many of our recurring economic problems stem from our debt money system and its fundamental requirement for continual credit growth. We either have credit growth or economic implosion. To achieve the required credit growth, we’ve layered bad loans on top of bad loans. Quite a pyramid scheme. It looked fine on the fed’s spread sheets, but it clearly wasn’t sustainable. Greed, corruption, fraud, cronyism, vanity – all have thrived. It’s not that I think free markets don’t work, they just don’t work the way our debt system demands them to.

The question: Isn’t it time to publicly discuss an alternative economic system? Something that fosters growth, but doesn’t require or force growth. Personally, I don’t think we can afford anymore forced credit growth. The last two bouts of “prosperity” put the majority in the poor house.

Lune says:

Overall, I liked Mr. Blodget’s piece. However, there are a couple of points I’d like to make:

Firstly, Mr. Blodget lays much of the blame for the housing bust on the homeowner who paid too much and took out a toxic loan. Yet when financial professionals did the equivalent thing by buying assets they knew were overpriced, Blodget excuses them with the financial world’s equivalent of “but I have to keep up with the Joneses”. Well, that’s why the homeowners bought that big house with the toxic loan too. After all, people raise large families perfectly fine in apartments, but if your neighbors all live in McMansions, then you need to do so as well. Mr. Blodget doesn’t explain why that herd mentality is excusable in financial professionals and not in homeowners.

Secondly, lay people have less responsibility to understand the arcana of finance than financial professionals. People think of govt regulation as some body of rules sent down from the ether, but the reality is, people elected their representatives to look out for their interests and part of that is regulating industries that the average person can’t regulate himself. The mortgage broker who offered the different loans should have a fiduciary duty, backed by penalties under a comprehensive regulatory regime, to advise his clients about the true costs and risks/benefits of a loan product. To merely state that “well, I offered him 5 different products and this is the one he chose” is a dereliction of duty. I have a friend who’s a part-time mortgage broker and he actually took such duties seriously, and would not write some of the more toxic stuff like neg amortization loans even if his clients asked him for it. Instead, he tried to convince them that they can’t afford the house and need to look for something cheaper. He lost customers that way, but he sleeps much better at night knowing that his customers aren’t getting thrown out of their houses these days.

One need only look at medicine to see a different model. It is understood that the layperson can’t evaluate the efficacy and risks of every drug out there, which is why the FDA screens the data and approves or rejects each drug presented. Furthermore, they regulate which warnings must be present on drugs, and even how prominent each warning must be. While I’d love for every American to have a deep enough understanding of chemistry, molecular biology, clinical medicine, and biostatistics to read and evaluate each million-page study themselves before deciding which cold medicine to buy at the drugstore, that ain’t happening anytime soon.

For better or for worse, most laypeople in America don’t even understand compound interest, and until that changes, the govt can be and should become an effective tool to look out for their safety as much as it looks out for their safety in the medical realm.

Thirdly, after doing a pretty good job analyzing the root human causes of boom/bust cycles, Mr. Blodget adopts an oddly fatalistic tone in our ability to prevent them. Yes, boom/bust cycles are caused by fundamental human forces. And I agree, fighting human nature is a futile endeavor. But the fundamental tenet of good systems design is that you take into account human nature, and design systems around them and incorporating them where appropriate.

His example of hurricanes is telling. The problem with hurricanes isn’t the hurricane itself: it’s the loss of life and property that it frequently causes. Yet millions of people safely live within hurricane territory and lead relatively normal lives. Why? Because we recognize the futility of fighting hurricanes and instead seek ways to minimize the damage that they can cause. We constantly improve our weather monitoring and prediction techniques, evacuation strategies, building codes, and public works like levees, in order to minimize the harmful effects of hurricanes. And we are largely successful (the stunning example of Katerina notwithstanding). If human nature is indeed like hurricanes, unable to be controlled, why can’t we still design financial systems that limit the wreckage regardless?

Indeed, Mr. Blodget himself cites such examples: “the carnage of 1933, for example, gave rise to many of our securities laws and to the SEC, without which this bust would have been worse”.

Finally, if it’s indeed true that we can’t prevent boom/bust cycles, then our first priority should be to prevent bailing out the financial system every time it happens. The tech bubble, for all the destruction of equity values it caused, didn’t require trillions of dollars of bailout money from the govt (i.e. from people who didn’t lose money riding the cycle). And the people who were the firmest believers in the boomtime actually did put their money where their mouth is and lost it fair and square. I have a much easier time swallowing a cycle like that, than the current one, where the government will be taking trillions of dollars from people who didn’t gamble on the market in order to make whole people who did. If we can’t prevent boom/bust cycles, at least we should ensure that whoever perpetuates them faces the consequences when the bust comes.

At any rate, while I liked the article, I think Mr. Blodget is still colored by his past life on Wall St. He excuses Wall St. for attitudes and ignorance, yet, when the same failings are found in homeowners, he expects them to take full responsibility. And he dismisses the idea that “fundamental” human nature can be successfully accounted for in the design of systems of regulation and oversight, when he himself cites examples of such systems.

Anonymous says:

Hi Yves,

Noticed an article on Bloomberg which mentioned that 3-month Treasury Bills traded at negative yield today. Wondering if you could shed some light on what this means?

Anonymous says:

Good article on the limited prospectus in Australia.

http://www.businessspectator.com.au/bs.nsf/Article/What-prospectus-$pd20081210-M6TDL?OpenDocument&src=sph

Skippy

Michael Fiorillo says:

Misdirection is a good term for Blodget’s piece, and to that I’d add another widespread pathology of the age: self-delusion.

The foundation of our economic catastrophe is the declining power and value of labor, the result of the unilateral revocation by capital of the postwar social contract, in which labor was permitted to enjoy some the fruits of increased productivity. in recent decades, and the consequent intense income polarization. People increasingly could not afford one of life’s necessities, housing, on their incomes without resorting to unsustainable levels of debt. That’s why the dot-com implosion was not nearly as catastrophic: it didn’t involve such a fundamental part of the economy and social fabric.

Blodget takes the faux-moralistic tone that “It’s all our faults!” Well, sorry, big guy, but I’m not going to allow you and Wall Street off so easily:

-was it “our” fault that in 2007 the increase in wealth of the top 1% of the population was greater than ALL of the assets of the lowest deciles?

– was it “our” fault that Wall Street has fattened for a generation on fees derived from extracting wealth from the nation’s industrial patrimony, creating an inverted pyramid where the productive economy has had to support an ever-increasingly parasitical financial apparatus?

– was it “our” fault that laws restraining usury and the worst instincts of capitalism were repealed?

Sorry, Blodget, it wasn’t “our” fault; the fault was the direct result of systemic pathologies that benefited a comparably small number of people, whose greed and self-delusion have harmed us all.