NationStates Jolt Archive

I've been exposed to this line a lot: "deregulation is at fault". Alternatives have included "trickle-down economics is at fault" and "Bush is at fault".

All of them propose that the government could or would have prevented the current financial market turmoil, had it not been neutered by a succession of politicians who deregulated everything.

Leaving aside the issue of whether or not the government is ever in a position to predict a crisis, and tell a bubble from sustainable good times, I'm interested in the specifics of the above claim, because I doubt its validity.

Which laws were written, which rules abandoned, that you think contributed or created this mess?

For the American people, Capitalism is only fair when it is working to their perceived advantage.

It's a combination of different factors all under the philosophy that an economy grows fastest through buy/sell investment, that if the rich get richer, the poor will also benefit.

Hence, deregulation and privatization of everything, looser laws to encourage speculative betting on the market, increased credit lending ability to spur those bets, lower capital gains tax to further encourage speculation, loose regulation of how investment banks can bend the rules to create dodgy investment vehicles, lowering taxes so that people have more cash to invest, the idea that a government in deficit is no bad thing, thus for an individual to be in debt is no bad thing.

Overall, since Reagan, America has been encouraged to play fast and loose with its money.

This is the inevitable result.

We might as well take the GDP to Vegas and play blackjack, the money will at least benefit the economy in some way then.

For the American people, Capitalism is only fair when it is working to their perceived advantage.
Is it not reasonable for a people to expect a system of trade to work to their advantage?

"deregulation is at fault": Only in the sense that some deregulation did happen to allow it the current situation to occur than yes, but no this isn't why.

trickle-down economics is at fault": Umm no, no can't see how.

"Bush is at fault": An old favourite of people who have no clue, I lost my wallet the other day, well that is the fault of Bush. Considering the deregulation began before Bush was President that I fail to see why, not to mention that the US Federal Reserve is independent but yeah.

We might as well take the GDP to Vegas and play blackjack, the money will at least benefit the economy in some way then.

Everything on black.

Is it not reasonable for a people to expect a system of trade to work to their advantage?

not when they tout it as "the best system ever" and everyone else is teh ebil. even free trade proponents don't like free trade when it hurts their intrests

I'd have to go back over my posts of the last 5 years or so, but I believe the general idea was that the last 30 years have shown a systematic undermining of the economic fundamentals for the middle and lower classes. Real wages have been declining, the number of hours workers have to work to get those wages have been increasing, and despite the fact that productivity has skyrocketed, the per-unit measure of what workers earn from what they produce has declined across the board. As this has happened, debt from credit cards and home mortgages has taken off to make up the difference.

To compensate for that fact, we've seen a series of investment "opportunities" that were supposed to more than make up the difference. Stocks in the 90's took off, which was supposed to incite a new investment bonanza in the middle class. Real estate in the 00's took off, which was supposed to more than tide people over during the recession. The general idea of the promise, and I'd have to dig into the specifics to be sure, is that while wages are declining, it's all okay, because you're getting more and better out of it in the form of home equity that you can leverage against and more access to the stock market which is the avenue to real wealth. Once these things take off, you can pay down your debt and be better off for it.

The exchange, however, was that we needed to systematically reduce the number of regulations on business and interpret more favorably towards business those that remain. We've adopted a far tougher stance towards unions than what we've had in the past, we allowed large-scale use (or abuse) of flex-time and part-time positions to limit the number of workers on worker-sponsored healthcare, and we've dropped millions from the pension and healthcare responsibilities that companies used to provide. We let slide the fact that the real tax rate for companies dropped substantially as companies exploited loopholes. The idea was that by doing this, we make our companies competitive, they become more profitable, and we as stockholders benefit more directly. To give one rather trivial example, I remember being outraged when I was about 5 years old in the late 80's when I saw evening news reports that companies were discontinuing the practice of paid lunch breaks--you'd now have to be at the office for effectively 9 hours a day rather than the old standard 9-to-5 in order to make sure the company got 8 hours of work from you.

The complaint, then, is that this bargained-for-exchange was made in bad faith. We the middle class upheld our end of the bargain. We went for the reductions in obligations that companies are supposed to provide. We worked far longer than we used to in exchange for less than what we once made. The average male worker in this country now works 50 hours a week, and yet his real take-home pay has declined. We in short gave them what they wanted. And how then were we repaid? Once those obligations were relaxed, the companies moved jobs overseas, or employed illegal immigrants (this is an explanation that I'm far less comfortable with, but it is being floated), or either frittered away our money or simply made it disappear down the rabbit-hole of lost money in the stock market or the real estate market. Meanwhile, the middle class has been saddled with a flood of houses and cars and crappy consumer goods they don't really want at prices they can't afford.

I've been exposed to this line a lot: "deregulation is at fault". Alternatives have included "trickle-down economics is at fault" and "Bush is at fault".

All of them propose that the government could or would have prevented the current financial market turmoil, had it not been neutered by a succession of politicians who deregulated everything.

Leaving aside the issue of whether or not the government is ever in a position to predict a crisis, and tell a bubble from sustainable good times, I'm interested in the specifics of the above claim, because I doubt its validity.

Which laws were written, which rules abandoned, that you think contributed or created this mess?

Deregulation is absolutely at fault, but not the WHOLE fault.

Deregulation is obviously at fault, if you remove regulation, and predatory practises expand, then deregulation is clear and causative as culpable. Yes - the predatory practises are also culpable, but what kind of fantasy world do you have to be convincing yourself you live in, to not even allow for the risk of predation?

Knowing that deregulation will allow predatory practise to flourish - if you go ahead and deregulate anyway, you are creating the situation.


The other large contributor, is the concept people bounce around of 'wealth'. It's a nonsense, has no real world meaning, and shouldn't be used as an objective measure... because it's not. There is no difference between sustainable markets and bubbles... every market is a bubble. There's no such thing as indefinitely expanding wealth - you can just ride the odds.

But sooner or later, something has to give, and the market will adjust.

The crash is brought about by lack of understanding of what underlies the economy, and unrealistic expectations. The crash we're experiencing NOW is happening NOW because deregulation is like taking the safety mechanisms off the rollercoaster.

I firmly believe that there is another, more substantial problem with the economy as a whole.

You see, the world around us is evolving faster and faster than ever before. We, as Americans, are struggling to keep up against countries that can produce more cheaper. While the dollar weakens, those at the top keep milking their cash cow. I firmly believe that most of these companies knew EXACTIALLY what they were doing when they started. They set people up for failure, took their money when things went bad, then went bankrupt.

Or they're asking the government for MORE money to bail them out.

Who loses?

The middle class investor who just wanted to have some money set aside for retirement (thank you, mismanagment of Social Security and Boomerang generation.) The poor schmuck who only wanted to have a house of his own or wanted it cheaper. The American dream is destroying the country.

The more important question, though, is where the government is going to get this $700 billion to bail these guys out?

I firmly believe that there is another, more substantial problem with the economy as a whole.

You see, the world around us is evolving faster and faster than ever before. We, as Americans, are struggling to keep up against countries that can produce more cheaper. While the dollar weakens, those at the top keep milking their cash cow. I firmly believe that most of these companies knew EXACTIALLY what they were doing when they started. They set people up for failure, took their money when things went bad, then went bankrupt.

Or they're asking the government for MORE money to bail them out.

Who loses?

The middle class investor who just wanted to have some money set aside for retirement (thank you, mismanagment of Social Security and Boomerang generation.) The poor schmuck who only wanted to have a house of his own or wanted it cheaper. The American dream is destroying the country.

The more important question, though, is where the government is going to get this $700 billion to bail these guys out?
Oh, the government would never take it from your average taxpayer! never in a million years! Big Brother PROTECTS and loves us!

*shudder* You feel that way, too?

Hey, I've got it! PULL THE TROOPS BACK TO THE US!

Or, you know, bleed the rest of us dry until we are so fed up that we finally rise up and march, destroying the government in a firey rebellion.

*shudder* You feel that way, too?

Hey, I've got it! PULL THE TROOPS BACK TO THE US!

Or, you know, bleed the rest of us dry until we are so fed up that we finally rise up and march, destroying the government in a firey rebellion.

A little bit of class warfare?

http://money.cnn.com/2008/09/26/news/economy/easton_backlash.fortune/index.htm?postversion=2008092810

This is a thoroughly good read.

Interesting. I finally feel like I'm going to be living history, win or lose.

Now, what can I do that will actually MEAN something to affect that future.

Interesting. I finally feel like I'm going to be living history, win or lose.

Now, what can I do that will actually MEAN something to affect that future.

Here, I have a tract that can answer that question:

http://www.fredvanlente.com/cthulhutract/pages/

Deregulation is at fault it the same way decriminalizing theft would be at fault for an increase in robbery.

More than deregulation, what seems to be the ultimate culprit is the availability of credit to small-scale borrowers, and the development of a culture within the banking industry that sought to make everyone a mortgage payer, and no one a renter. The problem, was, of course, that not everyone could pay a mortgage. Banks gambled big time, and they lost hard.

I'm not an expert on the matter, but were there any regulations on the mortgage industry, prior to deregulation, that would have stopped this from happening?

It's a combination of different factors all under the philosophy that an economy grows fastest through buy/sell investment, that if the rich get richer, the poor will also benefit.
That's not an answer, really. When people say "deregulation" caused this, or even partly caused it, then there must have been laws which were scrapped and would have prevented it.

I want the proponents of this view to name these laws. I don't know that much about the way American finance was and is regulated compared to some of you guys who live there, but from the laws I do know - primarily the Glass-Steagall Act and the Basel rules, I can't see it.

The former was in fact scrapped, but it existed primarily to keep investment- and main street banks seperate. Even after it was scrapped, very few mergers across this boundary happened. And now, it seems like such mergers are actually the way forward because it allows the investment banks to get back to their feet through the access to safe retail funding.

The Basel rules were somewhat at fault, because they encouraged moving stuff into off-balance sheet vehicles. But they weren't American, but written by an international group and finalised by the BIS. They didn't replace more thorough rules either, so it's more a case of bad regulation rather than deregulation.

I'd have to go back over my posts of the last 5 years or so...
That's got nothing to do with the regulation of financial markets though. Indeed, even though what you say may be true, it doesn't follow that we should now have a big financial crisis.

Deregulation is absolutely at fault, but not the WHOLE fault.

Deregulation is obviously at fault, if you remove regulation, and predatory practises expand, then deregulation is clear and causative as culpable.
Well, is it? What were the regulations that were weakened or scrapped. What were the laws?

Deregulation is at fault it the same way decriminalizing theft would be at fault for an increase in robbery.
So was anything decriminalised which would have prevented this?

Has anyone who blames this, even in part, on deregulation actually thought before talking? Surely deregulation means abandoning regulations, doesn't it? And those regulations should have names, places in wiki or law textbooks or whatever that you can point me towards.

That's got nothing to do with the regulation of financial markets though. Indeed, even though what you say may be true, it doesn't follow that we should now have a big financial crisis.


No, but that's beside the point. My argument wasn't If Deregulation, Then Crash, it's that we were promised If Deregulation, then Joe Six-Pack can retire at 45 with a nest egg set for the rest of his life. That hasn't happened, obviously, and the problem is that, whether or not failure to regulate one particular practice could or could not have averted the current fiscal crisis, the promise has gone unkept. Spectacularly so, in fact, because it appears that the fiscal crisis is hitting just at the point that the baby boom ought to have begun retiring and the baby boomlet children of Gen Y is hitting the workforce. Given that, and given the fact that anyone with half a brain and a liberal predisposition towards economics was warning that if you deregulate sufficiently, then A crisis OF SOME KIND will happen, it's not surprising our blood is boiling and we want a more and better regulated economy.

Put simply Neu, your question is beside the point, because it doesn't matter if this crisis was the result of some freak chance occurrence that, coincidentally, obviates the causal relation between regulation and the current housing mess and it's spread into the credit markets as a whole. Now mind you, I'm not saying that's what happened, I'm saying whether it happened or not, and hence the central axis of your question, is irrelevant. You're asking how much was Herbert Hoover to blame for the Great Depression when what you should be asking is to what extent was the failure to create institutions like the Federal Reserve responsible for preventing something like the Great Depression. What matters is the larger concern that because our economy was based on debt, because the middle-class's income has been declining for the last thirty years, because the economy has been propped up by one new form of credit after another, and because the middle-class was banking on a promise that times would get better if they sufficiently deregulated, we were in fact riding for a fall, and if the housing crisis hadn't happened, something else would have. The predictive value of this hypothesis, I would guess, is that this economic downturn will be far tougher than others because we are tapped out for assets and our income is stretched to hell and gone to cover existing obligations.

Narrow technocratic answers I suspect will not save your worldview, but even if it they do, they don't obviate you from answering the larger question of If Not This, Then Something Else that currently hangs over the libertarian worldview. Nor does it change the fact that your worldview promised the American Middle Class better prosperity in exchange for heightened risk, and it failed to deliver. You can play like a 70's-era democratic socialist and talk about how If Not For Stalin, We Would Have Utopia all you want, but that doesn't save libertarianism from a well-deserved comeuppance.

Here is the issue. the Banking system has gotten so used to regulation since the 1930's they really don't know how to function with out it. normally in a deregulated market that's always been deregulated crappy companies fail before they gain assets equal to the federal budget. But when you deregulate after institution have become large during regulation they suddenly make a grab for more money. and when the sub prime loans fail they have what happened happen.

Deregulation is at fault it the same way decriminalizing theft would be at fault for an increase in robbery.

when has it ever been criminal to loan someone money just because they didn't have 10% of the value of the property to be bought down.

Well, is it? What were the regulations that were weakened or scrapped.
...ask McCain's financial advisor, Phil Gramm?

I think it's not deregulation that's the problem, it's the kind of deregulation that has come to mean "deregulation". Basically, we're giving these companies the ability to pursue private profits with socialized risk; this applies to both the GSEs and the major banks, both of whom pursued investments and financial instruments that would not have existed without the kind of socialized risk that basically guaranteed those companies would get some kind of bailout if things hit the fan.

I can guarantee you that allowing companies to pursue profit freely without assuming the free-market risks that would normally check greed and unsustainable profits is a recipe for disaster. This bubble would not have likely inflated as much as it did without those distortions, and it would have burst and corrected itself without the need for a bailout without those distortions. The kind of model we have here is so blatantly flawed (in hindsight) that I think it will have to be changed or else we face greater disasters down the line.

I guess Hearts of Iron 2 was right...the mixed market does suck. You either need a lot or a little regulation, not anything in between.

More than deregulation, what seems to be the ultimate culprit is the availability of credit to small-scale borrowers, and the development of a culture within the banking industry that sought to make everyone a mortgage payer, and no one a renter. The problem, was, of course, that not everyone could pay a mortgage. Banks gambled big time, and they lost hard.

I'm not an expert on the matter, but were there any regulations on the mortgage industry, prior to deregulation, that would have stopped this from happening?

Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp (http://en.wikipedia.org/wiki/Marquette_Nat._Bank_of_Minneapolis_v._First_of_Omaha_Service_Corp.) effectively eliminated the ability of state governments to enact anti-usury laws. Anti-usury laws restrict credit.

I think it's not deregulation that's the problem, it's the kind of deregulation that has come to mean "deregulation". Basically, we're giving these companies the ability to pursue private profits with socialized risk; this applies to both the GSEs and the major banks, both of whom pursued investments and financial instruments that would not have existed without the kind of socialized risk that basically guaranteed those companies would get some kind of bailout if things hit the fan.

I can guarantee you that allowing companies to pursue profit freely without assuming the free-market risks that would normally check greed and unsustainable profits is a recipe for disaster. This bubble would not have likely inflated as much as it did without those distortions, and it would have burst and corrected itself without the need for a bailout without those distortions.

Also, 'deregulation' as a mindset encompasses 'lack of regulation' as a policy. It's not just removing regulation, it's not imposing regulation when it is needed.

Also, 'deregulation' as a mindset encompasses 'lack of regulation' as a policy. It's not just removing regulation, it's not imposing regulation when it is needed.

Yes, that's exactly right. The stock market boom (and bubble) of the 1980's and 1990's created this very prevalent attitude that Wall Street could do no wrong and that CEOs that drove profits were, well, heroes, and that giving them the freedom to pursue profits was all that mattered, even if it meant risking financial disaster. Even when it turned out both of those counts could be brutally wrong, little was done to stop it because there was still that hope that the next boom was right around the corner, and thanks to low interest rates the housing and commodities bubbles rolled right along on the tail of the dot-com bubble.

Ultimately, that mindset needs to change if we want a better banking system. People need to realize that markets need to work properly if they want to reap the benefits; that means regulation where it is needed and deregulation applied on both the profit and risk sides, not just the profits.

Deregulated corporations end up like junkies looking for a quick fix. Nothing will stop them but honest financial institutions making them exercise due diligence. Now that doesn't HAVE to be governments doing it - but somebody has to.
Remember Gordon Geckoe in "Wall Street"? These bastards have been playing at being Gordon Geckoes for a long time now - sending several third world countries broke in the process.
NL, I wouldn't deify economic rationalism if I were you. It's just another theory and not a very good one. The flaw is that there is no "level playing field" and that corporations use their amazing wealth to do dishonest things for short term gain. (Oh! And don't drink Chinese milk!)

Yes, that's exactly right. The stock market boom (and bubble) of the 1980's and 1990's created this very prevalent attitude that Wall Street could do no wrong and that CEOs that drove profits were, well, heroes, and that giving them the freedom to pursue profits was all that mattered, even if it meant risking financial disaster. Even when it turned out both of those counts could be brutally wrong, little was done to stop it because there was still that hope that the next boom was right around the corner, and thanks to low interest rates the housing and commodities bubbles rolled right along on the tail of the dot-com bubble.

Ultimately, that mindset needs to change if we want a better banking system. People need to realize that markets need to work properly if they want to reap the benefits; that means regulation where it is needed and deregulation applied on both the profit and risk sides, not just the profits.

The irony is - we can't even claim it's out of the blue. There's barely a person in the country who doesn't at least have name-recognition for the word 'Enron'. My ten-year-old would recognise the name, even if she didn't know the story.

We've been sitting watching this coming, and basically going 'wow, that was a fuck-up... but probably every other business and businessman in the whole country is super-honest, puts the customer and the country first, and would never do ANYTHING shady or dangerous'.

I've been exposed to this line a lot: "deregulation is at fault". Alternatives have included "trickle-down economics is at fault" and "Bush is at fault".

All of them propose that the government could or would have prevented the current financial market turmoil, had it not been neutered by a succession of politicians who deregulated everything.

Leaving aside the issue of whether or not the government is ever in a position to predict a crisis, and tell a bubble from sustainable good times, I'm interested in the specifics of the above claim, because I doubt its validity.

Which laws were written, which rules abandoned, that you think contributed or created this mess?
Personally, I doubt it's validity somewhat too, but I do suspect some deregulation--or perhaps a simple lack of regulation on key points--on loans helped out a lot. The main thing that caused the crisis here was loans, after all, and I think that if they had been better monitored so more institutions wouldn't keep going for long-shot after long-shot loans, things might've worked out better.

But then again, that might be too much interference, so much that it would slow things down too much.

It's a hard situation to figure out.

No, but that's beside the point. My argument wasn't If Deregulation, Then Crash, it's that we were promised If Deregulation, then Joe Six-Pack can retire at 45 with a nest egg set for the rest of his life.
To be fair, I'm hardly to be made responsible for what people promised other people perhaps decades before I was economically or politically conscious. And one factor is, I think, that Americans have always, culturally, been particularly optimistic about their future and their ability to improve it.

This article (http://pewsocialtrends.org/pubs/706/middle-class-poll) gives a good overview, while particularly concerning itself with the apparent change that happened since 1999. Now, economically liberal politics have been around since before then, so I would put forward that we're looking at an economic shift particularly due to the rise of China and the implications for competitiveness.

Given that, and given the fact that anyone with half a brain and a liberal predisposition towards economics was warning that if you deregulate sufficiently, then A crisis OF SOME KIND will happen, it's not surprising our blood is boiling and we want a more and better regulated economy.
I haven't seen such claims, I really haven't. But even if I had, some kind of crisis isn't really good enough. Regulations are specific laws, written to achieve specific purposes - if you can't point to what they're actually trying to prevent, then how can you write good regulations?

What matters is the larger concern that because our economy was based on debt, because the middle-class's income has been declining for the last thirty years, because the economy has been propped up by one new form of credit after another, and because the middle-class was banking on a promise that times would get better if they sufficiently deregulated, we were in fact riding for a fall, and if the housing crisis hadn't happened, something else would have.
You're putting truth and conjecture together. Obviously the economy has taken on progressively more debt, and middle class income has adjusted in relation to the skills and knowledge of the income earns compared to the rest of the world. Those aren't things created by deregulation, unless we're going to talk about trade barriers, which I see few people actually advocate.

But that this was because people had promised other people something, I think is a hypothesis that you can't prove. If we're going to talk fundamentals, then the great lead the US enjoyed after WWII wore off at some point and has diminished since then. The rest of the world caught up, one region after another, and that depressed the relative strength of the US economy and employee. The results were perhaps lower economic growth, more unemployment and slower wage growth, a current account deficit and so on. Now, I'm not certain about the details of the Reagan campaign for example, but he may have promised that deregulation would help the situation. He wouldn't be wrong by saying this, since deregulation can reduce red tape and the costs of conducting business to a point where there are pay-offs in terms of growth and employment. But the US was never regulated to the extent that removing the red tape would have a big enough effect to actually reverse the general trend towards a weaker relative position in the world. So deregulation may help, but it wouldn't solve the problem. Nothing would.

Again, I don't think that any such speeches suddenly encouraged people to borrow like crazy or buy their stuff from overseas. So the things that caused the crisis, whether it be micro-reasons like shoddy risk management assumptions in financial modelling, or macro-reasons like this overreliance on debt, can't really be tracked back to deregulation - with perhaps the exception of a largely free trade environment with other industrial countries, particularly Japan and China. But the response to such a claim would obviously be that the losses from trade barriers would have been huge.

Narrow technocratic answers I suspect will not save your worldview, but even if it they do, they don't obviate you from answering the larger question of If Not This, Then Something Else that currently hangs over the libertarian worldview.
Actually, I'm not surprised this happened, nor do I think it implies anything. Financial crises are part of economic development, and have been for much longer than modern capitalism or liberal economics have been around. A bunch of Dutchmen going nuts over tulips wasn't caused by libertarian politics.

The size of this is of course astonishing, and it's sad that it imposes such a big cost, but the alternatives...well, there aren't any. Deregulation, liberal economics and financial crises have little to nothing to do with each other. In recent decades, the biggest causes of financial crises were either governments getting themselves into fiscal catastrophe (Latin America) or the sort of moral hazard problems Vetalia was talking about (East Asia).

But I'm not one of those types who will now blame the mess on the government. With the exception of Fannie and Freddie, I don't think considerations about intervention in case of trouble would have played much of a role in the valuations or behaviour of Wall Street. I put this one down to humans being idiots, which seems to be an inescapable fact of life.

Nor does it change the fact that your worldview promised the American Middle Class better prosperity in exchange for heightened risk, and it failed to deliver.
Well, the obvious answer would be that my worldview and the politics of the US of the past 30-odd years have nothing to do with each other. But even assuming that US governments had some inkling of economic libertarianism about them, I'm not sure it really failed. We'd invariably get stuck trying to isolate causes, of course, but I still think it would be worth examining how middle class lifestyle changed over a period in which "my worldview" was put into place. If you're up for that, I'd happily tag along.

Deregulated corporations end up like junkies looking for a quick fix. Nothing will stop them but honest financial institutions making them exercise due diligence. Now that doesn't HAVE to be governments doing it - but somebody has to.
So in other words, you're not blaming deregulation, but slack ratings agencies?

Remember Gordon Geckoe in "Wall Street"? These bastards have been playing at being Gordon Geckoes for a long time now - sending several third world countries broke in the process.
You mean the fictional character in the popular movie?

And I'm not going to get into a debate about the involvement of "these bastards" into various financial crises in the developing countries (here - I'd happily contribute in another thread), other than saying two things: 1) the majority of the "speculation" that brings these countries down in the end comes from the inside, as people try to get their wealth into safety and 2) no speculator can't make money of a bet against a country or company if it doesn't give him reason to.

NL, I wouldn't deify economic rationalism if I were you.
You could at least stick to proper definitions. As people have tried to tell you before, economic rationalism is the outcome of academic economics, that is the work on theory and the examination of practice. People who disagree with economic rationalism are properly defined as deluded.

Economic rationalism is also remarkably free of ideology, which is why my libertarian viewpoints for example can't be defined as economic rationalism. Ideological viewpoints have certain measures of "goodness" that a rationalist approach might then use, and want to put particular weight on different criteria - in my case "freedom", in your case perhaps "stability" or "equality". I can use a rationalist approach to evaluate a situation and design policies aimed at any of these - with the problem being of course that there are limits to what is actually possible in the real world.

It's just another theory and not a very good one. The flaw is that there is no "level playing field" and that corporations use their amazing wealth to do dishonest things for short term gain. (Oh! And don't drink Chinese milk!)
So this crisis was caused by corporations doing dishonest things for short term gain? In what way?

You see, this thread is trying to sort out the invariable use of this crisis in arguments made for certain ideological viewpoints. People who want more regulation will (and already are) pointing at this and saying "look, we don't want that, agree with me". I'm questioning the link, in an orderly way, nice and early, so that we can sort out truth from rhetoric more effectively.

The irony is - we can't even claim it's out of the blue. There's barely a person in the country who doesn't at least have name-recognition for the word 'Enron'. My ten-year-old would recognise the name, even if she didn't know the story.
The things people did with Enron were illegal. There were regulations in place, and the company's managers broke them. That makes it a very different kind of case.

On the whole, this crisis was not caused by anyone breaking any laws. The argument for more regulation would be that there should have been some, the argument that deregulation was involved in causing all this would be that there were some rules (and Xenophobialand is suggesting that some of these weren't actually written in law, but rather informal, social ones) which were scrapped.

Well, you know, the Communist Party had nothing to do with the failed economy of the Soviet Union either, it was really the people.

Well, you know, the Communist Party had nothing to do with the failed economy of the Soviet Union either, it was really the people.

Not true at all. In the Soviet economy, the government had full control, and there were many mistaken policies, from a lack of incentive to work, to bad science--trying to get wheat kernals to adapt to cold conditions? What?--and so on and so forth.

Don't forget the constant environment of fear. That'll kill any economy that's not on a wartime footing.

Not true at all. In the Soviet economy, the government had full control, and there were many mistaken policies, from a lack of incentive to work, to bad science--trying to get wheat kernals to adapt to cold conditions? What?--and so on and so forth.

Don't forget the constant environment of fear. That'll kill any economy that's not on a wartime footing.

Well quite, my point is that to say a government has no bearing on the economy is pretty silly.

I can't help but notice that despite some rather indignant responses, "Well obviously deregulation is to blame!", no one has pointed out a set of regulations that were removed which could have prevented the current situation.

Well quite, my point is that to say a government has no bearing on the economy is pretty silly.

Oh, yes, that.

Sorry...I'm tired so I miss subtlety even more than usual tonight.

I can't help but notice that despite some rather indignant responses, "Well obviously deregulation is to blame!", no one has pointed out a set of regulations that were removed which could have prevented the current situation.

Well much of the point is that pointing to a specific piece of legislation is, well, pointless.

I could say that Ronald Reagan's Economic Recovery Tax Act, which slashed taxes on individuals and corporations started the idea that liquidity was more important than balance. That is, it's more important to have the money to invest for greater gains than it is to have a balanced budget.

And it's not necessarily the case that a balanced budget is overly important, and much depends on the times, but the message is - don't worry about being in debt, we can always spend more to get us out of difficulty.

Hence, lower interest rates, lower taxes - hell, give back money - lower Capital Gains Tax, whatever it takes to get Americans to spend more.

And again, each by its own isn't necessarily bad, and really, people don't have to follow the example of the government by going into debt, but the example is set, the message is to spend, spend, spend and the economy will rise forever.

Well it didn't and the fact that no one had any money meant that, when the crunch came, no one could afford it.

Well much of the point is that pointing to a specific piece of legislation is, well, pointless.

Why?

I could say that Ronald Reagan's Economic Recovery Tax Act, which slashed taxes on individuals and corporations started the idea that liquidity was more important than balance. That is, it's more important to have the money to invest for greater gains than it is to have a balanced budget.

Given that the current problems have their origin in a lack of liquidity rather than an excess I'd hardly point to encouraging liquidity as the root of the problem.

Given that the current problems have their origin in a lack of liquidity rather than an excess I'd hardly point to encouraging liquidity as the root of the problem.

One would argue that it was too much liquidity, which encouraged people to gamble with money they didn't have.

The gamble went sour, house prices, which underpinned everyone's credit, money they didn't have, dropped and suddenly investors realised there was no underlying support.

It was a mirage of easy credit provided on actual debt.

If you owe me $1, 000 but tell me you know a horse at 15:1 that's sure to win and I lend you $5, 000 on that, which I, in turn, have had to borrow from a friend, where that horse loses, you're now in debt $6, 000 and I'm in debt $5, 000 whereas previously, you'd only been in debt for $1, 000.

The problem is that I could borrow money so easily.

That's fine for a while, until the point where everyone's in debt, everyone' relying on that horse to come in at 15:1. Worse, all the money flooding onto that horse drives down its odds to 2:1, making it seem more and more likely to win, further encouraging people to put in money. At some point, everyone's money is invested in a horse that is still, basically, a 15:1 shot.

The horse doesn't win.

That's when there's suddenly no liquidity.

Someone should have pointed out that 15:1 weren't the best odds.

the real reason for the crash lies in where it started in freddy and frannie. It's been democrat policy to support "affordable housing" which involves enticing poor people, especially minorities into purchasing homes using nice low (adjustable) rates. Its great because the dem's can say they got x number of people into houses using the program, and now claim that deregulation was at fault, and be a savior to everyone by even further increasing government involvement.

Of course fanny has been allowed to hold far more liabilities than assets than a normal bank was allowed, but I don't think that was a general republican deregulation. If you go back the regulator of fanny was sounding the warning call years back.

Well quite, my point is that to say a government has no bearing on the economy is pretty silly.
But in what way had it a bearing here? As I said, these financial crises have happened in every system but the state communist (that being due to people not being allowed to spend their money how they wanted) ones - including feudalism.

People claim this and liberal economics had a connection. But when I ask how, no one but Xenophobialand has put forward any sort of a case.

Here, I have a tract that can answer that question:

http://www.fredvanlente.com/cthulhutract/pages/

ROFL. I can personally feel that because I live in the south, and we have tons of tracts that end up all over from Jehovah's Witness and various other groups. I now want to put this one out just to scare normal people unfamiliar with Lovecraft into thinking there is some bizarre cult forming lol.

But in what way had it a bearing here? As I said, these financial crises have happened in every system but the state communist (that being due to people not being allowed to spend their money how they wanted) ones - including feudalism.

People claim this and liberal economics had a connection. But when I ask how, no one but Xenophobialand has put forward any sort of a case.

Okay, I put forward lowering interest rates to record lows and lowering CGT from 29% to 15% within 4 years, both encouraging people to recklessly invest when they were already in debt.

It's not the values of CGT themselves, it's the massive drop within a short space of time.

Here, I could have added that a focus on low inflation was also a problem...

That is not surprising; investment bankers (the good ones) are among the most financially and economically sophisticated of mankind, so if they thought excessive leverage was advantageous, that belief was naturally transmitted to other less exalted and less wealthy beings:

• There was the mortgage salesman who bought several rental properties, on the assumption that his income was assured and negative cash flow from the properties didn’t matter in an environment of rising real estate prices.
• There was the yuppie anxious to impress his friends and attract the opposite sex, who bought a flashy and mechanically unreliable a car on a long-term automobile loan.
• There was the two-income professional couple, who thought that by buying a McMansion the size of Chatsworth, their social status would turn into that of the Duke of Devonshire.
• There was the laid-off manufacturing worker, who thought it didn’t matter that he could find no job paying more than half his old union pay scale, because credit cards would allow his family to live the good life.
• There was the low-skill immigrant, legal or illegal, who found the wages he could earn were totally insufficient to fulfill his dreams of life in the bountiful United States, but thought that through liberal use of credit cards and maybe a subprime mortgage, affluence might be forthcoming
• There was the corporate CEO, who understood that buying back stock in his unexciting company and financing the purchase by junk bonds would increase the value of his stock options, but failed to realize that it made long term corporate survival unlikely to impossible.
• Finally, there was the President of the United States, who thought he could pursue an expensive if unsuccessful foreign policy, allow his Congressional colleagues to be thoroughly sloppy on public spending and introduce new social programs that pleased his wife, all without raising taxes.

Is it a problem of capitalism per se? Is that your question?

No, but my argument is that government could have put in place checks and balances to curb our natural instinct to make, what on the surface seems, easy money.

Link (http://northcoastinvestmentresearch.wordpress.com/2008/09/15/the-perils-of-leverage/)

EDIT: More on the same, it may be that we're arguing slightly different points, you're saying deregulation is not to blame, I'm saying government can and should do something to curb excessive investment based on debt.

Link (http://stats.org/stories/2008/understanding_financial_crisis_sept28_2008.html)

Okay, I put forward lowering interest rates to record lows...
That's not liberal economics though.

...and lowering CGT from 29% to 15% within 4 years, both encouraging people to recklessly invest when they were already in debt.

It's not the values of CGT themselves, it's the massive drop within a short space of time.
Thank you.

http://www.cbo.gov/ftpdocs/70xx/doc7047/02-23-CapitalGains.pdf
CBO has updated its latest models with available data through 2004. Those models, which incorporate changes in the tax rate, fall well short of explaining the surge in realizations that occurred in 2004. Roughly half of the growth in realizations between 2003 and 2004 remains unexplained. After examining the historical record, including that for 2004, we cannot conclude
that the unexplained increase is attributable to the change in capital gains tax rates. Volatility in gains can stem from other factors, such as changes in asset values, investor decisions, or broader economic trends.

That little bit of neither here nor there seems to be the state of the debate on capital gains taxes. Big cuts seem to inspire a lot of selling as people try to lock in gains, lest rates go up again. Over time they also seem to inspire more investment (http://www.ncpa.org/pub/st/st307/st307e.html), which may be more at the heart of the issue than effects of gains realisations on tax ravenues.

But the biggest bubble we saw wasn't in share prices, it was in real estate. Was that caused by capital gains taxes? There are those who say that it contributed, along with other incentive schemes designed to get people to live their American dream sooner rather than later. That's probably true.

Is that liberal economics/deregulation though? I'm not sure - it seemed to have been a bipartisan effort at the very least. The government wanted to get people owning their own homes, because that makes for happy voters. They overshot the target by some margin. We could say this illustrates that people can't tell a bubble from sustainable growth and that this includes regulators and lawmakers. Any conclusions beyond that are probably not a good idea.

No, but my argument is that government could have put in place checks and balances to curb our natural instinct to make, what on the surface seems, easy money.
That's really a different question though, and it's been debated for some time: whether or not a government can accurately identify a bubble, when market participants can't.

Finding the right spot to step in and stop people from investing, expanding capacity or generally making money is difficult. In the 90s inflation slowed to a crawl, and the Fed was getting panicky about deflation, wanting to cut interest rates. In the one thing that Alan Greenspan did that was truly great, he instead argued that the fall in prices was due to the introduction of IT into the economy, which made things more efficient and productive and prevented the Fed from doing something stupid. Alas he eventually missed the point when the boom became a bubble.

And that's really the point here - these are incredibly complex issues, dealt with by incredibly intelligent and creative people. Writing good regulation for it is not easy. There were some regulations there, they didn't do jack. Had there been some to fix one problem, the money would have taken a different route and grown a bubble somewhere else. Of course the government has the power to influence or outlaw things - the question is whether it has the ability to use that power. I'm not sure it does.

Link (http://stats.org/stories/2008/understanding_financial_crisis_sept28_2008.html)
That's a pretty good website.

Well much of the point is that pointing to a specific piece of legislation is, well, pointless.

I could say that Ronald Reagan's Economic Recovery Tax Act, which slashed taxes on individuals and corporations started the idea that liquidity was more important than balance. That is, it's more important to have the money to invest for greater gains than it is to have a balanced budget.

And it's not necessarily the case that a balanced budget is overly important, and much depends on the times, but the message is - don't worry about being in debt, we can always spend more to get us out of difficulty.

Hence, lower interest rates, lower taxes - hell, give back money - lower Capital Gains Tax, whatever it takes to get Americans to spend more.

And again, each by its own isn't necessarily bad, and really, people don't have to follow the example of the government by going into debt, but the example is set, the message is to spend, spend, spend and the economy will rise forever.

Well it didn't and the fact that no one had any money meant that, when the crunch came, no one could afford it.

this . .. and thank you

the real reason for the crash lies in where it started in freddy and frannie. It's been democrat policy to support "affordable housing" which involves enticing poor people, especially minorities into purchasing homes using nice low (adjustable) rates. Its great because the dem's can say they got x number of people into houses using the program, and now claim that deregulation was at fault, and be a savior to everyone by even further increasing government involvement.

Of course fanny has been allowed to hold far more liabilities than assets than a normal bank was allowed, but I don't think that was a general republican deregulation. If you go back the regulator of fanny was sounding the warning call years back.

Sorry what? the government (your government) has been financing that housing for a while and . .. ok here.
One--> look at canada, almost an identical economic situation but we are MORE left wing than you. So that "leftys are at least at much at fault" is bullshit.
Two--> Its not the low incoming housing that the banks KNEW couldn't finance their mortgages if it came down to it. They could have and did manage risk on that housing from the start.What it was was the middle class who should have been low risk but weren't because deregulation and lowering house taxes caused them to buy hoses more expensive than they could afford under the assumption that the taxes were gonna keep going down and house prices were gonna keep going up.
Three--This occurred during a republican government that has blown tons of money on tax cuts and war. . . .coincidence? no

This is slightly unrelated but interesting nonetheless...

Any subsidies eventually given to the monster banks of Wall Street will be as American as apple pie and obesity. The sums demanded may be unprecedented, but there is nothing new about the principle: corporate welfare is a consistent feature of advanced capitalism. Only one thing has changed: Congress has been forced to confront its contradictions.

The biggest money crop - $21bn - is harvested by Big Farmer. Slivinski shows that the richest 10% of subsidised farmers took 66% of the payouts. Every few years, Congress or the administration promises to stop this swindle, then hands even more state money to agribusiness. The farm bill passed by Congress in May guarantees farmers a minimum of 90% of the income they've received over the past two years, which happen to be among the most profitable they've ever had.

A new paper by the US Institute for Policy Studies shows that, through a series of cunning tax and accounting loopholes, the US spends $20bn a year subsidising executive pay. By disguising their professional fees as capital gains rather than income, for example, the managers of hedge funds and private equity companies pay lower rates of tax than the people who clean their offices. A year ago, the House of Representatives tried to close this loophole, but the bill was blocked in the Senate after a lobbying campaign by some of the richest men in America.

The US is unique among major donors in insisting that the food it offers in aid is produced on its own soil, rather than in the regions it is meant to be helping. USAid used to boast on its website that "the principal beneficiary of America's foreign assistance programs has always been the United States. Close to 80% of the USAid's contracts and grants go directly to American firms." There is not and has never been a free market in the US.

Here comes the relevant part...

A report published last week by the advocacy group Common Cause shows how bankers and brokers stopped legislators banning unsustainable lending. Over the past financial year, the big banks spent $49m on lobbying and $7m in direct campaign contributions. Fannie Mae and Freddie Mac spent $180m in lobbying and campaign finance over the past eight years. Much of this was thrown at members of the House financial services committee and the Senate banking committee.

Whenever congressmen tried to rein in the banks and mortgage lenders they were blocked by the banks' money. Dick Durbin's 2005 amendment seeking to stop predatory mortgage lending, for example, was defeated in the Senate by 58 to 40. The former representative Jim Leach proposed re-regulating Fannie Mae and Freddie Mac. Their lobbyists, he recalls, managed in "less than 48 hours to orchestrate both parties' leadership" to crush his amendments.

You give a million dollars to the right man and reap a billion dollars' worth of state protection, tax breaks and subsidies. When the same thing happens in Africa we call it corruption.

Anyhoo...

Link (http://www.guardian.co.uk/commentisfree/2008/sep/30/marketturmoil.subprimecrisis)