Bill Clinton: I should have better regulated derivatives

[Cutten]

Quote from trendlover:

Pabst, I ask you this because you said you have trading expierence over 20 years, so I think you know that business. I want to understand what happened and why. I have no money in that game of subprime, and have no loss, but want to understand how traders work in capitalism and if what is happened in the last 2 or 3 years is normal boom and bust or corruption in your opinion.

What happened is that most people radically underestimated the risk of a housing bust of this magnitude, or they underestimated the consequences of that bust. Since real estate - and indeed, almost all markets of any kind - has historically always had periodic booms, bubbles, and busts, this was an elementary oversight caused mainly by laziness, and ignorance. Human nature being what it is, most people didn't bother to do their research before taking large risks in assets exposed to the housing market. Of those that did, many were still caught out because they are not skilled at forecasting or identifying bubbles and busts. Forecasting economies and markets is very difficult for most people, just like any other complex, highly competitive field.

Corruption always follows the lure of easy money, so one feature of booms is that you get corruption and law breaking as people cut corners to try to get their hands on the money involved. However, it is a symptom, not a cause. The housing bubble would have occurred even in a totally honest society where everyone followed the letter of the law. The lure of profits has sufficient hold on sufficient people that they are driven to speculate when easy money seems at hand. And their ignorance, laziness, and lack of forecasting talent means that they are often unaware of the risks. Some are aware but choose to ignore it because of the potential rewards. Others are in denial because they so *want* the illusion to be true.

For booms and busts to moderate would require human nature to change. Society would have to become extremely conservative and risk averse. Whilst this would moderate bubbles and busts, it would probably have even worse consequences because little innovation or progress would be made. Very old people are usually conservative, and they are rarely the engines of progress, dynamism, and innovation in society. Perhaps a more educated society would be less vulnerable to bubbles. But since basic financial concepts are not even taught to the elites at Ivy League universities, there is no prospect of that happening in our lifetimes.

 

[Cutten]

Quote from Landis82:

And where did you "cut and paste" this article from?

It might help your credibility on this website if you were to use your own words, and not someone else.

Just a thought.

These are my own words, I just typed them today.

 

[Cutten]

Quote from Landis82:

You can't be serious.

The VIX is an actual quantitative measurement of what is being reflected in the market place. A credit rating is obtained via subjective research and is PAID FOR by the issuer of the security.

Can you say conflict of interest?
Duh.

You're attacking a straw man.

"They have their differences but they also have certain things in common."

The things you list are some of the differences. How does that contradict what I said?

 

[Landis82]

Quote from Cutten:

For booms and busts to moderate would require human nature to change. Society would have to become extremely conservative and risk averse.

Not true at all.
People ( and those in power such as Alan Greenspan ) simply needed to stop embracing their ideological belief that markets are self-regulating, and that they are not susceptible to failure, or have issues of distortion on incentives.

As Roubini says, "There's nothing wrong with greed, per se. It's not that people are more greedy than they were 20 years ago. But greed has to be tempered, first, by fear of losses. So if you bail people out, there's less fear. And second, by prudential regulation and supervision to avoid certain excesses."

I would suggest that Greenspan did nothing listed above.
And as head of our central bank, there was plenty that he could have done to provide financial stability.

 

[Cutten]

Quote from Landis82:

Not true at all.
People ( and those in power such as Alan Greenspan ) simply needed to stop embracing their ideological belief that markets are self-regulating, and that they are not susceptible to failure, or have issues of distortion on incentives.

So you think if people realized the above, that bubbles would stop occuring? I don't see any evidence for that. After all, bubbles have occurred long before Alan Greenspan was ever alive, long before Adam Smith was alive even. The current bubble and bust has affected many countries outside the US. Did the Russian government have an ideological belief that markets are self-regulating, or not susceptible to failure? They experienced a bubble and then bust (ongoing) with far greater impact on their economy in both directions than anything that went on in the US. Ireland, UK, Spain, Eastern Europe, Australia and Canada also - were their governments run by Republican free-market fundamentalists, or were their central banks run by Alan Greenspan?

Bubbles and subsequent busts have been going on since money was invented. The evidence looks compelling that it is something in human nature, rather than specific government regulations, that causes them to occur. Regulations that lower leverage will probably, as I already said, reduce their severity - but that will also come at a cost. After all, we had regulations through each bubble in Greenspan's tenure, and before (Volcker presided over a commodities bubble, for example). Regulators are just as fallible as capitalists, and unlike capitalists there is no automatic corrective mechanism for when they get it wrong. If heavy regulation were panacea, central planning would have worked.

P.S. still waiting for you to back up your plagiarism claim. Quick tip - just type some sentences from my prior post into google, using quotes. If I "cut & pasted" it as you allege, then the original source should show up. I'm not quite sure why you thought I would plagiarize something - I don't exactly have a history of cut & pasting other people's work and posting it here without attribution, the stuff I wrote is pretty similar in thought to other posts I've made over the years on similar subjects, I had made several posts just minutes before that one, the post has swear words like "fucking", just like other posts I make, and unlike pretty much any articles that get published in financial journals, magazines, or respectable blogs. And it is nowhere on google. So, I'm rather curious as to your grounds for accusing me of that.

 

[trendlover]

Cutten, I understand risk is good. But when banks create insurance for loans, and they get their pay for the insurance they write, but have no money to pay when default happens, this is the problem. Who should check to see if the ratio of insurance to cash is good? Some regulation is needed because like you say, greed and human nature will make big bets with no money to pay out if they lose that bet (swaps)

 

[Cutten]

Quote from trendlover:

Cutten, I understand risk is good. But when banks create insurance for loans, and they get their pay for the insurance they write, but have no money to pay when default happens, this is the problem. Who should check to see if the ratio of insurance to cash is good? Some regulation is needed because like you say, greed and human nature will make big bets with no money to pay out if they lose that bet (swaps)

Well I partly agree with you. That's why in my earlier post I advocated free banking or full reserve banking (i.e. where every loan comes from a deposit - a bank can only lend out what it actually takes in from depositors). In my opinion that would be the most effective step in reducing the severity of financial market crashes on the rest of the economy, and regular workers who have no wish to speculate and just want banks to be safe convenient places to park cash. With free banking the market would sort out which banking models people prefer and can endure; with full reserve banking it would be made (relatively) safe by decree.

You do make one IMO false assumption, which is that regulation is needed. If people like yourself want to check the solvency of insurers, then why would not some enterprising individual or firm set up such a service? It is IMO a rather misplaced faith in government if you think that they will set up a solvency regulatory scheme that will work effectively. Remember, the current crisis occured in a heavily regulated area - the SEC, FINRA, FDIC, CFTC, Congress etc all regulated the markets while this was going on. They did not warn the public of the bubble and forthcoming bust. Who did? Mostly a minority of people in the financial industry e.g. economists (Roubini), researchers (Schiller), commentators (Faber, Rogers), hedge fund managers (Soros, Robertson, Paulson etc). It was the capitalist section of society, not the government, not the regulators, who have Joe Public the best advance warning against impending collapse. There were numerous warnings on this very website by myself and others.

I do not know whether free banking or full reserve banking would be the better solution, since neither has been tried in the modern world. In my opinion it would be best to experiment, try both, and assess the results before deciding on one or the other (or both co-existing). However, past experience suggests that heavily regulated sectors of the economy suffer from poor service, reduced innovation and growth, and some of the other problems of central planning. Excessive leverage and periodic bubbles have afflicted the fractional reserve banking. So if I had to bet, i would say that free banking would be the most likely to produce the best result.

 

[Landis82]

Quote from Cutten:

Bubbles and subsequent busts have been going on since money was invented. The evidence looks compelling that it is something in human nature, rather than specific government regulations, that causes them to occur.

No one has ever argued ( and certainly not me ) that "bubbles and busts" have not been gong on since money was invented.

But you continue to miss my point, which is that political interests have allowed for human nature to take over the market place and left to go unbridled, and untempered.

Ever read the Commodity Futures Modernization Act of 2000, what it created, and how it got put into law?

I believe that it has a lot to do with why we are where we are today with our credit markets essentially "frozen" and the balance sheets of our banking system filled with toxic assets.

Financial "bubbles" have in their roots a belief that "free-markets" self-regulate. This is how the Phil Gramm's of the world have been able to take advantage of human nature with legislation that seeks to benefit the few, at the expense of the masses.

Ever ask yourself why the financial industry sector only produced 15.5% profit back in 1983, but 32% in 2007 the year before the financial melt-down?

Easy.
It's called the ability to deduct interest immediately. An opportunity that the capital equipment and manufacturing sector does not have because it has to be expensed out over the life of the capital equipment.

Back to trading.