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See this comment and the three links therein.

You would have needed better accountancy standards as well as semicompetent regulators.

The "market" justification of what was going on over the past 10 to 15 years as well as of the light touch of regulation, selfregulation or even deregulation was a bogus justification. The problem with framing this as "market failure" is that then government steps in to "restore proper functioning of the markets". Which is what all governments are running around like headless chickens trying to do. But the problem is not that markets are not pricing things, it is that the money center banks would be rendered insolvent by the market price. And this is as it should be.

Your "market solution" is not all that different from the Geithner plan, and is not a solution, even if "market based".

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 06:51:56 PM EST
[ Parent ]
Accountants are supposed to be part of the regulatory system. They are supposed to prepare 'fair and balanced' reports to both regulatory authorities (not just Tax authorities) and shareholders.

The motivations of accountants for the last few decades have shifted from 'neutral observers' to 'problem solvers' for corporations. Bad, bad, bad.

Tightening the rules for accountancy would go a long way to resolving current problems.

You can't be me, I'm taken

by Sven Triloqvist on Sun Mar 22nd, 2009 at 07:10:36 PM EST
[ Parent ]
How can there be anything other than a conflict of interest when the same group is being paid for an audit and also for advice on tax avoidance?

No one seriously believes that for all the talk of Chinese Walls and other cliches that the corporate accountancy industry is on the side of government and regulatory enforcement. Not even the SEC or the FSA do that job.

In fact no one at all does it, which may possibly have contributed a little here.

But as Frank said - the real underlying problem is class war in the US. The rich have been vicious and ruthless, and the left is only just starting to get organised again after a thirty year break.

This is fundamentally a political problem. It's about a system which includes positive feedback loops which reward and reinforces aggressive class war against the majority by the minority.

The only positive push-back has to come from the left - and it's going to take more than raising money for Obama and a bit of flag waving to create a genuine and effective left wing opposition.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Mar 22nd, 2009 at 07:23:23 PM EST
[ Parent ]
I wouldn't argue for a moment that we didn't have a monumental accounting and regulatory failure as well as a market failure.  But if framing the problem as a market failure results in Governments thinking that all they have to do is to "restore the proper functioning of the markets" - through better regulation - then framing the problem as a failure of proper regulation doesn't result in any better solution.  Of course better regulation/enforcement is required whatever way you frame it.

But my solution is not to even try to fix the problem by trying to cover the (unknown but almost limitless) liabilities of insolvent institutions and thus to make them solvent again, but rather to let them go into Chapter 11 and focusing your efforts on ameliorating the downstream impact on "good businesses" in the really economy which are required to get the real economy moving again.

Thus a lot of very rich speculators go very bust.  A lot of the collateral damage to good businesses/banks is addressed on a case by case basis - perhaps by "good" banks given access to federal funds/guarantees set aside for that very purpose - effectly acting as subcointractors to the Government which doesn't have the resources/expertise/locus standii to make individual banking/lending decisions.

I don't know a whole lot about Geithner's plan, but it doesn't seem to me to be about letting the most delinquent firms go to the insolvent fate they have so richly deserved...and bypassing their traditional role by directly aiding productive businesses in the real economy.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Mar 22nd, 2009 at 08:20:00 PM EST
[ Parent ]
Frank Schnittger:
But if framing the problem as a market failure results in Governments thinking that all they have to do is to "restore the proper functioning of the markets" - through better regulation - then framing the problem as a failure of proper regulation doesn't result in any better solution.
But that's not what they're doing. "Restoring the proper funcitoning of the markets" to them means pouring money into failed institutions so that when they sell the bad assets at market prices they can remain solvent.

The market isn't clearing because the bans are insolvent. The "market failure" point of view is that the banks are insolvent because the market isn't clearing at the "right" price. So to repair the "market failure" they artificially prop up asset prices.

In so many words, you have chosen the wrong frame for your diary. It is not "market" failure and your solution is not a "market" solution.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Mon Mar 23rd, 2009 at 04:33:48 AM EST
[ Parent ]
Pouring trillions of taxpayers money into insolvent institutions to make them solvent again is explicitly an anti-market activity.  It is no different from a "socialist" propping up of "inefficient" state enterprises which cannot survive in an open market. (Ignoring for the moment the fact that such enterprises may also be fulfilling social rather than commercial mandates).  The market led approach is to simply let them fail and be replaced by other better structured, managed and regulated institutions.  

I am explicitly suggesting that toxic assets be purchased at current market prices - i.e. near zero in some cases - which will do nothing to help insolvent institutions but which will put a floor under further deflation and cut taxpayers in on the actions when market pricers recover.  The focus of "my rescue plan" is to to help the good banks/businesses vital to the functioning of the real economy which might be killed by the downstream effects of those insolvencies to remain in business.

I think we may be getting into a semantic squabble here.  I am partly using a market framing to get around the USA phobia of state intervention/ownership and also to avoid the taxpayer being stuck with almost unlimited liabilities.  I am also buying into Chris' more general thesis that the financial system as is is unrescuable and the focus now must be on finding ways to support the real economy which move away from dependency on "too big to fail" banks and from excessive debt financing in general.

Whichever way you look at it the future must move away from debt to equity, bond, and revenue sharing agreements as a way of funding productive enterprise.  Debt at the levels we have been operating is uninsurable because it is simply too vast and to removed from real productive economic activity.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 23rd, 2009 at 09:37:37 AM EST
[ Parent ]
Frank Schnittger:
I think we may be getting into a semantic squabble here.  I am partly using a market framing to get around the USA phobia of state intervention/ownership and also to avoid the taxpayer being stuck with almost unlimited liabilities.  I am also buying into Chris' more general thesis that the financial system as is is unrescuable and the focus now must be on finding ways to support the real economy which move away from dependency on "too big to fail" banks and from excessive debt financing in general.
Possibly. It's not the first time I am irked by a piece you geared to a different audience...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Mar 23rd, 2009 at 10:01:43 AM EST
[ Parent ]
Yea - my problem is I don't like preaching to the converted and prefer reaching to the convertable...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 23rd, 2009 at 10:13:55 AM EST
[ Parent ]

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