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The problem is not one of market failure and your "market price" is not a 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 Sun Mar 22nd, 2009 at 04:50:04 PM EST
Migeru:
The problem is not one of market failure

I don't understand how you can make this point- even the free market fundamentalists have come round to the view that a market failure occurred where risks and rewards became almost totally divorced from one another.  "Irrational exuberance" was based on some people being able to make a killing whist transferring virtually all risks to "the system" and now Governments and Central banks at no cost to them.  Even now no one knows the really price/value of many of the financial instruments on and off corporate balance sheets.  How is this not a market failure?

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Mar 22nd, 2009 at 06:34:06 PM EST
[ Parent ]
The problem was one of regulatory and accounting fraud, not of "market failure".

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 06:37:07 PM EST
[ Parent ]
If it's fraud, there should be criminal charges flying all over the place  - and not just for the Madoff's and Stanfords.  It's not clear to me, even now, how better accountancy standards would have eliminated the problem - mitigated perhaps - but the greater problem seems to be with the system design itself, not just with the methods of reporting on it.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Mar 22nd, 2009 at 06:43:48 PM EST
[ Parent ]
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 ]
Frank Schnittger:
If it's fraud, there should be criminal charges flying all over the place

Yep.

Did you see the FBI rap sheet? There's evidence of systematic mortgage fraud - and that's just on the surface. God only knows what would be discovered with deeper digging.

Another way to look at is that a few trillion will buy you a lot of political influence. The odds of none of that money ending up in the pockets of various right and far right groups are not high.

So Obama is literally handing the next election to Wall St.

Isn't that a cheerful thought?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Mar 22nd, 2009 at 07:14:04 PM EST
[ Parent ]
ThatBritGuy:

So Obama is literally handing the next election to Wall St.

Isn't that a cheerful thought?

It would be if Wall Street were still around as we know it.

Which IMHO it won't be.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Mar 22nd, 2009 at 07:16:37 PM EST
[ Parent ]
Possibly. But Wall St's owners - the people who have used Wall St as their own personal high street bank - will be.

Inexplicably, Geithner's plan won't be making them any poorer.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Mar 22nd, 2009 at 07:26:53 PM EST
[ Parent ]
So Obama is literally handing the next election to Wall St.

Isn't that a cheerful thought?

Indeed!  It is the reason that, for the first time in a very long time, I have embraced the old Leninist philosophy of "The worse, the better!"

The only real hope is if the financial crisis gets so spectacularly bad so quickly and so outrageously that Obama has no choice but to dump Geithner, Summers and all of the Market True Believers and very forcefully and publicly make the case for holding the culprits in the financial sector accountable in massive criminal and civil investigations, use the I.R.S., the Fed, the SEC CFTC, etc. in such ways as to paralyze their financial capability, PUSH THROUGH CAMPAIGN FINANCE REFORM, and go after all the wealth that is recoverable.

Contrary to self serving assertions, a direct assault on the wealth of the owners of the financial sector will not harm the economy, as they have withdrawn their money from productive investments precisely because of the mess they have made of it.  The government could extend an olive branch in the form of 25 year long bonds at, say 4%, en lieu of an annual tax on total assets.

Conceptually, there are clear ways out of the current situation.  Practically, it will require a massively greater crisis for this to be possible, if even then.  But, if Obama has not brought himself to make decisive moves against the financial sector by year's end, all will probably be lost and he will have handed the looters the whip handle.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 23rd, 2009 at 12:15:03 AM EST
[ Parent ]
ARGeezer:
Indeed!  It is the reason that, for the first time in a very long time, I have embraced the old Leninist philosophy of "The worse, the better!"

Absolutely spot on, ARG. That is exactly why solveig and I dance a little jig each morning when we read the latest financial news......

But my take on it is that the main part of the solution, will be P2P financing spreading virally and implemented from the ground up.

ARGeezer:

Contrary to self serving assertions, a direct assault on the wealth of the owners of the financial sector will not harm the economy, as they have withdrawn their money from productive investments precisely because of the mess they have made of it.  

There's no need to assault them. Just demonstrate to them that the solution being offered is a better one than anything else. If they agree, they join in. if they don't, they will wither on the vine.

Politicians can facilitate the process and surf the wave, I think. If Obama were to update Henry George.......

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 23rd, 2009 at 08:48:07 AM EST
[ Parent ]
The regulations were implemented in the first place because markets proved with the '29 Crash that they couldn't prevent this type of fraud on their own.  Beginning with Reagan and carrying on through Bush I, Clinton, and Bush II, though, the US government let the markets run loose again and expressly kept its hands off of hedge funds and the CDS markets.  So underlying the regulatory failure was a market failure that had been identified before my parents were born and that had not been cured by the passing of a half-century.  Deregulating the markets had the same effect as taking a schizophrenic off his meds (And for every John Nash, there are thousands stumbling down the street yelling at the invisible.  Did we really want to play those odds with the world's economy?).  This is a fact that needs rammed up every neolib/neocon's nose so that we don't forget again and in another half-century listen to another Milton Friedman peddle Kool-Aid.
by rifek on Mon Mar 23rd, 2009 at 08:43:28 AM EST
[ Parent ]

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