Later On

A blog written for those whose interests more or less match mine.

Very interesting thought

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The financial meltdown marks an epoch. TerranceDC writes in the Booman Tribune:

I admit it, the past week has left me speechless. As I sat and read the news about how the last of the investment banks shuffled off into extinction (kinda; they’re just becoming regular old banks now), it did feel like I was sitting in front of my television again watching the Berlin Wall come down.

In this sense, the fall of Wall Street is for market fundamentalism what the fall of the Berlin Wall was for communism — it tells the world that this way of economic organization turns out not to be sustainable. In the end, everyone says, that model doesn’t work. This moment is a marker that the claims of financial market liberalization were bogus.

Only this time there doesn’t seem to be as much celebrate.

Sure, there’s vindication in the failure of deregulation.

This will come to be seen as the greatest regulatory failure in modern history. The degree of leverage that these institutions took on is indefensible. The average large securities firm was leveraged 27 to one in mid-2007. They were not regulated by any prudential supervisor. In effect, they regulated themselves. The lack of transparency was stunning. Many big lenders did not disclose off-balance-sheet risks. In some cases, they did not understand these risks themselves. More fundamentally, we allowed a second, huge financial system to develop outside the normal banking network. It consisted of investment banks, mortgage finance companies and the like. It was unregulated, not transparent and way too leveraged. But with nine separate and mostly ineffective financial regulators, these risks were ignored. That is, until this second system crashed.

There’s the failure of market fundamentalism — no surprise since, as with other types of fundamentalism, its success depends on the purity of belief and action of all participants. And there lies the irony of the coalition of market fundamentalists and religious fundamentalists under the umbrella of conservatism. They should talk more, really. Because the latter could fill the former in on the whole story of the “fall of man” resulting in a “fallen world,” where “…nobody is born truly innocent and pure, but has the inbuilt desire to sin.”

As long as people are compensated hugely for taking risks with other people’s money, and do not suffer equally on the downside, then those risks will inevitably become outrageous. Whether markets are efficient or not, I don’t know for sure. But I do know that, if there’s a way for someone to make money at another’s expense, he will.

… So where next? And, most important, what should be done? I’ve taken to comparing the current situation to “Hamlet”: We’ve had the deaths of Polonius, Claudius and Laertes – that is, the falling house prices, the rising commodity prices and the collapse of banks. As of now there is no sign of Hamlet himself, a catastrophic fall in the markets. Yet it’s difficult to believe that markets are not going to undergo a climactic implosion some time soon. If the current situation doesn’t fill investors with fear, then what are they smoking?

I believe that, to get to the root of the matter, we have to address the bad side of greed. We know from Ivan Boesky and Gordon Gecko that greed can be good. Greed makes the world go around. It makes people take risks that ultimately lead to economic or scientific advances.

But the greedy must also face the consequences of taking those risks. And thus the current system of compensation at financial companies does not lead to anything good at all.

But the greedy aren’t facing the consequences. At least not that I can see. Not when the administration is asking taxpayers for $700 billion to bail out Wall Street, after already forking over $600 billion in bailouts thus far, and with a potential $1 trillion tab hanging over our heads as a consequence of all this. And to ask for this historic bailout with no strings attached, no accountability on the part of those being bailed out, and complete immunity from any legal or administrative review beats all standing, sitting or leaping records for gall.

No, this crash carries with it none of the hope that came with watching the Berlin Wall come down. Instead, there’s the gnawing sense of dread that I felt after watching the towers come down — and the fear was not so much what outside force might strike next, but what the administration might try to push through in a moment when people were frightened, confused, and desperately wanting someone to “fix it.”

There was a “fix” all right, and the “fix” was in. The “fix” may be in now, too, if we let that gnawing fear get the best of us. …

Continue reading. It’s good. Especially the idea how to pay for the bailout.

Written by Leisureguy

23 September 2008 at 12:57 pm

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