Tuesday May 22nd 2012
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Economics
Recommended economics writing
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Dec 2nd 2011, 21:02 by R.A. | WASHINGTON
TODAY'S recommended economics writing:
• Is modern capitalism sustainable? (Project Syndicate)
• Where is Wal-Mart when we need it? (Vox)
• Slipping into a double-dip recession? (Vox)
• Economics and inequality (Boston Review)
About Free exchange
In this blog, our correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts. Adam Smith argued that in a free exchange both parties benefit, and this blog's aim is to encourage a free exchange of views on economic matters.
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fundy,
Flawed again. In both cases consumers have to go into the establishment and demand the product.
You remember demand?
Part of supply and demand.
Consumers failed to realize that the people they were dealing with for those loans were salesmen only worried about a sale, not financial planners.
Sorta reminds me of during the internet bubble when Cisco salesmen sold all kind of products to companies that couldn't afford them, or were counting on continued growth to pay for them - much like housing prices.
Regards
And which poor person given the chance to buy a house with no money down won't take that opportunity. Congress demands the banks do it and the demand exists. The poor person will be no worse off if he defaults on the loan and there was a good chance that he could flip the house for a profit. Obviously there has to be demand, but when isn't there demand for virtually free stuff with no risk? Congress made the free stuff with no risk, not the banks or the consumers. The consumers just took advantage of what Congress offered.
fundy,
We are back to where we were over a year ago.
I gave you 4 regulations approved by the FDIC, OTS, the Fed, and the OCC.
Try reading: "Real Estate Lending Standards" http://www.federalreserve.gov/boarddocs/srletters/1993/sr9301.htm
Show me where "no money down" is cited.
95% Loan-to-Value (LTV) is allowable, only with private mortgage insurance.
Regards
fundy,
Capitalism is a system of winners and losers.
If one continues to lose - via luck, or their own stupidity - that's the individual's problem. (Think Indianapolis Colts 0-11, not grooming someone in case of a Manning injury.)
The problem with health care is that everyone expects to get the best treatment for minimum premiums, and they also want the health care industry to take care of every minor problem. (Do people file a claim with their auto insurance after every oil change or tire replacement?)
---
As for:
The biggest mistake investment bankers made was in trusting the top mainstream economists in the country who were confident that housing prices would not fall...
Every big bailed out bank and investment firm has their own chief economist. So you can't put the blame on other economist.
The problem was with Mortgage Backed Securities (MBSs) was that the system was set up for the shadow banking system to feed them dud mortgages. Check "mortgage fraud" "FBI" and you'll see that the lower level guys are getting nabbed.
Until someone finds a "smoking gun" - an e-mail from the big guys to the shadow banking system - "plausable deniability" keeps the big guys from going to prison.
Regards
I strongly disagree, hedge. Capitalism is not a zero-sum game. Everyone benefits from cooperation. Some people "win" more from the arrangement, while some win less. That doesn't make the latter losers.
The world is more equal than any other time in human history. That's really the problem. People like the feeling of being better than others. In the 60's, 70's, a golden era in the Left's imagination, a middle-class white person living in the West is guaranteed a certain social status. No matter what he did, however crazy and stupid, he belonged in a privileged club. He was always better than Negros, Chinamen, and Slavs behind the Iron Curtain. Now that security is gone. You could finish school at la Sorbonne and end up working under some ambitious Polak. As we learn from centuries past, people will fight for social position that they feel they're entitled to. And they will lose--not because someone else won but that their victory conditions are impossible. Managing their disappointment will definitely be a challenge.
The US isn't a capitalist nation. It's closest to fascism, which is just a flavor of socialism.
"Every big bailed out bank and investment firm has their own chief economist." Who followed mainstream economics. I wasn't blaming economists; I was blaming mainstream economic theory.
"The problem was with Mortgage Backed Securities (MBSs) was that the system was set up for the shadow banking system to feed them dud mortgages."
The dud mortgages happened because Congress insisted that banks make them. Regulators following Congress' wishes made banks make dud mortgages. No consumer bought MBSs. They were available only to large financial organizations such as insurance companies who have financial experts as smart as anyone who created an MBS. It's just stupid to claim that anyone who bought MBSs didn't now what they were buying.
Do you think no mortgage fraud happened before the creation of MBS's? I worked for a mortgage company 15 years ago whose biggest problem was fraud against it. Was mortgage fraud worse during the boom, as a percentage of new mortgages, than before? What percentage of sub prime loans were due to mortgage fraud? I think you'll find that fraud was a minor part of the crisis.
You throw out howlers of pure unaccepted opinion like:
"The US isn't a capitalist nation. It's closest to fascism, which is just a flavor of socialism."
And then get your underwear in a twist when hardcore libertarians like you are called Randians.
Hypocrite much?
You clearly don't know anything about capitalism, fascism or Rand.
Instead of insults, why don't you tell me in what ways the US is different from fascism and like capitalism? And in what ways I think like Rand. Then we can actually have a conversation instead of trading insults.
I'm not the one making ridiculous assertions as if they were self-evident. Burden of proof is on you.
The dud mortgages happened because Congress insisted that banks make them.
And my state legisature insists that every corner gas station sell beer and wine. I guess we can blame the state legislatures for alcholism.
I received many "re-fi your overpriced house" from many fly-by-night mortgage institutions. I just tossed them into the trash instead of giving them a chance to make money off of me if I were to go deeper in debt, knowing the housing prices were in a bubble.
Heck, they were giving out credit card applications (with a free gift!) in the late 90's, when the sub-prime credit cards expanded.
You should see the $20k-$30k homes in Cleveland with the $50k SUV parked in the drive.
It comes down to personal responsibility.
I guess that isn't a trait of the younger generations of Americans.
Ah, the good old days.
Regards
You're analogy would be more accurate if the state required every corner gas station to give beer to those who could not afford it.
Kenneth Arrow makes some excellent points in his article, but he also makes some serious mistakes:
“But the products of the finance and health industries are individualized and complex. The consumer cannot seriously evaluate them—a situation that economists call “asymmetric information.”
Consumers aren’t supposed to be experts at everything. That’s a stupid expectation that mainstream econ has. Common sense tells people to spend most of their time and effort on their comparative advantage (sound micro econ) and rely on experts who have a comparative advantage in finance and healthcare.
The experts in finance, mainstream PhD economists and financial experts, fail the public miserably on a regular basis because mainstream economic theory is so bad. They convinced people that housing prices would never fall and that banks could lend money to poor people without risk. Arrow is one of those responsible for the failure of mainstream econ.
Medical experts are doctors. I don’t see how they have failed us.
“The individual patient or financial client does not have access to all the relevant information.”
Again, simply not true. We all have access to experts in both fields.
“There has been some erosion in the law, for example under the Clinton administration, and in enforcement.”
That is simply not true. Basel I and II increased bank regulations. By loaning to poor people banks were simply following the law and wishes of Congress.
"A proper sense of responsibility has to be enforced by legislation, as it was in the 1930s."
Unfortunately, financial firms were given another chance to prove that they could be trusted to behave responsibly. We all know how that turned out.
If you read books like "Slapped by the Invisible Hand" you get the idea that financial firms did behave responsibly. Slapped is the best book on the technical aspect of the financial crisis that I have read. Very few people understand what actually happened in investment banking that caused the crisis. Investment bankers followed mainstream economic and financial theory as closely as possible in striving to meet the needs of their customers. Mainstream financial econ let them down.
The biggest mistake investment bankers made was in trusting the top mainstream economists in the country who were confident that housing prices would not fall, but if they did it would happen regionally and by a small amount. None of the securities the developed went bad until housing prices collapsed.
Mortgage bankers made the mistake of following the law. Congress put enormous pressure on mortgage banks to loan money to poor people, people who could never make the payments on the loans. Bankers obliged and we got the subprime crisis.
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing.”
Chuck Prince, Citibank CEO, July 10, 2007
What do you think he meant by that, because I don't know.
Rogoff’s article ‘Is Modern Capitalism Sustainable?’ is a nice long list of all the common erros in mainstream economics. To touch on a few:
“First, even the leading capitalist economies have failed to price public goods such as clean air and water effectively.”
Most public goods, such as clean air and water, are not market issues; they are property issues, the protection of which falls in the domain of government. To ask the market to do the government’s job is stupid.
“Second, along with great wealth, capitalism has produced extraordinary levels of inequality.”
Capitalism does not create inequality. Inequality has been a part of humanity since prehistory. Capitalism reduced the inequality of medieval Europe.
“A third problem is the provision and distribution of medical care, a market that fails to satisfy several of the basic requirements necessary for the price mechanism to produce economic efficiency, beginning with the difficulty that consumers have in assessing the quality of their treatment.”
There is no free market in health care. The government controls every aspect of health care and causes the problems Rogoff blames the market for.
As a person who has also noticed the errors you have pointed out I applaud you