Markets Fail When Humans Are Unregulated

Discussion in 'Current Events' started by Contessa_Sharra, Feb 17, 2010.

  1. Contessa_Sharra
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    Contessa_Sharra Searcher for Accuracy

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    Markets Fail When Humans Are Unregulated
    Posted By Paul Craig Roberts On February 5, 2010

    Former Federal Reserve chairman Alan Greenspan answered that he had placed his trust in a flawed theory when he was called before Congress to explain why he, Goldman Sachs Treasury Secretary Robert Rubin, and Deputy Treasury Secretary Larry Summers prevented Brooksley Born, head of the Commodity Futures Trading Corporation, a government regulatory agency, from doing her job of regulating over-the-counter derivatives.

    The efficient markets theory is that unregulated markets are efficient and rational. According to this theory in which Greenspan placed his trust, unregulated markets produce the best possible result. Any regulatory interference worsens the outcome.

    Greenspan blamed his own bad judgment on a theory. The theory, or Greenspan’s understanding of it, nevertheless still holds sway as Congress has proved impotent to re-regulate the gambling casino that is Wall Street. Clearly, the theory serves powerful interests.

    But what is the truth?
    The truth is that markets are a social institution. Their efficiency depends on the rules that govern the behavior of people in markets. When free market economists talk about markets deciding this or that, they are reifying a social institution and ascribing to it decision-making power. Socialists make the same mistake when they blame markets for the results of human action. But, of course, markets do not act or make decisions. People act and make decisions, and markets reflect the decisions and actions of people.

    The entire debate over regulation is misconstrued. It is not the market, an efficient social institution, that is regulated. What is regulated is the behavior of people in markets. If you want good results from markets, good regulation of human behavior is a requirement.

    The market is like a computer. Garbage in, garbage out.
    If people who use markets are not regulated, they issue fraudulent financial instruments.

    They leverage assets with absurd amounts of debt. They market their instruments with fraudulent investment grade ratings. They deal themselves aces.

    Did Greenspan not know this? Was he a victim of a theory or an enabler of greed unleashed by the absence of regulation?

    The way to bring socialists and capitalists together is to recognize that markets are efficient and that self-interested human behavior requires social regulation.

    The failure to regulate financial markets has produced enormous losses to all Americans except the super-rich. But the U.S. government is guilty of an even greater failure. Washington has not only permitted but also encouraged the unemployment of its citizens by enabling greed-driven corporations to send American jobs abroad in order to maximize profits for CEOs’ bonuses, shareholders, and Wall Street.

    As Ralph Gomory has made clear, economic theory has been shattered, because there is no longer any connection between the profits of American companies and the welfare of Americans. The profits of American companies are derived from the cheap labor in offshored locations and are at the expense of the American work force.

    This dispossession of American labor has been heralded by offshoring’s pimps in the major universities as “the New Economy.”
    The “New Economy” is a hoax like most everything else the bought-and-paid-for-media feeds to Americans. There is no new economy. There is an unemployed economy. The headlined unemployment rate is just over 10 percent. The real unemployment rate, as measured by the current methodology is 17 percent. The unemployment rate as measured by the methodology of 1980 is 22 percent.

    If jobs offshoring is a benefit to America, as the hired pimps of the transnational corporations claim, why is more than one-fifth of the U.S. work force unemployed? Why does the U.S. have the largest trade deficits in world history? Why is the U.S. dollar losing value over time to other tradable currencies?

    MORE: Markets Fail When Humans Are Unregulated | Foreign Policy Journal
     
  2. Oddball
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    Oddball BANNED Supporting Member

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    Huh?

    Do not the same human failings apply to the regulators as those in the markeplace?
     
  3. johnrocks
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    johnrocks Silver Member

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    He is just covering his own incompetency as Fedd. Chairman, there was a lot of govt. intervention and regulation already involved but capitalism does make a good scapegoat when their own regulations/policies backfire.
     
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  4. JWBooth
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    JWBooth Gold Member

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    Greenspan, wanting to be continually thought of as relevant, did as he always has and played to his audience today, claiming to have bought into a faulty argument in the past with regards to limited regulation....
     
  5. saveliberty
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    saveliberty Diamond Member

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    People do act rationally most of the time. The system was, expand home ownership beyond normal limits by offering homes to those who previously were unqualified. Mr. Franks pushed really hard for that through CRA. Then Freddie Mac and Fannie Mae pressured banks into making these loans. The risk was high, but with the insurance program in place, that risk was transfered to others. Everyone behaved as should be expected in an artifical environment created by the government.
     
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  6. rdean
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    It's not just about regulation.

    What Republicans don't get is that cost cutting is NOT the only way to make a profit.

    To SELL something means you have to have people who BUY what is being SOLD.

    If you move jobs overseas because you can pay less for labor, then good for you, but eventually, you won't have anyplace to sell your goods.

    People here don't have jobs so they can't buy.

    The people you are paying less don't make enough to buy the goods they are making cheaply.

    So what can you do with a bunch of goods made cheap that no one can afford to buy?

    So you continue to cut money out making the goods cheaper and cheaper. Example? Toyota. They have been through cost cutting for the last couple of years and now they are seeing the result.

    If it weren't for the regulations we have left that Republicans haven't dismantled, could you imagine what Toyota would actually be selling?

    Worse, Republicans have always wanted to limit Americans ability to sue. We would be stuck with crap, but the corporations would be fully protected.

    They died, but they died for a good cause, profits for Toyota.
     
  7. MIPS
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    MIPS Active Member

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    No, Bureaucrats and Politicians are divine and thus are infallible.
     
  8. rdean
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    rdean rddean

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    No, corporations must be protected at all costs. They are the givers of everything good and holy.
     
  9. Vast LWC
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    Vast LWC <-Mohammed

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    This is a complete fallacy.

    The problem was not that unqualified buyers got homes, the problem was that those mortgages were packaged and then rated incorrectly as far as risk and value went.

    If those mortgages had been rated at the correct level of risk on the market, as opposed to all the ridiculous levels the Mortgage Derivatives were rated at, we would have never had a bubble and then a bubble crash in the first place.

    The problem originated with the Commodity Futures Modernization Act of 2000, where such derivative trading was made legal again after nearly 70 years of being illegal.

    Thanks Republican Congress of 2000!

    Fannie Mae and Freddie Mac did have a part to play in all this, as they were reselling some of the mortgages, but most of the trading and re-rating (approx. 75%) was done by private institutions.
     
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    Last edited: Feb 17, 2010
  10. saveliberty
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    saveliberty Diamond Member

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    Fallacy huh?

    So there was no intent or program(s) to expand homeownership to low income people?

    CRA had nothing to do with it?

    Private institutions rate mortgatges?

    No one had any idea of the risk levels?

    You are the joke.
     

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