Markets Fail When Humans Are Unregulated

[Contessa_Sharra]

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

 

[Oddball]

Huh?

Do not the same human failings apply to the regulators as those in the markeplace?

 

[johnrocks]

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.

 

[JWBooth]

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....

 

[saveliberty]

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.

 

[rdean]

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.

 

[MIPS]

Huh?

Do not the same human failings apply to the regulators as those in the markeplace?

No, Bureaucrats and Politicians are divine and thus are infallible.

 

[rdean]

Huh?

Do not the same human failings apply to the regulators as those in the markeplace?

No, Bureaucrats and Politicians are divine and thus are infallible.

No, corporations must be protected at all costs. They are the givers of everything good and holy.

 

[Vast LWC]

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.

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.

 

[saveliberty]

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.

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.

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.

 

[Sherry]

Does the author hope Obama fails??

Greed and elected representatives, who are toadies to special interests, are decimating the American economy.

Consider President Obama’s budgets for 2010 and 2011. The combined red ink is $2.9 trillion. No one anywhere in the world has this kind of money to lend to Washington. How will these massive deficits, never before experienced on earth, be financed? They can only be financed by the Federal Reserve destroying its own balance sheet by its purchase of toxic financial instruments from the banks thereby providing the banks with cash with which to buy the Treasury’s bonds, or by the Federal Reserve itself purchasing the Treasury’s bonds by creating new money, or by another collapse in equity values that sends investors fleeing into “safe” Treasury bonds.

American power is on the precipice, about to fall. Perhaps it is a good thing. The world will be rid of bullying, of invasions of innocent countries based on blatant lies, of torture and murder of woman and children, of redistribution of income from the poor to the rich.

 

[Vast LWC]

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.

There was such a program and CRA did have something to do with it. But if the Mortgages had simply been rated at the normal level of risk and not packaged into mortgage backed securities and mortgage derivatives, they would have never caused an issue. Oh, people may have defaulted, but there would have been no national crisis, as the bubble would have never emerged.

Private institutions rate Securities, yes. Standard and Poors, for instance, was one of the prime culprits in the BS ratings these derivatives received.

Yes, Standard and Poors and the other rating agencies did in fact have an idea of the risk levels, but they criminally falsified the ratings in order to make a profit.

Why was all this able to occur? Say it with me: DEREGULATION. Specifically the legislation previously mentioned, the Commodity Futures Modernization Act of 2000.

And you might want to make sure you're not wrong about something before saying something as assinine as "you are a joke", genius.

 

[Oddball]

If the mortgages had been properly rated, they wouldn't have been written up in the first place.

Deregulation had nothing to do with that.

 

[Vast LWC]

If the mortgages had been properly rated, they wouldn't have been written up in the first place.

Deregulation had nothing to do with that.

You can write high-risk mortgages. As long as the risk is rated correctly, the only problem is for the home owners.

But let's say there were a large amount of mortgages that had incorrect risk ratings to begin with, which is entirely possible.

By themselves, they would never have caused a national crisis, as the banks that held the mortgages would have been insured.

The issue was that the securites the mortgages were bundled into were then given triple A ratings. Then they were manipulated by the big players in the market to be given higher and higher values over time.

By the time they were done, a large portion of these derivatives were rated at 60 times their original value. Thus when the bottom dropped out, trillions and trillions of dollars disappeared overnight, causing a national crisis.

This exact situation was the reason for the law that made these types of derivatives illegal in the first place. The over leveraging and over valuing of securities that led to the market crash of 1929 spurred congress to do so.

The specific deregulation that reversed this illegality was contained in the reversal of the Glass-Steagal act of 1999, and in the Commodity Futures Modernization Act of 2000. Both legislations were drawn up by a Republican Congress and signed by an embattled president who would have never found support in congress for any kind of Veto, thanks to Ken Starr and Monica Lewinsky.

 

[Oddball]

The high risk mortgages weren't properly collateralized....That was not a fault of regulation, but of the passive-aggressive nature of poverty pimps like Sharpton, Jackson, Frank, ACORN, et. al.

The derivatives market was infused with mortgages that should never have been written up....That's not the fault of the derivatives traders.

 

[saveliberty]

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.

There was such a program and CRA did have something to do with it. But if the Mortgages had simply been rated at the normal level of risk and not packaged into mortgage backed securities and mortgage derivatives, they would have never caused an issue. Oh, people may have defaulted, but there would have been no national crisis, as the bubble would have never emerged.

Private institutions rate Securities, yes. Standard and Poors, for instance, was one of the prime culprits in the BS ratings these derivatives received.

Yes, Standard and Poors and the other rating agencies did in fact have an idea of the risk levels, but they criminally falsified the ratings in order to make a profit.

Why was all this able to occur? Say it with me: DEREGULATION. Specifically the legislation previously mentioned, the Commodity Futures Modernization Act of 2000.

And you might want to make sure you're not wrong about something before saying something as assinine as "you are a joke", genius.

My last two posts have resulted in you giving up ground on your points. The claim of this thread is a market will fail without regulation. Banking and the securities market are both regulated. Yet these problems occurred. It was not a lack of regulation, but regulation aimed at a specific result. These were unintended results from these regualtions. Government created none the less. 0bama seems intent on beating those big bad bankers into submission. Why has he not requested Holder prosecute them? Why is S & P not charged? You make wild claims without evidence (an opinion piece is not evidence).

 

[Vast LWC]

My last two posts have resulted in you giving up ground on your points. The claim of this thread is a market will fail without regulation. Banking and the securities market are both regulated. Yet these problems occurred. It was not a lack of regulation, but regulation aimed at a specific result. These were unintended results from these regualtions. Government created none the less. 0bama seems intent on beating those big bad bankers into submission. Why has he not requested Holder prosecute them? Why is S & P not charged? You make wild claims without evidence (an opinion piece is not evidence).

I did not give up any ground in my posts. My point was that the small amount of problem that the original mortgages represented would have never caused a national crisis. I even pointed out that Fannie and Freddie, the hobgoblins of the right, were part of the problem in my original post.

The crisis was caused by the derivative trading that was only loosely based on the original value of the mortgages, and eventually became unbelievably exaggerated to the point of absurdity.

That was caused by deregulation.

Let's say, for the point of argument, that the bad mortgages totalled 100 Billion Dollars in value. (Note that this is a completely made up figure, as I have no idea what the original number was, and frankly neither do most people who should know.)

After being packaged by either Fannie/Freddie or (in most cases) some private firm, the value of the the total became 60 times as much as the original, or 6 Trillion dollars.

Now, the insurance agencies could have covered default on all of the original 100 Billion without an issue, but there's no way they can cover 6 Trillion. Thus the national crisis.

And S&P should be charged. I am making accusations against S&P and the other ratings agencies because they committed fraud. I have no idea why they have not been prosecuted. Perhaps they found some legal loophole in the existing regulations.

I did not present an opinion piece, I only present the facts, and the facts are that the value of the mortgage backed securities continued to climb, for no apparent reason, every time a bank or investment house brought them to S&P or their competitors to be rated. Look it up for yourself.

 

[Contumacious]

Former Federal Reserve chairman Alan Greenspan answered that he had placed his trust in a flawed theory

Fascism is indeed a flawed theory. How many agencies were regulating Bernard Madoff?


The zombified never cease to amaze me.

 

[Vast LWC]

Former Federal Reserve chairman Alan Greenspan answered that he had placed his trust in a flawed theory

Fascism is indeed a flawed theory. How many agencies were regulating Bernard Madoff?


The zombified never cease to amaze me.

Apparently none.

The one that was supposed to be, the SEC, was undermanned, and Bernie had one of them in his pocket.

 

[Avatar4321]

Who should regulate the market? Should it be the government or the people in the market who knows what's in their best interests?

The problem with this nation is we have become so dependent on government that people just assume everything is alright without doing any sort of fact research. We all think that no matter what happens someone will bail us out so we can take risks we wouldnt normally make if we realized we couldnt. We live beyond our means. We are dishonest.

And that pretty much somes up the problem. We, as a society, are dishonest. We lie to ourselves. We lie to others. Most of us are still in complete denial about what is going on in our lives. We want to blame others. It's the other guys fault. It's always there fault. Or it's God's fault. Or it's Life's fault. It's everyones fault but your own.

Maybe all of us just need to sit down and do an inventory of our lives and start being honest with ourselves about our circumstances. Until you recognize the problem, you can't fix it. And government sure can't fix it.