One Of YOU Econo Types- Help!

[Annie]

Whenever I read something economy related that makes sense to me, I get nervous. What's your take on this?

Links at site:

The Volokh Conspiracy - -

Continuity We Shouldn't Believe In - Moral Hazard and the Geithner Bailout Plan: Nobel Prize-winning liberal economist Joseph Stiglitz points out that the Treasury Secretary Tim Geithner's plan to have the government subsidize investments in "toxic assets" creates a serious moral hazard: Private investors will pocket any gains, while the federal government promises to cover virtually all potential losses:

Professor [Joseph] Stiglitz on Tuesday led a list of well-known economists and high-profile industry figures who have said Treasury Secretary Tim Geithner's toxic asset plan may not be as successful as it first seems.

The plan involves ensuring up to $100bn of government funding is matched by private investors, with the monies combined and leveraged up, in some cases to by as much as 20:1, with the help of the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), to buy pools of unwanted assets.

Professor Stiglitz, speaking at a conference in Hong Kong, said that the US government is essentially using the taxpayer to guarantee the downside risks, namely that these assets will fall further in value, while the upside risks, in terms of future profits, are being handed to private investors such as insurance companies, bond investors and private equity funds.

"Quite frankly, this amounts to robbery of the American people. I don't think it's going to work because I think there'll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer."​

As Stiglitz suggests, this privatization of profits combined with socialization of losses is likely to incentivize overly risky investments that taxpayers will be left holding the bag for. It may also lead to misallocation of resources, as investors transfer funds from more economically efficient uses in order to take advantage of Uncle Sam's blank check for investing in "toxic assets." Jeffrey Sachs, another prominent liberal economist, makes a similar point in this Financial Times piece (free registration required).

Ironically, the moral hazard created by the Geithner plan is similar to the incentivizing of risky mortgage investments by the government's backing of Fannie Mae and Freddie Mac, which played a major role in causing the financial crisis in the first place, as economists Peter Wallison and Charles Calomiris describe in this paper. Wallison deserves some credit for warning about this danger back in 2005.

Both parties deserve blame for the policy of federal backing for dubious mortgages and investments. Certainly, President Bush didn't help matters when he, in his own words, "use[d] the mighty muscle of the federal government" to promote the issuing of risky mortgages.

Barack Obama, however, promised to break with the failed policies of the past, and often criticizes those who he claims advocate "the same failed ideas that got us into this mess in the first place." Ironically, he has now embraced some of the worst of those ideas himself.

 

[Agnapostate]

Ah...moral hazard. Moral hazard and adverse selection are two of the most critical agency problems caused by asymmetric information in a corporate financial structure. In this broader scheme, Stiglitz is quite right to note the moral hazard cost involved. Indeed, I don't know why so many deluded progressives were under the impression that an administration that appointed officials that played a role in causing this financial crisis (such as Rahm Emanuel), would be equipped to solve it, a decision that was, in Chomsky's words, "like appointing Osama bin Laden to lead the war on terror."

One point of contention that I do have with this analysis is the insinuation that there's such a limited selection of choices involved. Since Bush already thoroughly abandoned his free market pretenses through effective nationalizations, I don't see why a sense of realism couldn't be injected into this equation, seeking to nationalize remaining major financial institutions and whatever other industries might be subsidized and then implementing decentralized control of their management structure on municipal, county, and state levels, as opposed to consolidating managerial control in the hands of the federal government. We cannot accept such an absurd divergence between "ownership" and actual managerial control, since, as noted, American taxpayers are burdened with the costs of "ownership" in cases of financial mismanagement whilst not being able to democratically manage the institutions that they are allegedly responsible for.

 

[neurosport]

so we have white house stuffed full of bankers handing out our money to other bankers

where does the "conspiracy" part come in ?

 

[Annie]

so we have white house stuffed full of bankers handing out our money to other bankers

where does the "conspiracy" part come in ?

LOL! You didn't check the link? It's a 'name'.

 

[editec]

so we have white house stuffed full of bankers handing out our money to other bankers

where does the "conspiracy" part come in ?

Yeah, spot on, dude.

There's no conspiracy.

There's just a consistent pattern of a select group of people working together to insure that they stay rich and the rest of us pay to insure they do.

But since it's done PUBLICALLY, that's all A-Okay.

What amazes me is some of you think this is socialism, and others of you think this is capitalism.

Where I come from, we just call this theft.

 

[Annie]

so we have white house stuffed full of bankers handing out our money to other bankers

where does the "conspiracy" part come in ?

Yeah, spot on, dude.

There's no conspiracy.

There's just a consistent pattern of a select group of people working together to insure that they stay rich and the rest of us pay to insure they do.

But since it's done PUBLICALLY, that's all A-Okay.

What amazes me is some of you think this is socialism, and others of you think this is capitalism.

Where I come from, we just call this theft.

He was caught on the link name: Volokh Conspiracy

 

[Agnapostate]

What amazes me is some of you think this is socialism, and others of you think this is capitalism.

Where I come from, we just call this theft.

Oh, but that is capitalism. What is isn't is a free market. Mainly because those don't exist outside of the textbook, therefore making "free market capitalism" somewhat of an oxymoron, and its supporters just that also...without the "oxy."

 

[neurosport]

He was caught on the link name

yeah link names on this forum are auto generated.

in most places you write your own name ...

 

[Annie]

He was caught on the link name

yeah link names on this forum are auto generated.

in most places you write your own name ...

I understood what happened. In fact there was no 'conspiracy' about the post.

 

[editec]

To imagine that the formerly rich and powerful gave up their wealth or their power and gave the power to the people is, of course, absurd.

What they're calling capitalism is merely a sham system of power and control.

Just as what every state I can think of who declared themsevles socialist states were nothing but shams, too.

You're anachro-socialism might have existed for a year or two in one or two places, but they didn't last long because some facist system pretending to be something else will always wipe that off the face of the earth, Agna.

That is the social nature of mankind that stems from the nature of human beings.

Basically, any time enough like minded people get together to create anything even remotely like a fiar society, the monsters will wreck it.

They must, otherwise too many people might realize that there's a fairer way to structure society.

The hippies learned this lesson when many of their communes found themselves constantly under attack from the local police and power structures.

Now the ONLY way to create a commune is to create it, but never mention that its a communal system UNLESS you pretend that it is a RELIGIOUS community, and even THEN, the likelihood is that the local power and control freaks will be threatened by it, and start looking for reasons to make their lives more difficult.

 

[Agnapostate]

That's perhaps the chief reason that capitalism will likely be perpetuated through at least the next several centuries.

 

[neurosport]

the problem is people are not equal in capacities.

and the strong are not interested in any other kind of equality with the weak.

what the weak think ultimately doesn't matter.

that's all there is to it ...

maybe when we develop models for future societies we need to start with INEQUALITY as basis ?

 

[Agnapostate]

Uh...nobody claimed they were, which is why no one promotes a system based on equality of outcome. At least come up with more believable strawmen to tear down.

 

[neurosport]

Uh...nobody claimed they were, which is why no one promotes a system based on equality of outcome. At least come up with more believable strawmen to tear down.

i was talking about different kind of inequality.

i am talking about women, blacks or disabled people getting paid less for same exact work performed. not saying this happens now. i am saying this is TO BE EXPECTED.

why ? because collectively white men between ages say 20 and 50 are going to be the strongest group and they have the power to take things away from other groups.

you can reach all softs of agreements on paper where everybody says we gonna play fair but none of that matters. power is power. if somebody with power promises not to use it it doesn't mean shit.

but people want to believe promises. and thats a problem. what i was saying is maybe it would have been better if it was as in feudalism where there was NO SECRET BEING MADE about the strong raping the weak. everybody knew what was up.

instead we built up this COLOSSAL ILLUSION of progress, equality, democracy all that BS while underneath it there is the same good old laws of physics which dictate feudalism.

 

[neurosport]

the whole "all people are created equal" thing is just a political catch phrase yet we've come to believe that it means something

i think its a dangerous illusion ... and we weren't always subject to this illusion

there were times where people KNEW they were owned. they knew who their owners were. now we just don't know.

 

[Annie]

the whole "all people are created equal" thing is just a political catch phrase yet we've come to believe that it means something

i think its a dangerous illusion ... and we weren't always subject to this illusion

there were times where people KNEW they were owned. they knew who their owners were. now we just don't know.

Have you looked at university acceptance and graduation numbers? White guys are not moving on up. However you are definitely the most pc on here in a long time.

 

[editec]

the problem is people are not equal in capacities.

and the strong are not interested in any other kind of equality with the weak.

what the weak think ultimately doesn't matter.

that's all there is to it ...

maybe when we develop models for future societies we need to start with INEQUALITY as basis ?

Yeah, well that is sort of the presumption that communial life starts out with.

For example, children on communes are not expect to carry their weight.

Communes are basically extended families.

And there's another reason few of them surive for very long, too.

Even when there is no outside pressures trying to break them down, that old demon HUMAN NATURE tends to break them up.

I'm sometimes tempted to turn the editec compound into a small commune, but knowing what I know of human nature, I know damned well that my version of a commune would make me something of a benevolent dictator (at best!).

Somebody has to be in charge, and there's the END to that society's communalism.

As annoying as I find this sham capitalism we suffer with today, this system tends to be more functional for more people most of the time than other systems.

Sadly, the same problem (human nature) tends to distort the benefits of capitalism because inevitably the strong and smart and productive tend go gain enough power that they fix the game to their benefit.

As we are now witnessing with this so called economic crises.

 

[Paulie]

When I make a profit from an investment, and someone else less equipped than me lost SOMETHING because of it, how do I think negatively of myself?

If that less equipped person had been more educated and informed, it very well may have been THEM who profitted instead. The biggest reason people lose in capitalism is lack of information. More often then not, from what I've seen, that lack of information was due to their own apathy. There is a WEALTH of information out there that can help a person prosper in capitalism.

 

[Richard-H]

Whenever I read something economy related that makes sense to me, I get nervous. What's your take on this?

Based on what I heard on NPR the other day, this article is a severe misrepresentation of the Geitner plan. Not that I know who's lying but either NPT had an economist on that was blatantly lying or the author of this article is.

From what I understand, the government will suppliment up to 85% of the price of the investments. The investor is reponsible for the rest. Both investor and the governement assume the risk up to the percentage that each paid. However, the government does not get a share of the profits. It does get the amount of it's original investment back (assuming that the investment didn't lose value).

So it's like a government loan of up to 85%, but the governemnt is willing to absorb it's percentage of the losses. The investor does risk losing up to 100% of his investment.

The whole idea being that since investors do take on risk, they will make intelligent choices.

 

[Annie]

Whenever I read something economy related that makes sense to me, I get nervous. What's your take on this?

Based on what I heard on NPR the other day, this article is a severe misrepresentation of the Geitner plan. Not that I know who's lying but either NPT had an economist on that was blatantly lying or the author of this article is.

From what I understand, the government will suppliment up to 85% of the price of the investments. The investor is reponsible for the rest. Both investor and the governement assume the risk up to the percentage that each paid. However, the government does not get a share of the profits. It does get the amount of it's original investment back (assuming that the investment didn't lose value).

So it's like a government loan of up to 85%, but the governemnt is willing to absorb it's percentage of the losses. The investor does risk losing up to 100% of his investment.

The whole idea being that since investors do take on risk, they will make intelligent choices.

Forgive my ignorance, but isn't a 15% risk, nearly a guarantee when it comes to risk? Mightn't this be the reason that only the rich get to play?