Pro-Wrestler Smacks Down Keynesian

[Toro]

The markets were far from unregulated.

That is very true, and the regulatory architecture and government institutions are partially to blame for this mess. However, the financial system had become increasingly deregulated over the past three decades, and this deregulation was a big reason for the financial collapse.

The implosion of the financial system would not have occurred had financial institutions been well capitalized. The government, however, allowed banks to take on more and more debt under the belief that banks could better regulate themselves than the government since they knew the risks better. Countries even signed international accords allowing for this increased deregulation, culminating with Basel II. This has turned out to be disastrous, and surely will be scrapped once we are out of this mess.

 

[Ravi]

Um, the collapse was more the fault of the ability of banks to sell off their bad risks immediately and the credit rating agencies bad ratings. If only freddie and fannie mortgages went unpaid we'd not be in this situation.

You don't think people being tricked into buying homes they couldn't afford with artificially low interest rates had anything to do with the bubble?

People being tricked into taking out mortgages they can't afford did not cause the bubble. Interesting that you bring up the trickery though...I'm pretty sure that tricking people isn't one of the aims of the free market system.

What it is is proof that some regulation is needed.

 

[Kevin_Kennedy]

Um, the collapse was more the fault of the ability of banks to sell off their bad risks immediately and the credit rating agencies bad ratings. If only freddie and fannie mortgages went unpaid we'd not be in this situation.

You don't think people being tricked into buying homes they couldn't afford with artificially low interest rates had anything to do with the bubble?

People being tricked into taking out mortgages they can't afford did not cause the bubble. Interesting that you bring up the trickery though...I'm pretty sure that tricking people isn't one of the aims of the free market system.

What it is is proof that some regulation is needed.

Those companies would not have allowed those high-risk mortgages in a free market, because it would be bad for business. The government forced them to do so, and that is not a free market at work.

 

[Agnapostate]

Those companies would not have allowed those high-risk mortgages in a free market, because it would be bad for business. The government forced them to do so, and that is not a free market at work.

Nor is any economic model outside of a textbook, for that matter.

 

[Paulie]

People being tricked into taking out mortgages they can't afford did not cause the bubble. Interesting that you bring up the trickery though...I'm pretty sure that tricking people isn't one of the aims of the free market system.

What it is is proof that some regulation is needed.

You say the biggest cause was the immediate packaging and selling of toxic MBS's. They were toxic because of the bad mortgages they were derived from. The mortgages were bad because too many people couldn't afford them. One of the biggest reasons was because banks gave mortgages to ANYONE. Another reason was because people accepted unrealistic offers that they should have known weren't going to work in their favor. Simple history of only a few years earlier ought to be adequate enough for people to know that their house can't and won't rise in value forever, and interest rates won't stay low forever. The bottom line on subprime mortgages is that people just shouldn't have been that gullible. The information was there if any of them would have just wanted to learn more. We shouldn't NEED regulation to prevent that, we should simply encourage the population to be smarter about their money. A president that's speaking to tens of millions of households that are giving him their undivided attention is a great opportunity for that.

What you simply can't ignore is what ignited the whole speculative boom to BEGIN with, and that's artificially low interest rates. Rates that almost can't possibly go any lower. This, added in with increased money in the supply, enticed everyone and their mother to go buy a house, because it was being touted to us as the greatest opportunity to become wealthy in years.

You can regulate those banks to death, and all you're left with is a continually uninformed population that was given no reason at all not to be financially irresponsible the next time there's an opportunity. Everyone's been bailed out now. We've now been conditioned to accept that in the worst of circumstances, the government will just save us all from ourselves by throwing more at any big crisis.

What keeps the next round of speculators from going too far when we're not even made accountable for our actions anymore?

 

[Toro]

Those companies would not have allowed those high-risk mortgages in a free market, because it would be bad for business. The government forced them to do so, and that is not a free market at work.

I'm sorry, this is simply wrong. Less than 10% of subprime mortgages were backed by the government. Most Alt-A mortgages were not backed by the government, and no jumbo mortgages are backed by the government. It was the subprime, the Alt-A and the jumbo mortgages which were the problems, not the conforming loans which are backed by the government, since it was subprime, Alt-A and jumbo mortgages which fueled the housing bubble.

I saw financial companies doing oceans of this garbage for years that you knew, or at least I knew, would eventually blow up one day. These companies dug their own graves on their own volition. The idea that companies would not do something because it was bad for business simply doesn't jive with what actually occurred in financial markets.

 

[Ravi]

Not to mention that no banks were forced to give out bad loans.

Paulie, a simple regulation of not allowing banks to make bad loans and turn around and sell them creating a crazy ponzi scheme would have prevented the entire mess. The banks that were stupid enough to make bad loans would have failed...and those numbers would be small.

 

[Paulie]

Not to mention that no banks were forced to give out bad loans.

Paulie, a simple regulation of not allowing banks to make bad loans and turn around and sell them creating a crazy ponzi scheme would have prevented the entire mess. The banks that were stupid enough to make bad loans would have failed...and those numbers would be small.

Why can't a bank be allowed to sell a loan? I don't quite understand why you have a problem with that. I certainly don't agree with incorrectly, and possibly deceivingly, rating the debt. But I'm at a loss for understanding why a bank shouldn't be able to sell their debt. That's BUSINESS, Rav. The seller and the buyer are not forced to make that transaction, and either party has all the ability in the world to inform themselves as much as possible before taking that kind of risk. No one forced AIG, for instance, to buy up a bunch of toxic debt-backed securities. They were their own worst enemy there, because they were GREEDY.

What stops the next speculative bubble somewhere else, when these ONCE AGAIN historically low interest rates, and an unprecedented monetary base, lead to high inflation and potentially over-inflated asset(s)? You regulate the banks to death, and you STILL have the environment where too much money is left chasing finite assets.

As long as you keep allowing the manipulation of credit and the money supply, you're going to have irresponsible speculation SOMEWHERE within the market. Speculation should not be considered "illegal", it should simply not be enabled by such free-flowing credit, and an ever expanding money supply.

How many times do you have to watch the Federal Reserve's monetary policy of loosening credit and increasing of the money supply leading to out of control speculation, before you start to realize where the root cause of all this nonsense is?

Even Toro admits the Fed was a primary catalyst. Why still, don't you?