The Flaw In Blaming The Fed

Discussion in 'Economy' started by PoliticalChic, Apr 14, 2010.

  1. PoliticalChic
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    PoliticalChic Diamond Member

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    The Flaw in Blaming the Fed. It's politics.

    Until one can demonstrate free market capitalism in our economy, some of our economic ‘experts’ should stop excusing government interference in the financial crisis.

    Banking may be the most regulated of industries- but the fed is the scion of banking and government.

    “As the financial system comes crumbling down, the 20/20 hindsight begins. Of course the casualty of this latest fiasco will be free markets. But when you examine the industries that have had massive scandals, you'll find a list of the most highly regulated industries including telecoms (WorldCom), energy/utilities (Enron, NorthWestern) and banking (too numerous to mention).
    In fact "libertarian free-market fundamentalism" hasn't really existed in the scandal industries (banking, telecom, banking/investing and airlines). In fact we find the most highly regulated, highly watched industries are in fact the most prone to scandal.”
    Are Scandals Inevitable in Regulated Industries? - Wealthy Reader

    “The banking industry is a highly regulated industry with focused regulators. In the U.S., banks with FDIC-insured deposits are regulated by the FDIC, Fed-member banks are regulated by the Federal Reserve, the Office of the Comptroller of the Currency regulates national banks, and the Office of Thrift Supervision is the federal regulator for thrifts”
    . Banking Industry - Business Exchange

    “And few industries are as risk averse as those that are heavily regulated by the federal government or state governments…It is ENTIRELY possible to innovate within a regulated industry….However, the fact that a firm is regulated doesn't give it a pass for innovation. In fact, it may make the need for innovation even greater. Here's why: heavy regulation builds a comfortable fence around an industry, and the key players within that industry usually agree to divide the market up.” Innovate on Purpose: Innovating in a regulated industry

    So, then, how does a highly regulated industry such as banking ‘innovate’?

    “Visa had the most former Congressional officials, with 37 lobbyists; it was followed closely by other financial powerhouses like Goldman Sachs, Prudential, Citigroup and the American Bankers Association, according to the analysis from Public Citizen, an advocacy group that has pushed for tougher lobbying restrictions.
    The case of Peter S. Roberson, whose hiring by a derivatives clearinghouse drew the ire of Mr. Frank, is the most extreme, and it points to holes in the rules governing lobbying by former aides.
    As a senior aide to Mr. Frank on the House financial services committee, Mr. Roberson helped draft legislation last year on regulating the over-the-counter derivatives market, which played a big part in the 2008 market collapse. After leaving his Congressional post in January, he began working as a lobbyist for IntercontinentalExchange, the world’s leading clearinghouse for derivatives.
    Minting Bank Lobbyists on Capitol Hill - NYTimes.com

    So, what can we conclude from these readings?
    1. To blame the free market for the mortgage meltdown recession is somewhere between dubious and disingenuous.
    2. To theorize that one single factor, such as fed policy is the culprit is shortsighted.
    3. Corporatism, or crony capitalism has a heavy thumb on the scale.
    4. Regulation as a solution is far from a firewall. In fact, allowing government regulation is a shortcut to corruption.
     
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  2. Neubarth
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    Neubarth At the Ballpark July 30th

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    BUT, allowing some government regulation is the only cure for the corruption that is now endemic in our business world.
     
  3. PoliticalChic
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    PoliticalChic Diamond Member

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    But this guy makes the point re: less regulated industries:

    "So why are the most regulated industries the ones that fail the most? I could offer my explanations, but the truth is I don't know. I'm only trying to question the common wisdom(stupidity?) that "libertarian free-market fundamentalism" is the root of all evil.

    I have a few examples of industries with almost no regulation that have behaved themselves. When you look at industries that are truly free market competitors you find some interesting characteristics.

    Software..."
    Are Scandals Inevitable in Regulated Industries? - Wealthy Reader


    Once the burden of regulation is in place,,,government functionaries step in and do 'favors' for donations, or become lobbyists.

    This is the source of "the corruption that is now endemic in our business world."

    Or, at least in large measure.
     
  4. Neubarth
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    Neubarth At the Ballpark July 30th

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    As long as there are dishonest people in the world, moderate regulation is necessary.

    I lock my doors at night because I know that there are dishonest people about.

    In the banking world there are lots of them.

    In the finance world there are lots of them.

    Because of all of those dishonest people we need rules and regulation.
     
  5. PoliticalChic
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    PoliticalChic Diamond Member

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    Why have you not mentioned "dishonest people " in the political realm?

    The thrust of the OP is that regulation is the entree of the corrupt pols into the business worldl
     
  6. Toro
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    Toro Diamond Member

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    1. There were many reasons for the melt-down, but you assume that people will always act in self-interested manner that will not damage the economy. That is not the case. The five top executives for Lehman alone pocketed $2.4 billion in compensation, despite destroying their company. They kept most of it. What do they care if they destroyed their company and the economy? They're rich beyond belief. And that is just one company. Billions and billions of dollars were paid out to executives who failed. Milton Friedman once said that executives wouldn't do anything to harm their corporation because they wouldn't risk their livelihoods and reputations. But if you can make hundreds of millions of dollars in a few years but taking excessive risks, what is your motivation for not risking everything? Also, the fact that banking "is the most heavily regulated industry" is something of a canard. If the regulators are not regulating as they should be, then the market is acting in a de facto free fashion. Derivatives were not subject to the same oversight as other regulations as other financial products, and it ultimately was the derivatives market which packaged all these loans that ultimately brought the world to its knees.

    2. True. Paul Krugman agrees with you. However, bubbles are very hard to effectuate without money freely flowing through the economy. Since 2000, the real Fed funds rate - the rate after inflation - has been effectively zero. In other words, money has been free for the past decade. There is enormous incentive to use free money to leverage up and make large bets so traders can pay themselves tens of millions of dollars. Without the Fed keeping interest rates so low, the Housing Bubble almost certainly would not have happened.

    3. Yes, I agree. The financial industry spends more on lobbying politicians than the next five industries combined. The Federal Reserve system and the federal government bailed out the financial system despite their gross incompetence in getting us into this mess because they are bought and paid for.

    4. That may be, but there is also a lot of corruption in corporate America today. Weak governance structures allows incompetent executives to be paid egregious amounts of money despite their gross incompetence. In a free market with poor internal governance, you don't need bad government regulation to destroy the economy.
     
  7. william the wie
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    william the wie Gold Member

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    Several problems with the OP.

    A) The shift away from what is thought to be banking started in the 1920s.

    B) The meltdown happened because the Fed didn't know what was or was not a bank. Money market funds and the Euro-dollar pool are both much larger than sticks and bricks banks and been major players since the 1960s. They and hedge funds such as Graham-Newman 1926-56 and insurance companies such as Berkshire Hathaway are not subject to Federal Reserve regulation. So the Fed managed to tank the shadow banking/repo market run by the money markets because they didn't know it existed until they, the Fed, tanked it by their idiotic handling of Lehman brothers.
    C) Forex exists outside of national controls so when the Fed tangled with it by accident in the past it lost. Japanese housewives own the foreign exchange markets. The Fed ignored this problem too.
    D) The Fed by joining congress in denunciation of derivatives forgot or never knew that letters of credit needed to sell wheat to for example India is a 5000 year old derivative used by Sumerians before there was money or writing. After getting the farmbelt and foreign allies really irritated at DC the derivatives bandwagon lost steam.

    In sum the Fed should be replaced by a switch that is not connected to anything.
     
  8. Neubarth
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    Neubarth At the Ballpark July 30th

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    total bullshit from a clown who does not know what he is writing about.
     
  9. william the wie
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    william the wie Gold Member

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    haven't studied the meltdown at all have you?
     
  10. georgephillip
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    georgephillip Gold Member Supporting Member

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    In an economy governed by libertarian free market fundamentals, what institution would control the monopoly of violence, i.e., courts, prisons, police, and military?
     

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