New wave regulation

Politics International Politics
1

The spillover effects of this are going to be HUGE. There’s no way this is going to be confined to the finance sector.

[quote=“NYT”]Alan Greenspan, the former Federal Reserve chairman, said Thursday that the current financial crisis had uncovered a flaw in how the free market system works that had shocked him.

Mr. Greenspan told the House Oversight Committee on Thursday that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had proved to be wrong.
[color=#0000FF](Really? Where are the incentives for exercising prudence while gambling with others’ money while secure behind a golden parachute?"[/color]

Mr. Greenspan said he had made a “mistake” in believing that banks operating in their self-interest would be enough to protect their shareholders and the equity in their institutions.

Mr. Greenspan said that he had found “a flaw in the model that I perceived is the critical functioning structure that defines how the world works.”

Mr. Greenspan, who headed the nation’s central bank for 18.5 years, said that he and others who believed lending institutions would do a good job of protecting their shareholders are in a “state of shocked disbelief.”

He said that the current crisis had “turned out to be much broader than anything that I could have imagined.”[/quote]
There’s already a chorus of “gov’t regulations encouraging lending to the poor made us do it”-itis, but I expect a broad and rapid retreat from free market fundamentalism and “government is the problem”-itis. When that happens, where’s the right going to plant its flag? I’m betting that it’ll be right, smack dab in the middle of religion and the culture wars. Gov’t intervention will become popular again (Bush has already laid the ground work), and given the new ideology, it could be a whole lot of fun. Not.

2

[quote=“Jaboney”]The spillover effects of this are going to be HUGE. There’s no way this is going to be confined to the finance sector.

[quote=“NYT”]Alan Greenspan, the former Federal Reserve chairman, said Thursday that the current financial crisis had uncovered a flaw in how the free market system works that had shocked him.

Mr. Greenspan told the House Oversight Committee on Thursday that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had proved to be wrong.
[color=#0000FF](Really? Where are the incentives for exercising prudence while gambling with others’ money while secure behind a golden parachute?"[/color]

Mr. Greenspan said he had made a “mistake” in believing that banks operating in their self-interest would be enough to protect their shareholders and the equity in their institutions.

Mr. Greenspan said that he had found “a flaw in the model that I perceived is the critical functioning structure that defines how the world works.”

Mr. Greenspan, who headed the nation’s central bank for 18.5 years, said that he and others who believed lending institutions would do a good job of protecting their shareholders are in a “state of shocked disbelief.”

He said that the current crisis had “turned out to be much broader than anything that I could have imagined.”[/quote]
There’s already a chorus of “gov’t regulations encouraging lending to the poor made us do it”-itis, but I expect a broad and rapid retreat from free market fundamentalism and “government is the problem”-itis. When that happens, where’s the right going to plant its flag? I’m betting that it’ll be right, smack dab in the middle of religion and the culture wars. Gov’t intervention will become popular again (Bush has already laid the ground work), and given the new ideology, it could be a whole lot of fun. Not.[/quote]

Well…be fair, that not quite what he said. I watched portions of the testimony out of sheer perversity, (I mean you’d have to be a true sadist to watch the whole thing). Essentially he said that the demand for asset backed securities grew so high, since they seemed to offer a high, risk adjusted return, that people were driven to take almost anything and package it up. Nothing to do with the gov. forcing people to sell mortgages to the poor. Naturally, this won’t stop the Republicans from trying to spin it this way. When was the last time they let facts stand in the way of ideology? And of course, he neglected to mention, (dodged?), how executive compensation may have short-circuited the usual fiduciary responsibility to the shareholders.

3

Banks make dumb moves. Banks go broke. What’s the problem?

4

The bankers set the rules (in our societies), right? Now that the bankers aren’t located in NY, but Beijing, guess what?

[quote=“Washington Post”]Leaders from Asia and Europe on Saturday called for new rules and stronger regulation of the global monetary and financial system at the close of a two-day summit in Beijing as China assumed a new leadership role in the crisis.
[…]
“We are very glad to see that many countries have taken measures that have initially proved effective. But this is not enough given the current situation, and more needs to be done,” [Chinese Prime Minister Wen Jiabao] said Saturday…
Wen also said stricter regulation might be key to recovery. “Lessons should be learned from the financial crisis, and the responsibilities should be clarified for governments, companies and supervision, respectively,” he said.
[…]
In a joint statement, the more than 40 world leaders in attendance – including Japanese Prime Minister Taro Aso, German Chancellor Angela Merkel and French President Nicolas Sarkozy – said they recognized “the need to improve the supervision and regulation of all financial actors, in particular their accountability” and pledged “to undertake effective and comprehensive reform of the international monetary and financial systems.”

[…] it was clear the groundwork was being laid for a Nov. 15 meeting on the crisis that President Bush is hosting in Washington.

The Beijing meeting appeared to be a victory for Sarkozy, who has taken the lead in representing his European Union colleagues in pushing for an overhaul of the world’s financial systems and the creation of a new “regulated capitalism” as soon as possible. Sarkozy has said such steps cannot wait until a new U.S. president takes office. [/quote]

The US still seems to be fine, thanks to the willingness of global capital to buy debt, and the interest of countries like China in seeing the dollar retain its value. To some extent, they’re stuck: holding such vast reserves of US dollars, they can’t afford to dump the currency or cease buying debt. Still, this could get interesting.

5

Why would top bank executives getting massive golden parachutes signal a flaw in the free market?

If people perceive these massive golden parachutes as really bad, then they will demand change in management practices. If such changes don’t happen, they’ll lose faith as either investors or depositors, which will force said banks to change their ways. This problem is a combination of greed and apathy though. If any problem gets big enough, it will overcome both greed and apathy.

Regarding the OP’s assertion that the right will plant its flag firmly in religion and the culture wars, I think that’s quite likely, not to mention quite scary.

6

Haven’t they been doing this for some 25 years already?

7

Haven’t they been doing this for some 25 years already?[/quote]

Yes, but there are at least two strains in the Republican Party (and a fair cross-over between them). There’s the Bible thumping element (who often have no qualms about filling the trough for their special interests in big business) and there’s the economic rationalist element. The latter will become rarer and rarer.

8

[quote=“GuyInTaiwan”]Why would top bank executives getting massive golden parachutes signal a flaw in the free market?

If people perceive these massive golden parachutes as really bad, then they will demand change in management practices. If such changes don’t happen, they’ll lose faith as either investors or depositors, which will force said banks to change their ways. This problem is a combination of greed and apathy though. If any problem gets big enough, it will overcome both greed and apathy.[/quote]
Shareholder activism has run into a number of barriers. That’s in addition to apathy, ignorance, and the assumption–held also by Greenspan, until recently–that companies will act in the best interests of their shareholders. As few corporate officers have much interest in listening to the ‘uninformed shareholders’, they’ve been lobbying to erect high legal thresholds for shareholder action, or implementing in-house governance-based measures to the same effect.

That signals a flaw in the free market because a) there isn’t really a free market in corporate officers, and b) their incentive structures are decidedly skewed and insulated from real performance.

We could wait for the problem to get big enough to overcome both greed and apathy, but at that point the pound of cure may cost far more than ounce of prevention (and it’s inevitable unintended consequences).

9

[quote=“Jaboney”][quote=“GuyInTaiwan”]Why would top bank executives getting massive golden parachutes signal a flaw in the free market?

If people perceive these massive golden parachutes as really bad, then they will demand change in management practices. If such changes don’t happen, they’ll lose faith as either investors or depositors, which will force said banks to change their ways. This problem is a combination of greed and apathy though. If any problem gets big enough, it will overcome both greed and apathy.[/quote]
Shareholder activism has run into a number of barriers. That’s in addition to apathy, ignorance, and the assumption–held also by Greenspan, until recently–that companies will act in the best interests of their shareholders. As few corporate officers have much interest in listening to the ‘uninformed shareholders’, they’ve been lobbying to erect high legal thresholds for shareholder action, or implementing in-house governance-based measures to the same effect.

That signals a flaw in the free market because a) there isn’t really a free market in corporate officers, and b) their incentive structures are decidedly skewed and insulated from real performance.

We could wait for the problem to get big enough to overcome both greed and apathy, but at that point the pound of cure may cost far more than ounce of prevention (and it’s inevitable unintended consequences).[/quote]

Again, I say though, that if people don’t like the way a company is run, they can sell their investments, withdraw their deposits, stop buying their products or stop using their services. That it is the free market. The free market doesn’t mean every single enterprise will be run in a particular way. There may be strains of totalitarianism, collectivism, etc., and strains of competency and incompetency. However, taken as a whole, people can choose to be a part of those or not, except where and when government forces their hands.

10

[quote=“GuyInTaiwan”]Why would top bank executives getting massive golden parachutes signal a flaw in the free market?

If people perceive these massive golden parachutes as really bad, then they will demand change in management practices. If such changes don’t happen, they’ll lose faith as either investors or depositors, which will force said banks to change their ways. This problem is a combination of greed and apathy though. If any problem gets big enough, it will overcome both greed and apathy.

Regarding the OP’s assertion that the right will plant its flag firmly in religion and the culture wars, I think that’s quite likely, not to mention quite scary.[/quote]

The issue is when it upsets the alignment of interest between owners & management. If management knows they will get compensated regardless, then they are willing to take on more risk than is sensible. In this case, owners also lost there sense with unrealistic expectations of returns.

As for the part in bold… There is certainly now a correction in people’s appetite for risk. However, one usually tries to keep the correct from getting too big that they destroys huge volumes of the wealth. This is like 20+ times bigger than the '86 crash.