Capitol Hill Blue Forums Political Issues Constitutional Issues The Self-Destructive Habits Of Politics

Here's what happens with a little government intervention:With Congress prepared to underwrite $300B of bad mortgage debt, wonder how long it will take tax-payers to work off this obligation and its likely iterations and how many politicians will be enriched? Read the masthead when longing for so-called government intervention since all human action is fraught with unintended consequences.

Excellent
then you are well informed to know what I said was accurate.
IE the every contract is composed of a long and a short position which balance each-other in terms of the underlying value of the relevant commodity. And as such it is rather meaningless to talk about $500 trillion of underlying risk. You will also know that most/all derivatives are highly leveraged... and so again the "underlying value" concept hugely inflates the actual risk. For example you might have a contract on a million dollars worth of T-Bills... but the actual change in value of the contract in trading would be in the thousands. And even that, in most cases is covered by margin requirements.

What is currently a problem is the "off the books" derivatives that have been set up by large financial institutions. These are entirely unregulated... and that in fact is the problem... lack of regulation and oversight rather than presence of regulation and oversight as you have contended.

In any case, this discussion seems to have gone far afield from the "constitutional issues forum" I will be separating out various of the issue we have been discussing and posting them to new threads on the "Economics forum" I will be starting with your contention (as I understand it that) current Keynesian economics have made the economy far more unstable than some halcyon pre-Keynesian period. If you care to beat me to the punch, you can open this thread and post your views on the topic on the economic forum... or I will do my best to summarized your points

It is interesting to note the many times that the word "panic" comes up when discussing these pre WWII economic events. Panic often included numerous bank closings where people lost their entire life savings.

How many bank closings have we had recently where people lost their entire life savings?

Even if one looks at the recent rash of foreclosures, current bankruptcy laws are such that people are not left destitute.


Current bank regulation policy has reduced bank failure, and eliminated the ordinary person's deposit risk. Even if one considered nothing else, this would represent an enormous success of financial "regulation."

Given the indisputable fact, I simply cannot see evidence for the suggestion that "regulation" has destroyed our economy.

Phil, once again, you are making my point for me. As I have said, since the economy is self-regulating, dependent primarily upon Human Action, government intervention rarely, if ever, does any good and in most cases when the economy enters into a down-side cycle, the government intervenes in ways that not only don’t help, but hurt. We are about to see a perfect example of this fact in the coming months. For if these regulations and interventions actually worked then we would have seen a far different history than we have during the past Century. After all, the Federal Reserve/government intervention was touted to stabilize and strengthen the mechanics of the economy, but that is not the case, its track record sucks. Within 15 years of its formation, we entered into the worse depression this country had ever seen. As I said earlier, now even Bernake and Greenspan admit that the policies of the Federal Reserve caused the Great Depression.

My point is that there were numerous regulations in the 1800s that affected the economy; it was never my contention that we should return to the policies of that period because it was no better than the one we currently are subjected to in this country. My contention has been that the massive mounds of government regulations do not prevent economic distress, but many times precipitates and extenuates these periods. Once again, the economy is ruled by forces that are simply immune from what we are told that regulations and interventions are touted to protect us from. Human Action, psychological behaviors are not subject to the effects of such regulations and therefore neutralize any supposed effectiveness of those regulations and interventions, history has, time and time again, proved that fact, and it will be proven again.
Yet, we continue to put faith in both the FED and the government to make us safe economically, that faith is about to be tested in ways that few of us are prepared for.

In viewing government regulations on business and finance, it is physically impossible to enforce the mounds of regulations that apply to commerce in this country. In a multitude of cases, these very regulations conflict with each other. I am constantly amazed at our gullibility when it comes to government and the banking cartel that supports it.

Ah, the Tulip Bulb Bust, it was the perfect example of herd mentality and greed however, it was not without the influences of government intervention. If you merely view the events of the bust itself without understanding the economic conditions of Dutch Society of the 17th Century, then you will naturally not fully understand how the Mania began, what promoted it and what finally bust the bubble. Both the Dutch Oligarchy and its magistrates of the period were intervening in the economy to provide a balance between what they considered “safe” and “risky” investments. The very powerful Dutch East India Company supervised most government edicts and this company held sway over the economy in ways that we simply cannot understand in modern terms. I could easily go into the various edicts that began in 1610 and casts conflicting influences over the Dutch economy. The Dutch oligarchy sought to limit what we now would call “futures contracts”.

Both the Crown and the Bank of England influenced the South Seas scam; for one thing both the Crown and the Bank of England were beneficiaries of the speculation. The Mississippi Bubble and John Law benefited, for a time, the King of France.
My point throughout this entire thread however, has been the despite government intervention human action will continue to regulate the economy regardless of government intervention. Additionally, it is evident that government both promotes and aggravates conditions of economic distress, prolonging in many instances the natural cycles within the economy.


Now, the Panic of 1837 should be of particular interest because, as usual, we accept a general view without looking deeper into what actually caused the Panic. In the early 1830s, there was a huge influx of silver coming in from Mexico, which rapidly expanded the money supply during the 1830s contributing to natural inflationary pressures that contributed to the eventual Panic and the subsequent recession. There was also a very dramatic change in the China trade at the time, of which the British were the primary beneficiaries, but in order to promote this trade the British granted huge lines of credit to American importers, they also helped fund the American canal and railroad boom that was going on at the time. The result was a rapid increase in specie stock in the U.S., banks expanded their loans and discounts without proportionally decreasing their specie reserves. Also, there was a massive land boom happening at the same time. There were several factors that contributed to the Panic of 1837, the least of which was government policy and the contraction of bank credit when the British stopped exporting capital in the form of credit to the United States and demanded hard currency for all new imports. Then in 1837, something amazing happened that shocked the American economy and that was that the demand for American cotton dropped dramatically, American cotton prices sunk. The entire credit structure for cotton as collateral security totally collapsed. The banks no longer extended credit; hard money became king and prices collapsed. Prior to the period, of course, Jackson withdrew the government deposits from the federal Bank of the United States and from 1833 to 1837 bank reserve ratios fell from 15.2% to 13.7%, as with all fractional reserve systems, this would prove to help induce the Panic of 1837. Once again, this is hardly an example of non-intervention by government or banks into the economy. This Panic does however, point to the very real danger of the fractional reserve system, the very system that the government supports.

Once again, we rarely look, in depth; at the circumstances that surround economic events, primarily because few people are really interested in the subject…I happen to be one of those who enjoys the subject.

One of the largest failure in U>S. history was on a regulated banking system called the Savings and Loan; it appeared that all the regulations in the world are not effective. This debacle cost American taxpayers over $250 Billion Dollars. The problems that caused the S&L collapse remains a solidly embedded within government regulatory policy today. The regulations that were born out of that debacle have done nothing to prevent the same thing happening again, in fact a similar situation has just happened with the sub-prime mortgage market. The problems stem from markets that are directly distorted by government regulations that twist, turn and undulate throughout the banking systems of this country. Although it is not widely understood by most people, naturally expansions and contractions serve a very essential purpose to a healthy economy, the problem is that theses cycles are interrupted or averted by government intervention and the underlying boil just festers until it erupts in painful corruption.

Now, once again we rarely relate the Panic of 1857 with government regulations and interventions however, once again it is evident that not only were there such interventions and regulations, but that many of these, including the various tariffs on trade contributed, once again to a variety of economic ills. Between 1854 and 1857, there were several restrictions imposed on the banking industry. Most of the bank failures of the period were due to the use of the fractional reserve system, the same system that we use today with the exception that today our money that is held in reserve is total fiat.

Most of these banks were victims of government restrictions and falling asset values which then pressed against their fractional reserves. Nearly 55% of all banks that failed during that period were also subject to falling bond prices, particularly those banks in Illinois and Ohio. The best source for information on the subject of the Panic of 1857 can be found in the State’s Auditor’s reports of the period, additionally, you can find a listing of the various types of government interventions in the U.S. House Executive Documents and the reports of the U.S. Controller of the Currency. Banks and other financial institutions were subject to a particularly risky government regulation that no bank could use its assets in times of a banking emergency. In addition to the reserves of the banks, they held a very large portion of their assets in highly liquid instruments, such as loans, discounted bills of credit, all of which could be easily converted into specie in a very short period of time to cover an emergency situation, but the government and banking auditors prevented the use of such assets even though those assets could have saved the banks from failure.

Oh, a great book was written back in 1852, it presents a perfect example of Human Action and how it controls economic processes, the book is titled:
"Memoirs of Extraordinary Popular Delusions and the Madness of Crowds"

Concerning the derivatives market Warren Buffet has called it the most dangerous economic time bomb in existence, actually his words were: "financial weapons of mass destruction" Like I said, usually in a futures contract you have a "Zero Sum Game" and at the end of the day the books are cleared on each contract that matures on a given day, but like Warren Buffet said about derivatives "I will guarantee you, if you add up the marks on both side, they don't add up to zero". That is a very, very dangerous position to be in on such financial instruments, then add the complexities of some of the more arcane instruments like SSPs and MBSs and it can get hairy.

One of the things that drew me into Futures Trading was the power of leverage, as you said Futures and Derivatives are leverage instruments, it was amazing and, if you used your head instead of your heart, you could see a massive return on your risk. I was always careful to use "stop-loss" orders, butterfly spreads and options to hedge my risk in the futures markets.

Yep, today we are seeing the results of a regulated state, government intervention at its height. So, you would think that if such government intervention and regulations, which are in absolutely unbelievable super-human proportions, actually worked or were even effective, then we would see a very different situation in this country. My contention has been that the vast majority of problems we now face are a direct result of the regulatory process that intervenes within this country, its economy and its social structure. Every single problem that has reared its ugly head in times of economic distress is portrayed as an issue of unregulated free-markets; we have not see a free-market in this country for decades. The latest "mortgage crisis" is being blamed, particularly by politicians, on the lack of regulations in the mortgage industry but when you look at the rotting mass of regulations in that industry you have to ask yourself where are regulations lacking. The Federal Reserve and the government have regulated that industry to the hilt, don't believe it, go to the ALLREGS site or to the American Association of Residential Mortgage Regulators. The policies of the FED were a prime contributor to the latest mortgage "melt-down", the FED promoted many of the very same mortgage instruments that it now seeks to restrict through regulatory oversight.

It's such a ridiculous contradiction that I am amazed that no one stands up and says "wait a minute, something is crazy here", many of our politicians love it when things like this happen because they can slap a few more tons of regulations, laws, act and oversight on industries like the mortgage industry and expand the scope of their powers while reaping political benefits from many sides of the regulatory game being played in this country.

By all means, read the latest report from the world's Central Bank of Central Bankers, The Bank for International Settlements. One excerpt states: "The difficulties in the sub-prime market were a trigger for, rather than a cause of, all the disruptive events that have followed. Moreover... the magnitude of the problems yet to be faced could be much greater than many now perceive. The eventual global slowdown could prove to be much greater and longer lasting than would be required to keep inflation under control. This could potentially even lead to deflation, which would evidently be less welcome."

Ah yes, the world of a regulated economy, all is well in hand, don't concern yourselves with the man behind the curtain.

I will confess at the outset that I have not followed everything on this thread, but I believe that this was a relatively succinct recitation of your previous position. I am afraid that I will have to join the chorus in disagreeing with your premise. I will be very specific in this particular criticism, in fairness to my limited participation. To that end, I disagree with your central premise, If you look at the examples that Phil provided, for example, and the one you have addressed, the "mortgage crisis" - they completely undermine this assertion. My response is specific to this point: In this instance, and the ones described by Phil and ardy, are not attributable to the areas that are regulated, but to the areas that are not. The subprime mortage crisis in particular was not the result of government action or overregulation but occurred in the areas around the margin that were outside the scope of current regulation. It wasn't federal reserve policy at all, but irresponsible lending practices that hid, sometimes criminally, the risk from the the buyers (of the mortage papers). Billions of dollars of bad debts were obscured by the practice of commoditizing debts. That had nothing to do with overregulation - nor, by the way, did the junk bond crisis of the 80's (Michael Milken, Ivan Boesky ring any bells?), and the 1987 stock market crash. It is, in my opinion, a convenient argument to claim that "there has not been a free market" in decades, centuries, whatever, because these crashes are not attributable to government action. They are, indisputably, related to "market forces" - the market, in this case, not being the actual market (e.g., product or services), but the speculative markets of stock trading in general. The real problem, economically, is that we attribute all economic vitality to the health of the "stock market" which is, as we can all observe a world that is often disconnected from the real world we all have to inhabit.

Methinks a duet doeth not a chorus make, NW Ponderer.;-)

Republicae-Seditionist has been methodical in presenting his argument, basing it on an understanding of economics as being intrinsically a part of humanity -- not an adjunct to it like the top-down, centralized theory Keynesians would have the less wary among us accept.

So far, Republicae-Seditionist's argument stands unrebutted.
Yours,
Issodhos

The argument is sufficiently butted that rebuttal would be superfluous.
Yours in Mirth
Ardy

It is always easy to point out the errors of a false argument one creates on his own. There are so many false premises in RS's well stated argument that it is not worth the effort. There is no evidence in all of history that the markets will self-regulate and at the same time not cause incalculable suffering to the population at large.

Anyone can state the opposite proposition but I have yet to see anything other than a well stated, albeit false, argument.