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Dec 6th, 2017
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Joined: Sep 2005
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Pooh-Bah
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Pooh-Bah
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Now to the next question. With the new government poised to spend the next Trillion... how long do you think it will take the people to catch on? Ah, there is the rub (with apologies to Willie S.).:-) The Establishment's propaganda machine is going full speed to keep the people focused away from the politician's complicity and the state's heavy hand at the root. Blame will be directed at the result (people doing what people do when opportunity avails itself and the path is smoothed) rather than at the cause. Yours, Issodhos
"When all has been said that can be said, and all has been done that can be done, there will be poetry";-) -- Issodhos
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Administrator Bionic Scribe
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Administrator Bionic Scribe
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Most experts will tell you that Barack Obama needs to move quickly to contain the multitrillion-dollar market that turned low-quality mortgages into high-priced derivatives, the Wall Street innovation now widely blamed for the credit crisis. Shiller says the opposite. He argues that unless the central issue of risk is addressed, all the money that governments are pouring into financial rescues won't prevent another, potentially worse financial crisis down the line. In Shiller's view, derivatives "are a risk management tool much the same way insurance is. You pay a premium and if an event happens, you get a payment." His radical answer to our problems is that trying to leash financial innovation is hopeless, and that we should instead push forward into a brave new world where derivatives become as common as cash.
What separates Shiller from the majority of economists is his lack of faith in the "efficient-market hypothesis." That belief, which also guides the hand of most money managers, holds that the market will price assets according to their fundamental value and that those prices reflect all pertinent information. Shiller instead follows those, like John Kenneth Galbraith, who hold that market prices reflect "animal spirits" and popular passions, not perfect information.
Life is a banquet -- and most poor suckers are starving to death -- Auntie Mame
You are born naked and everything else is drag - RuPaul
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old hand
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old hand
Joined: Jan 2003
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Phil:
I totally agree that derivatives are, or should be a good thing. The problem, that Shiller (at least as shown in the NW article), didn't address four major problems... the ones that brought down the market.
1. Transparency - As soon as the mortgages were collateralized, they lost identity. Risk models have been proven to be wrong. The is just no reasonable way to backtrack derivatives.
2. Leverage - Actually two parts to leverage... First, the percentage... 10% down to 2%... Encourages day trading which excludes the market, and leaves the profit/loss in the hands of speculators. Speculation is ok and good, but when it's used to play roulette, the results return to the Enron Model.
3. Regulation. This is, and has been purely political. Any economic model can be said to be workable, but it's when there are rules, that it can be successful. (IMO)
4. I believe that Shiller sees the concept of insurance as being viable. I would agree. But the derivative market was, by law, limited to those with extreme wealth. We hear the term "phantom banking". Part of that means that the assets that have been pledged to "back" leveraged bets, aren't liquid. That's where the entire derivative problem arose. When the time came to settle the derivative "swaps", there were not enough liquid assets to pay out. As long as the traders were content to "swap" debt, everything worked fine. The crash came when the counterparties refused to pay obligations with liquidity.
Long and short... free markets are fine, but as long as not everyone can play... as long as the rules are made by the players as they go along, as long as the deals are made in dark rooms, as long as leverage encourages speculation, then there will be abuse.
I think that derivatives came as an extension of the commodity futures market... which stabilized so many industries, and was good for business and the country. Credit derivatives (mainly housing) skipped the collateral step... then as the string played out, credit derivative swaps topped off the re-inflation of the Enron and the Internet bubbles.
We can have all of these financial instruments, but only with regulation. Trust in Free Markets per se, will be a long time coming.
I don't believe that we'll go anywhere in fixing the economy until honest people write the rules. (and that means someone other than politicians and bankers).
Last edited by itstarted; 01/15/09 12:14 AM.
Life is Good!
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Administrator Bionic Scribe
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Administrator Bionic Scribe
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I see your points, itstarted. I posted the article because it presented a view I had not considered before, not so much because I agreed with it.
Life is a banquet -- and most poor suckers are starving to death -- Auntie Mame
You are born naked and everything else is drag - RuPaul
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Joined: Jan 2003
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old hand
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old hand
Joined: Jan 2003
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Another small (at least for now) note on the status of a promised plan to set up a system for clearing the 35 Trillion dolars (notional value) of derivatives. I haven't been following this since the original proposal, but now see that there are actually 3 firms trying to get approval. Maybe it's just my suspicious nature, but I can't believe that they are doing this as a public service. The DOJ is apparently checking in to the background as a matter of course. My problem with this is that ICE is the company trying to get approval. ICE is the company that took derivative trading to Europe, so as to avoid the margin requirements in the US. Confusing I suppose, but it looks like the fox is trying to get a job as security for the henhouse. Derivatives Clearing Plan
Life is Good!
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Pooh-Bah
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Pooh-Bah
Joined: Sep 2005
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Shiller instead follows those, like John Kenneth Galbraith, who hold that market prices reflect "animal spirits" and popular passions, not perfect information. [/quote] Values are subjective and subjectively set in a market by the process of voluntary exchange or multiple voluntary exchanges. So, yes, if human action (decisions) are "popular passions" and "animal spirits" then that is a good description of value determinants. And, perfect information does not exist and is not and has never been necessary to a free or kinda, sorta, somewhat free market. Yours, Issodhos P.s. "Fundamental value" is a myth that participants and actors in the world of finance/investment/speculation/commerce pretend to subscribe to or unknowingly subscribe to. It is popular with bean counters -- 'nuff said.:-)
"When all has been said that can be said, and all has been done that can be done, there will be poetry";-) -- Issodhos
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Joined: Sep 2005
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Pooh-Bah
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Pooh-Bah
Joined: Sep 2005
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Confusing I suppose, but it looks like the fox is trying to get a job as security for the henhouse. Speaking of assigning foxes in guard the henhouse.... Geithner, Summers and Orszag have all been followers of the economic formula that came to be called Rubinomics: balanced budgets, free trade and financial deregulation. Yours, Issodhos
"When all has been said that can be said, and all has been done that can be done, there will be poetry";-) -- Issodhos
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Joined: Aug 2008
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veteran
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OP
veteran
Joined: Aug 2008
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- The Ugly Truth: America's Economy is Not Coming BackWhat we are now seeing is the beginning of an inevitable downward adjustment in American living standards to conform with our actual place in the world. As a nation of consumers, and not producers, with little to offer to the rest of the world except raw materials, food crops, military hardware and bad films (none of which industries employ many people), we are headed to a recovery that will not feel like a recovery at all. Eventually, productive capacity will be restored, as lowered US wages make it again profitable for some things to be made here at home again, but like people in the 1930s looking back at the Roaring 20s of yore, we are going to look back at the last two decades as some kind of dream.
It would be better if the new administration would be honest about this, because with honesty, we could have a recovery program that would actually address the real critical issues facing the country--the decline of our educational system, the irrationality of official promotion of home ownership that has led to the proliferation not just of suburbs but of exurbs, the over-reliance on the automobile for transportation, the unprecedented waste of resources, the pillaging of the environment, not to mention the decimation of the retirement system and the creation of a vast medical-industrial complex that is sucking the life-blood out of families and businesses alike.
With honesty, we could also confront the other big obstacle to national recovery--the nation's obsession with militarism and foreign wars. The honest truth is that the US is technically bankrupt and in a state of chronic decline, and yet the nation persists in spending a trillion dollars a year on war and preparations for war, as though America were in mortal danger from foreign enemies.
The truth is that we are not threatened by Communism, by drug lords, or by Muslim Jihadists in any serious way. Rather, we have become our own worst enemy.
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Joined: Dec 2005
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Pooh-Bah
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Pooh-Bah
Joined: Dec 2005
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- The Ugly Truth: America's Economy is Not Coming BackWhat we are now seeing is the beginning of an inevitable downward adjustment in American living standards to conform with our actual place in the world.
snip
The truth is that we are not threatened by Communism, by drug lords, or by Muslim Jihadists in any serious way. Rather, we have become our own worst enemy. afraid that pretty much nails it
"It's not a lie if you believe it." -- George Costanza
The whole problem with the world is that fools and fanatics are always so certain of themselves. --Bertrand Russel
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Joined: Aug 2008
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veteran
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OP
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- We do live in an Age of Wonders! Financial Week ["the Home Page of Corporate Finance"] has this in its columns! [b]U.S. must 'save capitalism' from...ks nationalizated—and bankers punished Nassim Nicholas Taleb, the author of “The Black Swan: The Impact of the Highly Improbable”, has a simple proposal to as he puts it, “save capitalism and free markets from the banks.”
Nationalize the banks, limit the rewards to those who work in what he calls the “utility” part of the system and have a completely uninsured second leg that can take all the risks it wants and lose its shirt, he said in an interview in Davos at the World Economic Forum.
“They rigged the game. We pay them for their profits, there is no clawback so their incentive is to hide the risk they are taking.”
“Which is why eventually as someone who loves free markets, a total nationalization of the part of the business that requires insurance and does clearing and payments needs to happen.”
“I am angry with U.S. policy. What we had is exactly the opposite of socialism, they got TARP to pay their bonuses and to take more risk.”
He describes his plan as Capitalism 2.0. It would have a barbell structure, with the insured utility-like part on one end and the free market bit with privatized risk on the other.
He describes banking bonuses as asymmetric because the banker gets the upside but does not share in the liability which ultimately may be funded by taxpayers, as we have seen.
Mr. Taleb, who as you may have noticed doesn’t mince words, is no fan of private equity.
“Private equity has absolutely no reason to exist. The private equity holder has all the upside and the banks all the downside.” He’d have no objection to a system where private equity funds itself via hedge funds, so long as neither party had any recourse to government insurance.
And a bit like an Old Testament prophet, Mr. Taleb is angry and wants those he thinks are responsible to suffer.
“I want them poor and they deserve to be poor. You can’t have capitalism without punishment.”
Oh, and another thing, he wants Bob Rubin, who trousered millions while chairman of Citigroup, to cough up. “I want Bob Rubin to return his $110 million dollars to the American taxpayer.”
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