I don’t understand how the financial markets can make up “products” out of thin air. MBS are understandable: Basically they are different types of debt instruments packaged neatly and offered for sale.. CDS are understandable: Basically insurance of the MBS. However, were these products tested? How do we know they will work? Will they kill the patient?

Now, let me ask you, if I said that I came up with a new way of harnessing the wind using tethered, floating (using helium) windmills, what do you think the Government would say?

1. It will need to be tested using the best engineering principles (basically on paper).
2. A protype must be built and then it will need to be tested, in a place that will not impact humans
3. It must meet all safety regulations
4. We need to add new regulations to safeguard the public
5. It will need a permit and can’t be higher than X number of feet
6. You must have a study completed to determine the impact on wildlife, people, watersupply, future generations, etc.
7. You will need to have a way to tie it into the current grid
8. Etc, etc.

Second example, what about a new medication? Same result right? It will need to be tested, it must show efficacy, long term studies must be done, it can’t be duplicative, etc.

My point in this example is that in non scientific pursuits, such as law, government, finance, etc. we as humans “wing it” all the time. If we injected the scientific method into this practice, we would all be better off in the long run. We should make it mandatory that any new “financial” instrument is completely vetted prior to allowing it to be unleashed. We have unleashed a plague due to our lack of forethought.

And we continue to play with fire. What evidence do we have the Tim’s plan will work? What are the second and third order effects of the Fed buying up debt? The answer is NO ONE KNOWS…

I agree with Carson, there will be cultural fallout and I fear we may pass beyond the event horizon and get sucked into the debt black hole from which there is no returning. They didn’t call it the dark ages for nothing.

Believe it or not there are TEN, count em, TEN members of Congress with any scientific background (and that is counting Brian Baird, which for me, is a stretch). For all you scientists out there, that is 1.8% of Congress.

Here is a current list of Congressman who has degrees in the scientific area:

Vernon Ehlers received his undergraduate degree in physics and his Ph.D. in nuclear physics from the University of California at Berkeley in 1960. After six years teaching and research at Berkeley, he moved back to Grand Rapids to Calvin College in 1966 where he taught physics for 16 years and later served as chairman of the Physics Department. During his tenure at Calvin, Ehlers also served as a volunteer science advisor to then-Congressman Gerald R. Ford.

Russ Holt earned his B.A. in Physics from Carleton College in Minnesota and completed his Master’s and Ph.D. at NYU. He has held positions as a teacher, Congressional Science Fellow, and arms control expert at the U.S. State Department where he monitored the nuclear programs of countries such as Iraq, Iran, North Korea, and the former Soviet Union. From 1989 until he launched his 1998 congressional campaign, Holt was Assistant Director of the Princeton Plasma Physics Laboratory, the largest research facility of Princeton University and the largest center for research in alternative energy in New Jersey. He has conducted extensive research on alternative energy and has his own patent for a solar energy device. Holt was also a five-time winner of the game show “Jeopardy.”

Jerry McNerney has his PhD in mathematics, served several years at Sandia National Laboratories in New Mexico as a national security contractor. Then McNerney moved to California, accepting a senior engineering position with US Windpower, Kenetech, and in 1994 began working as an energy consultant for PG&E, FloWind, the Electric Power Research Institute, and other utility companies. Prior to his election to Congress, he served as the CEO of a start-up company that manufactures wind turbines.

John W. Olver was a chemistry professor at the University of Massachusetts at Amherst. Olver earned his B.A. from Rensselaer Polytechnic Institute, his M.A. from Tufts University, and his Ph.D. in chemistry from the Massachusetts Institute of Technology.

Brian Baird received his B.S. from the University of Utah, graduating Phi Beta Kappa in 1977. He continued on to the University of Wyoming, receiving his M.S. and PhD in clinical psychology.

Ron Paul graduated from Gettysburg College and the Duke University School of Medicine, before proudly serving as a flight surgeon in the U.S. Air Force during the 1960s

Dan Lipinski earned a Bachelor’s Degree in Mechanical Engineering from Northwestern University, a Master’s Degree in Engineering-Economic Systems from Stanford University, and a PhD in Political Science from Duke University.

Nancy Boyda graduated with honors from William Jewell College in Liberty, Missouri, where she received dual degrees in chemistry and education. She began her career in 1978 working as an analytical chemist and field inspector for the Environmental Protection Agency. Over the next two decades, she held management positions in several pharmaceutical companies, including Marion Laboratories.”

Cliff Stearns graduated with a degree in electrical engineering [from George Washington University] and then started his four years of service in the Air Force. Serving during the Vietnam War, Stearns worked as an aerospace engineer in satellite reconnaissance. He left the service with the rank of Captain.”

Joe L. Barton earned a four-year Gifford-Hill Opportunity Award scholarship to Texas A&M University, where he was the outstanding industrial engineering student for the Class of 1972. After earning a Master’s of Science degree in Industrial Administration from Purdue University, he joined Ennis Business Forms, where he rose to the position of Assistant to the Vice President. In 1981, he was selected for the prestigious White House Fellows Program, and served as an aide to then-Energy Secretary James B. Edwards. He returned to Texas in 1982 as a natural gas decontrol consultant for Atlantic Richfield Oil and Gas Company before being elected to Congress.”

Taxes can be saved if you invest at the right place. It is more like you tuck away the money in some sort of bonds or the like where the Government benefits. If you take a closer look, its a win-win situation for the Government. You pay them taxes, its fine with them, you invest in some FDIC insured instrument, its great for them. In the end, they get what they want. The thing about reducing the toxicity of the assests that are primarily responsible for freezing up the credit markets is that nobody is willing to buy those. Old wine in new bottle? Sorry, still not good marketing enough. So, maybe a bailout and a good propaganda campaign would do some good to promote this.
While I found the comment about defaulting a rather amusing one, I do have good belief that people still prefer to keep that as a last resort. It would rather be prudent to consider that such defaulters were actually classified as ‘sub-prime’ in the first place.
In the end, I do have good faith in Geithner’s plan. If it works or not is a different story, but he sure is making the righ moves in the right direction.

I have just recently returned to my Law/Economics Student life from a deployment to Afghanistan with an Army Military Intelligence unit. Prior to the deployment, several of the other officers had been stationed at the height of the housing bubble at facilities located near D.C. in Northern Virginia – where even their very modest homes removed from their workplace by substantial driving distances were particularly pricey for someone with a family and on a military salary.

Nevertheless when they had arrived they found the local branches of the nation’s largest bank chains exceedingly eager to loan them up to 100% of the asking price plus costs with a minimum of fuss, delay, paperwork, or any other prudent diligence. I had a similar, “Really, is that it? That can’t be right. Are you sure that’s all you need?” experience when I received my mortgage in 2005 from Countrywide. The officers were also heavily encouraged to dabble in those now infamous Option-ARMs and other financial “innovations”, but despite the temptation and being skeptical-conservative types they opted for traditional fixed-rate mortgages.

As soon as the market started to tank while we were away, their small equity positions were wiped out and they started going negative. By the time they were close to returning they were all badly underwater over $100K and, worse, the Army had reassigned them and they were required to move promptly. They were simply not in a position to hold out, wait for prices to go back up in the long term, and continue making monthly payments. Unfortunate professional timing had compelled them to buy at the top and sell at the “bottom”.

So, as the depth of the murky trouble in which they were finding themselves became increasingly clear they all found themselves perplexed as to what to do. Their uncertainty had two dimensions – (1) technical and (2) moral. They asked for my assistance and I tried to explain the basic information I knew about short-sales, negotiated settlements, and other ways of dealing with their banks to offload their properties and what the various consequences, for example to their credit scores, would likely be.

But even when presented with these various options, with one course-of-action usually standing out as being clearly the winner when measured purely in terms of their financial self-interest, they still wondered which fork in the road was the right one ethically. They had each accumulated a small life’s savings and could decide to hand it over the entire family education and retirement fund to the bank or choose one of the legal options that would let them try and keep it. What was the right thing to do? With these men, and with many others I would estimate, they sense a moral dimension that should be addressed in their decision-making but don’t know how to conduct the ethical analysis. They look for guidance and advice in the words of their acquaintances and the acts of their community and national leaders.

Their instinct was that if they had borrowed $1,000 from a friend or a neighbor they would feel a deep, almost sacred, obligation to make good on their debt and pay it off in full plus interest as soon as they could manage it. It would be wrong to stiff the guy next door even if you were in trouble and the law would let you get away with it.

And their first impulse was the extend the principle to all debts, including the one on their house.

But then the bailouts with taxpayer money started, and the “too big to fail” talk, and the wave of foreclosures and layoffs and emerging scandals of the the unjust excesses of the financial industry, and so on. And these men began to feel that from the personal scale of their little world, their family was also perhaps “too big to fail” and forfeit their life’s savings.

They also started to question how could the bailouts make sense without some of the benefits flowing to innocent and responsible men such as themselves while the reckless nut who lied on his applications and bought six houses to “flip”, each of which more than double what he could conceivably afford, can just abandon ship and mail the keys to the banks – or even has his multiple foreclosures delayed for months by the state legislature. All of sudden, what had seemed moral now appeared foolish, even stupid.

And then it never seemed to end – bailouts for the big-3 car makers, countless earmarks, a thousand inexplicable giveaways in the “stimulus”. And these gentlemen are not economists or political scientists and must distill the message of these actions through our hysterical press which tells these stories in a way, it seems, increasingly so as to make us terrified and irate.

And the point of all of this is that there is indeed an effect on culture, intended or now. The whole moral universe, in regards to debt, has been overthrown for these good and righteous men with whom I went to war. They started out with an inclination as to what the right thing to do was, and then were unsure, and then questioned whether they were just being “suckers” and if there should be a moral question at all given what was happening in the world around them.

I think the observation of Mr. Gross makes it both mysterious and tragic that neither party at the level of our national leadership has sought to address the unintended, but nevertheless real, cultural and moral implications of our economic rescue efforts.

I don’t think there has been a huge cultural shift here. What has changed is that a lot of people have hugely negative equity coupled with cash flow problems coupled with uncertainty about the future coupled with real signs of deflation.

Companies and individuals have always been willing to default on debt when they are in this situation.

Like you I don’t have a crystal ball and my worries about what may happen are enhanced by anecdotal evidence. I know of people already who are deadly serious that they simply won’t make above $250,000 even though they have in the past. They’d rather quit working above that level than give more money to the government.

I’m even more concerned about our continuing spiral (this has been going on for decades) into becoming an entitlement society. Increasingly we as individuals do not accept our lots and expect help as a right.

It now seems common-place for people to refer the economy in their conversations, whereas in the previous ‘boom’ period, people thought nothing of it.

As far as they were concerned, so long as the world went round, it didn’t really matter.

We are now heading into a long and dark tunnel which is unfamiliar territory, to all nations. Mention of the ‘global economy’ strikes fear into the hearts of bankers and politicians.

Mention of interest rates makes savers shudder.

In fact, there’s likely a financial term for every type of person in the world.

What we have to ask ourselves is not ‘how do we get ourselves out of this mess?’

It’s ‘what do we see at the other end of the tunnel?’

This has nothing to do with Rand. It has a lot more to do with Polanyi (Karl). In his view, the market economy generally relies on a cultural context that springs mostly from other sources, is eroded by the market and so those sources have to fight back through measures involving the “self-protection” of society (old-age security, etc.).

Of course, he didn’t anticipate how extreme this might get. For a long time now, market logic has been undermining legal logic (and the culture of promising) itself: this is what a big part of the law and economics movement in law schools has been doing, for example. The irony here, of course, is that this can attack contract itself.

In philosophical terms, this is runaway utilitarianism (and of a sort that would make classical utilitarians, who cared about people, very upset). When consequentialism, instrumentalism, expediency–whatever you want to call it–reaches a certain point, we get to where we are now: when you have people continually saying “We have to do *this* now, or everything is going to hell!” where *this* amounts to something (transfer payments to screw-ups and extorters) that regularly, seriously, offends our senses of justice and fairness.

But those senses of justice and fairness are, as you point out, what make the world–including this crazy, runaway, fictitious-capital-accumulating world, go ’round. The thing is, nobody knows just quite how depraved it can all get before it stops working–how many systems can work on fear and greed alone, with no other supports (no glory, no loyalty, much less reciprocity, etc.)? (This is not about “egoism” v. “altruism” or other silly modern reductions that Chesterton, for one, saw through, but that e.g. Steven Pinker is totally beholden to.) Who knows….

But don’t forget about the power of forgetting. If there’s any culture that forgets, it’s this one!