Frog, Toad, Cookies, and Financial Regulation

My two-year-old daughter loves Frog and Toad.

There is a Frog and Toad story called “Cookies.” It is the only Frog and Toad story I remember from my childhood. Toad bakes some cookies and takes them to Frog’s house. They are very good. Frog and Toad eat many cookies, one after another. They try very hard to stop eating cookies, but as long as the cookies are in front of them, they cannot help themselves.

So Frog puts the cookies in a box. Toad points out that they can open the box. Frog ties some string around the box. Toad points out that they can cut the string. Frog gets a ladder and puts the box on a high shelf. Toad points out .  . .

Finally Frog takes down the box, cuts the string, opens the box, and gives all the cookies to the birds.

“Read more, Daddy,” my daughter says.

“One moment, I have to tell all the nice people the moral to the story.”

On last Friday’s Planet Money, Alex Blumberg talked to Republican Congressman John Campbell (starting around 24:30), who happens to be on the House Financial Services Committee. According to Campbell, there are three broad regulatory designs under consideration:

  1. Break up the banks and impose rules to keep them small (simple size caps).
  2. Allow large banks, but impose stringent regulations on them.
  3. Similar to 2: Allow large banks, but impose regulatory constraints that increase with size (for example, increasing capital adequacy requirements), so that at some point being large becomes unprofitable.

These may all seem like plausible solutions when you look only at economic considerations, but not when you consider political factors. The most fundamental problem is that as long as you have big banks, they can climb the ladder, take down the box, cut the string, open the box, and eat all the cookies. For example, when Citigroup merged with Travelers in 1998, there was this thing called the Glass-Steagall Act, which prohibited mergers between banks and insurance companies. Sandy Weill, chairman of Travelers, said at the time: “We are hopeful that over that time [two to five years] the legislation will change . . . We have had enough discussions [with the Fed] to believe this will not be a problem.” Sure enough, the legislation changed.

Options 2 and 3 allow banks to become big and then use their power to weaken the regulations. Frog should have put the box on the shelf, climbed down, and smashed the ladder. Yes, someday he might have built a new ladder, and no regulatory scheme can serve its intended purpose forever. But the simpler it is, and the weaker the parties who want to undermine it, the stronger it will be.

60 responses to “Frog, Toad, Cookies, and Financial Regulation

  1. bewilderedandindespair

    I hope you have introduced your daughter to Jeremy Fisher by Beatrice Potter!

  2. Have you daughter watch this for a lesson in oration:

  3. One of the biggest surprise for many people was the consequence of the Lehman Bro. failure. Few at the time foresaw the whole world economy will grind to a halt. In fact, many cheered that the government did the right thing by letting Lehman fail.

    In my opinion, the opaque interdependency of financial institutions chained together by complex financial instruments is the biggest problem that we need to address. This massive domino set that span the globe was just waiting for a triggering event.

    This is a much bigger problem than having banks too big to fail. In fact, the real reason we have banks too big to fail is because the big bank is interconnected with many other financial entities. Size of bank is not the primary issue.

    I think we need a global financial system that is interconnected. However, the opaqueness should become transparent or there should be fire roads that insulate various institutions when things go bad.

    On a side note, this is similar to the concept of “isolation” in computer science. On a modern OS (e.g. linux, windows, etc.) one can run many different programs concurrently. These programs can be of varying level of quality. However, bugs in one program usually doesn’t take down the whole system. Furthermore, multiple programs can still collaborate and share information to help the user get his job done. We need a financial system like that.

    Separately, I think we should step back and compile a list of all the problems we’ve identified thus far. We can than work on fixes that complement each other.

  4. The US could be chasing its own shadow.

    Banking is a concentrated industry. There are about 5500 FDIC insured banks in the US. The top 10 banks hold most of the assets, loans, and deposits. There are certainly economies of scale, but I would venture a guess that the next lower tier of banks also benefit from the same economies of scale and that economies do not explain by themselves the extreme concentration. There may be even diseconomies for the very large banks in comparison to slightly smaller banks.

    It could be that there is a too big to fail size that some large banks strive to reach that offset the extra costs of the top banks’ size. If so then the proposed extra costs of new constraints have to be so great as to completely negate the benefit of being too big too fail. I do not think we have the quantitative data to be sure the new requirements will do the job.

    Breaking up big banks is ok if the benefits of the scale economies remain. Otherwise, we are imposing new banking costs on the consumer. The change will force an unpredictable behavioral effect at the consumer level of banking with unintended economy wide results.

    Stringent regulations probably will not work. Too big to fail banks have too much risk taking incentive and will find the weaknesses in the regulations. The banks will take the additional risk in less well-regulated areas.

    The best alternative may be to phase out the too big to fail doctrine.

  5. Looks like they’ve chosen door #3.

    “Geithner to Propose Vast Expansion Of U.S. Oversight of Financial System”

    http://www.washingtonpost.com/wp-dyn/content/article/2009/03/25/AR2009032502311.html

    I’ve been quoting Holmes (Oliver Wendell) to friends lately “[FDR had] a second rate intellect but a first rate character” and saying that it looks like Obama is quite the opposite. This seems to be more evidence in support of that proposition.

  6. Frog and Toad! Boy, that was so long ago I can’t remember any of the stories. (Though along with Ten Little Animals, Frog and Toad Are Friends is the book with which I first started learning to read.)

    As for the three solution, (2) and (3) are simply insane. The exponential debt economy is winding down, and every cent and every day spent trying to prop up these large bank-derivative structures is simply time and dwindling real wealth being wasted forever. The opportunity cost is simply tragic.

    And for anyone in the day of Too-Big-To-Fail psychological terrorism to still think big banks can still serve any stabilizing purpose, any purpose at all other than to run an extortion racket, bespeaks an inability to learn the most simple lessons which is utterly, clinically retarded.

    The only other option is that one is a fanatical corporatist ideologue, which I do think is in fact the case with Geithner and Summers.

    Beyond that, (3) is needlessly complex, jury-rigged, likely to be cobbled together in an ad hoc fashion without any clear concept or principle (since if you had either of those, you’d choose (2)). Therefore it fits in well with Geithner’s discombobulated M.O.

    I believe the clarity, sanity, wisdom, and justice of (1) speaks for itself. I’ll just add that I believe it’s the only plausible solution economically as well as politically. Both physical resource depletion as well as the sheer weight of debt militate that the civilization-wide debt bubble cannot be sustained, and one way or another (and by now, given this political leadership, it looks like the choices are the hard way or the REALLY hard way) things are going to get a lot smaller.

  7. Be sure to read her “Owl at home”, also by Arnold Lobel. I’m not sure those stories have a moral, but they’re great.

  8. You point out the simple and simply unsolvable problem: we cannot decentralize economic power until we decentralize political power and we can’t do that until all of us are as equal as our ballot–not dollar–access.

  9. As Ben implies above, the Lehman collapse showed the danger of having banks ‘too big to fail’ is multiplied by counterparty risk.

    Breaking up banks, inhibiting excess banking growth and prohibiting excessive risk-taking are critical components of a banking recovery programme. Two thoughts:

    1) significant moves have to be co-ordinated internationally (otherwise there will be a stampede of capital to less regulated markets); and

    2) the ownership of these ‘new’ broken-up, inhibited banks needs consideration, viz: bank growth will be limited and as such, presumably all surplus profits will be passed as dividends to equity investors. There is an inner tension here between this and equity investors looking for ever-increasing returns. Will the banks ever be owned privately again?

  10. I just thought of something.

    Moons ago, when I was in grad school, we were studying why the Soviet Union collapsed. As I remember, one of the important factors was that the leadership had become intensely centralized and isolated or insulated from important dynamics that would propel a healthy nation.

    Hummmmm—If the jolly bankers and their isolated government collaborators write a new reg. here and there, they are operating in their own small little world and can change anything to the way they want it at any time.

    So, would one strategic solution be to decentralize the politics and shape the new politics in a way that had continual involvement with the citizens? Don’t ask me how to do that, but piece by piece, maybe good people should push for that kind of change.

    Bob Spencer

  11. I think transparency is as important as size. If there were ironclad laws ensuring complete transparency, then the market could actually work. Think how much earlier the extent of this crisis would have been known if investors could see what was on the balance sheets. Even now no one is sure. Transparency is to free markets what free speech is to democracy. How many years ago would the market have signaled distrust of Citi and AIG if investors had known what they were holding?

  12. This is certainly among the most important postings here at the Baseline Scenario.

    As long as politicians can be bought and sold, the regulatory situation will not change over the long run. I favor option #1 — no Too Big to Fail Banks/Other — because perhaps for some number of years, we will have some economic peace. All human arrangements break down sooner or later because there will always be those who see a substantial advantage to themselves in getting those rules changed. Since time immemorial, bribes have always worked when such changes are requested. (All hail Phil Gramm!)

    I could say something very nasty about Larry Summers here but what’s the point? He works for Obama.

    One might have hoped that the Central Bank, which is supposed to maintain stability and which is supposed to be immune from such political meddling, would not have caved on past regulatory failures. Thus was our past corruption complete.

    Thanks, James, for your story about Frogs and Toads.

  13. Too big to fail = too big to exist. A Priori.

    Until every member of the American electorate, currently watching with mouth open in disbelief, contacts their congressmen (and Barney Frank for good measure) and makes it clear that those supporting the share price of big banks over the interests of the economy and the public will lose next term’s election, plans like 2 and 3 above will prevail.

    And our childrens’ children will read books like “Frog and Toad Remember America” and “Frog and Toad Wonder Why Grandpa and Grandma Let Them Do This to Us.”

    Bob, try club orlov for a view on US/USSR parallels.

  14. Glass Steagall broke the ladder. Friedman rebuilt it.

    You might remember the Anti-Trust actions of the ‘60’s(?), which broke up big companies that were considered so dominant in their field that competition was stifled. Those Anti-Trust cases were not pretty, they were not easy. The hearings would go on for years. Ma Bell got broken up, IBM didn’t.

    In that case, the pain was of dubious value. Not so with the Banking scene – we MUST have a stable financial system.

    The current situation is an ideal opportunity to break up the big banks. They are discredited, and the Government effectively owns them anyway. Summers, Geithner & Bernanke are surely aware of Glass Steagall, and must have asked themselves whether or not similar constraints are appropriate. The fact that it isn’t being done puts real questions to the efficacy of current policy.

    However size is not the only issue. The counterparty risks inherent in Derivatives, particularly CDS’s, have made the present mess exceedingly difficult to unravel. Then, mixing Merchant Banking with S&L functions has opened the door to all sorts of conflicts of interest.

    So, my vote is for limiting size, separating functions, and regulating Derivatives.

  15. James Twiner

    “Breaking up big banks is ok if the benefits of the scale economies remain. Otherwise, we are imposing new banking costs on the consumer.”

    NEW BANKING COSTS ON THE CONSUMER? You mean like the unsustainable debt burden that is being created right now to save the investors in these Too (politically Powerful) Big to (be allowed to) Fail (like any other failed business) Banks?

    I would maintain that raising my checking acount fee from $0 a month to $10 a month is no great sacrifice if it results in my children and grandchildren not having to pay back this mountain of debt.

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  17. I agree with every point in your analysis. What do you thing the odds are that solution 1 will be followed? (Before, that is, it becomes not an option but the only recourse.)

  18. Your analysis is dead-on correct but incomplete. The USG is spending hundreds of billions–actually trillions if guarantees are included–to prop up insolvent banks until the storm passes over. It is a fantasy to believe that the USG would then break up those same institutions. The time for a break up is now–or never.

  19. As a student of human nature most of my life, I am continually amazed at the lack of that ingredient in the overall picture. Over and over, the ability of “creative” minds to overcome all obstacles, regulations and rules is incredible. We can put whatever we want in place but over time these “creative” (I’m being kind) minds will chip away at them. The American fear of a “managed” society is extremely useful to them. We have all kinds of fancy language but, as a group of people, we want to do what/when/where we want without any interference. When it runs awry, as it inevitibly will, we yell for controls which, in turn, we will slowly dismantle.

    As a nation, we idealize the human animal and ignore the reality of who/what we are. No matter what, we will find outselves in a similar spot again.

  20. I am going to hearken back to older discussion. Geither, the President Bernanke, and the FDIC are proposing having the authority to do what you want in the first case. This is a very interesting development. Either they have the authority to nationalize Citigroup or they don’t. If they do, then this is a trial balloon to see if distress is bad enough yet so that this augmentation of authority is necessary. If they don’t the Conservative Supreme Court will likely agree with the Banks when the inevitable court case is brought arguing the government didn’t have the authority to break up and nationalize a firm. The resulting mess if they rule the wrong way would make what is happening now pale.

    This points out the intrinsic weakness of the US governing authority. It simply lacks adequate power and ability in general to govern, or so the US government thinks..

    By the way its very natural for “conservatives” to oppose doing anything. Turning the US into Brazil say before Lula has every advantage for this class. Cheap formerly scared middle class labor, a hugh servant class etc. The rationality from a certain point of view of political discourse is striking. One only has to follow the money and keep track fo what the natural interests of the players are.

    If you state that the Republican Program becomes maximize the wealth and income of the Ultra–Rich much that becomes inexplicable becomes totally rational. In politics one should follow what is done and forget largely about what is said.

  21. Here’s my timeline for nationalization of the sickest banks. Geither knows he can’t simply force institutions as large as Citigroup into default overnight, so he’s going to do it over time. In keeping with the theme of this post, its sort of like boiling a frog.

    Geithner is essentially making a drawn out “offer the banks can’t refuse”. His plan is all about buying time and letting the steep yield curve generate earnings at a (hopefully) faster rate than the growth of loan loss provisions. Some banks are already hopeless, however, and the market knows this, the charade of a “stress test” notwithstanding.

    Here’s the timeline:

    Stress tests are completed for the top 20 banks by the end of May. Banks which fail the test (my guess is there will be at least 3 – with C already being the test case) will be politely told to begin liquidating toxic assets into the (now up and running) PPIP for whatever they can get. They will also be told to raise private equity within 6 months, or face conversion of preferred, trust preferred and (for the sickest banks) debt, at the 20-day average common price pre February 9th in return for more federal cash.

    Here’s the kicker: THE OPTION TO CONVERT IS OWNED BY THE BANKS, NOT THE TREASURY, so we essentially have a race against the clock. Banks without a demonstrable ability to grow their way out (we should know the answer to this by the fall) are going to end up converting because they have no other choice. Your end product is perhaps several large boiled frogs (i.e,; banks owned by the taxpayers).

  22. James,

    I would rephrase your conclusion and term it Kwak’s Law:

    The more a regulation it reduces the ability of the regulated parties to lobby for an abolishment, the longer its life expectancy.

    There is an equivalent in biology (Evolutionary Stable Strategies) the modelling of which should appeal to economists :)

    Simplicity is a virtue in itself – call it Occam’s Reverse for democratic scoeities: The simpler the law, the easier it is to explain, understand, and enforce.

    You can try for other implementations of Kwak’s Law: The higher your income, the lower the absolute limit for your political donations. The higher your market cap, the lower the absolute limit for lobbying expenditures.

    Too copmplicated? It has a peak after all, unless the limit is always zero. Hence, simplicity: No donations, no lobbying at all. Every citizen can donate their own unpaid volunteer labor, or spend their spare time exercising their First Amendment rights.

    Of course, one of the simplest and most robust regulations of the financial system we call a democracy would be: Corporations have no right to make any type of payments (contract, employment, donation) to past, present or future members of legislature, judiciary or ececutive.

  23. If you ever get a chance to take her to see the play, “A Year with Frog and Toad,” do so. She’ll love it. It’s currently at the Arden in Philly.

  24. So, my vote is for limiting size, separating functions, and regulating Derivatives

    Hear, hear.

  25. A similar point is made by CR on his blog. From this, you could assume the ladder had been climbed right to the top:

    “Imagine if the Federal Reserve had been the “systemic-risk regulator” during the bubble.
    According to Greenspan in 2005 “we don’t perceive that there is a national bubble”, just “a little froth”, and even in March 2007 Bernanke said “the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained”.”

  26. Unfortunately, I have little hope that society as a whole will ever wise up. I think they’re going to keep trying to do the same things (i.e. trying to maximize size, growth, debt, centralization, consumption, environmental impact) until reality forcibly and forever diminishes them.

    That’s why I place my hopes in communities of like -minded people who understand what’s happening and come together to prepare for a materially smaller but spiritually much larger future.

    So far such a movement, as a physical reality, is only in the early stages. But the ideas are spreading.

  27. How about the fable of the scorpion and the frog:

    The frog helps the scorpion cross the pond.

    Yet the scorpion bites the frog once it is safe across the pond.

    In his dying breath the scorpion asks the frog “Why? Why did you hurt me when all I did was help you not drown?”

    It’s pretty obvious who’s the tax payer and who’s the banker.

    These bankers have been bred to think that common law doesn’t apply to them and feel they can get away it. It’s the nature of anyone who only concerns themselves with profits without any human or environmental perspective.

    When you expect there are no personal negative consequences to your actions, the temptation to profit off others misfortune is all the stronger.

    When will economists take this into consideration? Alan Greenspan obviously didn’t.

  28. I imagine the world being a better place in what….25 years…..when young Miss Kwak becomes Chairwoman of the House Financial Services Committee and cajoles her colleagues to pass the improved Glass-Steagall-Kwak Act. Do we still dare to dream!?!?!!?

  29. Such fun. Too think that a fairy tale would better describe flaws in our system than so much other analysis says quite a bit about what such a system does to the people who run it.

    I’m for adding a Sesame Street segment on CNBC. Oscar’s commentary should be entertaining.

  30. I’m sorry to post such a non-substantive response, but the Frog and Toad analogy is just splendid. Kudos.

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  33. My pantry is being depleted of cookies. Can I have MORE?

  34. Elizabeth Warren said on some Public Radio talk show that there were three simple things that would have prevented the current economic crisis. First, the requirement that all mortgages needed to have a minimum down (15% – 20%) and clear documentation about the qualifications of the borrower. As part of this, that those mortgages couldn’t be sold until they were “seasoned”, i.e. paid for regularly, proven that they were good. Second, that the rating services, such as Moodys, could not receive payment from the firms and instruments of finance they were rating; they had to be “hands on” no “conflict of interest”. Third, that any instruments created from the mortgages, such as derivatives, needed to be absolutely “transparent” so that anybody could tell what was in them, what it was worth, whose mortgages were included. Now, I am not used to these terms, and I may have mis-remembered some of this, but her general statement were that there were simple things that could have been done to avoid the crisis; experts weren’t needed to understand them. If anyone remembers her statements with more clarity, I’d appreciate hearing them. Perhpas buried in her comments were that non-banks had to come under the same regulations as banks, so hedge funds couldn’t escape the rules.

  35. I would ignore her comments because she has to follow the administration’s policy.

    There is transparency. Investors in these derivatives are getting their payments in the proper amounts from the underlying paying mortgages. There is legal documentation for each of these derivatives. There are lists of the investors, how much they get paid and under what circumstances. There are lists of the properties and the amount of the mortgages and their remaining balances, etc.

    It just takes some due diligence work to get it, but in many ways, it is no different that what any Wall Street analyst does every day. Her complaints are equivalent to a high schooler’s complaint about reading Anna Karenina and wanting a one page summary of the love story instead.

    Yes, there were and are conflicts of interest in the rating services. However, for many years, studies show that rating services do not foresee problems in credit instruments. They consistently change their ratings way after the market has already reflected the new information in the price of the debt securities.

    Even without conflicts, there is a very good chance the ratings services would have missed the problem until it was too late. We would be in this mess anyway. Furthermore, it is the regulators who require credit ratings and who place importance on them. They are used to determine capital levels and who can own the securities. These ratings pressures would exist even without the conflict of interests.

    Down payment amounts are best left to another day. Simply though, in California, Florida and other parts of the US the decline in property values far exceeds the 15-20 percent down and many homeowners would still have had negative equity. Furthermore, if you lose your job and cannot pay the mortgage, the amount down is irrelevant.

  36. adios amigos

    Milton, I’m sensing your an American. Are you saying that if the rating agencies had price these toxic assets for exactly what they were – junk, then we would all still be in the same position today? Are you saying that it’s OK for Mexican migrant workers to come to California, USA to pick crops, mortgage a $2,000,000 dollar home with nothing down, totally lie on the mortgage application, get the payments deferred for 12 months, then flip the house after it appreciates 20% in a year? Because that happened….a lot. And are all of you Titans Of Finance in the U.S. wondering now why we, out here in the rest of the world, kind of wish you would all commit suicide? Why don’t you do us all a favor over there in America: STOP LYING, STOP STEALING OUR PENSION MONEY, STOP KILLING INNOCENT CIVILIANS IN FAR AWAY PLACES WITH YOUR NEVER ENDING WARS, STOP SELLING US TOXIC WASTE INVESTMENTS. And while your at it, stop living. That would probably be the best thing you could all do for the other 95% of the population of the globe. You have destroyed our economies with your bullshit. My pension fund, after 30 years of savings IS BANKRUPT, and it’s because of all the bullshit mortgage backed securities we bought from YOU. You lied, and you stole our lifes savings. WE WILL NEVER FORGET WHAT YOU ALL DID……..NOR WILL OUR CHILDREN. We’re bankrupt here now, THANKS A LOT AMERICA.

  37. when Citigroup merged with Travelers in 1998, there was this thing called the Glass-Steagall Act, which prohibited mergers between banks and insurance companies. Sandy Weill, chairman of Travelers, said at the time: “We are hopeful that over that time [two to five years] the legislation will change . . . We have had enough discussions [with the Fed] to believe this will not be a problem.” Sure enough, the legislation changed.

    This merger blatantly broke the Glass-Steagall Act while it was still in effect, but there was never any intimation that Citigroup would be charged with breaking the law.

  38. Prof. Elizabeth Warren is no simpleton, and she is aware of the situation’s details.

    She works for Congress, which is dominated by the Democrat Party, so being a team player she has recently taken a back seat publicly. Warren has a knack of pinpointing a detail others less informed miss. For example she pointed out that this entire mortgage situation would have been greatly mitigated by simply requiring pre payment penalties on mortgages. Not only would have this discouraged flipping (which by the way was a large component), but it would have reduced average mortgage interest rates by more than 60 basis points. It was the free for all for a piece of that extra 60 basis points that hyperventilated the entire securitization mess.

    She is on record advising Sen. Dodd’s committee to move swiftly to identify the capital “gap” at banks, then to either fill the gap or dismantle those where the gap is deemed too large. Drawing things out, she advised, was a bad idea.

    What she recommended is, in fact, what is being done. There’s a stress test (identify the gap), then there’s a decision to either fill the gap (PPIP) or to dismantle if the gap is too large (Geithner’s call for power to unwind).

    As for Bernanke, his distaste for the position he’s now in is palpable. He has flat out stated he doesn’t like the TBTF model. As a Fed Chair he’s using his power to provide huge amounts of liquidity, to be counter cyclical, and is doing the best he can to do so in a way that can be unwound. But it appears clear, at least to me, that given the ability to unwind a TBTF large bank or non-bank like AIG, he would have done so already.

    Unfortunately Geithner, as bright and talented as he is, appears to be a captive regulator. There’s still an outside chance he will do what’s right and downsize the industry, eliminating TBTF, and re installing the “divide and regulate” model we once had.

    He has an ally, by the way, in BofA Chairman Ken Lewis, who is on record in favor of separating investment banks/brokerages from commercial banking functions. Lewis, in other words, wants to have a breakup.

  39. What a charming story. And of course this is always the problem, how to put in place regulations that are both effective and difficult to circumvent?

    I’d like to add that banking is not an industry. It is a service, and a necessary one, but at the best it merely sells us time, not bread and milk and iron and lumber.

    Banking reminds me of the expansion joints in a bridge. The bridge will fail without them, true. But you cannot build a bridge out of expansion joints.

    Noni

  40. Just a little niggle about this story — actually, the scorpion stings the frog halfway across the river, and as both are drowning the frog asks why he did it. “You knew I was a scorpion when you agreed to help me.” the poisonous creature replied.

    If the scorpion was sufficiently self aware and self controlled to wait till the other side where he was safe, this would be a different story.

    Noni

  41. Aside from the financial crisis and the policy responses,
    the participants (banksters,traders, analysts and managers/ceo) in the industry as well as the others including accounting firms (did not Enron tell about the fallacious audited reports?),rating agencies, consulting firms, politicians, governments,media, flakey economists like A. Laffer, real estate firms and others were all faced with incentives to commit fraud, civil, criminal and fiduciary violations. I doubt, despite all efforts,that the financial industry will be re-set to avoid this scenario again. All countries as corrupt die from within and not from the bogey of external enemies.The contradictions are to many and widespread. R.I.P.

  42. Your answer can be found in the “Fair Tax” movement. It places tax collection at the state level and that would shift the concentration of power back to the individual states.

  43. adios amigos

    I LOVE all this “debate”. Tell me America, are one of you going to step up , and refund me the dollars that your toxic bullshit investments drained from my retirement account? Huh? Anybody? Maybe I should call Bernanke for a “bailout”. Oh, I forgot…..I’m not a special interest group that can offer a bribe. So….I’m screwed.

  44. You miss a key point. If you didn’t have the extra demand from people buying no-doc, no $ down mortgages, the value of these homes wouldn’t have inflated nearly as much. We got caught in a self-reinforcing bubble cycle because anybody and his dog could buy a home, and that spun prices higher and higher, fueling more of the same (with the added problem that anyone could play the game of infinite leverage) … without those dynamics you might have seen only 5, 10% overpayment — IF that.

  45. Per Holmes, FDR had “a first-class temperment,” not character. Don’t disagree about Obama, however.

  46. obama is making mistake with afganistan. there has been too much bloodshed. he needs to think what he’s doing and get some balls and not be bullied. this aint no party, this aint no disco,,,,this is serious. don’t let me down.

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  48. for the good of the country all is said.

  49. adios amigos

    Hi Beezer !
    Are you an American? If yes, will you personally refund me the losses my pension took from buying toxic mortgage securities? I’m from Norway. My pension fund got wiped out because we purchased US toxic mortgage securities. You see Beezer, we were idiots. We actually believed the credit rating that your American ratings agencies were putting on these portfolios. Stupid….I know. Believing American business people! We’re idiots! How could we have been so stupid??? But, we did. So…..can you cut me a check to re-coup all the money that was basically stolen from my pension account?

  50. just a challenge to our leader. if you can’t lead,, get off of the porch. screw the correctness and do what is right. this ain’t the time for fuzzy politics. grow a pair.

  51. adios amigos

    Merlin,

    Uh huh. Sometimes the truth hurts…..but, its still the truth….right? You do remember “the truth”, don’t you?

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  54. I have to admit, I’m a big fan of treating political issues like programming issues. I’d love to put the legal system into SVN and just do an svn rollback to the Glass-Steagall Act. Maybe spend more time putting laws through QA and doing bugfixes, rather than tossing out the whole program because it has one bug. Moreover, I think we should practice more legal abstraction. If we have a good routine for indexing a law to inflation, we should abstract it in such a way that we can reuse it on other laws.

    But having said that, I don’t think process isolation is really a feasible free-market solution. The reason that this is possible in computers is because we have the OS doing a *lot* of work to coordinate inter-process communication. Performing an analogous process isolation in the financial system would essentially commit the government to inspecting and validating every signal between any two firms. This is what a computer OS does and I don’t think that any government could perform this service practically.

  55. As a former software engineer I fully get the idea of isolation, or keeping all the parts loosely coupled instead of tightly coupled. This produces a desired quality called “resilience” – one failed subsystem doesn’t cripple the whole.

    I’m hearing today that because of India’s byzantine and inward economics, that this country in particular is most isolated from the current mess, and is therefore one of the more resilient.

    I heard a similar argument following the 1997-98 Asian meltdown, with regard to China at that time, that because its internal situation was so primitive, it was largely uncoupled from the other troubled economies and so the problems at that time were contained. Since then, each country’s economy has only gotten more tightly coupled with all other economies, and so one failure brings down nearly everybody.

    This whole notion of designing societies for resilience is discussed in some detail in Thomas Homer-Dixon’s “The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization”.

  56. Is burn baby burn now an economic plan? This stuff(i wouold prefer a stronger word) is straight out of a banana republic.

    Before is gets worse… it gets worse…

    –i forgot who said this

  57. Zeke hit it on the head. We live in a payoff society and we all want the fast money. Where did principles go? Six million Americans took out mortgages they couldn’t pay for houses they couldn’t afford and we’re blaming the lenders and Wall Street? Come on. We brought this on ourselves. The big banks and Wall Street sold us the tools to wreck our economy and we bought and used them. We should begin by imposing some rules about compensation in a sensible society.

  58. Robert Johnson

    Banks should simply be forbidden from holding debt in other banks.

  59. Patrick,

    We already have some isolation mechanisms for our financial system. Have you ever wonder what happens when you buy an stock option from someone you don’t even know in the stock market? Did you worry a lot about counter party risk? I won’t get into the technical details here but the stock market and brokerage system is a perfect example of isolation mechanism at work and it works very well.

    Unfortunately, other derivatives (unlike stock option) are not traded through stock market like isolation mechanisms.

    This is the broad direction the global financial system needs to advance toward.