The Private Sector Fallacy

By James Kwak

Felix Salmon highlights an important point to bear in mind when it comes to banks and short sales. Actually, it’s an important to bear in mind when you’re thinking about any big private sector company, be in Citigroup or British Petroleum. Yes, companies do things in their own self-interest that hurt other people and may not be net benefits to society. But they also do things that are not in their own self-interest all the time, because companies just aren’t all that efficient.

Felix’s post is largely about two factors. One is that big company executives are prone to exactly the same sort of cognitive fallacies as ordinary people, and hence make stupid decisions routinely. The second is that the incentives of individual people who make decisions (or provide information to people who make decisions) are only tangentially related to the interests of the company as a whole, and certainly not when you think of those interests over the long term.

A third factor is simply that companies are big, dumb, poorly designed institutions. There’s lots of talk about how individual human beings do not resemble the rational actors of textbook economic theory. The same is at least as true of big companies, of which I have seen many, from various perspectives.

Yet the belief that the private sector is the answer to all our problems remains deeply rooted. One might even call it an ideology. I would hope that the financial crisis (and the BP disaster) might cause people to question that ideology, at least a little bit.

144 responses to “The Private Sector Fallacy

  1. Welcome back James! We do not have capital punishment in Canada and this is a legal position I support. Best of luck with your summer job.

  2. I do not know anyone who believes that the private sector is the solution to all our problems but I certainly know many, I included, who are convinced that we are better of leaving most in private hands, especially since that is the only way to have a chance for that lean and good public sector we all want… and so I have no idea what James Kwak might be referring to here.

    That said let me also make clear that the financial crisis was a direct consequence of some stupid financial regulations which gave incentives to the banks to go where the risks perceived by the credit rating agencies were low… as if we have had any financial crisis that has resulted from the banks going to where the risks were perceived as high.

  3. If we concede stupidity is a universal human tendency, then isn’t the public sector going to be just as prone to stupidity as the private sector? And when we factor in the tendency of private sector firms to fail when their stupidity gets the better of them, while public sector units (such as government bureaucracies) just keep growing regardless of their stupidity, isn’t the danger of stupidity more acute in the public sector than in the private sector? Just wondering.

  4. There is no company named “British Petroleum”.

    It is true that the private sector is not the answer to all of our problems.

    It is at least as true that the public sector does is not the answer to all of our problems.

    Most of our problems have no answer, or have an answer that involves looking to yourself, not to anybody else.

  5. Democracies are also subject to the whims of transient political leaders, elected by voters likely looking out for their personal gains rather than the best possible future for the rest of the country as a whole.

    Yet the belief in Democracy is deeply rooted. One might even call it an ideology. I would hope that the financial crisis (and the BP disaster) might cause people to question that ideology, at least a little bit.

  6. James, you are right on. I am constantly amazed at how the defenders of “doing it in the private sector, it’s got to be better than the public sector” (yes, you, Outer Life, Nemo, Per Kurowski, and the others rushing to join in) believe that all of their criticisms of the public sector are unique to the public sector.

    In reality, all of the Hayekian criticisms of central planning (limited rationality, limited info, artificial prices, etc) apply equally well to the giant enterprises. BP, GE, Wal-mart, etc are certainly larger than many of the failed central-planned economies. Yet they don’t implement markets internally. Most of the largest corporations don’t even face serious competition, especially since we stopped enforcing anti-trust and competition laws in the 80’s.

    As for the claim that at least private companies will fail if too poorly mismanaged but public sectors won’t, I suggest looking at Pfizer and the giant banks. Pfizer blatantly violated law. It cheated. It lied. It got caught (see the fines for violating FDA regs). But it was too big to nail, so rather than fail, it set up a shell subsidary and let the shell subsidiary “fail”. Then it went on, business as usual. The banks we know about. No matter of malfeasance or mismanagement produces failure on Wall Street.

    As for the idea that the public sector doesn’t face “failure”, what do we call elections? What’s a revolution? If the public sector is immune from failure, then how did the USSR fall? Are there no regime changes? No revolutions?

  7. Also, you guys are now off my RSS list and I’m removing your book from my wish list. This post is reflective of one of the following:

    a) Amazing ignorance
    b) An inability to perceive opposing viewpoints
    c) Just grabbing for pageviews

    I’ve been reading you guys because you present decent evidence for your views. But this settles that Kwak, at least, willingly or not, doesn’t make an effort to understand opposition.

  8. It is not about private vs. public; it is about small vs. big.

    Individuals, families, and small businesses generally do behave in ways consistent with their own long-term interests. Sometimes they even behave in ways consistent with other people’s interests, in my experience, hard as that is to imagine.

    This is one reason — among many — that companies the size of Citigroup or BP should not be allowed to exist at all.

    The solution to too-big-to-fail corporations is not to hand ever more power to an even larger organization. The solution to too-big-to-fail corporations is to break them up.

    But super-sized government is not the solution to anything. Americans understood this once; they will learn it again soon enough.

  9. “The solution to too-big-to-fail corporations is to break them up.”

    Yes, I can see TBTF corporations quaking in their boots at the threats made by a small, weak government.

    “But super-sized government is not the solution to anything.”

    Meaningless slogan.

  10. Bye Sean!

    The funny thing is, Sean seems to have gotten James’ point without realizing it. Democracy and market economics are mechanisms that allow countervailing forces to correct each other. Both democracy and market economics are extremely dangerous when their adherents adopt the ideological position that the mechanisms cannot be tinkered with (except by the high priests of course) because only an ideologically pure system can produce a beneficial outcome.

  11. “Yes, I can see TBTF corporations quaking in their boots at the threats made by a small, weak government.”

    Teddy Roosevelt did it, and I do not think he needed a multi-trillion-dollar budget, even inflation-adjusted.

    A government does not need to own the economy in order to eliminate large corporations. The power to tax is quite sufficient.

    “Meaningless slogan.”

    Seems perfectly well-defined to me. Which word did you not understand?

  12. Kurowski,
    You’re going to have us all crying for those big bankers soon. The evil regulators holding a gun the the large bankers’ head, forcing them to sell all those CDOs. Regulators holding a gun to big bankers’ head forcing them to have low capital, forcing them to have zero collateral, forcing them to lie about their total liabilities on their balance sheets, forcing them into Repo 105 transactions. Regulators holding a gun to big bankers’ head forcing them into “off balance sheet” transactions. Regulators forcing Dick Fuld to go play Bridge games in Nashville while Lehman was doing a swan dive into the toilet. Hank Paulson getting immunity so he could save all his pals at Goldman Sachs and then Geithner using government money to pay 100% of AIG’s bills to Goldman when they had already negotiated it to about 60cents on the dollar.

    I am sorry, I can’t continue with this blog comment. I need to get some tissues for my tears before I ruin this keyboard, Kurowski has made me so sad with these tales of the horrid pains inflicted on big bankers.

  13. Stephen A. Boyko

    “Yet the belief that the private sector is the answer to all our problems remains deeply rooted.”

    Agreed! But why then is breaking-up TBTF scale argued as the sole source of solution. Why not consider the other parameters of scope, span, and speed? In a global world of financial innovation and complexity, I argue that it is “uncertainty” that creates the problem of “too-random-to-regulate (TRTR)” that should be reform’s independent variable.

    • If there is innovation, there is complexity.
    • If there is complexity, there is uncertainty.

    You cannot govern uncertainty with the same one-size-fits-all, deterministic metrics and mind-set that you use to govern risk. If we segment education governance, why do we use one-size-fits-all regulations for the capital market?

    Most would agree that Citi’s failed financial supermarket concept was flawed. If you cannot cross-sell, you cannot cross regulate—non-correlative information problem or category error. For effective and efficient governance, you need to segment regulation into predictable, probabilistic, and uncertain regimes that correlate with the randomness of the underlying economic environment.

    Stephen A. Boyko

    Author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of articles on capital market governance.

    http://w-apublishing.com/Shop/BookDetail.aspx?ID=D6575146-0B97-40A1-BFF7-1CD340424361

  14. Large corporate bureaucracies are certainly no more efficient than government bureaucracies, and they are even less accountable. This is demonstrated by the futility of dealing with “customer service” personnel.

  15. Let me say I’m am not a believer in EMH. There are some things government does better. National Defense, public safety, courts of law, even education I believe (with some private competition biting at their heels) is generally done better by government. And frankly I’m not a fan of Milton Friedman. He was an extremely clever guy (as is typical of Hebrews), but was too extreme in his views on free markets being the “magical answer” to everything. But there is not much doubt, with some amount of regulation, in a democracy where people are allowed to vote freely, capitalism is pretty much the best answer we have now.

    But when I think of Ben Bernanke (another clever Hebrew, who I believe is now corrupt and only cares about preserving one job at this point his own ) spending money he creates at a printing press to give to corrupt bankers in America and Europe so they can let it sit in their reserves or give out to cronies taking corrupt loans while the unemployment lines in America get larger, I think of this video, which explains the concept better than anything I’ve ever seen.

  16. Joe in Morgantown

    TBTF in the financial sector is an artifact of government policy. If governments hadn’t bailed out Citi it would have failed 3 times in the last 3 decades. That’s not exactly private sector.

  17. Kliment Voroshilov

    “Yet the belief that the private sector is the answer to all our problems remains deeply rooted. One might even call it an ideology.”

    Where it exists in its most virulent form, libertarianism, this ideology has acquired the characteristics of a religion, or pseudo-religion. For libertarians, the state actually is seen as a moral agent – that is to say much in the same way as theological anthopology envisions the human person – and this agency is seen as having a fixed trajectory: Evil. No thought is ever given to the absurdity of this central tenet. In fact, the state is a neutral entity morally, a construct not an organic reality. And the morality of its acts are determined by the personal morality of those that guide it. But try to explain this point to the faithful, to the Ron Paul true believer. One risks being burned at the stake.

  18. Yes, but when they are evil AND successful you don’t get to unelect them, which you do in theory with the public sector.

    Anyway, I don’t think James is arguing for “all public”, just against the theory that private is any better than public.

    Working for a very large corporation myself, I can quite accurately say there’s no reason to believe corporations do it better than the government.

  19. Let me add, Bernanke giving free “QE” to corrupt banks in Europe, without an American vote on the matter, has to be the dumbest thing this country has done since passing Gramm-Leach-Bliley into law in 1999. THE DUMBEST

  20. True – but do you have a better alternative? It’s sort of like life – it sucks, but there isn’t a better game in town.

  21. Jim Coffman

    The private sector is as prone, if not more so, to excess and error than the public sector. In part, because the public sector (individual regulators, etc.) do not command the budgets and spending flexibility that is available to the private sector. This is not a public vs. private issue per se.

    The real issue is whether the public sector can avoid dominance by the private sector. Right now, it is clear that it can’t. Regulatory capture is not a passive concept whereby regulators come to adopt the perspective of the regulated. Regulatory capture is the result of the mismatch of power. When folks from the industry assume control of the regulatory system, as they have over the last 30+ years, the regulations favor the those who are, purportedly, regulated. Don’t ever believe this is the result of some kind of passive, natural, Stockholm syndrome. It is the result of pure power.

    There are idiots on both the public and private side. The problem is that we only have the means of controlling the former, not the latter.

  22. Unfortunately when we talk about “super-sized” government, we ignore 50% of pie and instead only attack the smaller slices on the other side. It’s as if the half pie doesn’t even exist (if the metaphor isn’t working – I’m talking about military spending).

    I don’t want bigger government, but I also believe it has an important role to play. Just because it’s not playing that role well, doesn’t mean the answer is to eliminate it. The answer is to fix it.

  23. You sure read a lot into this post…

  24. Re @ Outer Life____If our government grows by another 15%+/- …we will by definition be an unadulterated socialist government – and if our government doesn’t put a stop to gerry-mandering/redistricting (which it won’t,and all individual states putting up little argument?) we will be by definition a truly bonifide, communist country – and if we go bankrupt in the interim we will by definition via US Pol’s Rhetoric – surely be a fascist state! This…I speak of as defined sequencing facilitated only by deterministic boundaries of radius/quadratic parameters known only too the few as the “Apriori Engendered Syndrome” (slang meaning: the great abattoir) – Comrade…yes…no?

  25. No pain on the bankers… they just made profits on that arbitrage… the pain is for the small businesses and entreprenuers that have to pay even higher interest rates that they normally do only because of the regulatory discrimination they are subject to.

  26. @ @ @ so long sean – don’t let the submit threshold hit you in the ?

  27. Moreover they demand the dissolution of the state without providing a viable roadmap for a replacement. What they envision is much akin to the wild west albeit lacking the frontier and low population of the original wild west. That is, their vision of America still posits a small population and a large amount of unoccupied land. It does not adjust itself for 300 million interconnected people who, when one pees on their own land, the result ends up in their neighbor’s water. It is the simplistic vision of America from the past, not one that can support the future.

  28. Kliment Voroshilov

    Driven by a million adolescent you-can’t-tell-me-what-to-dos, libertarianism is simply sociopathy writ large. It absolutises “liberty” without grasping that liberty is ambivilent. It doesn’t oppose war because war might be immoral, for example, rather it opposes it because it is in one sense an imposition. I can’t think of a more sterile formulation on which to base one’s opposition to war.

  29. I am similarly baffled by this “principle” of the — that in providing for the common good, there is a preestablished size issue for government (i.e. very small or very big?), without any reference to the the size or complexity of the entity that is to be governed or the various problems facing it.

  30. priscianus jr

    Sorry, I meant “‘principle’ of the libertarians”. And I didn’t mean to submit as anonymous, just forgot to fill in my monicker.

  31. I think John Kenneth Galbraith might have suggested that things are actually _worse_ at major corporations than among the general populace. Authority in large corporations frowns upon dissent or genuine individuality. People rarely advance who stick out, are dissidents, etc. Indeed, the surest way to advance is by being an efficient, passably profitable, yes-man. So the case could be made that corporate executives are arguably _more_ prone to cognitive fallacies. Then there is the added factor that authority and privilege tend to breed arrogance and the assumption that one is right.

    Among the Wall Street executives who should have been tarnished but haven’t, Jamie Dimon stands out as one of the very few who, however cravenly money-grubbing, was at least moderately competent.

  32. Ron Wilkinson

    Free Market fanaticism is a religion! “Objectiveism,” Milton Freedman and Alan Greenspan’s bio reads like cultism. I’m I wrong??

  33. carping demon

    @SB: “You cannot govern uncertainty with the same one-size-fits-all, deterministic metrics and mind-set that you use to govern risk.” It is known that uncertainty cannot be governed.

  34. the ability to deny, denigrate and divert by the topic away from the greed. away from the responsibility that goes with power.

    the power in the private section can’t be controlled when it controls the public section. that’s worse than communism, that’s fascism.

    and that is what we’ve got today. no matter how the private section denies the truth. no matter their “truthiness”. all this bs in defense of the indefensible.

  35. I think it imporatnt to keep in mind the distinction between “the private sector” and “free markets”. It has been common practice to conflate the two as though corporations and the private sectors are the ultimate promoters and protectors of free markets (and by extension government is the enemy of free markets) when in fact corporations hate free markets, and wants markets fixed to favor themselves. Virtually all of their lobbying seeks to reduce competition, to reduce transparency, to reduce accountability, etc. To have truly free markets you need governments to enforce competition, transparency and accountability. In general free markets work well in many areas (though I would argue not healthcare), but simply letting corporations have their way undermines rather than supports free markets. Only strong effective government regulation can ensure that the private sector delivers the benefits of free markets.

  36. deontologistics

    The problematic view is that the private sector is better at managing certain features of the economy than the public sector in all cases. This view is analogous to the equally irrational faith in outsourcing within many large businesses. The issue is not that the private sector is never better than the public sector (or that outsourcing is never a good solution), but simply that this belief prevents people from accurately assessing the benefits of the private sector vs. the public sector (or outsourced vs. in house).

    The debate is often construed in absolute terms as whether our economy should be dominated by the private sector or the public sector, when really the debate should always be which parts of our economy should be handled by which, in what way, and *why*. The poisonous thing about the belief James has pointed to is that it prevents us from having this debate, and that’s what prevents us from getting our economic systems in order.

    A good example is the debate over whether utilities such as water and electricity should be state run or private. The benefits of private management (incentives to lower costs and improve quality) all stem from competition which is at best severely limited and at worst completely abrogated in the case of utilities. Moreover, private companies have incentives to under-invest in long term infrastructure improvements, which are of great importance in the case of utilities. Despite this, many countries still privatise utilities on the basis that the private sector will run them better. This can only because they’re convinced that the private sector is better in all cases (or, as in some cases, because of external pressure from people who do), rather than because of any analysis of the specific benefits in these cases.

    In short, we should be arguing about the details, and this means we should have good reasons why the private management or public management is the right choice in each case.

  37. But the lazy man likes the easy way. The devilish hard work is in the details

  38. George999x

    James – BP is not called British Pretroleum, and doing such in the current climate is national/jingoistic. Its a UK-based British company, with 40% british ownership, 39% US ownership

    http://www.bp.com/extendedsectiongenericarticle.do?categoryId=9010453&contentId=7019612

    George

  39. Gary Cohn, chief operating officer of Goldman Sachs Group Inc. “While every market participant benefited from the government’s actions, we took our own steps, from the very beginning, to protect our shareholders.”
    Is there any distintion (public/private)these days?

  40. Public and private entities each have successes and failures, well run and poorly run entities, crooks and gods. But on average, which is better? Which gives the greatest return on investment?

    In the private sector there is a natural weeding out process. Incompetents will eventually run out of money and their enterprise will disappear. Those hurt will be people who decided to invest, decided to lend, decided to work for and decided to buy their product or service.

    The public sector, short of criminal prosecution, has no natural automatic means to end defective enterprises. And they inflict pain not on free choice participants but on taxpayers and legally mandated participants.

  41. “This is not a public vs. private issue per se”

    Of course not! But that is what the priests of each side need it to be for them to prosper.

  42. deontologistics

    The whole point is that the ‘on average’ view tells you nothing about what to implement in any given case. There are some natural weeding out processes in the public sector, due to the democratic process. These are often much less effective than competition in market systems, but sometimes they are superior, insofar as competition can break down (e.g., monopolies) or can be inherently weak (e.g., utilities).

    In essence, we want some kind of correction mechanisms that discourage mismanagement in both the short and long term. We simply have to determine how best to implement such mechanisms on a case by case basis.

  43. There is an interesting article in the latest issue of the American Interest http://www.the-american-interest.com/article.cfm?piece=829 “Dear Mr. Corporation” (paywall after a few paragraphs) that elaborate on the point that corporations are nothing more than contracts. A corporation do not want to do anything, only individual human beings have that capasity.

    “third factor”
    When we in our comments use phrases like “evil banks”, we end up believing that the guilt is in fact in the contract that incorporated the corporation. By doing so we are at the same time strengthening the defence of those human beings called bankers who actually did the actions we critisize.

    BP is evil? I do not think so. But some very guilty individuals hired by BP are very relieved that we use that kind of language.

  44. In old days when banks were required to have the same capital no matter what assets they had, for instance 8 percent, a bank with $1bn in equity could only become a $12.5bn bank. Now when banks are required to hold only 1.6 percent against operations with private entities rated AAA or with sovereigns rated like Greece was during 5 years, until December 2009, then that same bank can become a $62.5bn bank… and if it wants to lend to sovereigns rated AAA then there is no capital requirement at all, and the bank could be a sky-is-the-limit bank.

    And of course those regulations are only good for the big… the big private corporations and the big governments… and all discriminate against the small businesses and entrepreneurs.

    But of course they do not write about that here in Baseline, because this is a blog which purpose is seemingly to sell us big governments against big private corporations… and caring about the small would only muddle the debate and stand in their way.

  45. It is British Petroleum. And no amount of whining from old Brits losing their pensions is going to change that fact. If Exxon or Chevron had gone over there, built an oil rig just outside of Liverpool and crapped all over the UK coast we’d have NEVER heard the end of it. They can take their bitter medicine with a smile or have it stuffed down their throats. Either way, I don’t give a damn.

  46. notabanker

    Can we agree that USA Inc. is a business which we want to provide goods and services to allow all to have a decent life. Simplistically I can think of it like a trucking company which operates with maximum entrepreneurial freedom but has to work within a set of road rules.

    Our problem is not rampaging banks but a defective set of rules within which banks have to operate. The rules are so loose that keeping to the right, obeying speed signs etc are not mandatory. You folk are all as smart as paint so let us see 10 key rules for effective free enterprise operation of our financial sector. All this talk-fest seems so much wasted effort by incredibly knowledgeable banking experts.

    If I was Obama and Geithner I wouldn’t pay much attention either as no better solution is being advanced!

  47. Yes but let us not forget that there is probably more US pension fund money in BP than “Brits” pension funds. In a globalized world it is hard to know who you are stuffing it down the throats.

    For the time being since the perceived risk of having to pay up for creating an environmental disaster has increased substantially, especially for the big companies who have funds, the costs of financing for all BPs, Exxons, and Chevrons alike has increased… as well as have the possibilities that the next disaster is going to be created by a smaller company with no reserve funds and willing to bet the house.

    Welcome to reality!!!

  48. The rules are in fact so bad that the small businesses and entrepreneurs, those who we most need to create jobs, actually end up paying around 2 percent in interest rate more than needed, just because regulators want to favor the already big AAAs and fancy Sovereigns (like Greece)

    http://subprimeregulations.blogspot.com/2010/07/basel-committee-makes-small-businesses.html

  49. I do not know enough of history to say it was the dumbest but indeed it has to rank somewhere there… though I shiver thinking about US-Europe relations if this QE had not taken place.

    Come to think about it… the top of the heap dumbest thing must have been joining with the G10 in approving the Basel II regulations that stated that if some securities or borrowers could hustle up some AAA ratings then when doing business with these the banks were allowed to leverage their capital 62.5 to 1.

  50. I can remember a better time when even Sr. Executives of financial institutions understood that just because you can doesn’t mean you should. On the other hand, they also took the idea of fiduciary responsibility seriously.

  51. So where does this put private institutions that are deemed too big to fail? Seems like someplace there needs to be balance between private accumulation of wealth and public benefit. Seems like an ongoing battle between those who equate quality of life with accumulation of wealth and those who don’t.

  52. well said

  53. quartz –

    Bravo!

    I’ve come to believe that corporatism – most especially trans-national mega-huge corporatism, a la big oil – is as divorced from the mythical construct of “free markets” as is socialism.

    And I don’t recall EVER seeing anyone else make that point.

    Well played, sir!

    Cheers!
    JzB

  54. Gee, I can remember when Sr. Execs were compensated for how well they managed uncertainty. Before I retired from a financial institution this had changed to outrageous compensation for providing certainty. This was done by managing to Wall Street expectations at all costs – don’t come in more that 1% over or under. I saw excellent managers get managed out for saving millions and consequently coming in more than 2% under budget. I saw other managers get promoted for grossly over-estimating projects and coming in right on budget – after all, it’s pretty hard to figure out how to spend extra money. The TBTF I worked for went from one with excellent operations managers to management clueless about how to run a good operation – but they were exceptional at gaming finances.

  55. In job interviews I used to ask the managers questions to flesh out their views of the competency deviancy curve (i.e. you are allowed to be deviant to the extent you are perceived to be competent). The jobs I got utilized by strengths fully and provided me with great satisfaction. I finally retired when the M&A management changes shifted to managing diversity by making everyone the same.

  56. Yes I can remember those good old days too… like those when also teh regulators asked themselves what the banks were supposed to do for the society, and not just tried to live out their own private boudoir dreams of a world with no defaults… which only means a world where the big can become bigger.

    “If you have reached an AAA status then your friendly regulator will help it keep it that way by guaranteeing you the access to even cheaper funds than what you would have able to achieve on your own in a free market.”

  57. What part of “meaningless slogan” did YOU not understand?

    One wonders sometimes whether the educated contributors here wrote this way to earn their degrees.

  58. There are NO benefits of so-called “free markets.”

    There are MANY benefits of competitive markets.

    We have the former, not the latter, and in all practical terms, a free market means simply, “free from competition.”

  59. No More Bailouts

    “…companies are big, dumb, poorly designed institutions…”

    But not as big, dumb, and poorly designed as the federal government.

    That’s why the big, dumb, poorly designed companies should have been allowed to fail, allowing small, smart, well designed companies to take their places.

    Alas the big, dumb, poorly designed government bailed them out.

    And you call this evidence that the private sector is flawed???

  60. Simon J Needs an Internship

    Felix Salmon’s position regarding short sales is irrelevant because banks are required to write-down a home on their balance sheet and account for expenses required for upkeep. Does not matter if a sale has taken place or not. Felix also mentions that, “Few banks view restructuring, short-selling, or foreclosure processing as core to their missions”, somehow trying to make an argument that this should become a core business, which of course, will last another 1-2 years. Thankfully, Salmon is not in a decision maker in a bank.

    However as Salmon mentions, Jhonson and Kwak are never interested in recognizing their own failures. That’s painful. They’s rather avert their eyes, even if that proves costly.

    The fact that Kwak chooses to weave a story out of someone’s irrelevant comments is just a reflection of an individual who has spent most of their adult life in an educational institution without ever learning much.

    What makes this dangerous is their ability to mix accusation, innuendo and falsehoods with facts and present as an apparent academic argument.

    It is important point to when you are thinking about any institution such as a big university like MIT or Yale. Yes, universities do things in their own self-interest that hurt other people and may not be net benefits to society. But they also do things that are not in their own self-interest all the time, because universities are only marginally more efficient than the government.

    Kwak’s post is largely about two factors. One is that professors and long career students are prone to exactly the same sort of cognitive fallacies as ordinary people, and hence make stupid decisions routinely. The second is that the incentives of individual people who make decisions (or provide information to people who make decisions) are only tangentially related to the interests of society as a whole, and certainly not when you think of those interests over the long term. A professor of entrepreneurship only wants to sell a book as a startup business venture, fully exploiting the populist sentiment in the country.
    A third factor is simply that universities are big, dumb, poorly designed institutions. There’s lots of talk about how individual human beings do not resemble the rational actors of textbook economic theory. The same is at least as true of universities.
    Yet the belief that TBTF is the answer to all our problems remains deeply rooted. One might even call it an ideology. I would hope that 13 Bankers and the subsequent silly comments posted by Jhonson and Kwak, might cause people to question that ideology.

  61. Right, like when the regulators intervene the markets and allow for ridiculously small capital requirements on the banks whenever they do business with those blessed by their outsourced and well paid credit surveyors… and slap on higher capital requirements on the banks for when doing business with whoever does not have the size, the breeding, the clothes or the savoir faire to get themselves an AAA rating.

  62. The college experience, even high school offers an insight. It may not be public/private, nor Rep./Dem. but as Per Kurowski is pointing out, whether your in the club(clique). The little guy, gets raves at election time then gets the shaft. The clique partys on.

  63. So create uncertainty as a way to not be governed?

    Where have we seen this movie before?

    Nihilism – 4. “A doctrine among the Russian intelligentsia (ashkenazi et al?) of the 1860s and the 1870s, denying all authority in favor of individualism and advocating terrorism.”

    TBTF is a form of terrorism – an immortal giant that indoctrinates human beings to being “renters” and slave labor….and “individualism” is no longer about a HUMAN BEING, but now the collection of human beings in a “private” profit making schtick?

    Big bowl of crazy – today’s 2 cent depression special.

  64. Er – you’re making out this is about a british person shifting the blame onto americans? No. I’m british, I do care about my pension but I care about Top Kill far, far more.

    What makes you think the Brits are outraged over BP’s treatment (!)? Our press coverage? You think the press represents british opinion and the interests of normal brits? If you have that mindset you have no place on Baseline Scenario.

    BP are a disgrace, and to turn this into a “brits vs. yanks!!!” issue rather than an elite corporation vs…. well… everyone issue (which you did, and James sailed close to the wind) undermines things somewhat, in my view.

  65. “I do not know anyone who believes that the private sector is the solution to all our problems…”

    You’ve never been to Kansas, have you?

  66. (that was addressed at Ted K btw). I’m actually rather angry about Ted K’s comments. Should I launch into a sarcastic diatribe about “yanks” electing Bush and letting Cheney and Goldman run out of control, and if any old “yank” whines at me that it wasnt them that elected bush, I’ll say americans elected him and start citing articles on the odds of Palin being elected in 2012 by “yanks”?

    (none of which I believe for a second btw, hence my posts above)

    F*** it, instead I’ll offer something I will outrage us Both, and raise a smile…

    Sarah Palin May 2010
    “Do you think should continue to go full speed ahead with the offshore drilling?”
    “Absolutely!”

    Sarah Palin June 2010
    “Extreme Greenies… see now why we push ‘drill,baby,drill’ of known reserves and promising finds in safe onshore places like ANWR? Now do you get it?”

    http://mediamatters.org/blog/201006020033

  67. There is no public sector.

    There is no private sector.

    There is only the corporate sector.

  68. No I haven’t. Tell me about it. Is the sherriff position a private position?

  69. Imagine a place where Sarah Palin is your savior, the Tea Party is the only acceptable political organization, you carry a gun everywhere you go, you won’t allow evolution to be taught to your children, you’re a homophobe, a bigot, a flag-waving jingo, and everything Obama does is pure evil.

  70. carping demon

    Say what?

  71. Stephen A. Boyko

    @ carping demon and Annie

    The movie: “Dirty Harry.”
    The reference: “A man has to know his limitations.”

    I do not advocate “no” governance, that results in anarchy. (Please provide reference so I can correct or are you projecting perceived ills?)

    But you need to segment determinate from indeterminate underlying economic environments. Otherwise, conflation provides category errors (non-correlation of information problem). This creates what has mistakenly been called systemic risk. I argue for the term “systemic randomness” to include both risk and uncertainty.

    By trying to govern determinate and indeterminate issues with one-size-fits-all metrics, you actually weaken the entire capital market governance. It is like trying to write one set of rule for US and UK driving—chaos.

    Further WAS differentiates rule-writing from governance. Rule-writing is ad hoc policymaking that Band-Aids over the current problem. It expects buy-in from society by describing the undesirable situation and prefacing it by saying “don’t do this.” Former SEC Secretary Jonathan G. Katz commented, that when “the SEC adopts a rule, it believes it has solved whatever problem it is addressing. … The solution is to rethink the rulemaking process. Instead of assuming, as lawyers do, that rules are self-effectuating, the SEC should adopt a scientific approach. (p. 51, We’re All Screwed (WAS)).

    The hard part is determining the bright-line that differentiates indeterminate and determinate segments of randomness. I suggest +/- cash flow and mark-to-market vs. model.

    We have been securitizing mortgages since 1988. It started with Ranieri-Wilson. Problems arose with no-money down liar mortgages that gave property rights to renters. These negative cash flow mortgages were erroneously rated AAA and marked-to-model. I argue that their valuation should have been deemed “uncertain,” segregated, and afforded different capital treatment.

  72. Is that Kansas? If so Kansas has its twin.

    In my Venezuela only hugo the commandeer is allowed to be the savior, his own party is the only acceptable political organization, only his militia is allowed to carry the 100.000 Kalashnikovs he bought, he will only allow his XXI century socialist revolution to be taught to the children… there is also plenty of flag-waving jingo and he also fully shares considering that all Bush and Obama do is pure evil.

    Tell me, at what price do they sell gas in Kansas, since in Venezuela hugo sells it at 4 cents a gallon to those who have cars and love to sit in traffic jams?

  73. Stephen A. Boyko

    @carping demon and Annie

    The movie: “Dirty Harry.”
    The reference: “A man has to know his limitations.”

    I do not advocate “no” governance, that results in anarchy. (Please provide reference so I can correct or are you projecting perceived ills?)

    But you need to segment determinate from indeterminate underlying economic environments. Otherwise, conflation provides category errors (non-correlation of information problem). This creates what has mistakenly been called systemic risk. I argue for the term “systemic randomness” to include both risk and uncertainty.

    By trying to govern determinate and indeterminate issues with one-size-fits-all metrics, you actually weaken the entire capital market governance. It is like trying to write one set of rule for US and UK driving—chaos.

    Further WAS differentiates rule-writing from governance. Rule-writing is ad hoc policymaking that Band-Aids over the current problem. It expects buy-in from society by describing the undesirable situation and prefacing it by saying “don’t do this.” Former SEC Secretary Jonathan G. Katz commented, that when “the SEC adopts a rule, it believes it has solved whatever problem it is addressing. … The solution is to rethink the rulemaking process. Instead of assuming, as lawyers do, that rules are self-effectuating, the SEC should adopt a scientific approach. (p. 51, We’re All Screwed (WAS)).

    The hard part is determining the bright-line that differentiates indeterminate and determinate segments of randomness. I suggest +/- cash flow and mark-to-market vs. model.

    We have been securitizing mortgages since 1988. It started with Ranieri-Wilson. Problems arose with no-money down liar mortgages that gave property rights to renters. These negative cash flow mortgages were erroneously rated AAA and marked-to-model. I argue that their valuation should have been deemed “uncertain,” segregated, and afforded different capital treatment.

  74. Are you implying that I defend larger corporations? With all I have spoken out against financial regulations that favor those who already made it, the AAA rated? With all I have protested that the only ones who are able to generate low capital requirements for their lenders are the “risk-free” and sovereigns, like BP and Greece? You´ve got to be kidding.

    When have you been out there asking that if they absolutely must have discriminating capital requirements then the lower of these should be for lending to small businesses and entrepreneurs or other that have a better chance of producing jobs and public goods.

    You are profiling! The fact that I do not call the bankers “oligarchs”, as Simon Johnson likes to do to keep his fan base happy, does not mean anything. How many times have you read Simon Johnson or James Kwak come out against the discriminatory capital requirements created by the financial regulators? Not once? Correct!

  75. Stephen A. Boyko

    Consistent with my experience for private placements fro entrepreneurs (as differentiated from small businesses).

    See: “Small is Beautiful”, The National Interest, No. 77 – Fall 2004.

    http://www.findarticles.com/p/articles/mi_m2751/is_77/ai_n6353167/print

  76. carping demon

    @SB: “But you need to segment determinate from indeterminate underlying economic environments. Otherwise, conflation provides category errors (non-correlation of information problem). This creates what has mistakenly been called systemic risk. I argue for the term “systemic randomness” to include both risk and uncertainty.”

    Using one term, e.g. systemic randomness to include two different things is conflation. Sometimes useful, not here.

    Stating that, “[by] trying to govern determinate and indeterminate issues with one-size-fits-all metrics, you actually weaken the entire capital market governance,” implies that uncertainty (which I gather you are calling ‘indeterminate issues’) can, somehow, be governed. It cannot. CDOs were bruited as managing (governing?) risk, when, in fact, they introduced uncertainty. The non-correlation of information was considered a feature, not a bug.

    “These negative cash flow mortgages were erroneously rated AAA and marked-to-model. I argue that their valuation should have been deemed “uncertain,” segregated, and afforded different capital treatment.”

    The problem, IMHO, is in the tradition that generally lies behind the use of the word “erroneous”. It would be erroneous if it were a mistake in judgement–too much this way or that way. In the securitization that brought us to the GR, however, it was not erroneous, but reckless; like picking up an AK47 instead of a tennis ball to win a prize at a carnival booth.

    It sounds like we’re ending up in sort of the same place, from really different starting places.

  77. carping demon

    Ooops, see below.

  78. Stephen A. Boyko

    I tend to agree.

    I beleive it to involve timing and sequence perspectives relative to the independent variable being effectiveness or efficiency drive.

    Kurowski and I do a similar dance.

    But diversity is good vs. the lump-and-label crowd where the default reaction is ad hominem

  79. Re: @ Per Kurowski____It is only the wealthy that live off dividends. Pension funds will only effect the commoner by cents on the dollar invested in a defined pension program.

  80. Re: @ George999x____America has its head up its ass, period! We are so sequestered by the United States media all we know about is Al Gore’s masseuse, Lebron James’s basketball carreer, or whether Opra will stay in Chicago. We are fed a steady diet of “America at War”, and how we are the saviors of the free world. I appreciate your candidness, and please keep us informed on this side of the pond where big brother doesn’t think it necessary for world news to touch our eyes,pathetic! Thanks Mr. Earle

  81. Not the answer to all our problems, but certainly some. Like efficient use of resources. People NEVER spend someone elses money as carefully as their own, for example. It’s called ECONOMIZING.

  82. Re: @ George999x____ANWR – just another bandaid mustered in triage…spoken incantations from the frozen effervescent priestess Palin while spearing moose feces for evening snacks?

  83. Re: @ jake chase____So you don’t mind that our government is spending $2.25tn during 2010-11 and counting? Let’s see…our soldiers are being used as publicly paid mercenaries in Iraq,and Afghanistan too line the pockets of “Big Oil” backed by the “Bankster”s” at whose expense. We’ll pay for their “Dirt” also on the taxpayers dime in Afghanistan as we have so far in Iraq (for we are permanent occupiers/civil war?). Tell me…what will America do when a decade or so has gone by, and 50%+ of the veterans are bonafide heroin addicts or fallen down drunks. PS. The Russian’s not only lost the war but went bankrupt, with a military on a needle or a bottle – and now their giving us advise? Go figure! All this paid for by the US Taxpayer so the “Bankster’s” can reap the profits, and you say it can be fixed? It is “Fixed”!

  84. While Felix Salmon raises some good points, I think that he is too dismissive of the servicer argument and the much more important factor of boards and CEO’s not being willing or able to deal with public hits to the balance sheets and earnings. Doing the latter would force them out of their fantasy that the global meltdown was a “few bad weeks,” and it absolves them from having to take scalpels or machetes to their sprawling business lines.

    Incidentally, if staffing is such a worry, why not outsource the short sale business to qualified consultants? Make their pay incentive-based and once it’s done, they’re done. Permanent hires are not the only option.

    Have the board charge one C-suite exec with the task of resolving the short sales related issues and partner that exec with the CFO. Put a significant portion of incentive comp at risk for the objective. Problem solved!

  85. Re: @ carping demon____The genesis is “CMO’s” which gave birth to all…so get it right – not “CDO’s”!

  86. Okay, I get your specialized economic definition of “uncertainty” and my comments were the collective “you” not the YOU you :-)

    YOU, Boyko wrote, in part, “By trying to govern determinate and indeterminate issues with one-size-fits-all metrics, you actually weaken the entire capital market governance. It is like trying to write one set of rule for US and UK driving—chaos.”

    So what part am I missing about what just happened?

    The two types of banks were SEPARATED after the “Depression” in the early 20th century – savings and loan was separate from investment.

    That separation was chucked…not going into the psychology of WHY it was chucked – it does not matter to the solution to KNOW the psyche

    because the CERTAINTY (economic) was always there that avarice, power, greed and stupidity would RULE.

    And now all hell broke loose – AGAIN – and the stat I heard today is that EVERYONE in the USA, collectively, has “lost” 17 trillion.

    What kind of mattress can hide a STOLEN 17 trillion?

  87. Don’t get me started on “outsourcing” and the medical research (health care ORIGINS) “business model”.

    Finally some REAL data on the retrogressive results – 20 years worth – is out there for consideration. Tragic results…think Pfizer…

  88. Yes, many of Felix’s observations are correct but what is the alternative? Private sector firms also go bankrupt whereas the public sector compels you to do business with it and as long as the government can borrow, it can remain bloated and useless for ages.

  89. Both the public and private institutions have one characteristic in common: The main talent necessary to run the show is the talent of self promotion.

  90. dispatcher

    Watched a company close one office to save $16 million, another company takes over company and reopen office. Nothing changed except money and loss jobs.

  91. Re: @ Per Kurowski____Great stuff, Thanks

  92. No thank you… it helps… it is somewhat lonely there in the extreme center.

  93. Your comments voice the prevailing conventional wisdom. Don’t wig-out, it is an observation more than a criticism. I believe but do not know what I advocate is correct as it is different/novel/new whatever, but I do know that the prevailing deterministic regulation is wrong. It has produced larger and more frequent economic dislocations aka crashes. We need to advocate for “real” change not wordsmithing reform that changes regulatory commas, into semi-colons.

    OK—why is conventional TBTF (scale) and Glass-Steagall lite (structure) wrong? I argue that it is the randomness of the underlying investments that is the independent variable not the scale or the structure.

    Think margin clerk, if a new, negative cash flow biotech company was bought on margin, the margin clerk will asses the collateral in terms of marketability—ability to sell, and liquidity—ability to sell at a price (random net realizable value differs for T-bills (predictability), IBM probability) and 3 other similar biotech stocks (uncertainty)).

    Per Kurowski makes the following similar reference but I believe more readers can relate to having a margin account vs. having run a bank. We are the product of our experience. Both are essentially the same concept.

    In old days when banks were required to have the same capital no matter what assets they had, for instance 8 percent, a bank with $1bn in equity could only become a $12.5bn bank. Now when banks are required to hold only 1.6 percent against operations with private entities rated AAA or with sovereigns rated [...]

    It doesn’t matter how big or what structure a financial institution is, if the portfolio randomness is not properly controlled. FNM and FRE enabled no money down mortgages to be securitized giving renters property rights. With no skin in the game, home owning renters walked when their mortgage went upside down increasing the uncertainty of the securitized investment.

    There are many analogies:

    • If you had a goose that laid golden eggs would you limit its size?
    • If you had a chicken that laid golden eggs would you trade it for a goose?

    More seriously, why do we segment the education of children into elementary, jr. high, and high school—randomness of student behavior and level of development to limit non-correlative information processing. The same is true for financial governance.

    Finally TBTF and TRTR work in destructive opposition to one another. See Mr. Volcker is wrong! http://www.yorktownpatriot.com/article_659.shtml

    Hope this helps, for greater detail to above or answers to your other questions send email or follow-up on blog.

  94. Joyce, you nailed it.

  95. George999x

    (agreeing with Nemo)

  96. @Kurowski

    That is because they want to arbitrage the difference between Senators McConnel and Dodd. There is nothing wrong with that, Baseline is a very good political platform, but it is not about capital market change and wed to preserving the legacy system.

    The current regulatory system is flawed requiring real change whether via capital (Kurowski) or via randomness (Boyko). We may disagree about timing and sequence, but we arrive at the same conclusion differntly.

    See:

    Mr. Volcker is wrong! http://www.yorktownpatriot.com/article_659.shtml

    Small and Micro Caps Suffering From SEC’s Uniform Regulations, May 30, 2006, http://smallcap.seekingalpha.com/article/11323

    “Small is Beautiful”, The National Interest, No. 77 – Fall 2004.

    http://www.findarticles.com/p/articles/mi_m2751/is_77/ai_n6353167/print

  97. B -Your comments voice the prevailing conventional wisdom. Don’t wig-out, it is an observation more than a criticism.
    A – Conventional wisdom is truth re-discovered anew. Would you want to live on a planet where you did not know from which direction the sun was going to rise simply because that kind of uncertainty could be bet upon in such a way as to win the bet either way? So wouldn’t that kind of betting become the only way to organize around the uncertainty of the direction of the rising sun – every day?!
    B – I believe but do not know what I advocate is correct as it is different/novel/new whatever, but I do know that the prevailing deterministic regulation is wrong. It has produced larger and more frequent economic dislocations aka crashes. We need to advocate for “real” change not wordsmithing reform that changes regulatory commas, into semi-colons.
    A – Apologies to the person who posted this on Baseline (I can’t find your name) – but it appears like Boyko did not read it: Quote – “I think it important to keep in mind the distinction between “the private sector” and “free markets”. It has been common practice to conflate the two as though corporations and the private sectors are the ultimate promoters and protectors of free markets (and by extension government is the enemy of free markets) when in fact corporations hate free markets, and wants markets fixed to favor themselves. Virtually all of their lobbying seeks to reduce competition, to reduce transparency, to reduce accountability, etc. To have truly free markets you need governments to enforce competition, transparency and accountability. In general free markets work well in many areas (though I would argue not healthcare), but simply letting corporations have their way undermines rather than supports free markets. Only strong effective government regulation can ensure that the private sector delivers the benefits of free markets.”
    B – OK—why is conventional TBTF (scale) and Glass-Steagall lite (structure) wrong? I argue that it is the randomness of the underlying investments that is the independent variable not the scale or the structure.
    A – I would argue that they are living in a delusional virtual world of their own making – a world where they pretend the sun isn’t going to rise in the east every morning. But you are right about it not being the scale or the structure.
    B – Think margin clerk, if a new, negative cash flow biotech company was bought on margin, the margin clerk will asses the collateral in terms of marketability—ability to sell, and liquidity—ability to sell at a price (random net realizable value differs for T-bills (predictability), IBM probability) and 3 other similar biotech stocks (uncertainty)).
    A – Disease and broken bones are not an uncertainty. While it is possible that there could be more than one antibiotic or antiviral, and better means to set the bone, the DISCOVERY of the cause of the malfunction in the human body is a GLOBAL search for truth – and product. Why is the taxpayer-funded NIH tasked with the discovery of truth? And why do they get to pick, in secret, the “biotech” and insurance widgets to become private owners of the “profit” from “public” discovery?
    B – Per Kurowski makes the following similar reference but I believe more readers can relate to having a margin account vs. having run a bank. We are the product of our experience. Both are essentially the same concept.
    A – You can’t suck out LIFE- MAINTENANCE currency from the “boring” stability (AKA INFRASTRUCTURE) of savings and loan banking to cover bad bets!
    B – In old days when banks were required to have the same capital no matter what assets they had, for instance 8 percent, a bank with $1bn in equity could only become a $12.5bn bank. Now when banks are required to hold only 1.6 percent against operations with private entities rated AAA or with sovereigns rated [...]
    A – So much for “conventional wisdom”…
    B – It doesn’t matter how big or what structure a financial institution is, if the portfolio randomness is not properly controlled.
    A – It WAS controlled with INSURANCE widgets – the house never lost a bet.
    B – FNM and FRE enabled no money down mortgages to be securitized giving renters property rights. With no skin in the game, home owning renters walked when their mortgage went upside down increasing the uncertainty of the securitized investment.
    A – Not fair to bring this up – they BET on people walking away and you know it. They KNEW that there is not enough currency in circulation and with CASH needed in suitcases in Afghanistan and Iraq, it was “survival” to run that kind of scam at the same time the war lords were getting their booty from an “un-funded” war machine.
    B – There are many analogies:
    • If you had a goose that laid golden eggs would you limit its size?
    • If you had a chicken that laid golden eggs would you trade it for a goose?
    A – Oh cheeze-louize, don’t tell me we need a new children’s story to teach “don’t do this”? Which is the regulation argument simplified by a PAST GENERATION – they were smart enough and honest enough to ADMIT that too many people were going to game the system and if the consequences to the GAMER were not strong enough to get him to think twice about doing it, then it wouldn’t work. Fast forward to now – PRIVATIZE the profit, SOCIALIZE the loss. It’s UNSCIENTIFIC…yes, Virginia, SCIENCE does enter into “economics” – THE PHYSICS OF LIFE MAINTENANCE. We’ve have millennia of breeding UP in the higher cultures which is proven in the FACT that if a man to land ratio is set, people WILLINGLY breed to maintain the balance. Only people who would not control breeding would have to be “regulated” by the rest of a self-governing society. The SCIENCE of society is REAL – smart people NEVER permit themselves to be ruled by the less smart – psychos and sociopaths are NOT “smart” – clever and shrewd, violent and lying, selfish and murdering – they are not the fruits of humanity’s best individual and collective labors.
    B – More seriously, why do we segment the education of children into elementary, jr. high, and high school—randomness of student behavior and level of development to limit non-correlative information processing.
    A – Because there is only so much TIME available to actually experience the process of learning. There is only so much you can KNOW in 5 years.
    B – The same is true for financial governance.
    A – Not going to rub your nose in it…thanks for the conversation – good stuff.
    B – Finally TBTF and TRTR work in destructive opposition to one another. See Mr. Volcker is wrong! http://www.yorktownpatriot.com/article_659.shtml
    Hope this helps, for greater detail to above or answers to your other questions send email or follow-up on blog.

  98. This deserves sharing with Moyers fans, especially heading into July 4th weekend…

    about how censorship has replaced regulation.

    My comment,

    anchored around the First Amendment – everyone NEEDS to read it, preferable a copy of the actual document and not a corrupted internet version –

    to a “religion” article called “How Islam Found Me” on The Huffington Post

    was CENSORED. That’s really bad.

    Make no mistake about what is going on – take a look at which “cultures” were NOT signers of the Declaration Of Independence…

    Figure out funding the micro-economy, my friends. Buffet and Gates need to think about JUST redistribution as something other than “charity” here in USA.

  99. re: @ Per Kurowski____”strange that the earth changes its polarity (magnetic dipoles) every 100k +/- years – extreme indeed – yet mankind can’t accept change – a physi-neurological rebalancing – but would rather prostrate themselves for the flat world ideologies – clinging haplessly too anti-static temperamental mentality not knowing that the swiftness of reality will topspin their extinction – fanfare will only celebrate the center – existence laws align perpendicular to the center of gravity, perpetually too harmonize and refine descriminate coalescing – rescuing societies precisly by slowing down time – capturing our senses in the extreme center – mankinds mysterious sanquine savior”

  100. notabanker

    I don’t know how to organize a bank and I am impressed at the level of knowledge of contributors. However after reading all the postings I must confess I am no wiser re the fix!

    Something seems to be missing and I think it is the required but undefined outcomes. We seem to be discussing what seem very important aspects of a solution set for outcomes existing only in the mind of each correspondent.

    Could we define what end-point we should arrive at and then the applicable solution after which we can move on?

    I recall someone who being asked how to get to there from here replied ‘If I was aiming to get to there I wouldn’t start from here’.

    n . W.

  101. Stephen A. Boyko

    @ Annie

    Fascinating stuff!

    Do you believe that the governance of the capital market either needs reform as Congress proposes, or do you think that the system is broken requiring fundamental repair to correct the trend of larger and more frequent economic crashes?

    If the latter, please critique the proposition that financial complexity begets uncertainty restricting effective governance of one-size-fits-all deterministic regulatory metrics to require segmentation into predictable, probable, and uncertain regimes.

    Alternatively provide proposal as to how you would reform the broken capital market.

  102. A quote? From where? Thanks!

  103. Re: @ Per Kurowski____Just a thoughtful “whatever” response to your many conscientious post – IMHO very greatly appreciated on this fantastic blog of insight, and wonderous learning :^)

  104. I think that you are making a valid distinction as conflation is a major regulatory problem. Conflating risk and uncertainty is major theme of the book “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of articles on capital market governance.

    See:Fit Regulation to Market Reality, SFO Magazine, April 2009, Stephen A. Boyko

    http://www.sfomag.com/article.aspx?ID=1324&issueID=c

    that I believe is relevant to your point.

  105. Re@ @ Annie____`:-)

  106. For “free” on the internet…?

    Isn’t that anti-capitalist? Shouldn’t I write a book?

    lol

    I asked a simple question, at least I thought I did…there are TWO rivers of money, so to speak.

    One is based on the scientific (PHYSICS MASS of Humanity) CONSTANT involving Life-maintenance activities – I’m okay with parading the cattle through GoldmanSucks Manhattan offices instead of producing documentation and getting CASH based on the paper documentation of ASSETS…and the illegal alien cleaning crew would be happy, also, to collect the droppings and sell it in their black market to a fertilizer factory that also makes meth…you get my point, right?

    The FOUNDATION economy – the INFRASTRUCTURE economy that economists keep attacking hysterically as “too much money is spent on LIFE”

    was once SEPARATED from being sucked dry by “inwestors” (billionaires)?

    Da or nyet?

  107. whatever… it was much more than a “whatever” to me

  108. I don’t know what :^) means…?

  109. Double-dip trouble: Stock-fund gains dissolve in quarter as 2010 turns perilous:

    http://www.marketwatch.com/story/stock-fund-gains-dissolve-as-2010-turns-perilous-2010-07-02

    U.S. stocks in precarious place given economic uncertainty: Pessimism reigns:

    http://www.marketwatch.com/story/us-stocks-to-begin-new-week-in-vulnerable-spot-2010-07-03

  110. I only listen to the voices in my head when they say something funny

    :-))

    Re: job creation – hire a couple of pilots to fly up and down the New Jersey shoreline this weekend, either sky-writing or dragging a banner that says:

    This is God.
    Surrender Wall Street.

  111. Free ride may be over for the smokin’ printing presses as the diversified currency basket is eventually in place. America’s ‘get out of jail free’ card is looking endangered.

  112. The United States will never surrender. Collapse is likely though.

  113. Federal Reserve prepares for all-out MONSTER money printing marathon.

    “We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable,” he said in a note to investors. ”

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html

  114. Re: @ Annie____When your smiling the whole world smiles at you, as I do with admiration. (ditto to below)

  115. @Annie and Quartz

    First, you have to determine whether capital market either needs reform as Congress proposes, or is it broken requiring fundamental repair to correct the trend of larger and more frequent economic crashes? Otherwise the market foundation from which you opine your “two river” functionalities is a moving platform that is subject to constant change.

    However, you provide a good example how policymakers create non-correlative information as in the conflation of risk and uncertainty. “Quartz” raises a similar issue re the conflation of “the private sector” and “free markets”.

    Furthermore, you state that you asked a simple question—where is the interrogatory? You made statements and asked if I got your point. There is a good chance that whether I got your point is connected to the “missing question” related to your statements?

    A couple of points of clarification:

    1. Why the name calling “GoldmanSucks.” It does not add to your persuasiveness. Ad hominem attacks are usually a sign that you are bereft of ideas.

    2. I think you should write a book. Pick a topic about which you are knowledgeable and passionate. It is an intense, but ultimately worthwhile experience.

    Then consider this advice that was given to me by someone who has written several financial books, including a well known text book—get your money upfront. Not only does it give you leverage with content, but post-publishing ethical conflicts of interests are reduced to “disclosure” justifications. Your critics will find this hard to believe, but it enables you to be logically consistent and true to your message. It also discloses much about your critics as to how they are interested in your ability to make money from your ideas.

    It is why I have consistently defended Messrs. Johnson and Kwak advertising their worthwhile book on this blog. I certainly have differences of opinion but believe it provides valuable context to enrich Baseline. Even a quick review at a book store while drinking coffee should be mandatory for readers of this blog. Sell the idea and maybe Johnson and Kwak and/or B&N will give you a trail commission.

    3. For the record, it is “Tak” not “Da.”

  116. “Might call it an ideology”? “Might”? Surely, James Kwak is joking.

    The faith in private enterprise rises above ideology to the level of Dogma in the American Capitalist Canon. To challenge it is to risk be charged with heresy. Consider how rapidly Obama put to rest any suggestion that, with either banks or health insurers, there would be any challenge to private ownership.

    To be a grad student and vocally pursue such a position in a thesis is to drastically narrow employment opportunities post-graduation.

    The climate has not changed much (it has likely become more conservative) than the days when Samuel Bowles and Herbert Gintis were denied tenure in the Harvard Economics Department, prompting (if I remember correctly) the departure of Kenneth Arrow and Wassily Leontief and very nearly John Kenneth Galbraith.

    This is very much an Article of Faith in the United States every bit as much as any element of Catholicism or Judaism or any other religion. The US has conducted a decades-long crusade around the world to promote this faith. That crusade continues today.

  117. 1. Why the name calling “GoldmanSucks.” It does not add to your persuasiveness. Ad hominem attacks are usually a sign that you are bereft of ideas.

    This kind of scolding means you lost the BIG Picture debate about CERTAINTY being dependent on sustainability. Both are completely proscribed by laws of physics that are knowable and manageable because all the “details” and “complexity” in the process of fig-making do end up producing a fig. There’s no shape-shifting going on in the “regulation” of the tree making the fig. There’s just the SOP (standard operating procedure).

    In a season of plenty, some people may eat all the excess figs instead of doing some canning for a lean season where the fig growth is disrupted by forces of nature outside of human “control”. Savings and loan banking…

    And so where is the excitement in fig growing? It’s in what you do with figs left over after everyone ate more than enough and created a surplus to cover 2 consecutive years of bad harvests. Investment banking…

    Chopping down the fig tree to feed the fires of greed, hatred, and lust for war power,

    then going after every other tree – apple, orange, cherry, OLIVE, –

    then polluting the ground, air, and water where the fig tree grew,

    and then going after the SANITY of human beings through drugs, “religion” and political PSYCHObabble,

    and then throwing an all-out war – what booty? – the polluted land, the non-existent tree, or the craven pleasure of owning slaves? – for what’s left for a slave to do – polish your iPod that controls the robot throwing bombs?

    and then contorting all that CREATED “uncertainty” (should we REGULATE theft and destruction so that no one notices it’s theft and destruction?) with a holier-than-thou finish of a lecture about an ad hominem attack against a THING – a bank – turning you off from taking me seriously?

    You’re kidding me, right?

    Thanks for the background on how to do a book deal :-)

    “How to grow Figs”.

    Don’t worry, I’ll include a chapter on “defense of the fig tree against pestilence” and “how to calculate profit without slave labor”.

    That’s the BIGGEST FUTURE loss, btw, that I haven’t heard ANY “economist” consider – the loss of thriving “hobby” markets when a “living wage” was generous – telescopes, wood-working machines, kilns, grinders, looms, gas for fusing metals together, etc.

    “Surrender Dorothy”…?

    Germany, Russia, Iran – they did not threatened to wipe Poland off the map…no matter, USA decided to paint a bullseye on Poland and told the Poles that “dissent” around the world is not being tolerated.

    Don’t ever lecture me again, Sir.

  118. Private enterprise contributes to socialized debt by aggressively evading taxes.

    http://seattletimes.nwsource.com/html/nationworld/2012275048_oiltax04.html

  119. Does anyone think that the second half of the year will be good for stocks? Investment advisers longing for commissions are spreading the word around, hoping to bring back the good old days again. Any takers?
    LOL

    http://www.marketwatch.com/story/bond-rally-reflects-gloom-dont-bet-on-it-lasting-2010-07-02

  120. Stephen A. Boyko

    @ Annie’s response

    Res ipsa loquitur

  121. I believe it will rally and that we will win in Afghanistan, like we did in Iraq.

  122. Hundreds of comments have been posted on marketwatch.com regarding this ‘story.’ Almost every one scoffs at the idea that stocks will rally in the second half of the year. The story amounts to wishful thinking, at best.

  123. Res ipsa loquitur is used in court cases where negligence does not have to be proven because the negligence is obvious.

    There has never been 7 billion people on this planet.

    And we keep losing more and more land and ocean to “dead zones”.

    You do the math.

  124. winstongator

    Nemo – did you pay attention to the types of mortgages that were most likely to blow up: 2-28 teaser-subprimes, option-arms, 40-50% DTI, 0-5-10% DP. Were families really acting in their long-term interest levering up 10-20X (or infinite with the 0-DP’s), taking on onerous debt burdens, to buy an overpriced asset? Were the specuvestors buying ‘investment’ homes that they never intended to rent out really acting in their long-term interests?

    People in general, and Americans I think have a worse share of it, overestimate short-term gains and underestimate long-term risks. Part of this is because of many Americans’ insulation from the harsh realities of life (war, famine, etc).

  125. winstongator

    One of the problems is that there is a huge difference between GE (pre it becoming a bank) and a basket of freshly issued subprime mortgages. It was the MBS’s and CDO’s being instantly AAA rated securities that made them dangerous. If you set it up so that those started with lower ratings, and the better performing securities got ratings boosts, while poor performers quickly get downgraded. Making all those securities AAA eliminated any sort of premium for performance, and removed the incentive to create good securities, especially contrasted to the incentives to create terrible securities (GS/Magnatar).

    Is a local community bank governed by Basel? Why would a ‘small’ business go to a multinational to get a loan? Wouldn’t you have to discriminate between a small business with a significant history and a new business starting out?

  126. winstongator

    When talking about ‘private sector’ magic or the free-market’s invisible hand, it is helpful to show where markets have delivered the type of things that people hold up as their ideals. I work in electronics, and everyone (especially those commenting on these magic internets) benefits from the advances in electronics. The electronics market delivers better products at lower prices consistently for the past 40 years. Why has that market been successful? It was not without gov’t intervention, as defense and NASA procurement was a massive seeding. You have real competition, real creative destruction (where’s Bell Labs, DEC?), and real performance evaluation quickly. You also require more up-front investment for future profits – the opposite of the motivations of BP who put off investing in safety to boost current earnings.

    Banks are businesses where profit and risk are so time-lagged. Any of the I-banks were booking huge profits on the mortgage market, and then they instantly went bankrupt. Maybe those reported profits weren’t real profits? People need to consider feedback system (the only way markets work) stability. When you introduce time delays, often systems become less stable.

  127. Stephen A. Boyko

    “Res ipsa loquitur” translates to “it speaks for itself” as in your reluctance to address the inital question whether capital market either needs reform as Congress proposes, or is it broken requiring fundamental repair to correct the trend of larger and more frequent economic crashes?

    Otherwise, opinions in the absence of facts and focus are biases.

  128. Do not forget there was a new dimension involved. Previously borrowers could assume that lenders wanted their money back and so the sole fact they were given this money was evidence that someone up there believed they could really pay back the money… even if it all seemed a bit fragile.

    But, no, now there were lent the money by someone who had no such qualms, since his intention was to stamp a AAA on it, sell it off like prime-gold, pocket the profit and say bye-bye.

    One of the main reasons I feel the current regulation reform is so incomplete is that having observed what has happened in so many cases I feel that it is part of the human rights of a debtor to know who his creditor is. Right now million of mortgagees do not know who their creditor is, who to talk to if they need to restructure and whom against which to behave responsibly.

    In fact many creditor do not know who their debtors are either and, at least when we are discussing major debts, I believe that, for the good of society, debtors and creditors should be able to look in each other’s eyes.

  129. Stephen A. Boyko

    There are no innocents in this drama!

    No-money down liar loans enable by FRE and FNM gave property rights to renters with the unforeseen consequence that they were more likely to abandon their property.

    Securitization and related vapor hedges made it less likely that banks and rating agencies would have to internalize defaults.

  130. Stephen A. Boyko

    The TBTF concept is a flawed construct put forth by those who believe that the capital market needs reform as Congress proposes, rather than being broke requiring fundamental repair to correct the trend of larger and more frequent economic crashes? In Mr. Volcker is wrong! http://www.yorktownpatriot.com/article_659.shtml, I argue the causal problem is Too-random-to-regulate (TRTR) created by conflating risk and uncertainty.

  131. Every driller in the US controlled area of the Gulf of Mexico was under the oversight of the MMS at the Department of Interior, one of the most poorly managed government agencies. A great noise was made about the identical disaster plans prepared by the drillers. What was not really noted that these were the plans mandated AND APPROVED by the MMS and the Department of the Interior. (Congress and the Administration have really tried to dodge that bullet and apparently the press — and some careless commentators like you — are letting them get away with it!) Just another example of inept regulation (or captured regulators) which we have seen (and will increasingly see) among the (now more powerful) regulators in the financial sector. Alas, James, once again the Washington lawyer side of your brain is overwhelming your economic analytics.

  132. Stephen A. Boyko

    Well said, although this has been a persistent problem for some time.

    “Just another example of inept regulation (or captured regulators) which we have seen (and will increasingly see) among the (now more powerful) regulators in the financial sector.”

    As noted by Former SEC Secretary Jonathan G. Katz commented, that when “the SEC adopts a rule, it believes it has solved whatever problem it is addressing. … The solution is to rethink the rulemaking process. Instead of assuming, as lawyers do, that rules are self-effectuating, the SEC should adopt a scientific approach.” “Rules Are Not Sacred, Principles Are”, Jonathan G. Katz, Wall Street Journal, August 8, 2006

    But the “Washington lawyer side of your brain is overwhelming your economic analytics” since political “gotchas” are sought rather than functional commercial “gotits.”

    This results in few wanting to “rethink” the process (what Katz wants) as to whether capital market either needs reform as Congress proposes, or is it broken requiring fundamental repair to correct the trend of larger and more frequent economic crashes. A bipolar dynamic evolves with politicos on the left calling for retribution in the form of government control of private property and politicos on the right seeking anarchy in the form of the absence of governance.

  133. “You broke it, you fix it.”

    It’s NOT broken for the people who BROKE IT by throwing out Glass-Stiegel (sp?) – GOVERNMENT AND PRIVATE SECTOR DID IT TOGETHER.

    Privatize the profits, socialize the losses. It’s “genius”.

    None of us reading and posting along here depend on just what is being written here, btw…! Ask people like myself who HAVE THE PAPERWORK of how the attack was manned from every life-sustaining angle at the same time! Seems to me that they finally realized that you can’t control the black hole of war funding without wiping out the next layer – the hooligans (armed Tea Party types – The Wrecking Crew) who wiped out the “bottom” layer – those STUPID people playing by the rules.

    Can you tell me why every one who was playing by the rules was wiped on in the same way and by the same people?

    It absolutely needs “fundamental repair”.

    It speaks for itself…

    You left people with NO CHOICE but to grab the pitchforks. SCIENCE – sheer mass – is on the side of the wiped-out “middle class”. It’s SURVIVAL on a planet of 7 billion and we’re not allowing a virtual reality game played by psychos to RULE.

  134. Great depression and collapse on track. Dead ahead:

    http://www.cnbc.com/id/38092759

  135. What fun! A huffin’ and puffin’ “policy” wonk is telling the American people today to surrender the “American Dream”…

    What’s next? McChrystal becoming a “policy” consultant to wage an anti-insurgency campaign against American Dreamers?

  136. Rich S., your generalizations shows your ignorance.

  137. winstongator

    You are pretty much outlawing securitization then, which is a much bigger change than how you describe it.

    What about having an originator hold a loan for a certain period of time before being able to securitize it? You get a better understanding of payment history, and the originator has to retain the risk for a certain period of time.

    Outlawing securitization is a simple idea, but one that won’t happen. Marginal changes might.

  138. You are absolutely right… and there are ways to obtain some workable compromises… but they must start from the debtor having the right to knowing who his creditor is, and only giving up this right against reasonable safeguards that he will not be left hanging in the air. My problem though is that this debtor right is not even acknowledged.

  139. winstongator

    Per, I think there are already somewhat similar measures in place. I know that my mortgages have contained language saying that they may be sold, and today nearly every mortgage gets sold off to Fannie/Freddie.

    If you made it an option, you’d end up with the securitized loans being a little cheaper, 0.25-0.5%. Would someone really trade knowing their lender for a 0.5% rate increase? I think nearly all would choose the lower payment.

  140. I meant not acknowledged as an issue in the financial regulatory reform… and yes if given a choice I would prefer paying more but knowing who is my creditor… who I could at least try to talk to.