And it has to be a guarantee, too, because like gambling in Vegas, once you're wiped out, you lose and can't play again. (Without a government prop, anyhow.)

Add to that the way leverage calls tend to cascade and crash the entire system, and it just seems an insane primitive to build a financial system on.

(In practice, my ban would fail anyhow, since I'm sure some financial legerdemain could figure out how to triple-leverage something if somebody really wanted it, regardless of how carefully the law was written. Maybe what I really want is the ability to invest money (including my bank savings account) and specify a leverage tolerance limit. Anyway, I'm not really trying to propose a solution, just express some horror at the use of leverage in our system.)

Thinking as a libertarian, the key is to eliminate the government prop for the losers. People involved get the implied government/judicial prop of bankruptcy protection if they need it, but otherwise, let them fail, let the failures cascade as they will, and get on with the healing/repair/rebuilding as soon as possible.

Sure, I agree that it sucks that someone might have an employment agreement that suggests they are owed a stream of the future profits of a company in the form of a private pension, and if that company fails, they won't get that pension payment.

So what? That's like me betting my buddy a billion dollars on a coin flip and then the winner trying to collect the bet from a third party (the government is nothing more than a series of third parties acting collectively). "But I had an agreement and I was counting on that money to live in retirement?" True, but not the problem of the taxpayers that you wagered your retirement on a poorly managed company, whether it's a bank, brokerage, or in the case of GM, a retiree health care and pension company that happens to build cars with a portion of its efforts.

To me there seem to be two practically inseparable parts to thinking as a libertarian, when applying it to a practical issue. The idea that Government intervention is amoral & the idea that government intervention is counter-productive.

The former is really an assertions in an area where it is hard to rationally reach an kind of a foundation. This applies equally to most ethical frameworks. I'm not singling out libertarians. The latter often seems to be motivated by faith associated with the former.

You don't here many socialists admitting that while libertarians are morally wrong, their economic models produce a lot more wealth. You don't hear much the other way either.

In fact, those that accept that morally superior & practically effective are often independent. What I am saying is that I don't think that many without an ideological attachment to 'laissez faire' economies would be arguing your position.

The incentives & market signals may not have been perfect. There may have been some distortion coming from the possibility of state intervention. But there was & remains a clear incentive to succeed & a clear disincentive to go bankrupt. The major forces at play leading to a 30/1 leverage are market forces. But eliminating the chance a bailouts are a small drop in that ocean. How about eliminating the possibility of bankruptcy or legal liability? Those are probably bigger

The paper economics is built on lots of assumptions & axioms nailed in with common sense & on average or defining away problems. Consumers make rational decisions=> Define utility creatively. On average & in the long term people are perfectly informed.

Anyway, technical discussions aside, I think it is important for people to look at what parts of the 'ideologies' they subscribe to are independent of each other.

Does it follow from agreeing that socialism is a morally superior concept to capitalism mean that there are no problems inherent in state controlled institutions? Does believing that a coercive state is a bad thing mean that everything you want from an economy can be achieved without it?

I think that the anti-welfarists need to accept for example that sometime, somewhere laissez faire markets may produce a situation where a good chunk of society is undernourished. And more to the point that it may not always produce the economically most efficient outcomes.

To me, wanting minimal government interference in private choices is purely a matter of practicality, not one of morality. I'd prefer that the government not be a nanny to the entire population, constantly at the ready to wipe the nose and dry the tears of anyone who gets hurt. I do agree that if the government is going to serve that purpose, then they'll pretty much have to take away the rewards for good choices, as both a disincentive to take large risks and equally importantly, because it's going to be damned expensive to prop up everyone who chose poorly, someone's got to pay for it, and only those who chose well can afford it.

We're pretty far afield of hacker news at this point, and I suspect we understand each other views at a gross level and simply disagree on where the optimal point for a society's government to strive for is located. If it's any consolation, despite having made good choices, I have no say or sway in the matter and that people who think more like you are in power and are determined to wipe the noses that "need" wiped and dry the abundant damp eyes, so you'll get your way anyhow...

Social Democrats are predictably reading this as an example that markets do not protect themselves against unacceptable results.

But it seems that anyone without an ideological attachment is siding with the latter. Of course this is dangerous as it probably means a wholesale swing towards that side which comes with a whole lot of completely unrelated stuff.

Yes, but Social Democrats haven't figured out that regulation doesn't eliminate risk. Financial regulation in particular concentrates risk. The "most effective" reduces the probability of a loss but increases the magnitude even more, increasing the expected value (which is the product of the probability of a loss and the loss's cost if it occurs). This can be a bad thing if the expected value is catastrophic, as we're seeing.

We're much better off with continuous small failures than we are with occasional large ones.

thinking as a libertarian

+

but not the problem of the taxpayers that you wagered your retirement on a poorly managed company

It is the problem of the citizens to prevent the problem. In fact, it a huge problem we face right now. And the way to do that is to build, as best we can, a stable environment in which to build an economy.

In the case above, maybe the company was well-managed when you made the wager. Or perhaps somebody lied. There are certain cases where regulations build consumer/worker confidence and helps the economy and industry grow.

Although economic ideas are more abstract than a nuclear power reactor, there are still very concrete repercussions of instability. Taking away the regulations I suggested sarcastically is certainly folly. However, allowing an unregulated economy is also reckless. We are living through an unstable time now, and I don't like it one bit. If my vote counts, we'll rebuild a stable economy, as best we can.

Disasters are certainly an inevitable part of our trying to expand the limits of what we can do in any endeavor, but let's at least learn from them.

We seem to be dancing around to issues: first is fraud and second is usury. Usury works both ways. If you gain 50% in less than a year from some investment, then someone is paying 50%. (for simplicity lets ignore the win-win of an expending system, even factoring this, you end up with rates over 10%). Until the last few decades, usury above 10 or 15 percent was illegal in most U.S. states. So if a bank is booking earnings on home mortgages of 50% (due to people flipping property in 5 years), then is this usury? Is it healthy? Is there any model where these levels of usury are sustainable or healthy for a society as a whole?

Flipping properties doesn't give the bank higher earnings.

As long as it is current, the return on an mortgage is the interest on the remaining balance minus the service expenses. When a mortgage ends while current, the return ends, whether that "end" is due to a prepayment (which is how refis and sales work out) or the end of term.

I've always assumed that if you made payment according to a mortgage such as show here http://michaelbluejay.com/house/interest.html you get the effect as stated under the first graph: "Notice that in year 15 when you're halfway through the term, 75% of each payment is just going to make the bank richer, and only one-fourth is actually paying down your balance and building equity. Ouch! You have to get all the way to year 22 before more of your payment goes towards principal than towards interest."

So I assumed that if you made payments for the first 5 years and then sold the home, that the bank got to keep the amount it booked as interest (from the graph it looks like between 99 and 95% of your payments). The win for the home owner was the appreciation in the value of the home. The win for the bank was tons of interest.

It seems from your reply that if you sell after 5 years against a 30 year mortgage the bank somehow recalculates the interest and applies the exorbitant amount back to principal. Is that what you are saying? If so, is there some layman's doc that explains how this works?

In other words: People will take these risks no matter how many times you tell them not to as long as the arrow has been pointing up for a while.

1 - increased leverage (risk) => increased rewards (if risk pays off)

2 - intense competition between companies (with the possibility of buyouts, loss-leaders, etc)

Means that companies which don't adopt risky positions will fail in the marketplace if the risks don't home to roost soon enough.

Those which do adopt the risky position will out-compete them.

I'd love to know what economists make of this. Someone mentioned the 'dot com fallacy' last time I brought this up, but google tells me that is just "make it up in volume", which isn't what I mean here.

If you don't know it, only if marginal utility of potential loss is either smaller or equal to potential gain.

It is important, though, to not confuse potential loss with volatility. :-)