"The banks, however, are another matter altogether, and this is where I think capitalism has hit a roadblock. The government has intervened to save many of them, and now, these bailed out banks want to hand out billions in bonuses to their non-performing employees. Capitalism gave way to welfare economics, and now the government has to intervene further to limit these looters from behaving badly by imposing taxes and regulations."
If the government hadn't intervened in the first place, and instead let these irresponsible banks fail, then the transfer of taxpayer money in the form of bonuses never would have happened.
What she's describing here is, in actuality, yet another flaw of government intervention.
I wouldn't say that was the main thrust of the article, by any means. You take one sub-point amongst a set of much larger and more important points and mine it out and claim that yet again, government intervention has proven useless.
Her main points, for those who will tl;dr the article and take your post for granted:
1. People do not always act in ways that are inherently good, either in an ethical sense or in a sense of what is "financially good." Rand does seem to suggest that this will be an inherent property of people who are capable of rising to positions of power.
2. The current system rewards people who can amass capital and take risks with it more than people who actually create that capital in the first place. She points out scientists and engineers who make the world a better place and invent new technology that can revolutionize markets are not proportionally rewarded for this change, while speculators who can take big chances with money are rewarded disproportionately. This creates a strong draw away from the allure math, science, and medicine towards the better paying jobs in the world of finance, thus weakening our ability to innovate and generate new capital for capitalism to draw upon.
Your complaint addresses neither of these, and I can't help but feel like you were being a bit disingenuous and dodging the actual issues she raised by hiding behind a straw man outside the crux of the article. Please address her substantive complaints if you're going to argue with the article.
Regarding 1, that's nonsense. There are many unethical people in positions of power in both Atlas Shrugged and the Fountainhead.
Near as I can tell, the most she ever suggests is that people who compete within the market (e.g., by inventing a better metal or making better loans) are more ethical than those who use the government to gain an advantage.
The current system rewards people who can amass capital and take risks with it more than people who actually create that capital in the first place.
The origin of this system was not created through free-market-capitalist methods.
scientists and engineers who make the world a better place and invent new technology that can revolutionize markets are not proportionally rewarded for this change,
But the men and women who take on risk to pay them are rewarded.
> The origin of this system was not created through free-market-capitalist methods.
Is that relevant?
> But the men and women who take on risk to pay them are rewarded.
Yes, but that's the interesting part. The actual exceptional people are, almost invariably, the scientists and doctors, and engineers who possess unique backgrounds, education, and frequently unique cognitive abilities. Many people have invested large sums of money to gain the unique education that allows them to purse. And then suddenly any speculator is considered to have "taken risk" by funding these people? And they get the lion's share of the reward, while it may take years just for the actual inventor to pay back the loans. Meanwhile the funder could be "anyone with money" and now they simply have more money.
Sometimes people who like capitalism talk about a Meritocracy, but that word is deceptive in this case because it's a meritocracy of products, not a meritocracy of people.
Inventing something by itself does not create value, to create value it must solve a problem. If you invent something,self funded it, and then take it to market you will be incredibly rich.
Such as the Theory of Relativity, or inventing the Internet, right?
Too bad reality doesn't reflect your sentiment. Even solving a massive problem may not result in becoming rich. Especially with the way network economics has turned the whole scarcity model upside-down for modern internet-based startups.
What you consider "profit" depends on what you are trying to achieve. There are plenty of billionaires who'll be forgotten but in 500 years people will talk about Einstein like we talk about Newton, and about Tim Berner-Lee like we talk about Da Vinci.
But one of the points of the article was that people who have the potential to be the next Einstein or Berners-Lee are disincentivized to pursue that potential, and instead follow a path that makes more money, but doesn't add value to society.
Right. And allow the economy to go into a long-term depression with 25%+ unemployment. A government "for the people" does not have a choice in this matter. The real problem is that bankers/speculators have so much power on the outcome for people who are not at all related to the industry.
The point isn't whether or not the government should have intervened, the point is that because they did we can't blame Capitalism for the outcome of that specific action. A purely capitalist market would have let the financial crisis run is course, right or wrong. At least, that's how I see it.
strangely enough, that's not what happened when harding kept his hands off the market during the major crash of 1920-21.
and why did the bankers get so much power in the first place? there is a LONG history of government centralizing, cartelizing, supporting, and regulating the market's major financial players.
You write like you have a crystal ball and can see the future. There is no telling what "letting the banks fail" will do for the long term. However, we do know that increasing national debt to the degree that has been done is not good.
There is also no telling how bailing out failed businesses will help us in the long term either. Intuitively it seems worse to me. And unfair--what about all the other banks that didn't screw up by leveraging 35:1?
these bailed out banks want to hand out billions in bonuses to their non-performing employees
If I worked for a bank, and I had nothing whatsoever to do with its subprime business, and had made a trading profit (or was in an unrelated function like IT and had fulfilled all my targets) then damn right I'd expect a bonus, and I'd deserve it too.
It's interesting to note here in the UK that the 70% taxpayer-owned RBS has just posted record losses, where as Goldman Sachs who repaid their TARP money to the US government, plus interest, as soon as they could is doing good business and paying their employees decent bonuses this year.
Goldman's business was subsidized by the Government, in the form of funding Goldman's transaction partners, so that they could pay Goldman what was owed.
In normal business if my customer goes bankrupt, even if I made the sale and was owed money, I would take a loss on that transaction., and if the loss was large enough it would affect all of my employees, who in turn took the risk of working for me. I took the risk of selling to that customer, I was in the best position to judge their stability, and so would have to deal with the consequences. Goldman didn't have to deal with the consequences of transacting with unstable partners, the Government (in the form of the taxpayers) stepped in to deal with those consequences, and that is why in large part Goldman is able to exist, earn a profit, and pay bonuses.
Goldman's business was subsidized by the Government, in the form of funding Goldman's transaction partners, so that they could pay Goldman what was owed.
That is as true for them as it is for RBS! My point is that the government isn't doing a very good job of running a bank...
Goldman may have repaid their TARP payment, but they received a crazy amount of money through the AIG bailout. The amount of government flowing into these institutions is astronomical, and almost all of them should have entered bankruptcy -- had their assets sold to firms that were responsible.
Banks, more so than most enterprises, are stepchildren of the state. You can't charter a bank without "government intervention", because a bank's stability, and hence its ability to attract depositors, depends on things like access to credit from the government (the Federal Reserve, in the US). The question is not "government intervention" vs. "no government intervention", but rather what kind of intervention is in the best interest of the public.
you're right, our banking system isn't even remotely close to being based on voluntary trade and "free market". so I'm not sure how we can even discuss this supposed failure of the free market.
Do you have any idea what the current financial situation would have looked like if the government had just let the banks collapse?
Hint: a lot like a jenga tower does just after you take away a vital piece.
Letting the entire financial system collapse might _possibly_ have led to better behaving banks in the long term(although I doubt it, people don't learn). But in the short term it would have cascaded through the entire economy and left the economy entirely non-functional.
It could have, but I have seen no evidence to support this. In fact, that is why the econo-blogger Megan McArdle at The Atlantic supported the bank bailouts, because she feared that would happen. But despite reading her blog regularly, she has presented evidence only her (and others) fears about what could have happened.
That's also what (possibly) happens when your agricultural system fails due to a dustbowl/drought, free trade is eliminated, big chunks of industry/labor cartelize, and the government takes over huge sectors of the economy.
"Do you have any idea what the current financial situation would have looked like if the government had just let the banks collapse?"
No, and neither do you. That's why its called a free-market. It's free to do anything. It's not a free-market thats only free to take the form of what our expectations are.
I think the appeal of finance is the intellectual leverage one gets there. If I am really bright and I can develop a profitable arbitrage trade in the marketplace I can turn it near instantly into millions of dollars (if I'm right, obviously the market does not give points for effort).
If I'm in a start up, which we would probably consider to be very high cleverness to reward leverage, it can take a long time and have lots of randomness to get the big payoff, e.g. Kiko.
Now, compare that to being an employee, where to get enormous payoff you have to climb the ladder into stock options land.
The article's point is that this is not how the world should be, but markets cause this by construction: If I'm stranded on an island with a bunch of Robinson Crusoes I'm going to try swapping coconuts for mangoes across the island before I start experimenting with cross breeding them.
From a welfare perspective it even makes sense to do the easy things first (trade) and the hard stuff next (R&D) because effort is more likely to be rewarded in the former than the latter.
One could also complain about how all the socially well connected are lobbyists instead of high school teachers and the beautiful are in pharmaceutical sales rather than portrait modeling. Sure it's sad, but also mostly inevitable.
> if I'm right, obviously the market does not give points for effort
But the market does give points for effort. How else do you explain the bonuses awarded to bankers who damaged the economy? They were rewarded despite their antisuccess.
You're blatantly taking that out of context. GP's idea was to "develop a profitable arbitrage trade" using one's intelligence, not to go work for a bank.
It's a very perverted market, where banks that would have been bankrupt if not for billions in taxpayer funds, even gets to pay their employees salary.
On the other hand, bankers in the banks that actually lived through the crisis because they didn't jump on all the fancy derivatives, actually deserves a bit fat bonus.
The reason speculators can make tons of money on Wall Street, is because they can get people to play along.
You don't make money because an asset you own rises. You make money because someone buys it at that price. (That's the same, I know, but it's an important point to understand - it's NOT just numbers going up and down in a computer, at the end of the chain there's actual liquid money changing hands).
Now we've lived through two financial bubbles right after each other, and one can hope that people will learn that sharp rises in the value of an asset are often inflated, and stop putting their money into the game. After all, those who bet and then hedged their bets on real estate (this time) and .coms (last time) were also (generally!) the ones who lost the most.
at the end of the chain there's actual liquid money changing hands
Naked short selling doesn't require one to have any money to invest nor any shares. You can still make a lot of money and destroy a company's shares if well connected enough. The price falling on the shares is only produced by the apparent glut of shares offered for sale, they don't need to sell initially to produce a price fall, the offer is enough. Once the naked sale has iterated through a couple of loops and many other offers appear as the stock falls then the price plummets, not because of sales but because of lack of sales.
You make money because no one buys. Traders can make money any way the market moves and if sufficiently skilled and backed can make the market move - it _is_ just numbers going up and down.
Perhaps a better title would be "Mercantilism's fundamental flaw". Rand makes few assumptions regarding the inherent integrity of "leaders"; in fact, she assumes no such integrity, and argues for liberty.
While we trip over ourselves (as a society) to give up our freedoms and grant ever more sweeping power to "leaders" to save us, we will reap what we deserve -- ever greater examples of waste, bungling, abuse, malinvestment and looting, on scales simply unimaginable just a few years ago.
We gave up our ability to directly monetize wealth 2 or 3 generations ago -- what features of our present financial system makes you believe that it is "Capitalism"? Government giveth, and government taketh away. Sounds like good, old-time kingly Mercantilism to me...
I hate to bring this to a general discussion of capitalism/Rand etc., but I have a question:
How is Rand's "liberty" supposed to be provided?
It seems to me we already live in a universe where people have as much free will as we ever will. Some people use this free will to restrict the free will of others. Sometimes this is a government, sometimes it's a corporation, or sometimes it's a kidnapper.
But what hypothetical external agent could ever ensure that no one's free will will be restricted? To have such a system would necessitate restricting people's free will so that they couldn't restrict each other's free will; it would be a self-defeating situation.
This is analogous to the set of all sets in mathematics, or other paradoxes that arise by having "all powerful" objects. Humans are so free, that we are free to kill ourselves (for instance), and remove our freedom. Likewise, we are free to disable our own free will.
How could Rand change things so that this is not the case?
In my view, governments are the result of the utter freedom we have as humans. It is simply absurd to think of getting rid of the systems that restrict freedom; if we did, the freedoms granted would simply create new systems, like corporations, or another government, that would replace all the functions of the system we got rid of.
Let me put it another way: It seems we already have maximal liberty. How are things ever going to be better in that respect?
I think this whole argument implies an interesting normative method for evaluating government policy. Your implication seems to be that restricting some freedoms for some people ends up producing an overall increase in freedom relative to no restriction. The obvious crimes come to mind first but the framework could be applied elsewhere. Take copyright for example, do I have the freedom the control my own creative work however I like, or does the freedom not to have to constantly worry about the source of media outweigh the freedom to control my creations. More succinctly, in a world without copyright are we more or less free? It's not obvious to me.
Singapore is a case in point, freedom not to be caned for minor infractions vs. freedom to walk around relatively safely in a high density metropolis. Again who is more free is not clear.
I think you are wise to suggest there might be "maximal" achievable liberty. Does the culture of society affect the attainable liberty opportunity set? It seems like it must.
I was going to submit this a few days ago, but I don't like Rand-only discussions. However, I'd like to contribute to the thread with this recent Slate article, which abruptly reversed almost all my remaining positive feelings about Rand:
Not only was she a hypocrite who ignored her own teachings when things got personal, she worshipped a serial killer who raped and dismembered a 12-year-old girl, because she saw him as a hero defying society.
The Branden quotes weren't taken out of context. It was the Branden affair that first led me to doubt her words, and that's pretty much as it happened.
According to Rand scholar Chris Matthew Sciabarra, she deliberately modeled Renahan - intended to be her first sketch of her ideal man - after this same William Edward Hickman. Renahan, she enthuses in another journal entry, "is born with a wonderful, free, light consciousness -- [resulting from] the absolute lack of social instinct or herd feeling. He does not understand, because he has no organ for understanding, the necessity, meaning, or importance of other people ... Other people do not exist for him and he does not understand why they should."
So she modeled her initial Randian Hero after the psychopath.
In the original version of her first novel We the Living: "What are your masses [of humanity] but mud to be ground underfoot, fuel to be burned for those who deserve it?"
Sounds Jokereqsue, no?
Of The Fountainhead's hero, Howard Roark: He "has learned long ago, with his first consciousness, two things which dominate his entire attitude toward life: his own superiority and the utter worthlessness of the world."
And:
The editor also provides the briefest and most detail-free synopsis of Hickman's crime possible: "He was accused of kidnapping and murdering a young girl. He was found guilty and sentenced to death in February of 1928; he was hanged on October 20, 1928."
As far as I can tell, this is the one and only reference to Hickman's victim to be found anywhere in the book. Ayn Rand never mentions the victim at all in any of her journal entries. The closest she comes is a sneering reference to another girl, "who wrote a letter to Hickman [in jail], asking him 'to get religion so that little girls everywhere would stop being afraid of him.'"
I'll say we haven't reached maximal liberty, all one has to do is look at the drug war, education, and medicine. You'll quickly see limitation on your liberty.
The way things are better is when people are free to choose what they want through voluntary interaction without force. If I want certain standards for a school or a doctor, I seek those out -- If I want to go to witch doctor that's ok too.
I'd highly recommend Nozick's Anarchy, State, and Utopia if you're interested in this question.
Central bank money, created and debased at will, vs. Wealth-backed money, intrinsically valued by the wealth that backs it. Freedom to choose money that doesn't inflate allows multigenerational wealth transfer, etc.
I guess I'm curious what "wealth-backed money" is. All money is only a medium of exchange, and is only worth what people collectively agree it is worth.
I'm going to take a guess and assume you mean gold, but if that isn't the case, I'm really curious to know.
The fact that people collectively agreed that gold was a good form of money has nothing to do with any intrinsic (or god given) value of gold. It had everything to do with certain properties of gold that made it a good medium of exchange. Namely, it's durable, portable, hard to counterfeit, malleable, etc.
Eventually, gold's cause was assisted by tradition. People have been using it to represent money for so long they mistakenly believe it has intrinsic value. (Granted, gold isn't a bad choice, if you are betting on the fact that others will irrationally value it.)
So yes, it's harder for governments to manipulate a gold-backed currency... but it's not that hard. The US effectively did it twice, most recently after WWI with the Gold Reserve Act. Also, your money supply is now open to manipulation by private entities and even individuals. Gold mining companies, for instance, would have powerful sway over the amount and price of gold.
"Hard to counterfeit" is the key point there. The difference between gold and dollars is that dollars are very, very easy to counterfeit. Just get Congress to order more from the Treasury!
Expansion of the money supply is not "counterfeit" money, although there are circumstances where it is a bad idea. Counterfeiting is when a private citizen decides to, as it were, expand the money supply with his or her own printing press.
Why should we treat the action of the government differently from the same actions of citizens? Wouldn't it be wrong for a government to murder people with no provocation? Wouldn't it be wrong for a government to kidnap people and hold them captive in a secret location? Why then is it fine for the government to debase the currency, and therefore destroy the value of any accounts held in that currency?
This is the current global strategy to the debt crisis: inflate it away. If we (we being the government and central banks as a colluding entity) inflate the dollar 100:1, then the "toxic" debts are only 1% as bad as they were before. And we get to keep the houses we evicted everyone from, and sell it back for the new, inflated valuation.
Why then is it fine for the government to debase the currency, and therefore destroy the value of any accounts held in that currency?
The value of the currency depends on what I can exchange it for. If the US dollar's value relative to the things I buy and sell remains relatively stable over the next few years, and if my risk of losing my job remains low so that I can feel confident in my ability to keep earning those dollars, then as far as I'm concerned, the Fed is doing its job.
If the US dollar's value relative to gold goes down, I couldn't care less. I can't eat gold.
I'm not trying to defend the current setup of the Federal Reserve as it stands... I think there is a lot of room to make it more transparent and to erect barriers such that Goldman executives (or any other bank) can't make a career of moving back and forth between the company, the Federal Reserve, and the White House.
As you put it, the government has the ability to debase a currency (I'm not arguing it's fine to do so, but I agree that it has the ability). Would you prefer to give this ability to private entities (corporations and individuals) as well? That is what commodity-based money gives you. Whoever produces or purchases that commodity has an effect on the money supply.
As an alternative way to think about it, would you want a money supply based on oil? It is also non-renewable, malleable (yay liquids), portable, and hard to counterfeit. How about money based on copper?
I'm sure the folks in the middle east and Chile (respectively) would love to be able to affect our money supply. Also, the cost of driving a car or building a house would go up needlessly, just like the cost of gold for electronics and medical uses is needlessly high because of gold's status as a speculative commodity.
So yeah, if there was a way to have a perfect money supply not subject to manipulation, I'd be all for it... but a commodity-backed system is just as bad (or worse) than a fiat one.
"That is what commodity-based money gives you. Whoever produces or purchases that commodity has an effect on the money supply."
But in that sense, nothing has changed for fiat currency. Fiat currencies are still produced and purchased just like commodities, with the exception that governments can produce all they want to get a leg up on that game. That's what they use monetary inflation for, to cheat at currency trading and bonds games.
My point is that nobody should be "in charge" of a currency. Currencies came about through consensus in the market, not through government mandate. Nobody has the right to be the final arbiter of all "dollars" any more than anyone has the right to be the final arbiter of "time" (the only truly important resource) or "air and water" (the first truly vital resources). Monopolies are not good, especially monopolies that come about through force, which is as governments are. In a society that is claims to be free and equitable, having a super-citizen government is not equitable.
A single, mandated currency is a borderline oppressive idea. There are laws against "undermining the ubiquity and stability of the dollar". They're used against people who want to mint their own coins of their own design and use them in transactions with people willing to accept them. If people want to use something other than dollars for transactions, then more power to them. Hell, publicly traded corporations already do it, often using their own stock holdings as a medium of trade for merger deals and such. When you look at the plethora of trading (I mean this in the generic sense, not the Wall Street sense) options available to anyone with enough wealth, I think it starts to become clear that financial and monetary laws and regulations are really only meant for the working classes.
There is no reason it's illegal to make and circulate your own currency... my town even has it's own local currency.
To quote the section to which I think you are referring (Section 31 U.S.C. 5103):
"United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues."
Also Article 1, Section 8 of the Constitution:
"The Congress shall have Power...To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures"
Notice it doesn't say exclusive right.
The 'legal currency' just means that if you sell/loan someone something, and they offer to pay/repay in dollars, you either accept them or give up your claim to that debt. Also, the government will only accept dollars for taxes/fees. So you could legally refuse dollars if you wanted to, but if you did so, the other person could just say "I tried to pay but he wouldn't let me" and walk away. But if the other person wants to pay you in some other way... with Blah Bucks... and you accept them, nothing illegal happened. It would just be considered bartering.
I'm not sure I'd want a currency backed by my local bank. At least I know the US government and by extension the Federal Reserve can't go bankrupt, rendering my money worthless (although it's true they could hyperinflate, by choice). Imagine all the people that would have had Bear Stearns dollars and what a catastrophe that would have been.
During the last boom a full 40% of all of the profits in the system came from the non-productive activity of people manipulating cash flows. This is simply not a sustainable financial structure. History shows that economies that are based on financial manipulation rather than production don't last. The USA isn't the first to combine of financial manipulation along with the export of production and the knowledge that previous lead to persistent economic advantage. In the last several hundred years Spain, Holland and England did this. In all previous cases it was a big factor leading to financial collapse and the loss of empire.
Is there any reason to believe it will work any better for us?
I think that is what richcollins is saying. What I took away from that article, although I don't think it is quite what the author had in mind, is that Capitalism is flaw by the fact that our government does not allow/force us be purely capitalistic. The safety nets open the doors for greater risk, which require bigger safety nets.
Agreed.
I think people spend too much time arguing about "capitalism the ideal" when what we should be talking about is "capitalism the implementation."
Counterpoint: flash trading. If I can peek at the orders the little guys put in through scott trade and execute a trade before theirs clears, then I can benefit from the upward price pressure that their orders induce. Little risk, no government, hardly "fair".
In an ideal world new stock markets would pop up without flash trading and the little guys would flock to those instead but there are huge network effects to get over. In this case regulation, or at least shaming the exchanges into doing something, seems appropriate.
I'm totally with you on the bailout moral hazard, there are just definitely some zero-work-ethic, unfair, risk-less behaviors that are quite profitable even (especially?) under anarcho-capitalism.
From the articles: "Front running is the illegal practice of a stock broker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers."
"Flash trading is [when] certain customers are allowed to see incoming orders [30 milliseconds earlier] than general market participants, ... in exchange for a fee. ... Traders ... can conduct rapid statistical analysis of the changing market state and trade ahead of the public market."
So this is not front running, there are no brokers involved for one, and the trades in question already occurred. However if NYSE takes X milliseconds to execute a trade and BATS can fill my order in Y < X - statistical analysis lag time I can get my order filled before the NYSE guy. As far as I know doing the above is not front running or illegal but it is not necessarily full of fairness. So unless NYSE only gives flash traders a peek at completed orders rather than initiated orders the above could occur. It doesn't appear that this is the case:
"Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay."
It seems the trouble with this idea is roughly the same reason that it makes economic sense for poor people to not have car insurance. You're playing with other people's money, and it's an asymmetric risk situation: when your bet doesn't pay off you do not have to pay the entire price, because you don't have it. So it makes economic sense to subject yourself to long-term risk for short-term profit because if/when the crash happens you're not able to pay for the damage you did even if you were liable for it. (As opposed to now when money made is safe, at worst you can be fired.)
In hindsight the present situation is pretty predictable: as the # of goods produced increases and the amount of specialization increases the value supplied by the intermediary network ("the financial system") increases.
The way the financial system is currently "architected" (a strange term, but I'll use it) it has as a class an inordinate amount of negotiating power vis-a-vis everyone else (!), and thus is able to capture much of what ought to be consumer and producer surplus.
As much of the value it adds is due to network effects just going to a gold standard (which is a popular cure-all on the internet) wouldn't change much, even if you thought that was a good idea; there's still the same tremendous problem of coordinating trade in the same complex, highly-specialized economy and the central switchboard is still ideally placed to extract most of that value.
The easiest-to-envision solution is to forcibly unbundle the basic storage-and-transmission of credits between accounts (full-reserve checking accounts, basically) and run that infrastructure as a public utility (a handful of mainframes in the fort knox). Let the private sector sell value-added services on top of this, but don't leave the basic infrastructure of value-exchange in the hands of the private sector, who will retain the ability to hold the country up for ransom.
It's an easy solution to envision but it's hard to see much happening; it is too radical a shift to go down easily (and all that surplus value captured funds a lot of lobbying) and it too closely resembles socialism and other bugaboos to be an easy sell to the public at large.
(!) Where we are now is pretty analogous to having the local power company -- which provides necessary services to its area of operation -- also involved in speculative ventures that backfired enough that its continual operation is threatened; having the ability to turn the lights off would naturally give the local power company a lot of leverage negotiating for a bailout.
Suppose that the "too big to fail" banks were allowed to fail, and there was temporarily a severe disruption in the banking system. How would you propose that federal, state, and local law enforcement and other "essential services" get paid? With cash -- dangerous and risky? With checks -- while the banking system isn't reliably working? Would you trust them to work without pay for very long?
If the government imposed a small tax on stock purchases and other financial transactions, with the tax level rising according to the number of intermediaries and the amount of leverage, then working in an organization through which lots of money passes would not be such a lucrative career.
(And if it remained lucrative, at least the government would be able to participate in the bounty that comes from skimming a few parts-per-thousand off the top of a very large cash flow.)
This article suggests, twice, that "most intelligent people" agree with the author. Surely there is a better way of proving these facts, than just using such an assertion?
It is a hopefully temporary result of a world wide obsession with financial speculation.
Part of that is specific government policy resulting in financial speculation being more profitable then brick and mortar and bits and bytes businesses. I'm not just talking about the fed, and printing money, but also about trade policy.
The other part is lack of supply. When people can charge 2 and 20 and the 2 even if they suck, that means either there are a lot of people deliberately looking to lose money, or there is a shortage of hedge funds. And while those have exploded in number in recent years, that is not enough.
The government, through Ph.D. programs encourages education, some say this supply side intervention has the uninteded consequence of depressing wages for Ph.Ds.
But what if the government strongly encouraged everyone to go into wall street? Politically it would be crazy to try and explain why we're paying for people to become bankers or fund managers. But a flood of talent is perhaps exactly what we need, to even out supply and demand.
Antonio - good find. I read this article earlier this morning and it spoke directly to the disconnect I've noticed as well. Logistically, what do you think leaders on the Street and in business can do to curb these short-termist, corrupted practices?
If you don't mind me chiming in, I think the lesson is that there really is nothing that can be done to curb it.
Why? Two reasons.
First, every time we create legislation, laws and other governing to something, the problem either gets worse or creates a whole new set of issues. The problem becomes a snowball -- you can look at the examples there to see some of this.
Second, the saying that goes something like "locks keep out the curious, not thieves" is very true. Those who want to scam will always find a way and there is nothing to stop them, only try and catch them and prosecute them.
I could go on with a very lengthy post about this and sound very studious, but I think those two points in their simpler form make a lot of sense. What do you think?
1) Legislation can change things significantly and effectively. It can also merely shovel things around. Both are possible and doggedly asserting that only one effect ever happens is just ridiculous.
2) Locks keep out thieves very well a lot of the time. They may not keep out every thief, but it keeps out most of them, most of the time.
Show me a piece of legislation that hasn't shoveled things around? And show legislation that actually changed things significantly and effectively without already having legislation in place that it enhanced? Drugs? Education? Prostitution? None of those for sure. I know, gun laws? Nope, not there either.
And in regards to your response to my use of the saying "locks keep out the curious, but not thieves", you have to understand the underlying principle to completely get it. No "locks" (and we aren't talking just physical) keep out thieves, only the curious. Bernie Madoff anyone? The underlying principle to that saying ties with the really corny saying "where there is a will, there is a way". When someone really wants to do something, locks are not a deterrent, they will find a way.
Cheers to you for debating with me, really enjoy it.
I would suggest that it was an elimination of a lot of laws regarding financial transactions and regulation that enabled the recent decline. The removal of these laws enacted to prevent a recurrence of an historical collapse, did in fact bring another collapse, so pragmatically, I would say laws help.
We are more regulated now than we've ever been before. All this talk about deregulation, though real in some cases, often just meant a decline in the rate of new regulation.
When there are less regulations people take interest and make sure things work correctly. For instance, when opening a bank account most people don't do much research because they're all FDIC insured -- who cares what the bank does with your money. Without that insurance you would care.
If we removed financial regulations, the markets would radically reform and lots of small individual investors would get out -- either into mutual funds or some other managed investment.
We are not more regulated than ever before, that's just not true. Regulations are being removed and the regulators are more lax. Did you see what Madoff said about the regulator looking at his business? He called him a blow hard.
I also don't think most consumers of banking products are able to determine the solvency of a bank. If the FDIC wasn't there, the account holders would be at greater risk even if they did care.
I don't believe markets reform themselves. The market does what is in the individual best interest, not the interest of the market.
Perhaps an individual isn't able to tell, but consumer reports would be able to.
Each individual working in their best interest reforms the market. If they believe that it is unfair, e.g. insider trading, then they will refuse to take part. Thus a market would form to cater to these individuals.
The fundamental flaw of capitalism is the tendency for wealth to concentrate in the hands of those that already own the capital. There's nothing to be done about it because the fundamental flaw is more like a fundamental feature.
I though it was quite obvious captialism provides only incentive to increase profits, and that it does not necessarily correspond with an incentive to make better profits.
Consider communism, ideally no one will worry about financial gain and everyone focuses on self actualization and innovation (because there's no monetary incentive, so only the truly altruistic thrive). However there's yet to be an implementation this ideal.
It's probably impossible to achieve a perfect system, so I think the answer lies in a more perfect balance of capitalism and communism.
The banks, however, are another matter altogether, and this is where I think capitalism has hit a roadblock. The government has intervened to save many of them, [...]
There's a fundamental flaw in the logic that concludes that "government must intervene to stop the shameless looting of taxpayer money." Taxation itself is government intervention.
Abuse of money received from a government that shamelessly loots its people for the "common good" and through manipulation of a highly regulated system is no more an indictment of Capitalism than failure to run is an indictment of a man tied to a chair.
There's a fundamental flaw in your reasoning too. You can't have capitalism without some form of government and you can't have government without some form of taxation.
Maybe the term capitalism has a different meaning to you than it does to me, but I use almost synonymously with "free markets." And I would actually make the case that you can only have "pure" free-markets without government.
What I was suggesting in my comment above is that the failures of a bound and adulterated form of free markets do not indicate that free market principles are themselves flawed. The notion that banks' or other firms' abuse of bailout money is a problem with capitalism neglects that an extremely important (and often ignored) freedom in capitalism is the freedom to fail.
I agree that free market capitalism ended when the government bailed out the banks.
I think, the issue on that is what would have happened if the banks were not bailed out? Many believe, the western financial system would have collapsed and we would have been sitting amidst 25-30% unemployment right now.
Most economists agree that bailing out the banks was the right thing to do under the circumstances, and faced with the consequences.
But now that we do have a financial system that has not collapsed, we need to rethink how we recover from 10% unemployment and a gaping deficit wound that has been created.
For that to happen, we need more people like Kao, fewer like Soros. Those, after all, just examples. My point is, the system has created incentives for people to be attracted to the Soros-like professions, not the Kao-like professions.
And what we need right now are more the Kao-like innovators (and the Jobs like entrepreneurs, who, to your point, is very wealthy).
But entrepreneurship and innovation are not short-term money-making propositions the way speculation-oriented professions are.
And my point is we're diverting the youth in two directions as a result: (a) an entitlement path, where they expect the government to come to their rescue (b) the speculator path, where they are attracted by easy money.
The path that is longer, harder, riskier - the path of building, creating, innovating - is losing out in the process.
I am unable to understand this viewpoint that you can only have "pure" free-markets without government.
There can be no free market without government unless you define government as "official" government. If you define government more loosely as a "governing body", then it is clear that government must always exist in a free market system because conflicts and disagreements will always exist.
The governing body is a necessary factor in economic system.
I would argue the free markets never exist in a 100% free state. To talk as if they do is really to ignore the realities and complexities of modern economic systems.
Property rights need to be protected or an economic system falls into anarchy. On a small scale, it is possible for the community to enforce these rights (in which case, the community has formed a local government) but on the larger, societal scale, a transcommunity government is needed (or a warlord/city boss/etc appears which is, by its nature, a form of government).
If all free trade actions could be resolved by rational, respectful, interaction of two individuals of integrity (ie they keep their word), then no government is needed. As far as I can tell, if such a world existed, we wouldn't be having this discussion.
As long as individuals need to collaborate in order to resolve disagreements, as long as certain individuals need to take responsibilities for overseeing these collaborations, government is necessary.
my question is can property rights be adequately protected by government? seems like history has proven that not to be the case.
the assumption that warlords would always appear in society no matter what is just that - an assumption. on the other hand, every government we have today was born by conquest and initially created by warlords.
I simply don't hold to the assumption that government will always be necessary in society to protect property rights. they are actually the biggest violators we have of property rights. people are capable of progressing beyond government, and I think they will once they finally realize what government really is.
"She assumed integrity is implicit in the characters of the "leaders.""
I haven't read much Ayn Rand (i.e., none), but I've read a lot about what she has said and written. Is the quote from the article above dramatic license on the case of the author, or did Rand actually state that integrity is a required characteristic in the 'leaders'?
"The government has intervened to save many of them, and now, these bailed out banks want to hand out billions in bonuses to their non-performing employees"
So presumes the author that the people who are ostensibly receiving "billions" in bonuses are the same people who pushed this over-leveraging scam. All bankers are equal, none managed wisely.
"And thus, we lose Berkeley Ph.Ds in nuclear physics to hedge funds and MIT computer scientists capable of delivering computing to 6 billion people to derivative manipulation on Wall Street."
So presumes the author that nuclear physics and democratization of computing are more noble pursuits than finance. What he forgets is that mortgage-backed derivatives really did reduce risk for really bad mortgages. This was a phenomenal development, we could get more people into houses while not losing our shirts in the deals. Unfortunately, those same mathematicians weren't the ones employing this great tool that they created. "When the only tool you have is a hammer, every problem looks like a nail." It's not that mortgage-backed derivatives were wrong or evil or bad, it's that they were grossly overused. They reduce risk, they don't eliminate it, so when the scenario in which that risk turned to losses came true, the losses were too much to handle.
But, few people saw the risk for what it was because the Fed suppressed the price of money to lower-than-market rates, explicitly encouraging this sort of speculation. Price floors lead to shortages, this is a basic tenet of Capitalism. Is it any wonder that the entire nation is over-leveraged? Without the manipulation of the Fed, the price of money (interest rates) would have been much higher and this sort of speculation would not have happened.
So you're arguing that an accounting trick to statistically suppress risk and get a few more million people into homes that they ended up having taken away from them is fundamentally the same level of contribution to society as people inventing the Internet, the Telephone, Chemotherapy, Relativity, etc.?
You, sir, have an interesting outlook on life. But hey I guess a few high-risk buyers got to hang out in someone else's house for awhile, and that's good right?
I think his point is that, traditionally lending was a very local matter with local banks and local capital issues. If Norwegian pension funds want to fund a mortgage for a home in Paducah, KY, without some kind of securitization they're stuck earnings treasury rates and the home loan is charging the interest rate demanded by Paducah capitalists whether its higher than the Norwegian's rate are not.
The point is, there are gains from trade to be had from securitizing mortgages, the trick is to design them so that the information asymmetry costs don't outweigh the benefits. Maybe that's impossible and mortgage derivatives will always be value destroying but I doubt it.
Sure, but that doesn't change the fact that he's implicitly equating an accounting technique with the Theory of Relativity, the invention of the Internet, etc.
This worldview seems shocking to me. It's hard to imagine that someone can equate a vaccine for polio and a statistical method as equally beneficial to society, especially when one caused such woe and the other eradicated a crippling disease.
I never made that valuation, you made it for me. I said that the author implied finance was a lesser career choice than nuclear physics, then provided an example where statistical analysis can be used in finance to provide a social good.
Not all bad-credit people are bums looking to default on their loans, skirting the credit collectors as long as they can, living on the underbelly of society. But people who were hit hard by a disaster, made a few mistakes in the past, or are just getting started out are lumped in with the deadbeats. Unfortunately, there is no way to tell them apart, based on financial numbers. By minimizing risk in dealing with these types of loans, the people who are legitimately trying to improve their lives are given an avenue to show they are responsible enough to own a home.
There is still risk involved, but the construct is not inherently deceiving about its risk level. The problem was over-leveraging on this type of activity. Even over-leveraging on mutual funds and money market funds can make you lose your shirt.
"an accounting trick to statistically suppress risk"
Mortgage-backed securities as a construct unto themselves are no more an "accounting trick" anymore than accident, life, or health insurance policies are "account tricks". Regardless, "risk" is nothing but a probability factor anyway. Risk is the probability of losing money on an investment, not the certainty of it. To organize assets together in vehicles that allow the earnings of the winners offset the losses of the losers, you're not performing accounting legerdemain, you are reducing actual risk.
"The banks, however, are another matter altogether, and this is where I think capitalism has hit a roadblock. The government has intervened to save many of them, and now, these bailed out banks want to hand out billions in bonuses to their non-performing employees. Capitalism gave way to welfare economics, and now the government has to intervene further to limit these looters from behaving badly by imposing taxes and regulations."
If the government hadn't intervened in the first place, and instead let these irresponsible banks fail, then the transfer of taxpayer money in the form of bonuses never would have happened.
What she's describing here is, in actuality, yet another flaw of government intervention.