Archive for September, 2013

Part 4 Dialogue on Moral Hazard, fixing the financial sector and certainty of knowledge:

September 25th, 2013 No comments

Cross-posted from “we build our society” Facebook group:!/groups/webuildoursociety/permalink/426598337444055/

Terry, 2007-09 flow from various government interventions, not limited to those I just outlined, that served the purpose of blowing a bubble and freeing those playing with money from personal responsibility. This meant that smart men focussed on how they could game the system for their own profit. It happened continually and is still underway, though 1994 in Boca may be a good example.

Doug, [Jekyll Island 1913] was just the creation of the Fed (and just part of my item(3) above); the roots go much deeper to other state interventions I noted. The pre-Fed booms/panics also flowed from the state-level creation of banks as corporations and monopolies, and interventions to save banks that essentially broke promises to depositors by creating un-backed paper money. See Rothbard’s History of Money and Banking in the United States,

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Part 3: Dialogue on Moral Hazard, fixing the financial sector and certainty of knowledge

September 25th, 2013 No comments
Cross-posted from the “we build our society” Facebook group:
Terry, yes the entire financial sector is rotten/corrupt and rife with moral hazard. And things are now WORSE, as the banks are now TWICE as large as they were previously, and banking reform has served to squeeze smaller banks out of business…. Most of the approaches you suggest would be worthwhile (as would heads on pikes), but none of them actually address the roots of the moral hazard–
(1) the centralizing/federalizing Deposit Insurance by which Govt pretends to “protect” us, but instead builds a regulatory house of cards that puts the robbers in charge of the larger banks, and ultimately leads to taxpayers holding the bag when the bank fails or the “unexpected” but entirely natural/predictable “crisis” occurs and forces “responsible” pols/bureaucrats in DC to bail out the firms whose employees/managers/execs have done all the looting,
 (2) the federal effort (on behalf of favored elites) to take control of the money supply,
(3) the state/federal replacement of paper money as redeemable warehouse receipts for physical currency with just IOUs (and now backed by nothing), as long as the bank maintains “reserves” of cash or “secure assets” like federal bonds (so that the govt can loot the banks to fund pet “public infrastructure” projects; and
(4) the state creation of banks as limited liability local monopolies in the first place (in exchange for money to the state treasury/pols hands), and the then subsequent protection of bankers (by banking “holidays” etc) when they found it convenient to rob their customers by issuing more IOUs than could be redeemed in physical currency. Limited liability has always been the core intervention.
 The Big Boys now have entirely too much power to effectively regulate on a large scale, but we MIGHT be able to pare back deposit insurance, which would restore to some savers (rather than taxpayers) responsibility for figuring out where to put their money (and would create a REAL market for bank analysis). What we also need is to offer much lighter regulation to new banks that are exempt from any federal or state deposit scheme–and let depositors and shareholders manage their own risks, as they are now doing in private companies that are avoiding the public securities markets.

Part 2: Dialogue on MoralHazard, fixing the financial sector and certainty of knowledge:

September 25th, 2013 No comments

[Cross-posted from the “we build our society” Facebook group:]

Doug said: “I honestly don’t know how to punish or hold those responsible for screwing up the economy. I don’t know the best recommendations. I don’t know what should be regulated and what shouldn’t. I do know that I want the violence to end, because that approach, I believe, has gotten us here. My approach would be this: first, let’s take away the moral hazard created by government regulators and the Fed. Maybe in so doing, we would make things like derivatives completely obsolete because they wouldn’t be profitable. In fact, in that sort of environment, I don’t even think we would have a financial sector, at least, in the form it is in currently.”

Terry then added (my responses in brackets inside):
“There is no first; it’s all or nothing. Maybe you don’t know what business has done, but I surely do. And I just as suredly know what would be the right medicine.
[There is no perfect knowledge, so in general, economies do well that leave problems and solutions in the hands of the people who have the most skin in the game, rather than centralizing them.]

The gov’t didn’t initiate moral hazard in instituting regulation, moral hazard is “in economic theory, a moral hazard is a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk.” Moral hazard was exclusively created by the business activity of risk reduction by uncontrolled credit default swaps of structured debt that backfired and caused 2007-2009. The gov’t didn’t create the moral hazard, business did. And it influenced the regulations in order to get away with it.
[Wrong–the #MoralHazard in the banking/financial sectors was very much created by government, though of course the self-interested within the regulated firms did their best to influence what government did. I will comment on the roots of MoralHazard separately. What those within the regulated business (and government) did was to act in their own self-interest, freed from much concern that they would be help personally accountable by depositors, shareholders, counterparties or citizens for what they did.]

We have to address gov’t snippings and business snippings at the same time. And I would argue, I think largely rightly, that the violence the gov’t perpetrated on us was in the bailout.
[The roots are much deeper, but the bailouts were certainly wrong, both morally and as a “cure” for the “crisis”.]

So, get rid of what I have suggested both in business and gov’t. My plea was for proper regulation (ie, addressing business fraud, derivatives — credit default swaps — and infrastructural items such as microfrequency trading, a freeze on all new negotiable investment banking instruments until economists have had time to work out the consequences, kicking business out of gov’t regulation, possibly doing away entirely with the non-commodities side of Wall St except as information providers for individual decisions, and prosecutuon for those responsible for 2007-2009) and infrastructural changes. Both parties must be operated on at the same time. Absolutely. Swiftly.
[I am for strict regulation of financial firms, for as long as government is holding the rest of society hostage to its false “protection” of us. But the REAL solutions involve in making everyone involved in the sector, starting with the depositors and shareholders, more personally responsible for looking out for their own financial interests. This may only happen if we free up responsible, well-managed competitors, such as offering lower regulation for banks that have lower deposit insurance, or that are operated as partnerships rather than as corporations.]

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Dialogue on Moral Hazard and fixing the financial sector

September 25th, 2013 No comments

[Cross-posted from the “we build our society” on Facebook:]

[Brackets are my comments; some edits.]

Terry said this (edited)

“Now, I don’t know if you’ll so much like the following, because it is taking scissors to how business is done. The regulation that gov’t can do on business.
1) Business cannot be too big to fail, and ever hold America hostage again.
[Okay; how to de-link businss and politics is a deep issue.]

There must be complete and utter transparency in all negotiable instruments, nothing can be hidden in the books. Anything else is fraud.
[No–the problem isn’t lack of complete transparency, but lack of ACCOUNTABILITY. In the case of privately-held/not publicly-listed/not govt-insured business, those who own the company or deal with it on a voluntary basis are entirely capable of being satisfied with the financial condition of the company, or choosing not to deal with it.]

2) There must be a review of derivative trading. It must be either tossed or highly regulated. Trading should be on intrinsic value.
[We care about banking, finance, securities and publicly-listed companies only because government has stepped in to “manage” these particular businesses (in response to risks flowing from the MoralHazard set in motion by their govt-granted LimitedLiability status), and to “protect” ordinary people, who no longer pay much attention or have much if any of a personal voice. Besides that, there is no such thing as “intrinsic” value; things physical or not have value only because people value them, based to their use to such persons–and everyone has different purposes and values things differently.]

3) Uncontrolled swaps of structured debt should not be allowed. [No; this doesn’t address the real problems.]
4) There should be immediate and thorough review of any new proposals for contracting of negotiable instruments. None of this going ahead with credit default swaps like JP Morgan did without submitting itself to review.
[No–we should remove the public support for banks/investment banks, and for their shareholders, and let them manage their own risks.]

5) NO businesses writing regulation. They can have input, but they can’t be, or buy off. or put pressure, on regulators.
[Nice to say, but the fact of the matter is that the more regulation their is from government, (1) the greater the incentive of regulated business to invest in influencing/controlling the rules of the game, (2) the greater the corruption/unaccountability of public figures and (3) the less the influence that We the People actually have/the more hostage we are to a corrupt process.]

6) I don’t suppose too many people have entertained the notion that Wall St may not need to exist in a form other than regulated informative, with liars being held accountable (jail time) for Ponzi-ing us, or even misleading us about investments (non-transparency). We have the internet, we ourselves can decide what to invest in, and should then be able to invest by ourselves. I don’t think there should be a class that can decide how to invest our money. They should be there to give us all the background. Let us make the decision, not build their porfolio quotas or fund their schemes.
[YES! Agree 100%.]

7) We need to stop high frequency microsecond transactions. They leverage the market, and cause market computer failures. Sorry to put you out of work, you who work in that little building 300 yards from Wall St central, but you should have gone to work at CERN, where your skills would have been used better.
[This IS a problem, but only because of govt regs that purport to “protect” shareholders in publicly listed companies, but instead leave them at the mercy of smarter men to be gamed. Shareholders are at the mercy not only of the listed companies, but also to the securities companies that once used to own the markets and have incentives to make them relatively safe places. Now, they prey on the investors that government purports to “protect.”

And finally, (8) prosecution of the fraud and robbery that was 2007-2009. In short, either there has to be a complete review of how Wall St does business really, or Wall St should be shut down entirely. This of course would require potential investors to educate themselves.

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How do government actions enable pollution and other social problems?

September 25th, 2013 No comments

[from a comment at the “we build our society” Facebook group]

[A]s a factual matter, the greatest Industrial Revolution pollution occurred AFTER governments started to create #LimitedLiability corporations whose effect (and aim) was to protect INVESTORS from the downside risks of doing sh*t that hurt OTHER PEOPLE.

Even today, most of our largest social problems flow from risk socialization and lack of accountability, proximately resulting from wonderful LAWS that serve the powerful, while pretending to “protect” the poor and dumped upon.

Fukushima happened because NO ONE had any personal skin in the game. What happened was no “surprise” or “Act of God”, but an expected result where NO ONE was f*cking responsible for the downsides of poor decisions that benefitted themselves or their organizations, favored corporations with monopolies, whose shareholders and lenders are protected from liability, the banks that are protected by government, the executives and regulators who often retire to the regulated company, the mega-construction firms who built the reactors, the legislators who imposed taxes on all users to bribe the local communities into accepting them ….

Where no one is accountable, bad sh*t is no surprise, but more LIKELY to occur. The same story can be written of the BP/Gulf of Mexico disaster, the ongoing oil sands disaster, coal/oil pollution, the god-damned War Machine/Prison/Industry/Drug War complex, and the “unexpected” financial crisis resulting from monetary gaming by the Fed and a gazillion regs that left depositors and shareholders powerless in the face of looting by bankster elite-wolves.

The answer is NOT “more govt!” or “more regulation!”, but SMARTER regulation that RESTORES RESPONSIBILITY and stops the lie of govt “protecting” people. Keep regulating the old/big cos, but LET THE SMALL and ACCOUNTABLE BUSINESSES FREE. Firms run by managers who are members of the communities in which they operate, and whose owners have no government-granted #LimitedLiability be kept in check by their communities and the risk of losing their personal assets, and will, via the process of #CreativeDestruction, supplant the corrupt dinosaurs.