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

September 25th, 2013 Leave a comment Go to comments

[Cross-posted from the “we build our society” Facebook group: https://www.facebook.com/groups/webuildoursociety/permalink/426592164111339/]

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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