Observe that the unregulated Credit Default Swap market is now working just fine, despite handling gigantic money flows, such as the failure of the Icelandic banks, that shake other markets, despite, or perhaps because of, the fact that more highly regulated markets have frozen up. What went wrong in a short while ago in unregulated markets was that people in an unregulated market would look at a highly regulated participant in that unregulated market, such as AIG, and say “AAA …
Category: economics
The cause of the subprime crisis
The subprime crisis was caused by regulation and the expectation that some companies were too big to fail – that if those companies got in trouble, the government would make sure their debtors were paid. What did regulation tell financiers about subprime loans? It told them they had better make subprime loans, or face a lawsuit by ACORN, a lawsuit in which the regulators made it clear they would be backing ACORN. Ted Day tells us what regulation said The …
The cause of the crisis
The bailout will fail. If the government offers implicit or expicit debt guarantees, if a firm is “too big to fail, then that firm can easily borrow lots of money cheaply, and lend that money to people not so guaranteed at a higher interest rate. Free Money! The too big to fail firm is going to take absurd risks that no one would ever take with their own money. And if trouble ensues, then they have less to lose, in …
The cause of the crisis
If a company is too big to fail, then people will take risks they would not otherwise take. “Too big to fail†is an implicit subsidy for taking big risks – which results in people taking big risks. So we have just paid people seven hundred billion dollars for taking stupidly big risks. What do you think is going to happen?
What the bailout does to capitalism and the dollar
As we have seen, organizations that are too big to fail, fail big. The US government is the biggest of them all. For credit to work, people who need credit should not get credit. You should only be able to get credit if you can prove you do not need it. The major purpose of the bailout is to ensure that people who need credit will continue to get it. For capitalism to work, to produce good results, rich people …
Wall Street Journal explains the bailout crisis
Wall street journal reports that this crisis was the predicted result of politically correct lending policies commanded by the Clinton administration, continued and worsened by the Bush administration. Carpe Diem reports that this crisis was predicted when these policies were introduced by the Clinton Administration. In 1999, the NY Times observed: Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic …
The financial crash
Brad de Long looks at the financial crisis, and concludes that the wise and good hand of government is necessary. Third, the market fundamentalists in other sectors will need to be quiet for quite a while. We have just seen financial markets rife with moral hazard, agency, and adverse selection problems crash spectacularly. Is this a situation in which we should move health care–also rife with moral hazard, agency, and adverse selection problems–toward a free market configuration? No. Market regulation …
The success of globalization
Massive globalization — a major move towards free market capitalism — has brought over a billion people out of poverty, while sixty years of socialist chaos and violence has failed to convince most of the world that central planning is a very bad way to run any economy.“Ruble†symbolizes pretend money, unconvertible into goods, much as “Finland†symbolizes submission to a hostile power, and “Peso†symbolizes inflation. Globalism has done what socialism promised to do and failed to do: It …
Explanations of the oil price rise
My explanation for high oil prices is the collapse of oil states. Arnold Kling argues that instead the problem is that investors fear the collapse of advanced states, so are reluctant to take their money. My explanation is that oil states are increasingly short of the competence to pump oil, the ability to provide security to people pumping oil, and the credibility to make deals with people who are competent to pump oil — for example it is difficult for …
US Chamber of commerce protests junk science
The second national climate assessment predicts that the United States will “very likely†experience rising sea levels and increasing droughts, heat waves, intense storms and resulting illness and premature death over the next century as climate change intensifies. But, as is the usual practice with climate “science†, the report fails to make available the evidence that supposedly leads to this conclusion, a gross and flagrant violation of normal and proper scientific practice. And so, the US Chamber of Commerce, …