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Monday Message Board (on Tuesday)

March 24th, 2009

The Monday Message Board is running late again, but it’s up now for comments on any topic. As always, civilised discussion and no coarse language, please.

Tideland movie

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  1. Alice
    March 24th, 2009 at 14:27 | #1

    I know I put this link somewhere else very recently JQ, but does anyone think the US financial system is a product of a democratic capitalist system?


    I dont – not anymore.

    I think the US financial system is a laissez faire oligarchy and what regulation remains is tragically woefully inadequate, bordering on a total sham.

    The new plan for a PPS style purchase of toxic assets “where taxpayers get the downside but get to share in the upside..” is just more of the same spin emanating from Wall Street CEOS (ie they are telling Govt how they want they want their faulty business models fixed).

    It will bring nothing more than the dead cat bounce by way of market confidence.

    These institutions (AIG, Goldman and the others) should be left to fail, as they have existed only to gamble and they reward their largest gamblers within.

    I see no other remedy and it will only prolong the agony. Glass Steagall needs to come back and other legislation passed by Gramm reversed and some decent regulators appointed. Even that wont be enough. I dont think the damage can be repaired.

    If this is what Monte Pelerin / neoclassical / free market deregulated theory produces (thanks to people like Gramm) then its just chaos, not efficiency. Monte Pelerin and Hayek and free market economists to me are an insult to every prior economic theory – in essence its antitheory – a handbag of economic terms misappropriated to the purpose of supporting monumental greed by financial behemoths grown obese on deregulation, now crushing the life out of the US financial system, the US government and US capitalism.

    These large financial behemoths are not too big to fail. They need to fail to clear out the deadwood but the US government needs to have a good long hard look at the virtual absence of any financial regulation and its questionably close relationship to the executives of these institutions.

    They are a worse threat to the U.S. than terrorism ever was.

  2. Bruce Littleboy
    March 24th, 2009 at 15:24 | #2

    Alice 1 writes:
    “[D]oes anyone think the US financial system is a product of a democratic capitalist system?
    I dont – not anymore.”

    Alice, why did you ever think it was?!

    We still find people (some Austrians and libertarians citing Friedman or Mints) saying we should have 100% reserve banking system (ie illegalise fractional reserve banking). As if anybody ever had the political power to bring this about.

    Does anyone know whether radical ideas about the dominance of financial capital are finding their way into respectable discourse? By respectable, I suppose I mean economics. (Apologies to those doubtless slighted.)

  3. Alice
    March 24th, 2009 at 15:35 | #3

    As if anybody would ever have that power – you are right Bruce. They wouldnt. All the pressure is bearing down hard the other way (no rules on what you can lend out, who you can lend to, or how you create what you lend, as long as the commissions keep rolling in).

  4. O6
    March 24th, 2009 at 16:10 | #4

    But what will the outcome be? Printing money has normally led to high inflation, but don’t we need high inflation to avoid the deflationary effects of pricking an asset bubble that had overvalued financial assets and housing by 100% or more?

  5. March 24th, 2009 at 17:30 | #5

    You persistently and seemingly wilfully refuse to address the point that the financial firms are the most regulated of all. Please at least attempt to address this or will will have to call it for what it seems to be. At the moment ignorance may still be a plausible excuse.
    That’s not Freidman – it’s Rothbard.
    Many would argue that the only way you can get overinflated assets like that is because of the printing of money. It is therefore somewhat ironic that the cure that seems to be being advocated it, you guessed it, the printing of money.

  6. smiths
    March 24th, 2009 at 17:41 | #6

    You persistently and seemingly wilfully refuse to address the point that the financial firms are the most regulated of all

    that is absolute bull**** andrew and i am embarrassed for you

  7. Bruce Littleboy
    March 24th, 2009 at 17:56 | #7

    It’s Friedman (too): Amer Econ Review June 1948

    It’s associated with early Chicago: e.g. Simons 1934

  8. Alice
    March 24th, 2009 at 18:04 | #8

    You persistently and misleadingly argue that there is too much regulation despite all evidence to the contrary. Andrew it is quite clear there has been a failure of regulation as regards this global financial crisis. There wasnt nearly enough regulation. In fact there has been virtually no effective regulation on what these large firms did.

    None Andrew, none.

  9. Michael of Summer Hill
    March 24th, 2009 at 18:17 | #9

    John, today Rudd warned against a resurgence of protectionism for which he called “an intrinsic evil”. But is Rudd out of step with countries instituting new protective measures or was it a slip of the tongue?

  10. Oldskeptic
    March 24th, 2009 at 18:28 | #10

    Islamic banks, 100% reserves, no fractional banking at all (well a little bit due to fiddles of Sharia Law, but compared to western banks insignificant).

    You can lend out what you have and nothing else. Still run the risk of liquidity shortages (lending long with short term deposits) but much, much less vulnerable to asset speculation/boom/crashes.

    An interesting model.

    Once upon a time the Christian religion banned interest (as does Islamic banks now). Remember Christ and the money lenders? In fact Western banking/speculation practices are actually anti-Christian, though that hasn’t stopped the Vatican salting away squillions in Swiss banks over the centuries, but then again the Vatican is not religious, it is the very first multi-national corporation.

    Just some random thoughts for the never ending debate.

  11. Alice
    March 24th, 2009 at 18:37 | #11

    Rudd is probably in the U.S. listening to bailmeoutsoIcandoitagainspeak (thats slang for AigandGoldmanspeaks).
    Now I am really skeptical (oldskeptic2).

  12. Oldskeptic
    March 24th, 2009 at 18:40 | #12

    #8, protectionism is coming, already here (did it ever go away)? Let me think, when can we sell beef to the US under our {pause to stop laughing} FTA with them.

    Oh Govt’s will give a lot of lip service, but just about everyone: is, is planning, is looking how to do it.

    Carbon duties are going to be be one way, from the EU no less. Under the guise of saving the planet they will slap carbon taxes on their imports (oops Australia). Other countries will follow quickly, don’t you just love the smell of hypocrisy in the morning?

    Then again, since we never actually had free trade, what’s to lose? Oh, there goes our trade {another pause for laughter} trade surplus, or more accurately there goes our ever increasing current account deficit. Plus there goes 30% of living standards, by one way or another.

  13. smiths
    March 24th, 2009 at 18:45 | #13

    hey john why did my comment dissappear?

  14. Ikonoclast
    March 24th, 2009 at 19:46 | #14

    Well, maybe we should just commence on the long hard road to autarky. The idea appeals to me. A nation should be predominantly self-sufficient in the main categories; energy, resources, agriculture, technology, light and heavy industries.

  15. Socrates
    March 24th, 2009 at 20:03 | #15

    Well said Alice and Bruce (BTW Bruce you taught me some economics 20 years ago :).

    If I understand the maths of the US bailout correctly, the total cost may be $2 trillion, about $60,000US for every citizen; about $90,000 per taxpayer. People might well ask why they didn’t jsut pay off the otustanding loans instead. The average mortgage is $136000, so many people now lumped with paying off this debt via their taxes could have cleared their total debts for less. The total value of US mortgages was US$10.6 trillion as of midyear 2008 (Wikipedia quoting Fderal Reserrve stats) so it isn’t true that all mortgages could have been paid back more cheaply. The sub prime ones could have been – they were worth $1.3 trillion, and not all are in default. So it would have been cheaper for the government to take over all the failed mortgages and make those foreclosed renters.

    I know economists often don’t consider equity as much as growht and employment, but I think it is time they gave it more attention. This deal just seems to be massively unjust, with the innocent punished (public debt) and the guilty bailed out. I can’t believe that, at some level, there must have been multiple massive frauds in this.

  16. March 24th, 2009 at 20:26 | #16

    I can drop all of the relevant regulations on your desk if you would choose – it is my business to know them.
    Once you are done reading that (say in about 3 to 4 months) then you can start on the individual rulings given by each of the regulators. In the US, that is about 58 (the Fed, the FDIC, the OCC, the state based ones and several other, peripheral ones) all of which have the power to close down the operations of any regulated entity.
    In Australia there are probably only about 4 or 5 of those (APRA, ASIC, AUSTRAC, the ATO from memory). Oh – should add in all the States’ regulators that affect the business of a bank.
    Face it – banking is simply the most regulated business of all – bar perhaps only armaments manufacture or nuclear energy.
    Nice to see that you have put the word “effective” in there, though – gives you some weasel room.
    Why, then, do you see all of these as in effective? Do you propose that giving them more powers will make them “effective”? Perhaps the ability to execute bank executives summarily. They seem to have every other power they could possibly want.
    Why not? Autarky worked brilliantly in every other nation that tried it. North Korea, Cambodia, Albania, Burma …
    Sharia compliant banking does allow fractional reserves. As for “lend out what you have and nothing else” that rule applies to every single bank now. Banks can in fact only lend out up to about 90% of what they have (and nothing else). Looks like ignorance strikes again.
    Worked out how to disprove the labour theory of value yet? After your efforts with Black-Scholes I would expect nothing less.

  17. smiths
    March 24th, 2009 at 20:30 | #17

    you really are kidding yourself andrew,
    just because a set of regulations exist, it does not mean they are enforced
    the SEC in the US hadnt prosecuted one case of insider trading in about ten years,
    whilst huge funds nnaked shorted companies like bear stearns,
    there is no investigation into who did that, hich they could easily do,
    that bloke whose name escapes me handed bernard madoff to the regulators on a platter and they did not want to know,

    you live in a dreamworld

  18. nanks
    March 24th, 2009 at 20:38 | #18

    I am not in favour of autarky at all – I much prefer internationalising ourselves. But that doesn’t necessarily mean being a bunch of suckers or exploitative creeps. I really can’t see why I should be thrilled that someone I have never met gets a bailout job in Melbourne as against someone I’ve never met gets the job in India or France. In what way are they less deserving?

  19. Edward
    March 24th, 2009 at 21:16 | #19

    When a current account deficit comes home to roost…

    From Der Spiegel:

    “As the global recession bites, Latvia, a small and open economy, is being hit especially hard by declining exports. Its problems are exacerbated by having a currency pegged to the euro — a linchpin of the country’s economic policy that now looks increasingly problematic. But the foundations of the crisis were in fact laid years earlier.

    It’s a familiar tale of an overheated property market, fed by lax credit, excessive borrowing, and complacent regulators. “This real estate market was insane,” says Aleksis Karlsons, a hotel owner and property developer in Riga. “The mentality set in: I own an apartment or two-that means I’m rich. People thought they were wealthy without doing anything.” At their peak two years ago, apartment prices in Riga reached €2,000 per square meter ($234 per square foot). They have since plunged by more than 50 percent.

    While ordinary Latvians can be partly blamed for their naivete, the government bears an even heavier responsibility for failing to prick the bubble when it had the opportunity. “The government did nothing to stop the party. Instead it joined in,” says Peteris Strautins, chief economist of Swedbank in Riga. Even at the height of the boom, when the economy was growing by an unsustainable 11 percent a year, Latvia ran a budget deficit. Latvia’s current account deficit, the excess of imports over exports and capital inflows, reached a colossal 25 percent of GDP in 2007.”


    Excessive borrowing, an overheated property market, declining export revenue, a woefully large CAD… sound familiar?

  20. Alice
    March 24th, 2009 at 21:22 | #20

    Andrew (yet again)


    “Banks can in fact only lend out up to about 90% of what they have (and nothing else). Looks like ignorance strikes again.”

    No Andrew – it looks like your routine dose of disinformation strikes again. You wouldnt be trying to get a promotion in the financial sector would you? If you repeat something often enough you start to believe it (or at least you hope someone else does) – The poor financial behemoths like AIG and Goldman Sachs were struggling under the weight of all that regulation but hundreds (thousands) of their employees could still manage to live like Pharoahs and they get the inner hotline to the president’s best men.

    “When Morgan presented their plans for credit swaps to regulators in the late Nineties, they argued that if they bought CDS protection for enough of the investments in their portfolio, they had effectively moved the risk off their books. Therefore, they argued, they should be allowed to lend more, without keeping more cash in reserve. A whole host of regulators — from the Federal Reserve to the Office of the Comptroller of the Currency — accepted the argument, and Morgan was allowed to put more money on the street.”

  21. Alice
    March 24th, 2009 at 21:27 | #21

    No Andrew doesnt live in a dreamworld Smiths. Being a diligent footsoldier for the economic misinformation campaign, Andrew is creating a dreamworld he hopes we will live in.

  22. Alice
    March 24th, 2009 at 22:06 | #22


    “If I understand the maths of the US bailout correctly, the total cost may be $2 trillion, about $60,000US for every citizen; about $90,000 per taxpayer.”

    If they had given that money to taxpayers, instead of the Wall St firms (and let those firms sink in their own free market quicksand), I think we would have been better off. Thus far bailout funds appear to have been excessively hoarded or wasted on bonuses to the ‘directors of disaster’.

    Had the Obama admin distributed it to all citizens, it would have been much more likely to have been spent due to a higher overall average propensity to consume than the way they have proceeded ie a quicker injection all round which would have kept unemployment from ‘bearing the brunt as usual’ in such crashes. It would also have acted to reduce the pattern of widening inequality in the U.S.

    But it was never going to happen. Employees and other citzens will get the token efforts (and unemployment will bear the brunt). We cant possibly risk all those wealthy clients of the Wall St Financial Pyramids losing their money can we?.

  23. Smiley
    March 24th, 2009 at 22:35 | #23


    Maybe if bankers stoped coming up with innovative ways of shifting risk to other parties, or to some future point in time (e.g. negatively amortising loans), then maybe there wouldn’t be the need for so many regulations. You know it used to be the case that the principle role of the bank manager was to judge the credit worthiness of his customers. But it seemed that that was all thrown out when deregulation arrived.

    Rachel Maddow does a good job of explaining financial deregulation here for us simple folk who don’t have a degree in economics.

  24. El Mono
    March 24th, 2009 at 23:15 | #24

    Alice i am sure that Andrew isn’t currently involved in any conspiracies, whther or not he is wrong.

    They tried letting Lehman brothers fail and it automatically had systemic repurcussions, none the least of which was AIG. Sytemic instability has negative effects on the real economy, truly it does, to let every fincial firm die will not make our lives any better. Whatever there excesses these companies got upto, they are still also the companies that loan people (who can afford it) the money to buy houses, loan businesses (even the non-evil businesses) the money to do business and hire people. So the ramifications are wide spread and we won’t get out of the recession till we have a working financial instituitions.

    My main gripe however is that nothing which has been done so far has worked but whatever the structure of the ultimatly successful plan i am certain that some unworthy instituitions will remain. I hope (but not at all confident) that somehow individuals might be punished and the correct, and enforceable regualtions are put in placed to stop it happening in the future. Probable the most important would be to intervene to nip the “to big to fail” problem in the bud

  25. El Mono
    March 24th, 2009 at 23:19 | #25

    Ikonoclast I am guessing your belief that nations should be self sufficient in those areas is due to the idea of a sustainable steady state economy. I am wondering why this sort of economy requires autarky?

  26. March 24th, 2009 at 23:20 | #26

    The risk of lending from the banks is actually shifted the other way under US regulations. If a bank funds a house through a mortgage then the borrower always has the option, under US regulations, of walking away from the house with no more to pay. The incentive, then, is for the borrower to walk away when the price starts dropping – meaning that housing downturns turn into routs as once anyone walks away, the incentive is for everyone in the area to walk away.
    In Australia we do not have that regulation, so most housing loans are full recourse. Sounds bad for the borrower – but for the system it is good as it is then in th eborrower’s interest to maintain the value of the home and to keep living there.
    Combine the US no recourse loan with the US Federal mandated lending to the poor (i.e. sub-prime), the de-facto US Government support behind these loans through Fannie and Freddie and you have a recipie for instability.
    Sure the idiots at AIG deserve to get everything they have for sheer stupidity, but pointing the finger at the execs and then walking away and saying that it was all their fault is going to end up missing at least a large part of the problem – the regulations. Bringing in more to try to fix the existing broken set is hardly a good first step.

  27. March 24th, 2009 at 23:23 | #27

    Looks like the mention of a certain feathered friend has got one of my comments moderated. Fair enough. Alice will just have to wait.

  28. SeanG
    March 24th, 2009 at 23:34 | #28

    Everyone expected banks to be bailed out so their credit worthiness was never really questioned until the US Government decided otherwise. What happened is that the market realised that there is such as a thing as a major bank collapse.

  29. El Mono
    March 24th, 2009 at 23:35 | #29

    On a completly different note. Does anyone else find if you read something you disagree with before sleeping you don’t sleep well because, you are thinking about it for the whole night (why they’re wrong, why they might be right, why might i be wrong ect) and if you respond you think the whole night if you got your point across. I think i need to stay away from all blogs, message boards and maybe even youtube after 8:30. Or maybe stop being crazy….

  30. boconnor
    March 25th, 2009 at 06:45 | #30


    Yes, happens to me too. Read a good book instead, much more relaxing.

  31. Alice
    March 25th, 2009 at 07:04 | #31

    26# Andrew – Im hardly quaking in my boots..You will just have to wait. Im sure you will get your chance. All in good time and remember patience is a virtue…
    cheers, Alice

  32. Alice
    March 25th, 2009 at 07:09 | #32

    Oh and didnt Japan try the big bank bail / buy out in the early 1990s. How did that go for them…?

  33. SeanG
    March 25th, 2009 at 09:04 | #33


    Japan is a perfect example of “holy hell, let’s not do that”.

    The bad debts sat on the banks’ balance sheets because they did not want to embarrass companies by revealing the true extent of their losses.

    The Japanese Government (which you conveniently ignored) spent trillions of yen on white elephant projects and bailouts – Keynesian policies in action and nothing gained.

  34. smiths
    March 25th, 2009 at 09:35 | #34

    i wondered andrew if you havent read the article alice started by linking to,
    so i exerpted what i think to be a pertinent part of it,

    How a behemoth like AIG came to be regulated by the little-known and relatively small Office of Thrift Supervision is yet another triumph of the deregulatory instinct.
    Under another law passed in 1999, certain kinds of holding companies could choose the OTS as their regulator,
    provided they owned one or more thrifts (better known as savings-and-loans).
    Because the OTS was viewed as more compliant than the Fed or the Securities and Exchange Commission, companies rushed to reclassify themselves as thrifts.
    In 1999, AIG purchased a thrift in Delaware and managed to get approval for OTS regulation of its entire operation.

    given that the SEC was worse than useless it takes some doing for the OTS to be more compliant than the SEC doesnt it?

    is that regulation?

  35. Socrates
    March 25th, 2009 at 10:06 | #35


    I have seen your own website, understand the area you work in, and accept that banks are regulated in a complex and cumbersome fashion – much like the tax system we all suffer under.

    However volume of regulation is not the test – breadth and effectiveness is. Much of the current problem stems from markets (CDO and CDS) which are NOT subject to regulation. Hence the current regulation is inadequate. Thus we need more regulation, in that those markets must be controlled. Either that, or regulated (and govt guaranteed) banks should not be allowed to trade in them. If you suggest that we should have reform of existing regulations, which are often a historically accumulated mess, then I agree.

  36. Roo
    March 25th, 2009 at 10:51 | #36

    Different era and political and economic milieu, I know, but perhaps a re-assessment or even just a reminder of the whole Jack Lang episode would prove interesting,especially as many are not aware of the personalities and events.

  37. March 25th, 2009 at 11:31 | #37

    Andrew, you seem to have accepted the point that there’s been a regulatory failure. The rest I am afraid is semantics, you may want to call it fixing the current ‘broket set’ of regulations, or ‘bringing in more’ but effectively this means the same thing really: fixing up the current mess of a regulatory system in the US and imposing rules on the currently unregulated sectors such as credit default swaps.

    I don’t really follow your argument is to be honest: yes, banks are regulated quite a bit already but so they should given their systemic importance to the economy. Financial firms with no systemic risk need not be regulated as much: witness Allco or BNB on this point, there were not part of the regime and that was fine.

    Other than that, Socrates #35.

  38. March 25th, 2009 at 11:38 | #38

    Smith #17: Harry Markopolos is the name. See here: http://www.portfolio.com/news-markets/top-5/2008/12/12/SEC-in-Bernard-Madoff-Fraud.

    The SEC is a disgrace.

  39. March 25th, 2009 at 12:40 | #39

    Oldskeptic wrote “Once upon a time the Christian religion banned interest (as does Islamic banks now). Remember Christ and the money lenders?”

    That’s not what happened there at all. I wasn’t money lenders but money changers, and the issue wasn’t the earning of interest but the making of profits of the faithful who had to change ordinary coin – Caesar’s, with his head on it, as in the other story – for Jewish coin that was acceptable for offerings. Questions of usury came up as a moral issue a bit later in church history, though it was partly implied in the functions of the tax collectors (tax farming had other elements as well as collection, i.e. accepting payments in kind at poor rates, organising putting out to get supplies to sell to the government and others – and allowing deferred payments at high interest).

    “…the Vatican is not religious, it is the very first multi-national corporation”.

    Arguably various pagan temples were, followed by certain Christian monasteries (of which Mount Athos still survives).

  40. March 25th, 2009 at 12:43 | #40

    Andrew Reynolds and Alice, the financial industry is certainly heavily regulated, but equally certainly it is not regulated effectively. I think there are cross purposes arising from this, and from the fact that “effectively regulate” does not mean the same as “regulate effectively” (if you regulate people in the finance industry, say, you effectively regulate the finance industry, but you still may not regulate the finance industry effectively). There are issues of doing it efficiently as well. Some will take these facts as arguments for more regulation, as they will suppose that it can be made more effective, while others will take these facts as arguments for less regulation, as they will suppose that there is no point but much burden and that the underlying needs can be met in other ways, e.g. by better informed markets. Frankly, I doubt if either approach would work at this point with the resources we have to hand, and that we need to look far more closely at what is going on to work out what to do about it after the current round of dust has settled (probably years from now).

    Andrew Reynolds, autarky does work brilliantly (in terms of the goals of the countries involved) when two conditions are met: the goals are compatible with the resources; and, the outside world isn’t pushing at the countries. For instance, it worked in China, Korea and Japan in the 17th and 18th centuries, in Madagascar from the mid 18th to mid 19th centuries, and in Paraguay under the Jesuits and in the first 50 or so years of independence. Those all stopped working when the second criterion did, and your example countries never did succeed because they never met either of the criteria (but Burma has often come close, in terms of its rulers’ goals).

  41. PeterM
    March 25th, 2009 at 13:29 | #41

    Alice #1 and subsequent postings.

    I can sympathises with you as to you frustration with the antics of the Financial sector in the USA but it has been going on for quite a while now. It seem that the finance sector is now creaming off approximately %40 of all corporate returns world wide. Not bad money for nothing. You can listen to Paul Wolley’s speech on Radio National about a year ago to get some idea of the problem. He suggests there has been a market failure on a massive scale. The URL is:


    But bad behaviour from b(w?)ankers isn’t new. I liked Edna Carew’s book ”Westpac: the Bank that Broke the Bank” has a encellent read about the antics of one of the local banks during a similar period of deregulation to that has recently taken plance in the USA. The names and place change but the behaviour doesn’t. The following is the URL to a review of the book in Quadrant.


    The latest banking fiasco in it GFC clothing probably was caused by the excess of funds that these guys were able to get their hands on because of the mercantile trade policies of the East Asian economies and the resultant carry trade. But if history teaches us anything at all it is that these guys (bankers) require constant adult supervision. If this is present they have the capability to destroy large parts the economies productivity.

    Given the large number of people currently relying on the financial sector to feed their families, I suspect that there will be must distress winding back the resources currently appropriated by this sector for it current 40% of corporate returns to a more reasonable 10%. This apparently is what it was 40 years ago.

  42. Bruce Littleboy
    March 25th, 2009 at 13:30 | #42

    Btw, autarky also works fine if you invade places that have what you need but don’t have. Trade then becomes both efficient and internal.

    It is interesting that “The Church” got into almost everything (education, politics, charity, building, wealth accumulation) — except banking.
    I suppose they got anti-usury more from the Old Testament, as did Islam pretty much.

  43. PeterM
    March 25th, 2009 at 15:51 | #43

    My appologies.

    The last sentence of the 2nd last paragraph in posting 41 should read:

    “If this is NOT present they have the capability to destroy large parts the economies productivity.”

  44. Ubiquity
    March 25th, 2009 at 16:21 | #44

    Every single set of new regulations that arise will always result in the evolution of a mechanism to evade them by those who are affected
    by those regulations. (yep verbal logic).

    So go ahead and fight the bad guys with carefully crafted regulations, but the cracks will open up again. An analogy to this is the never ending battle between antibiotic development and the creation of ever more resistant bugs .

    So the first question is can we carefully craft regulations that ultimately solve the problems of our financial industry ? answer not yet .Will they prevent actions to evade those regulations ? unlikely. If so at what cost to our freedoms does this come ? for those who care. Finally is there another way to elliminate all those evil greedy desires ?

    But wait here is a solution expressed by G.O

    “In 1984, Winston Smith lives in London which is part of the country Oceania. The world is divided into three countries that include the entire globe: Oceania, Eurasia, and Eastasia. Oceania, and both of the others, is a totalitarian society led by Big Brother, which censors everyone’s behavior, even their thoughts. Winston is disgusted with his oppressed life and secretly longs to join the fabled Brotherhood, a supposed group of underground rebels intent on overthrowing the government. Winston meets Julia and they secretly fall in love and have an affair, something which is considered a crime. One day, while walking home, Winston encounters O’Brian, an inner party member, who gives Winston his address. Winston had exchanged glances with O’Brian before and had dreams about him giving him the impression that O’Brian was a member of the Brotherhood. Since Julia hated the party as much as Winston did, they went to O’Brian’s house together where they were introduced into the Brotherhood. O’Brian is actually a faithful member of the Inner-Party and this is actually a trap for Winston, a trap that O’Brian has been cleverly setting for seven years. Winston and Julia are sent to the Ministry of Love which is a sort of rehabilitation center for criminals accused of thoughtcrime. There, Winston was separated from Julia, and tortured until his beliefs coincided with those of the Party. Winston denounces everything he believed him, even his love for Julia, and was released back into the public where he wastes his days at the Chestnut Tree drinking gin”

    The drift to a totalatarian world is not as unrealistic as it seems. All you need is a institute of a science (the new god) that makes sure the right numbers are presented to the civilians and the suppression of dissent (and independent thought) through state controlled compulsory education systems and thought(=religious) police and the world would be perfect in every way.

    You may call the above an extreme example, but sometimes extreme examples can make a good point. Just asks the climate change advocates. They are called “climate alarmist” by some

    Personally I think the “motherload” type regulation most of you assert that is required to make the world a fair place is a dream, completely unrealistic, and unlikley to work as well as you think.

  45. Michael of Summer Hill
    March 25th, 2009 at 16:46 | #45

    John, the latest info suggests the US is in a really big poo for the Federal government has since December 2007 only spent $2.7 trillion of the allocated $12.9 trillion to rescue the economy. God help America.

  46. smiths
    March 25th, 2009 at 16:49 | #46

    It is time the government realizes it has two simple options: tightly regulate entities that are too big to fail or break them up so they aren’t.
    Eliot Spitzer

    ha, what does he know, these companies are very well regulated i was told …

  47. smiths
    March 25th, 2009 at 16:59 | #47

    the paradox at the heart of this ostensibly clever and undoubtedly complex plan is its dependence on subsidies to private investors

    this statement comes from a Financial Times piece on ‘the new plan’ – clever (you gotta love that sort of clever eh?)

    anyway, apply this statement to the free market in general and you’ll find it fits just about everywhere …

    clever is creating a global casino where the big players have heads they win, tails we lose kind of odds,

    and everyone thinks they are mismanaging the bailout …

    this is what you call, a killing joke

  48. March 25th, 2009 at 17:19 | #48

    Bruce Littleboy wrote ‘It is interesting that “The Church” got into almost everything (education, politics, charity, building, wealth accumulation) – except banking’.

    That depends on your definitions of “Church” and “banking”. Certainly the mediaeval military orders like the Templars and the Knights of St. John were involved, although more like pawnbrokers than true bankers.

  49. David Booth
    March 25th, 2009 at 17:23 | #49

    John, what is the thinking about the new bail out devised by Geithner? It seems to me to be adding a new type of junk derivative to a market that failed due to exactly the type of derivative they now propose. Are we blindly following the wrong the wrong US style solution? Is Britain stoney broke after all their bail outs?

  50. smiths
    March 25th, 2009 at 17:30 | #50

    at times the church got too far into banking,

    have a read about roberto calvi and the vatican bank

    his demise was a symbolic display of some sort

  51. SeanG
    March 25th, 2009 at 18:10 | #51

    Socrates @ 35 –

    The CDO and CDS market were designed to diversify risk. It allowed banks, hedge funds et al to then take on more risk. Take a step back and look at the issue. The products are not individually to blame but the increase in systemic risk that they helped cause.

    Mohammed El-Erian wrote “When Markets Collide” which is a very good primer for looking at this whole issue from a macro POV. The issues regarding savings in Asia flowing into the west.

  52. Oldskeptic
    March 25th, 2009 at 18:44 | #52

    SeanG: the CDS market was a casino. It was not insurance, it was not regulated, you could (and it happened) take out a CDS on another organisation’s bonds. You could apparently bet on just about anything, even credit re-grades. Heck if the market had continued for long enough there would have been CDS’s issued on 2 flies crawling up a wall.

    Bit like taking out life insurance on someone else. And just like that example the temptation to game the system and make a default/regrade/etc happen was irresistable.

    There was no insurance accouting (e.g. estimate costs, have sufficient reserves, etc, etc). It was opaque, there was no clearing house. Heck you have to even question the legality of at least some of the contracts (I’m sure the court cases will go on for decades). And there is still trillions outstanding in contracts at this very moment.

    So the problems are more than just increasing and ignoring systemic risk, the actual contracts themselves were rediculous and should have been illegal right from the beginning.

    These, and other reasons, are why I personally advocate cancelling the whole market (note Scholes agrees with me). Announce (with due secret preparation of course) that at 12:00 GMT on x date all CDS contracts are null and void.

    Then on a following period, send in the police (in every country) to shut down every hedge fund.
    Get some use out of all that ‘national security’ powers and legislation that every Govt has now.

  53. Alice
    March 25th, 2009 at 18:47 | #53

    Sean G at 33 says
    “The Japanese Government (which you conveniently ignored) spent trillions of yen on white elephant projects and bailouts – Keynesian policies in action and nothing gained.”

    Sean, better the white elphant fiscal projects thanks than the massive monetary bail outs of banks (the latter hardly a Keynesian remedy – the tax handout to individuals is as close as you will get to a Keynesian remedy – these massive liquidity injections are being pumped straight in at the top and not being lent (just held so they can use it takeover other banks or businesses that fail later ie a profit making opportunity, a “cash in on the crisis” opportunity) IF anything the monetary bailout is closer to the last resort Monetary policy remedy (dont intervene but if you have to it should be Monetary policy) – but for a last resort style monetary intervention its been rolled out pretty damn fast which a) kills that idea and b) just makes me skeptical that the large financial moguls have more say than Keynesian policy or MOnetary or any other economic idea in this mess.

    Futhermore, for an intervention that is supposedly designed to protect free markets (cough loudly)…. if individual freedom of choice was really what mattered the Obama admin with the agreement of MOnetary Policy and monte pelerin style advocates would have put the monetary bailout straight into individuals hands and let them choose. Isnt that what matters? The individual and his freedom to choose? (Cough loudly again)

    The whole thing is a joke, not a bailout, not a Keynesian remedy and nor if you subscribe to the spin is it a free market remedy. Its a handout to banks so they get away with minimum losses and unemployment (labour) – and small business (too small to object) bears the cost, like it always is in these collapses.

    Power gets protection and hides behind ideology. Its a sham.

  54. Alice
    March 25th, 2009 at 18:54 | #54

    Plus they are making the bad mistake that people will actually want to take on loans right now. Better the government does for its building because not may other people will want to. When inflation rises next because of the value of the US dollar plunging – the interest rates will kill people off.

    These massive monetary bailouts are a damn waste of firepower.

  55. Alice
    March 25th, 2009 at 19:02 | #55

    What happens next – the US dollar plunges – how about all those countries still sitting on US dollar reserves?? (like China – it wants a new reserve currency). So the money bailout depresses the USD and then does everyone else sell into it? Maybe the US should resign as reserve currency to maintain some dignity ??? (before there is a forced redundancy). Inflation runs wild in the US?

  56. Alice
    March 25th, 2009 at 19:25 | #56

    oldskeptic – you are so right. The insolvency lawyers and accountants arec already raking it in…as we speak. The court cases will feed sectors of the legal industry for years. Shame so few legal firms are public companies……nothing nicer than a partnership in times like this.

  57. Alice
    March 25th, 2009 at 19:49 | #57

    Peter M #41
    Oh just what I suspected(the rentiers in action and getting away with it.)

    You said
    “But if history teaches us anything at all it is that these guys (bankers) require constant adult supervision. If this is present they have the capability to destroy large parts the economies productivity.”

    I presume you meant “not present.” Its what has been missing (but where are the adults ????- if there can be a slip of the first draft of the bailout legislation for AIG between getting to congress – that enabled AIG to give those bonuses out who did it (the damn amendment – the late, last minute amendment)?

    Who slipped the legislation amendment in? Who understood it (the late amendment)? Probably only AIGs and Goldman. Who advised the amendement (answer – same as prior question). Who slipped the pen? (Geithner). On whose advice (PPS – same?).
    Who is running who and what? (govt or financial moguls).??

    I am more than cynical.

  58. SeanG
    March 25th, 2009 at 20:06 | #58


    Tthe CDS market is insurance. Insurance is about probabilities that an event or payoff will occur. Whether you want to compare it to a casino is not a bad description.

    However, the CDS market was efficient when the nominal value was $2 trillion (the netted value is considerably lower than that). The problem is excessive use. If you have a CDS taken out over a CDO for instance, then if the CDO blows up and the CDS comes into force then there must be systemic problem because the CDO is a collection of debts from multiple sources that must be in serious problems.

    The questions regarding legality are going to be the next big issue because banks, insurance companies et al have poor documentation so these things, if tightened, will flow through to the front office traders who will not be allowed to execute those trades once the details are known (credit sanctioning committee will restrict them).

    Alice @ 53,

    This is fundamentally a monetary issue. If we do not clear the system of bad debt then no amount of fiscal stimuli will ever work. I cannot understand why you jump to such irrational opinions (re: my view of the market) but bailouts will be necessary as well to create stability. Once these are established then reduced interest rates will flow into the economy and fiscal measures will have a greater impact.

    That is one reason by the Keynesian-inspired fiscal measures taken in Japan never worked. Have you ever read Keynes?

    One other thing – AIG is an insurance company, not a bank. That makes it’s actions worse because it has a duty to manage the premiums prudently while investment banks can be the cowboys.

    Quick question – have either Alice or Oldskeptic worked in the finance industry?

  59. Alice
    March 25th, 2009 at 20:09 | #59

    Sean – dont give me “irrational”. You just stick to your dream – you need to keep people thinking your industry is OK. Thats fine but its not.

  60. Alice
    March 25th, 2009 at 20:14 | #60

    Oh and they didnt even get the fiscal guns out until the interest rates were close to zero in Japan anayway – and MP hadnt worked…Sean go read history. You are starting to annoy me. You work in the finance industry – you are duty bound to maintain confidence. Its a prerequisite of your employment. Its self interest. Its not fact. The finance industry has become the new rentier class of aristicrats – no better, no worse than any other class of manipulative rentiers.

  61. Alice
    March 25th, 2009 at 20:17 | #61

    Oh and lets talk about the ratings agencies shall we?
    Aig says “you guys at S&P – we want this crap we are bundling and selling – CDOs – rated AAA??? Is that Ok with you? because if it isnt Moody’s gets our business. Do we make ourselves clear???

    S $ P responds “crystal. AAA – no problem.”

  62. Alice
    March 25th, 2009 at 20:21 | #62

    The trouble with a free market is anything can be had for price, even lies.

  63. TerjeP (say tay-a)
    March 25th, 2009 at 20:30 | #63

    In a communist nation with no free markets anything can be had for a price also. The fact that everything has a price is not a product of freedom. It is a product of human values and priorities.

    Of course the term free markets generally implies a reasonably black and white set of rules in relation to property. So one should not use the term “free markets” as a euphemism for chaos.

  64. Alice
    March 25th, 2009 at 20:39 | #64

    And Sean

    For such a deregulation no governemnt intervention proponent your hypocrisy is amazing….but not unexpected.

    “but bailouts will be necessary as well to create stability.”

    Wow. Am I surprised? No. Government intervention when it suits your interests in the finance industry in which you are productively employed, but no government intervention when it suits the finance industry’s need to gamble, extract profits from productive industry and maintain their mandarin status over all it reigns…at the peak of flogging CDOs..

    Hypocrisy with a capital H Sean. Its a good thing Oldskeptic and I dont work in the finance industry. Kid, we can both tell it to you like it really is…something you are unlikely to get from your employers.

    Your choice to battle against the evidence but in terms of economic health, who are you really helping – the rentiers or the producers?

    You dont need our views Sean. They may help you in the long run but not now, in the short run. We dont need your views either Sean. We arent interested in financial sector recovery (and we dont rely on the industry to feed us) to its peaks of the recent short run – overinflated and speculatively priced.

    We have quite different objectives you see..

  65. Alice
    March 25th, 2009 at 20:41 | #65

    The Terje

    Please explain how the property rights are enforced in a free market?

  66. Alice
    March 25th, 2009 at 20:47 | #66

    Is it with a gun that property rights are enforced in a free market (after all private negotiations have failed)???

    No one has quite explained to me who the enforcing body of law is in a free market?

    How is peace and order kept? The government? Pricate security firms ( if you are rich enough to pay for mercenaries?)

    Or what?

    Private what keeps the peace??

    Private lawyers ? (if you can afford them?)

    Looks like a recipe for a bloody civil war to me.

  67. Smiley
    March 25th, 2009 at 20:57 | #67

    Sure the people who took out the home loans did not take on the risk, but other banks and investment vehicles such as hedge funds were sold the risky debt. The originators were not forced to wear at least some of the risk that they created.

    There were a lot of naive people who were sold loans that they did not understand – (both investors and borrowers). I heard stories of people who believed that they would be paying the teaser rates for the life of their loan, and would pay off their home loans in 20 or 30 years. They had no concept of what negative amortisation meant, and they had no idea that the interest rates on their loans would reset.

    It was the height of irresponsibility on the part of the mortgage brokers, bankers and regulators to allow people that ill-informed to take out historically extravagant loans that they clearly did not understand.

    So in summing up I think some sort of regulation that forces mortgage originators (including mortgage brokers) to wear some of the risk that they create, seems like a good idea.

  68. Alice
    March 25th, 2009 at 21:21 | #68

    And i heard of people who were “prime loans”m converted by salespersons to “subprime” because the (exploding arms) nature of the interest rate re sets would make the financial firm sellers more (which the buyers did not understand).

    Its Amadios case in law – selling sophisticated loan structures to people who just didnt understand (and probably were not meant to understand…accidentally on purpose…it was all in the fine print which no one can understand).

  69. Alice
    March 25th, 2009 at 21:24 | #69

    I dont beelive loan customers were that “uninformed” either (of their own nature – ie were not intellectually challenged) Smiley. I believe the commissions being paid to mortgage brokers gave them incentives “not to inform” and to “hide the facts” in small print (very small if at all).

  70. Smiley
    March 25th, 2009 at 22:08 | #70

    Alice, from their own statments I believe that some sub-prime mortgage holders had been explicitly lied too. However, I believe that a majority of them were not sophisticated enough to even ask the right questions.

    Actually it reminds me a bit of the situation with Storm Financial. In a recent story on the 7:30 Report, one investor claimed that he had asked a broker if he could lose his house and he was assured by the broker that that could not happen. I guess that’s the risk you take when you rely on a verbal statement from someone in the finance industry.

  71. Ubiquity
    March 25th, 2009 at 23:36 | #71

    Maybe useful to some.


    It does neglect to link in the moral hazard of easy credit as a result of loose monetary policy.

  72. TerjeP (say tay-a)
    March 26th, 2009 at 00:32 | #72


    A free market is simply a market where exchanges are conducted free of coercion (whether from government or otherwise). It is a place where people exchange things freely as opposed to exchanging them in a context of coercion.

    A free market is an idealisation that will never exist but it is a useful relative term. We can talk of one market scenerio being more free than another. And you might rightly argue that minimising coercion within a market might require some degree of functional government.

    In the real world in which we live there is no such thing as a perfectly free market, just as there is no such thing as a perfectly round wheel. However it is still quite reasonable to say that things might travel better if a particular wheel was rounder or a particular market was more free, especially so if you articulate specifically how the wheel might be made more round or the market more free.

    You asked how property rights are enforced in a free market. This is a somewhat problematic question because free markets are without coercion by definition so defending yourself against those that would acquire your property in an unfree manner is unrequired by definition. However given that free markets are merely an idealisation we might ask what circumstances allow us to approximate a free market. The usual position of free market advocates is that a sound framework of property rights needs to be enshrined in law and defended by the judicial branch of government. However they would also note that governments, particularily the executive branch, often turn predator. So the question is then about how can we achieve the benefit of a government, that we see as necessary to provide an approximation of a free market, whilst not suffering at the hands of a tyrant. And the usual answer lies in systems of limited government (ie government which is constrained). The first and most obvious restraint being the rule of law.


  73. Michael of Summer Hill
    March 26th, 2009 at 15:05 | #73

    John, today it was reported that Defence is investigating the Fitzgibbon spying case, but something sounds fishy. Defence Signals Directorate conduct intelligence on a daily basis and the collated information is analysed and assessed for security risks and reports passed on. But in this case ‘if’ it is found that a classified document has found its way into the public domain then those involved, be it in Defence, the public service and/or a member of parliament caught up in the scandal have not only abused their powers and office, but were involved in the commission of a crime.

  74. Alice
    March 26th, 2009 at 21:13 | #74


    What on earth is going on in defence? Its so strange…could it be they just dont like the reforms? Could it be there were elements too attached to the large budgets under the prior government? Could it be the top brass need a clear out or could it be that top brass dont like taking orders from someone who seems to have been receiving large donations from a Chinese property developer. I will suggest the Labour Party in NSW, but Im less certain at federal level are too close to developer donations (both parties too close to influence of donations) and NSW Labour needs an updated broad spectrum anti corruption disinfectant.

  75. March 26th, 2009 at 22:11 | #75

    I agree with TerjeP, except where he/she says:

    “A free market is an idealisation that will never exist … [because] …free markets are without coercion by definition so defending yourself against those that would acquire your property in an unfree manner is unrequired by definition.”

    A free market can exist, where coercion (by theft or fraud or governmental force) is banned. The fact that the process of banning force involves the use of force doesn’t negate freedom. You don’t infringe political and economic freedom by using (retaliatory) force to defend yourself against (initiated) force.

    How can force be banned? By subordinating ones right to defensive retaliatory force to the government. As TerjeP says, this involves: “a sound framework of property rights … enshrined in law and defended by the judicial branch of government.” But since “governments, particularily the executive branch, often turn predator… a systems of limited government (ie government which is constrained)” is required. “The first and most obvious restraint being the rule of law”, within a constitution, protected by checks and balances.

    First, however, we need to ensrine the moral/political principle that we each have the right to our own life, liberty and property, for use as we see fit, in pursuit of our own (greedy) happiness – no one has a right to take by force one hour of any innocent citizen’s life nor one dollar from his pocket. In other words we must reject slave-master, or parasite-host relationships, and approach each other as free traders.

  76. Michael of Summer Hill
    March 27th, 2009 at 13:25 | #76

    John, I don’t buy the denials and conflicting messages coming out of the intelligence community concerning the Fitzgibbon spying case. My nose tells me that the airing of the case may have compromised an ongoing investigation.

  77. El Mono
    March 28th, 2009 at 14:57 | #77

    I am someone who is quite pro free trade, though i think using the Burma, North Korea as examples against autarky is fecicious. There are clearly a few other things wrong with the way those nations are governed.

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