Home > Economics - General > We are all Melmottes now

We are all Melmottes now

January 9th, 2010

Hot/cold on the heels of Iceland’s quasi-default, the Roger Lowenstein in the NY Times urges underwater/negative equity homeowners to “Walk Away From Your Mortgage!”. . Lowenstein’s key point is that businesses (including those owned or controlled by the banks themselves) treat default as a straightforward business decision, to be adopted whenever it is profitable to do so. Lowenstein gives a number of examples where leading banks like (inevitably) Goldman Sachs have engaged in strategic default and urges his readers to do likewise. The piece is in a section headed “The Way We Live Now” and it’s striking that it’s taken more than 100 years for the business ethics of Augustus Melmotte to percolate through to the American middle class

To be fair, it’s only in the last thirty years or so that such ethics have become dominant in the corporate sector, to the point where a board that rejected profitable opportunities to stiff their creditors would now be regarded as having violated its fiduciary obligations to shareholders (particularly if the creditors are workers). And despite all the talk about shareholder value, a CEO who passed up opportunities for personal enrichment at the expense of shareholders would be regarded by his or her fellows as a mug.

Millions have defaulted already – (one in eight mortgages is currently in arrears). Bankruptcy is once again as common as divorce. When defaulting on debt is this common, it is hard to sustain any sort of social stigma or internalised notion that this is anything other than a financial option, like refinancing an existing loan. And, as with divorce, we must soon be reaching the point where most people who take out loans will do so in the knowledge that default is an option.

The question is – can the consumer credit system survive this? Probably it can, but the system will need some radical changes. It’s worked for several decades on the basis of creditworthiness criteria that work on the assumption that (nearly) everyone will repay their debts if they can. Until recently, the checks could also rely on the assumption that people would be more-or-less honest in the information they provided in their applications. The financial system, by promoting ‘liar loans’ colluded in the destruction of the second assumption, and by leading the way in strategic default, helped to destroy the first.

The problem for lenders now is that they will increasingly have to act on the assumption that their borrowers (including those who appear creditworthy on the old standards) are planning, at a minimum, to use default as an insurance option. The only good way to protect against this is to demand lots of secure collateral. That means less liberal credit (and, given higher default rates, higher interest rates) for everyone and no credit at all for lots of us.

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  1. January 9th, 2010 at 12:58 | #1

    My thoughts exactly. This could only lead to more bank failures, and dropping home prices. The victims here will be the prudent savers of the failing banks and even more home owners, who will also become underwater borrowers as a result. I don’t know why smart and otherwise reasonable people are extolling this as a serious option for borrowers. they should be going after the guilty banks and complicit regulators instead.

  2. TerjeP (say Tay-a)
    January 9th, 2010 at 12:59 | #2

    Surely this is of relevance to Americans, but Australians can not walk away from their debts so easily. I suspect this is part of why our credit markets are more stable.

  3. Alice
    January 9th, 2010 at 12:59 | #3

    Maybe if credit is a little tighter we will have a few less banks and banks will be less willing to speculate. Maybe its the clean out we need of an industry that has come to dominate many other sectors?

    I cant see any bubble in history that didnt end up with the banks owning something, other than money, something they didnt necessarily want. I recall reading that the banks ended up owning three quarters of the wool clip in Australia after the 1890s crash, due to defaults on mortgages taken out for pastoral construction expansion. Similarly, the greatest default amount after the 1929 crash was residential mortgage defaults. Residential mortgage defaults in the US must flow into credit agency defaults.

    The question is, who is left holding all those devalued properties after the wash out?. The banks or mortgage insurers. Either way the costs of credit seem likely to grow.

  4. Alice
    January 9th, 2010 at 13:00 | #4

    @TerjeP (say Tay-a)
    Terje – do I find you supporting regulation in your comment at 2? First time for everything I suppose!!

  5. January 9th, 2010 at 13:23 | #5

    Pr Q said:

    The question is – can the consumer credit system survive this? Probably it can, but the system will need some radical changes. It’s worked for several decades on the basis of creditworthiness criteria that work on the assumption that (nearly) everyone will repay their debts if they can. Until recently, the checks could also rely on the assumption that people would be more-or-less honest in the information they provided in their applications. The financial system, by promoting ‘liar loans’ colluded in the destruction of the second assumption, and by leading the way in strategic default, helped to destroy the first.

    I am not so sure that “the financial system…lead the way in strategic default”. The practice seems to be pretty common amongst the financial populus in Main Street, they did not need much prompting from financial elites of Wall Street.

    My knowledge of US commercial practice is a bit hazy. But I understand that they have a system of no-recourse loans. This led to the practice of “jingle mail” as property owners with negative equity returned the keys to the lender, leaving the lender (or securitizer) to bear most of the losses (given low or no deposit).

    Australia, by contrast, appears to have much more stringent credit practices. This is surprising in a way, because one assumes that the US would be more vigilant in the enforcement of contract performance.

    Australian lenders who default are forced to carry their unpaid mortgage like an albatross hanging around their necks until they or the mortgage is finally amortised. And this practice seems to have worked much better in making lenders more wary about giving free and easy credit and forcing borrowers to live up to their obligations. Which generally acted to curb walk-away fire sales of distressed mortgagees.

    But all this shows is that stricter regulation, whether moral or legal, is required to make the capitalist contractual system work properly. Such regulation must be in some way altruistic – requiring the all parties to sacrifice their immediate interest for the long term welfare of the group.

    This is the moral paradox of capitalism identified by Weber and Durkheim. The altruist ethic that is needed to ensure contracts are undertaken in good faith and honoured is obviously at odds with the “greed is good” ethic predominant on both Wall Street and Main Street. But unlimited greed winds up consuming the social capital that actually underlies the capitalist system.

    It is striking that just at the moment when some Christian forebearance and self-restraint is most required we see a massive upsurge in atheistic liberalism. How ironic is it that such medieval virtues with their archaic quasi-religious flavour are essential for the most sophisticated systems to avoid panic and chaos.Or perhaps not ironic at all, but rather predictable.

    *

  6. boconnor
    January 9th, 2010 at 13:34 | #6

    Jack Strocchi :

    This is the moral paradox of capitalism identified by Weber and Durkheim. The altruist ethic that is needed to ensure contracts are undertaken in good faith and honoured is obviously at odds with the “greed is good” ethic predominant on both Wall Street and Main Street. But unlimited greed winds up consuming the social capital that actually underlies the capitalist system.

    Interesting thoughts. But I’m not sure that the basis for ensuring contracts is altruistic. If I lend money, then its in my personal financial interest that the borrower pays me back and that I can trust him/her to do so. Similarly, it is not for altruistic reasons that I might borrow money from a lender. Instead, I do so because I want to further my personal material objectives. That is, both parties act in good faith and honour the deal in order to further their (mutual) self interest (greed?), not for altruistic reasons.

  7. January 9th, 2010 at 13:55 | #7

    I’m not sure widespread ‘Melmottism’ – will lead to ‘radical’ changes in the credit markets but I agree with your sketched anticipation of what will happen. Most people have assets to lose so life will go on pretty much as is in Australia.

    But just thinking about it, I can think of two possible consequences.

    1) those who need capital will find it harder to get it. Where they might want to increase their leverage from say an 80% loan to valuation ratio to 90 or 100% it will be more difficult. Not sure that’s a bad thing however . . . . It’s how things used to be under post Bretton Woods financial regulation which seemed to banish financial crises in developed countries for a time.

    2) one of the important functions of the capital market is to get money to people who have none so they can invest it and return it with interest. Thus young families (sorry WORKING families) and those who come from the wrong side of the traps but who have an idea and a passion to do something entrepreneurial. Coping with widespread Melmottism will starve these people of capital that. This will reduce efficiency and more importantly social equity, though in the latter of these cases, the financial sector never coughed up much for entrepreneurs with a few ideas and no collateral anyway.

  8. January 9th, 2010 at 14:32 | #8

    Hi John,

    Not knowing who the hell Melmotte was, I followed your link. I wonder if Oscar Wilde’s assumed name in France – Sebastian Melmoth – was intended as any kind of reference?

  9. January 9th, 2010 at 14:45 | #9

    boconnor@#6

    But I’m not sure that the basis for ensuring contracts is altruistic. If I lend money, then its in my personal financial interest that the borrower pays me back and that I can trust him/her to do so. Similarly, it is not for altruistic reasons that I might borrow money from a lender. Instead, I do so because I want to further my personal material objectives. That is, both parties act in good faith and honour the deal in order to further their (mutual) self interest (greed?), not for altruistic reasons.

    The basis of any given contract is no doubt egotistic. But the basis of faith in the contractual system must be altruistic.

    The idea that preserving a man’s reputation is in his self-interest has taken a beating in the era of Paris Hilton, Harry M. Miller et al.

    Its always possible for a rational egotist to get a better deal by cheating on any given contract. As proven by the “Prisoners Dilemma”. See the better part of lower Manhattan, Canary Wharf and Pr Q’s literary allusion for contemporary example. Although the rawest example of how the destruction of altruistic trust can wreck capitalism is post-Soviet Russia.

    Liberal social (and biological) scientists has no solution to the Prisoners Dilemma so have to resort to various fictions (like the Leviathan and Social Contract) to account for the fact that people do indeed do nice things for un-selfish reason. This shows the weakness of the individualist “volutionary”, as opposed to group evolutionary, method of analysis.

    But in fact the natural history of families, faith and fatherland shows how the evolution of common feeling for ones fellows can lead to the establishment of a consenting capitalist contractual society. The circle of trust spreads outwards through trade (catallaxy) so long as people feel that they are not going to be screwed on the deal.

    But we post-modern liberals have spent the past generation trashing and dissipating the social capital handed down to us by our ancestors. Its great sport to make fun of clergymen and shoolmasters but they come a heck of a lot cheaper than lawyers and auditors.

    Liberals will have to rebuild institutions that foster self-sacrifice and trust. But now they have put obstacle in their own way by making their first order of business the destruction of the Christian religion which was one of the pillars of the trust building business.

    The alternative will be the PRC’s illiberal (“corporal”) Leviathan method of direct state command and control. Good luck with that for those wanting liberation from constraint.

  10. gerard
    January 9th, 2010 at 15:32 | #10

    But in fact the natural history of families, faith and fatherland shows how the evolution of common feeling for ones fellows can lead to the establishment of a consenting capitalist contractual society.

    That’s a nice bit of alliteration Jack, and an interesting take on history, in which a “common feeling for ones fellows” lay dormant in the human race until fortuitously appearing in north-western Europe in the eighteenth century, no doubt owing to the marked strengthening of clerical influence around that time. Perhaps if aboriginal society hadn’t been so individualistic they might have prospered in a similar way.

  11. January 9th, 2010 at 16:36 | #11

    Deleted – see Windschuttle post for policy statement on this: JQ

  12. Freelander
    January 9th, 2010 at 18:43 | #12

    Although the collapse of Iceland might not have demonstrated that capitalism is inherently flawed, its collapse and the defaults that have been brought upon US homeowners show that the neoliberal brand of capitalism, what could probably best be called F U economics, is fatally flawed and this will hopefully mean we never see that variant again. Although I think, probably, it will not. People forget, and after a while snake oil is simply rebottled and drunk with the refrain, “This time its different”.

    Those who have been drawing the largest salaries for the last 30 years have been practicing F U economics in its hardest and purest form. Each of them thinking they are “the motor of the world”; the Atlas that might choose to shrug. They have been plundering the corporate sector for fun and profit, and setting things up so they walk away unscathed from any downside they create. The beauty of linking bonuses to options, that were never deserved and that were on top of a salary that more than compensated their efforts, is, of course, that there is no downside – something missed by the PC’s recent report. Given that behaviour, it is a bit rich for any of their number to bemoan that the middle class is now adopting their ways. Of course, the middle class in choosing to take the bankruptcy option in preference to paying all their debts have not been clever enough to escape unscathed.
    If they had been that clever and unscrupulous, those poor sods would have already risen further than the middle class.

  13. January 9th, 2010 at 18:52 | #13

    “The only good way to protect against this is to demand lots of secure collateral. That means less liberal credit (and, given higher default rates, higher interest rates) for everyone and no credit at all for lots of us”.

    Surely the market solution is to give people the choice of different sorts of liability options. I don’t know if this is legally possible in the US but you should have the chance of offering to honor the debt and pay a lower interest rate.

    There seems nothing inherently wrong in forcing the lender to bear some share of the risk involved in borrowing against uncertain asset values. Isn’t that the idea of ‘interest free’ Islamic finance.

  14. January 9th, 2010 at 19:24 | #14

    I have some ideas on that.. but they are a bit too heretical for most

    http://dissention.wordpress.com/2009/12/21/alternative-view-on-money-03/

  15. Alice
    January 9th, 2010 at 20:55 | #15

    Ok- Im placing my bets on Augustus Melmotte, a character from an 1870s satirical novel called “the Way We Live Now” by Anthony Trollope (considered his finest work)!! It was inspired by the financial scandals of the 1870s. It lashes out against the pervading commercial, political, moral and intellectual dihonesty of the age..

    Now this IS starting to ring a loud bell…a big ben actually

    Augustus Melmotte is a foreign born financier with a mysterious past….

    and the rest of you find out what he does!

    Id say Augustus lacks a ethics and morals and is a polished foreigner with a handlebar moustache and a reasonable amount of charm with the ladies and a good story or two… but its just a guess…

  16. Ernestine Gross
    January 9th, 2010 at 21:13 | #16

    Oh no, Alice, I beg you to have compassion – or have you not come to the end of the story. Consider, if Augustus only had had the benefit of Gen Fama’s teaching, inbetween a bit of windsurfing, he might still be alive!

  17. Alice
    January 9th, 2010 at 21:17 | #17

    @Ernestine Gross
    And a six pack …(which I gather is the new expression for an arrangement of well worked pectoral and abdominal muscles…)

    but alas Ernestine…poor Melmotte is not still alive and he wasnt by the end of the story!

  18. TerjeP (say Tay-a)
    January 9th, 2010 at 21:58 | #18

    Alice – I’m not sure what in my comment you took as advocacy for regulation. However I am curious to know.

  19. hail satan
    January 9th, 2010 at 23:56 | #19

    @Jack Strocchi

    You might be interested to know that Christian forbearance and blah blah blah in the United States is associated with laxer regulation of the old midieval concept of usury, resulting in pervasive predation by payday loans in the South. Fundy politicians lots of campaign money from the loan sharks. Presumably by atheistic liberalism you mean ethics, which, as any devout Christian here will tell you, are pointless because Jesus loves you or something. Thanks, though, for injecting ignorant bigotry into a straighforward commercial issue.

  20. molecule
    January 10th, 2010 at 01:59 | #20

    @Nicholas Gruen

    “Thus young families (sorry WORKING families) and those who come from the wrong side of the traps but who have an idea and a passion to do something entrepreneurial. Coping with widespread Melmottism will starve these people of capital that.”

    No it won’t. Interest rates charged will be higher. This ensures a high return on investment. No one will borrow for marginal projects. This is a good thing. Buffet charges Berkshire Hathaway subsidiaries a high rate for just this reason.

  21. rd
    January 10th, 2010 at 02:23 | #21

    In the US mortgages are typically non-recourse, can’t be modified in bankruptcy proceedings, and the bankers are almost incapable of renegotiating them on their own.

    This leaves default and foreclosure as almost the only rational alternative for an individual if they are severely underwater.

    If the banks don’t want this, then they need to show much more willingness to renegotiate terms of mortgages where it would be rational for the mortgage holder to walk. The reason that businesses view bankruptcy as a viable option is because it can give them clout over their creditors so that negotiations become a two-way street. Why should individuals not be able to structure the same level of clout as companies?

  22. Ernestine Gross
    January 10th, 2010 at 05:06 | #22

    rd, If the USA would be a closed economy (no borrowing from outside) then individuals and companies in the USA could go into bankruptcy as often as they consider ‘rational’. But, the USA is not a closed economy.

  23. DownSouth
    January 10th, 2010 at 05:46 | #23

    Jack Strocchi :Pr Q said:

    This is the moral paradox of capitalism identified by Weber and Durkheim. The altruist ethic that is needed to ensure contracts are undertaken in good faith and honoured is obviously at odds with the “greed is good” ethic predominant on both Wall Street and Main Street. But unlimited greed winds up consuming the social capital that actually underlies the capitalist system.
    *

    There has been a revolution in the fields of neurobiology and psychology in the last decade or so.

    Just as it was a new instrument—the telescope—that led to the undoing of much of Christian mythology, it appears it will be new instruments—for instance those that allow us to measure fMRI in real time—that will lead to the undoing of much of the mythology of the Age or Reason.

    The infamous Cardinal Bellarmine, who prosecuted Galileo in his heresy trial of 1615, has found his modern-day twin in New Atheists like Richard Dawkins. When invited by Galileo to look through his telescope to see for himself, Bellarmine is reputed to have refused, saying that he had a far better source of evidence about the make-up of the heavens, namely, the Holy Scripture itself. Likewise, we find the New Atheists in a similar state of denial when they run headlong into some of the new findings of neuroscientists.

    The conception of human nature now taking form is more nuanced than the old one. As Herbert Gintis et al write in “Moral Sentiments and Material Interests”:

    “While the writings of the great political philosophers of the past are usually both penetrating and nuanced on the subject of human behavior, they have come to be interpreted simply as having either assumed that human beings are essentially self-regarding (e.ge., Thomas Hobbes and John Locke) or, at least under the right social order, entirely altruistic (e.g., Jean Jacques Rousseau, Karl Marx). In fact, people are often neither self-regarding nor altruistic. Strong reciprocators are conditional cooperators (who behave altruistically as long as others are doing so as well) and altruistic punishers (who apply sanctions to those who behave unfairly according to the prevalent norms of cooperation).”

    Nietzsche struggled with human nature at about the same time Trollope gave us Melmotte, a character who was “inspired by the financial scandals of the early 1870s, and lashes at the pervading dishonesty of the age, commercial, political, moral, and intellectual.” Nietzsche, without the advantage of modern instrumentation, figured out that the simplistic, reductionist concept of human nature embraced by orthodox psychology, biology and economics is science in the service of ideology. He evidently took his inspiration from the same sort of environment Trollope did, explained here by Jacques Barzun:
    “Nietzsche’s assault on the character of both the mass man and the intellectual conformist was launched in the 1870s and 1880s, a time when the booming of industry, the ruthlessness of capitalistic enterprise, and the ravages of renewed imperialism were at their height.”

    Nietzsche saw it as a descent into nihilism, and two world wars with the Great Depression in between seem to have vindicated his foreboding. There certainly do seem to be some kinks in the Age of Reason and Enlightenment projects—their underlying assumptions and philosophies–because we now find ourselves back in a situation not at all unlike that of Nietzsche and Trollope’s era.

    According to the new scentific theories I think we could postulate that we now ourselves in an epic struggle. We can either upright our moral ship or descend again into nihilism. Peter Turchin sums up the dynamic as follows:

    “Unconditional cooperators (altruists) are vulnerable to exploitation by self-regarding free riders. Moralistic punishers (or moralists, for short), unlike altruists, attempt to ensure that others also contribute by punishing free riders. If, despite their efforts, the majority fails to contribute to the common pot, moralists stop contributing themselves (thus, they are conditional cooperators). A moralist, thus, is a second-order cooperator because it creates public good (ensuring that all cooperate) while bearing some fitness costs (because punishment is costly). Mathematical models and experiments with real people show that when public good games are played by mixtures of altruistic, selfish, and moralistic strategies the outcome tends to one of two extremes. Either the moralists succeed in forcing free riders to contribute to the common pot, or moralists fail to do so, and then nobody contributes (except for unconditional altruists, if any are present). In other words, either the group achieves a cooperative equilibrium, or succumbs to the ‘tragedy of the commons.’ “

    This is of course a much more highly nuanced scenario than the simplistic “greed is good” and “red in tooth and claw” ideologies promoted by the New Atheists like Ayn Rand and Richard Dawkins.

  24. charles
    January 10th, 2010 at 06:05 | #24

    With the dollar collapsing the USA is pretty mush walking away from it’s debt. The corporate world has long waked away from debt, you lend to it in full knowledge of that fact. So the USA middle class is walking away as well. I doubt it will be the end of the world as we know it. It does make the financing of Australia mortgages look like a pretty good investment.

  25. Alice
    January 10th, 2010 at 06:24 | #25

    @TerjeP (say Tay-a)
    Terje – it was your comment at 2#

    You said “but Australians can not walk away from their debts so easily. I suspect this is part of why our credit markets are more stable.”

    I took your comment as an advocacy for regulation Terje because Australians cannot walk away from their debts so easily precisely because of regulation.

  26. Alice
    January 10th, 2010 at 06:27 | #26

    @TerjeP (say Tay-a)
    You see Terje – even a dedicated libertarian such as yourself slips up occasionally in reccognising the need for sensible regulation. However, this is one I dont particularly agree with strangely enough.

  27. gadubu
    January 10th, 2010 at 06:55 | #27

    I guess my feeling is that if lenders had been constrained by this perceived option on behalf of the borrower, we would not be in the situation we are in now.

  28. Ernestine Gross
    January 10th, 2010 at 07:14 | #28

    @DownSouth

    Nice post, Down South.

  29. Ernestine Gross
    January 10th, 2010 at 07:24 | #29

    gadubu :I guess my feeling is that if lenders had been constrained by this perceived option on behalf of the borrower, we would not be in the situation we are in now.

    And this gets us back to the role of the rating agencies, a recurring topic on this blogsite.

  30. Alice
    January 10th, 2010 at 08:22 | #30

    @Ernestine Gross
    I agree Ernestine…it does get us back to the hype and spin of ratings agencies…because clearly something came between expected financial institution caution and prudence and the ultimate borrower in the U.S. Ordinarily you would expect that if a risky borrower had the ability to “walk away” as they do in the US, this might actually make financial institution retail lenders somewhat more cautious? Yet, it didnt happen that way in the US did it?
    Perhaps the rapidly growing house prices there lulled all the good sense away…

    I can hear the real estate agents’ patter ….”Dont worry if things are a bit tough this year…in a year or two you will have much more “equity” in the property…but if you wait you will miss the train”.

  31. paul walter
    January 10th, 2010 at 08:23 | #31

    ” The way we live now” was gloriously adapted by the poms a few years back for teev, with David Suchet doing the lead (Melmotte). What struck me at the time was that Trollope was earlier said to be one of John Howard’s favourite writers, because it struck me how much of Melmotte’s story and Howard’s, and the whole noughties adventure, paralleled each other.

  32. Andrew c
    January 10th, 2010 at 08:38 | #32

    @downsouth

    When all your tossing around of science-y words is finished, there is still the question to be answered: ‘so where is this God person?’

    I’ll look down your microscope when you actually have some direct evidence to show me.

    And Ayn Rand a New Athiest? Somehow you seem to have forgotten to add Stalin and Mao (and that other dictator whose name can’t be written because then I lose the thread). Anybody else unpleasant you’d like to add to the list? I hear PJ Keating is one of them too!

  33. GavinP
    January 10th, 2010 at 09:27 | #33

    It is of course popular to blame the financial institutions for the excesses but might the consumer take a little blame for taking on an excessive amount of debt? OK, I know many of the mortgage loans had terms that were suspect or hard to understand but not signing a piece of paper you can’t understand should be one of life’s early lessons, no?

    For the record ‘walking away’ does not absolve you from liability in most US states. A few states may have non recourse laws which means the bank has to decide whether to take the house or pursue you but on the other hand some states also have homesteading laws which means you can file for bankruptcy but not lose your principal residence.

  34. Ernestine Gross
    January 10th, 2010 at 09:54 | #34

    @Alice

    Alice, the US based rating agencies played a role in selling their highly rated junk in the famous ‘global economy’. It seems to me to be appropriate that the US takes responsibility for the financial consequences of its legal system. How the US government is going to deal with the internal consequences of the conversion of privately generated debt obligations into public debt is its business. This is a simplified picture. Not all highly rated junk benefited US citizens and not all governments can be said to be unaware of the difference in legal systems. To this extend similar issues exist in many countries. Those who preached the native ‘free market’ economics, including ‘capital market efficiency’, might wish to show leadership in voluntarism – volunteer to pay higher taxes. The rest of the global economy is apparently in no mood to join the Melmottes.

  35. TerjeP (say Tay-a)
    January 10th, 2010 at 09:55 | #35

    Alice – no you are wrong. Australians can not walk away from their debts because of contract. Americans can due to regulations designed to protect them.

    Hail Satan – you must be joking. In the USA they are obsessed with the regulation of usury which is half their trouble. When inflation hit double digits in the 70′s the credit markets closed down in several US states because their were caps on the rate of interest you can charge and high inflation necessitated high nominal rates of interest to stop real rates going negative. But they stuck to their regulation of usury and suffered the economic collapse it ensured. You clearly speak from a position of ignorance. Our credit markets in Australia have always been less hampered that those in the US. Sure we have the four pillars policy but that is nothing compared to US reserve requirement laws, interest rate caps, branch restrictions and a muddled central bank comitted to multiple goals beyond low inflation.

  36. Alice
    January 10th, 2010 at 10:01 | #36

    @TerjeP (say Tay-a)
    Terje says “Alice – no you are wrong. Australians can not walk away from their debts because of contract.”

    I know that Terje. I nver said Australians could walk away. Read my post again.

  37. Alice
    January 10th, 2010 at 10:09 | #37

    @Ernestine Gross
    Ernestine – could not agree more with your comments “the rest of the global economy is in no mood to join the Melmottes”. The trouble is Ernestine, the Melmottes behind these CDOs and the Melmottes in the ratings agencies could be said to be hidden behind a fast moving wholesale mass production line with no lines of accountability to the ultimate borrowers or lenders….and unfortunately these Melmottes are alive and well and likely living every bit as well as before the GFC, thanks to the unsustainably indebted US taxpayers. The high priests of ‘free market’ efficiency are already damaged.

  38. TerjeP (say Tay-a)
    January 10th, 2010 at 10:28 | #38

    Alice – perhaps you can clarify things regarding your position. Which of the following do you agree with.

    1. Americans can walk away from their debts due to lending regulations. Australians can’t due to the absence of such regulations in Australia.

    2. Advocating that a regulation should be absent is not a pro regulation position.

    3. Australias credit markets are more sound in part because Australian borrowers can not so easily abandon their obligations.

  39. Lord Sir Alexander “Dolly” Downer
    January 10th, 2010 at 10:57 | #39

    Terje, I’m afraid Alice has you. The most “laissez faire”, unregulated arrangements would allow people whose house falls below the value of their outstanding debt to walk away.

    “Here’s your collateral Mr Lender, hasta la vista.”

    Banks in Australia are not allowed to enter into such arrangements. That’s called regulation.

  40. Alice
    January 10th, 2010 at 11:13 | #40

    @TerjeP (say Tay-a)
    Look Terje – Im getting a tad irritated

    My post above (at 25) was in response to your post (at 18) which was in response to my post (at 4) which was in response to your post (at No.2) .Your comment (at 2) is in inverted commas below (yes I once did the subject auditing).

    You (Terje!!!) said

    “but Australians can not walk away from their debts so easily. I suspect this is part of why our credit markets are more stable.”

    Ill let you ponder your comment again instead of continuing to completely misconstrue and misrepresent what I actually wrote. You said you were curious as to how I interpreted you as being pro regulation (at your comment 18) ? For starters I do not intepret you that way normally – you are the most dedicated deregulation devotee I know – I just caught you slipping up. Red handed. Big time. And you have slipped up in this thread with your comment above made at 2#!

    Dont try to weasel out of it by pretending you dont understand my comments Terje. I just caught you out! Not the other way round. Our Australian credit markets are more stable because of what? ….what?…..what is it that makes them more stable?? People cant walk away from their debts.

    Why not Terje? The big huge R word (that you dont normally like….). I know you dont want to say it Terje…but you sure as hell implied it.

  41. TerjeP (say Tay-a)
    January 10th, 2010 at 12:00 | #41

    Alice – I’m not trying to weazle. I just don’t understand what you are on about.

  42. Alice
    January 10th, 2010 at 12:54 | #42

    Sure Terje…

  43. Alice
    January 10th, 2010 at 15:07 | #43

    @paul walter
    Hey Paul – where have you been brother? You obviously like your literature – lets have a bit more on Augustus Melmotte – apart from his handlebar moustache, elegant attire and charm with the ladies…David Suchet, describes Melmotte thus
    His assets included “a house in London’s Grosvenor Square, a dangerous manipulative charm, an heiress daughter, Marie, and enough nerve to host a state banquet for the Emperor of China.”
    “”He’s vile to his family, including his downtrodden wife, he beats his daughter Marie, he’s a crook, a charlatan, a pig and he’s violent… yet he has a vision of free trade and free movement of money which in his mind could lead to a new and better world.”

    He even has a handlebar moustache in one or two images ….in Suchet’s depiction thick sideburns, thick eyebrows and much gesticulating with havana cigars.

    David Suchet also claims he had much in common with the 20th-century’s Sir Robert Maxwell.

  44. Jill Rush
    January 10th, 2010 at 15:42 | #44

    What ever happened to debtors’ prison for those who are not keen to pay contractual debts? However since the Productivity Commission seems to even think that there should be little regulatory limit on the rewards for those at the top whatever debts or losses they make I suppose prison as an option is out.

  45. DownSouth
    January 10th, 2010 at 16:27 | #45

    Andrew c :@downsouth
    When all your tossing around of science-y words is finished, there is still the question to be answered: ’so where is this God person?’

    I have no idea. I don’t believe in God, at least not God as the Unmoved Mover who lives at the farthest boundary, along with angels and other spirits in the service of God the Creator–the bearded guy, you know.

    So I’ll just fire the question back at you: ‘so where is this homo economicus person?’, and his neo-classical psychologial sibling, the ones described here by Amitai Etzioni in “The Moral Dimension”:

    “The Age of Reason advanced the image of a rational person, who chooses means on the basis of evidence and logic, free of the bondage of the superstition, prejudices, and biases that dominated early ages. Homo-economicus, rationalistic, isolated, and preoccupied with self-interest, is but one offspring of the Man of Reason; the offspring has a neo-classical psychological sibling. The sibling, too, is largely reactive, driven by inputs, is without personality, hedonistic and egotistic, a-social, devoid of affect (or emotions). Moreover, the sibling’s value judgments are locked away into a forgotten compartment.”

  46. Alice
    January 10th, 2010 at 20:43 | #46

    @Jill Rush
    Well Jill – thats a good question…maybe prison is only for the underclass after all.

  47. paul walter
    January 11th, 2010 at 01:05 | #47

    Good evening, ladies (and gentlemen).
    Alice, have been laid low by a “lergy”- hot in Adelaide but have had to sweat on lest I go back to shivering.
    Quick scan notes you have adressed Terje’s comments re, “walking away from debt”, if its of a comfort, it gobsmacked me too and before you had replied, given his anti regulation stance.
    Or am I (still) reading it “wrong” somehow?
    Please, some one, heeeelp!!

  48. paul walter
    January 11th, 2010 at 01:10 | #48

    As for the rest of a great thread, am better for the discussions and comments.
    However, If I do not reply again, a wreath will do fine.

  49. Alice
    January 11th, 2010 at 07:11 | #49

    @paul walter
    No Paul – you are reading it right. Terje did contradict his own views. I suspect a lot of libertarians dont really absorb the full ramifications of the “any regulation is bad regulation” view. Hence they will tend to slip up. Thus the ALS “no regulation, no government” view is mostly an artifice.

  50. Alice
    January 11th, 2010 at 07:12 | #50

    @paul walter
    Hope you get better Paul but stay inside today.

  51. TerjeP (say tay-a)
    January 11th, 2010 at 08:18 | #51

    Alice – I will try again.

    Several states in the USA have statutes that ensure that housing loans in those states are non recourse. This means that if you can not pay your debts the bank can take the house but is prohibited by law from pursuing you for the remainder of the debt. This is quite unique to the USA and Australia does not have anything comparable. In Australia if you can’t pay your debts then the bank can take your house and sue you for any outstanding amount.

    I suggested that this situation (ie US state laws that mandate that mortgages are non recourse) might be a part of the problem with US credit markets. In short I was being critical of these regulations and suggested that Australias more laissez-faire approach to lending practices might have some advantage. In short I was suggesting that perhaps US states should repeal these regulations. There are other regulations relating to credit that the US states should repeal but I was being quite specific on this occasion and limited my criticism to non recourse statutes.

    From what I have said you somehow infer that I am being pro-regulation on this occasion. However it is quite clear to me that on this occasion I am being anti-regulation. Specifically I am suggesting that these state laws in the US are problematic and perhaps they should be repealed. I’m confused as to why you think black is white and white is black.

  52. January 11th, 2010 at 08:20 | #52

    @Nicholas Gruen
    Wilde’s pseudonym Sebastian Melmoth (ftfy) was a reference to St Sebastian (the one pierced with arrows) and the novel Melmoth the Wanderer. From Wikipedia:

    “Melmoth the Wanderer is a Gothic novel published in 1820, written by Charles Robert Maturin (uncle of Jane Wilde who was mother of Oscar Wilde). The central character, John Melmoth (a Wandering Jew type), is a scholar who sells his soul to the devil in exchange for 150 extra years of life and spends that time searching for someone who will take over the pact for him.”

    Not the dastardly Augustus Melmotte but Melmoth’s attempt to pass on his contractual obligations to some other unsuspecting character may be very relevant.

    The Sebastian part refers to St Sebastian who was martyred twice. A secretly christian member of the Praetorian Guard, he was shot through with arrows on Diocletian’s order as punishment for his betrayal. He survived, however, only to be put to death again later. There may be something relevant to zombie debt in that as well.

    Just goes to show you can read meaning into anything in any situation really.

  53. Michael
    January 11th, 2010 at 09:18 | #53

    My take on libertarians is they are hostage to an absolutist position. A bit like hardcore free speech advocates who are admirible in their willingness to be consistent but very few can really stomach the full implications of the concept taken to it’s extreme.

    So just as most who invoke “free speech” do so only in defence of views they agree with, maybe libertarians are mostly thinking of removing regulations that effect themselves and people like them.

  54. Alice
    January 11th, 2010 at 09:35 | #54

    @TerjeP (say tay-a)
    Terje…I would suggest to you it is not just that loans are full recourse in Australia but also the existence of the Uniform credict code (UCCC) regulation that has assisted in the greater resiliance of our crredit markets. “Credit providers are required to be careful not to make contracts with consumers who would find it difficult to meet their repayments”.

    A lot less liar loans were issued here Terje.

    http://www.creditcode.gov.au/display.asp?file=/content/consumer.htm

  55. TerjeP (say Tay-a)
    January 11th, 2010 at 09:44 | #55

    Alice – you may disagree with my point but my real concern was that you seemed to fail to even understand it. To explain things in terms of your cited credit code you would have to demonstrate that this code represents a substatially different situation to that that applies in the US market. I suspect it doesn’t but I’m open to argument.

    Michael – I’m willing to take the free speech test. What examples do you have?

  56. Ernestine Gross
    January 11th, 2010 at 09:55 | #56

    Re: Terje @1, p2,

    It seems to me Terje is a bit too ‘laissez-faire’ in your usage of this term. For example, the first reference, listed below, contains a contemporary usage of this term in Australia. The second reference gives a brief history of the term, I suppose viewed from the perspective of contemporary authors:

    1. http://www.laissez.com.au/

    2. http://en.wikipedia.org/wiki/Laissez-faire

    I don’t know the lending (credit) policy of contemporary ‘laissez-faire’ in (1) but I know food regulations apply.

  57. Ernestine Gross
    January 11th, 2010 at 09:56 | #57

    Correction: “…in your…” should read “… in his…”

  58. iain
    January 11th, 2010 at 10:22 | #58

    Housing is a lot less affordable in many parts of Australia than the US. But I don’t think either country is a good model for producing optimal housing outcomes.

    In Australia, we have a generation that has to choose between a life of total indentured servitude or a life time of renting. I’m ashamed to live in country that prides itself on how well house prices have “stood up” recently.

    In the US, they have tent cities springing up unabated and 2% child homeless rates. While at the same time having 10% vacancy rates.

    Scandanavian approaches to house and land policies strike me as best of the bunch, but I’m sure many would disagree.

  59. Michael
    January 11th, 2010 at 10:24 | #59

    @TerjeP (say Tay-a)
    Thanks for the response, I’m glad you read it.

    I’m not a no-holes barred free speech advocate and I’m happy for “free speech” to be restricted when it involves the exploitation of children, sexually explicit billboards where people can’t avoid being exposed to it, holocaust denial and speech that perpetuates hatred on the basis of race or religion. There are a lot of other strange topics that many in the community probably shouldn’t be exposed to. A caveat on that is that there should be transparency about what is being censored and how – I’m not a fan of the internet filtering the government is planning because it’s not transparent. That is I’m not an absolutist even though I agree with speech being generally free. I also believe in markets being generally free. Surely an absolutist libertarian wouldn’t want to proscribe any of the ways in which consenting adults lend and borrow money.

    I’m for making reasonable regulatory trade-offs in order to live in a community and benefit from a functioning market.

  60. January 11th, 2010 at 10:44 | #60

    “no-holes barred free speech advocate”

    Freudian slip? ;-)

    “I’m happy for “free speech” to be restricted when it involves the exploitation of children, sexually explicit billboards where people can’t avoid being exposed to it, holocaust denial and speech that perpetuates hatred on the basis of race or religion.”

    I don’t what I could say that would constitute exploitation of children. Billboards (and advertising in general) are more conservative than the general populace – they have to be, to avoid giving offense to potential customers. I think you’ll find that advertisers self-regulate well in this particular regard. Holocaust denial should be allowed – that way we can laugh at them. Hate speech should definitely be allowed – it makes it easier to avoid the haters.

    Speech doesn’t harm anyone (or at least it can only hurt your feelings), and proscribing certain forms can have large negative effects. How we react to words is more important than the words themselves, and nasty words can be responded to positively (from a societal perspective), which I think is a better path than pre-emptive banning because of possible negative reactions.

    I’m willing to be convinced that free speech should be curtailed on a case-by-case basis, but in the meantime I’m going to keep my default preference for untrammeled free speech.

  61. Michael
    January 11th, 2010 at 11:14 | #61

    I didn’t mean to derail the thread with my cheap free-speech/deregulation analogy, but……

    Jarrah :
    “no-holes barred free speech advocate”
    Freudian slip?

    That’s funny, although I think it’s more a function of my poor cliche-riddled writing skills.

    I’m familiar with all the good arguments for allowing free speech but my views have changed a bit after having children and living in countries where race relations could potentially turn to bloodshed in short order. I find it interesting that most free speech advocates live in countries with well developed economies, strong legal systems and mild censorship. Where are all the shining examples of successful economies practising unmediated free speech and free markets. Australia and the US certainly don’t qualify. Although apparently they would be if only x, y, z….

    Jarrah :
    I don’t what I could say that would constitute exploitation of children.

    I was including all media under “speech” so child pornography fits that definition.

    Jarrah :
    Billboards (and advertising in general) are more conservative than the general populace – they have to be, to avoid giving offense to potential customers. I think you’ll find that advertisers self-regulate well in this particular regard.

    isn’t that an example of un-free speech? The self regulation is underpinned by legal regulation.

  62. Fran Barlow
    January 11th, 2010 at 11:16 | #62

    My own view is that free speech should be a presumptive right and a case for restricting it must be made by each legal authority. In cases where the attempt to restrain free speech is broad and toalaising — child p*rn*graphy might be an example — then the case should meet compelling tests of public interest.

    No society really allows unconstrained free speech of course. Quite apart from child p*rn*graphy, fiduciary duty, national security, trade secrets and even defamation law impinge.

    It seems to me that in the case of child p*rn*graphy one should restrict on the basis that those concerned in the production, distribution and purchase of such material are accomplices after the fact to what would be criminal activity at least within our jurisdiction. Free speech really isn’t germane here.

    A more difficult case in the digital age would be the production of material other than by recourse to actual live subjects. Personally, I’d oppose restricting such material and place the onus on the restricting authority to show that some sort of indecent dealing or other criminal activity were involved in the creation of the material. Mere ideas and fantasy should not be criminalised, IMO.

    In the case of racial vilification, again, I’d be against restricting speech, though clearly if one could show that particular speech acts were a prodisposing factor in a specific criminal act then that speech should be no more protected than someone inciting another person to murder or rape someone. One recalls that the Rwandan genocide was marked by radio broadcasts inciting Hutus to massacre their Tutsi neighbours. Such persons are plainly accessories before the fact to the tangible acts they incite and thus share responsibility for all the criminal conduct and suffering that ensues.

  63. Michael
    January 11th, 2010 at 11:29 | #63

    Hi to all the snopes at ASIO – your doing a bang up job!

  64. January 11th, 2010 at 11:31 | #64

    “isn’t that an example of un-free speech? The self regulation is underpinned by legal regulation.”

    If the self-regulation is more stringent than legal regulation, then that speech is free(ly chosen).

    Insofar as speech is material to physical crimes, I can see an argument for curtailment. However, I disagree with the notion of thought crimes, and so agree with Fran that “Mere ideas and fantasy should not be criminalised, IMO.”

  65. Michael
    January 11th, 2010 at 11:46 | #65

    @Jarrah
    I think you have more or less conceded that you aren’t advocating an absolutist position on free speech. Am I wrong?

    Where are the “all regulation is bad regulation” crowd gone? I’m surprised no one has advocated allowing consenting adults to make any kind of loan contract they want to without the dead hand of gar’ment stepping in to stifle their creativity.

  66. Ernestine Gross
    January 11th, 2010 at 11:51 | #66

    Fran, can you do a hypothetical for us regarding freedom of speech and financial system stability?

    Suppose the newpaper article “Walk Away from your Mortgage”, referenced in the thread is read my a very large number of people and those who can follow the advice with the consequence that some banks will face a liquidity problem and this turns into a bank run and spreads via the still existing links throughout the global economy. There are then reports of death from starvation or from the cold in the northern hemisphere and mass unemployment due to a financial crisis that may be called a total collapse. Is ‘free speech’ a good thing in this case?

  67. January 11th, 2010 at 12:02 | #67

    “I think you have more or less conceded that you aren’t advocating an absolutist position on free speech.”

    I can’t ‘concede’ what I’ve set out from the start: “I’m willing to be convinced that free speech should be curtailed on a case-by-case basis, but in the meantime I’m going to keep my default preference for untrammeled free speech.”

    “Where are the “all regulation is bad regulation” crowd gone?”

    Who are these people? I’ve never seen an anarchist on this forum. There are various stripes of libertarian visitors, but we simply want a CBA on any regulation before implementing it.

  68. Michael
    January 11th, 2010 at 12:28 | #68

    @Jarrah
    Well, maybe I overshot slightly with my last comment by directing it at you, but my original statement above started by referring to an absolutist position on free speech and de-regulation. So if the shoe doesn’t fit then don’t wear it. Happy? In the end it’s either free speech or you have to accept some regulation.

    As far as the “all regulation is bad regulation” crowd I didn’t refer to you or TerjeP in particular. I’m genuinely interested to know if anyone would take a strict hands off approach to lending money, and what that might look like. There is after all a lot of regulation of the financial system that has evolved over centuries, and the current crisis arrived after some de-regulation, so I don’t think it’s irrelevant to ask how far people of a libertarian persuasion would be willing to go in liberalising lending.

  69. January 11th, 2010 at 13:01 | #69

    “my original statement above started by referring to an absolutist position on free speech and de-regulation. So if the shoe doesn’t fit then don’t wear it. ”

    That’s fair, I’m happy to go along with that. However you should note that it implies your belief about libertarians having an absolutist position isn’t actually true.

    Regarding money lending regulation, and what a hands-off situation would look like, try starting here.

    “and the current crisis arrived after some de-regulation”

    That’s a canard that doesn’t belong in a serious discussion.

  70. TerjeP (say Tay-a)
    January 11th, 2010 at 13:03 | #70

    Michael – in terms of free speech my position is pretty much in line with that articulated by Jarrah. Perhaps it isn’t absolutist but I do think it is a rigourous and principled position. A judge recently ruled that a cartoon depiction of Bart and Lisa Simpson engaged in sex constituted child pornography and in this instance I’m very inclined to disagree. However sort out the definition issue and I’ve no problem with a ban on child porn so long as we don’t need to suffer drag net style attempts to block it (eg the proposed Internet filter).

    In terms of money and lending I think general contract law covers nearly everything that needs to be covered with few exceptions. Certainly I don’t think governments should be issueing currency or running banks, whether they be commercial banks or central banks. I don’t agree with the current fashion of regulating interest rates as part of monetary policy, and I certainly don’t agree with US style price controls on credit or mandatory reserve requirements or government guarantees. I do however believe that governments have an unavoidable role in the determination of the dominant unit of account within an economy unless taxation is outlawed (seems unlikely). As such I do think they should have a well defined monetary standard along the lines of the gold standard or some thing. A commodity basket might better satify some but the point is much the same.

    I’m not against regulation on principle. However I am against an awful lot of it in practice.

  71. TerjeP (say Tay-a)
    January 11th, 2010 at 13:08 | #71

    p.s. Filtering the Internet to stop child porn is in my book akin to a phone tap on every phone in the country so we can find pedophiles. It is a massive abuse of power that is well beyond a reasonable responce to the problem.

  72. Michael
    January 11th, 2010 at 13:14 | #72

    Jarrah :
    That’s fair, I’m happy to go along with that. However you should note that it implies your belief about libertarians having an absolutist position isn’t actually true.

    Okay, I’ll concede that I made a sweeping generalisation about libertarians and thanks for the link.

    Jarrah :
    That’s a canard that doesn’t belong in a serious discussion.

    Well you can argue about the causes of the crisis but not the sequence. The repeal of the Glass–Steagall Act is worthy of serious discussion.

  73. Michael
    January 11th, 2010 at 13:27 | #73

    @TerjeP (say Tay-a)
    Interesting reply. You have covered the big picture stuff on the money system, but what about the small scale mortgage level borrowing. Do you see a need for regulation in regards to things like 100% loans, bankrupcy protection etc? The crisis was played out in part at this level in the US.

    Just for the record I’m not advocating Conroy’s internet filter.

  74. Monkey’s Uncle
    January 11th, 2010 at 13:38 | #74

    Jack Strocchi :
    Pr Q said:
    This is the moral paradox of capitalism identified by Weber and Durkheim. The altruist ethic that is needed to ensure contracts are undertaken in good faith and honoured is obviously at odds with the “greed is good” ethic predominant on both Wall Street and Main Street. But unlimited greed winds up consuming the social capital that actually underlies the capitalist system.

    But this trade-off is apparent in all systems of social and economic organisation, and if anything is even more of a problem in non-market systems. One of the biggest problems with government regulation and control of resources is that such systems depend on a sufficient number of people being adequately well-informed, organised and altruistic enough to ensure the public interest is protected. Yet at the same time government systems tend to encourage an accumulation of special interest groups selfishly defending their own interests without much thought for competing interests or the greater good. If anything, the tension between individual selfishness and the greater good of society is actually worse with government than the market.

    The main virtue of the market is that it treats human greed and selfishness as one of the inevitable variables of human nature and tries to deal with it by providing incentives towards productive activity, instead of simply wishing it away or hoping to perfect human nature through social engineering. The market doesn’t preclude the existence of altruism. It just sensibly does not rely solely on altruism.

    Greed is not an inherent feature of a market economy any more than altruism is inherent in government intervention. Greed is an emotive term to describe a subjective value judgment. A more neutral term is self-interest, which is common to both market and government systems.

  75. Monkey’s Uncle
    January 11th, 2010 at 13:42 | #75

    Correction and apologies:

    The above quote is from Jack Strocchi, not Professor Quiggin. In cutting the quote, I accidentally failed to delete that bit from the start.

  76. gerard
    January 11th, 2010 at 14:03 | #76

    government systems tend to encourage an accumulation of special interest groups selfishly defending their own interests without much thought for competing interests or the greater good.

    What is a corporation?

  77. Fran Barlow
    January 11th, 2010 at 15:27 | #77

    @Ernestine Gross

    Suppose the newpaper article Walk Away from your Mortgage, referenced in the thread is read by a very large number of people and those who can follow the advice with the consequence that some banks will face a liquidity problem [...]
    {some apparent negative consequences then asserted } Is ‘free speech’ a good thing in this case?

    Yes, because

    a) the causal chain between the advice and the ostensible consequence is too attenuated to rely upon as real. Doubtless a great many necessary conditions would stand between the advice and the result, some of them the consequence of information to which the utterer may not be privy or be capable of comprehending.

    b) The system is dynamic not linear so one can’t fully anticipate how each decision affects the whole. One person’s decision may be the tipping point for catastrophe whereas all the persons before were moot. It’s a kind of sorites paradox.

    In our system, one must be able to reasonably foresee the consequences of one’s acts to be in tort. This is just as well because if this reasonable man standard were not a defence to tort (or worse to criminal charges), all decisions could be open to intrusive restraint and create tortious liability or criminal risk, yet the freedom to act to give effect to one’s passions is an intrinsic good, to be curtailed only when it impinges on the rights of others to do likewise.

  78. TerjeP (say Tay-a)
    January 11th, 2010 at 16:28 | #78

    Michael – I’m not that sure what you mean however I don’t on the face of it see any need for regulation in the areas you indicate. However it does depend a lot on what your question is. As such I’m hesitant to comit either way. Perhaps you could be more specific.

  79. Monkey’s Uncle
    January 11th, 2010 at 17:37 | #79

    Gerard, where did I suggest that corporations and private businesses are largely altruistic and not primarily self-interested? I was merely contrasting the differences of how self-interest plays out in market and government systems.

    The problem is that while greed and selfishness exists in all systems, it is actually more damaging in government systems than market systems as there is greater capacity to use state force to benefit at the expense of others. Or as some have put it, if the market is an invisible hand, the state is a veiled fist.

  80. Uncle Milton
    January 11th, 2010 at 18:50 | #80

    @Alice
    A university student that I know, who has very little income (certainly nothing left over after paying rent, food and other necessities) was recently offered a credit card by one of the big 4 banks with a $7k limit. If she maxed it out she would no more pay back the debt than fly to the moon. I suggest that the lending departments would not recognise the UCCC if it bit them in the backside. And this is at a time when credit is supposed to be quite hard to get.

    Terje is basically right. The recourse nature of home loans makes one think thrice before throwing back the keys, unlike the US, and also Britain. But there is also a cultural factor at play (difficult to model in a Radner sequence economy – sorry Ernestine); as a people we just won’t default on our home loans until all avenues of raising the money have been exhausted.

  81. gerard
    January 11th, 2010 at 19:01 | #81

    Unaccountable public institutions create opportunities for rent seeking; ergo society should be controlled by unaccountable private institutions for whom rent seeking is the raison d’etre.

  82. Ernestine Gross
    January 11th, 2010 at 22:25 | #82

    Uncle Milton @ 30,

    1. I think Alice’s point is that allowing recourse home loans is one type of regulation and so is non-recourse. One is better than the other, as agreed by Terje, and Terje’s tendency to be against regulation is hence contradicted. (She won the argument by a reverse application of a set inclusion error that is so often exploited in blog discussions).

    2. Without wishing to argue against your point about cultural factors (and their reflection in the legal system – chicken and egg type of problem) I may have to disappoint you regarding the Radner sequence economy. There is nothing in the model which prevents representing the (possibly culturally influenced) preferences of an individual who decides to sell the proverbial household silver in order to retain ownership rights of a house now furnished with milk crates for chairs and discarded cartons for wardrobes.

  83. TerjeP (say Tay-a)
    January 12th, 2010 at 07:52 | #83

    EG – Alice did not “win”. Firstly there is no contradiction in being against one regulation and for another regulation. Nowhere have I stated that I oppose all regulation.

    Secondly it is true that the absence of a particular regulation (eg absence of prohibition against recourse loans) may offer a better regulatory environment than the presence of that particular regulation (eg actual prohibition of recourse loans). However it is ludicrious to suggest that somebody opposed to the particular regulation is contradicting a position of being opposed to regulation. In fact were I opposed to all regulation this would merely further confirm my position.

    Just to spell this out again. Several US states prohibit recourse loans. Australia does not prohibit recourse loans. I think the Australian position of non-regulation in this regard is superior. I think the US states should repeal their prohibition of recourse loans.

    That you and Alice are so confused on this point does not reflect well on either of you.

  84. Ernestine Gross
    January 12th, 2010 at 09:13 | #84

    @TerjeP (say Tay-a)

    You are using a similar method to the one used by Alice – you ignore my qualification.

    Hopefully these discussions result in a shift from ‘pro’ vs ‘anti’ regulation to the question of how should the regulatory framework be changed – a question our host has repeatedly promoted. There is a paper by James Galbraith, referenced in the latest thread on the EMH, which IMHO is very helpful in this regard.

  85. Ernestine Gross
    January 12th, 2010 at 09:17 | #85

    @Fran Barlow

    Thank you, Fran, for replying to my question.

  86. Monkey’s Uncle
    January 12th, 2010 at 11:04 | #86

    gerard :
    Unaccountable public institutions create opportunities for rent seeking; ergo society should be controlled by unaccountable private institutions for whom rent seeking is the raison d’etre.

    Your position makes sense only if you apply a definition of rent-seeking that is so broad that practically everyone would have to feel neurotic and guilt-ridden for wanting to make a buck.

    As for “unaccountable public institutions” versus “unaccountable private institutions”, private corporations are actually more accountable because consumers make decisions every day about where to direct their business. Whereas governments are only held accountable by periodic elections, not to mention problems of rational ignorance and the fact that governments are by defintion a monopoly. In any case, public institutions should be more accountable simply because they are public institutions. Duh!

    Or as the old saying goes: A socialist is someone so disgusted by the power held by a few large corporations that they want to hand over all the power to one giant monopoly corporation.

  87. TerjeP (say Tay-a)
    January 12th, 2010 at 11:07 | #87

    EG – sorry but I can’t see any qualification. Perhaps I’m looking in the wrong place.

    In terms of shifting the debate I understand your sentiment. However the role of existing regulation in the cause of problems is so under rated that I think the case against these regulations often needs regular mention. Legislators are too quick to legislate and too slow to repeal. Further more I think there is this myth that the USA is unregated and so any US problem is due to a lack of regulation.

  88. Fran Barlow
    January 12th, 2010 at 11:18 | #88

    @Monkey’s Uncle

    Or as the old saying goes: A socialist is someone so disgusted by the power held by a few large corporations that they want to hand over all the power to one giant monopoly corporation which, unlike the few large corporations, is accountable to all the producers and returns the fill value of their product to them.

    [emendment to the 'old saying' (rightwing folk wisdom) in highlights by me ...]

  89. Fran Barlow
    January 12th, 2010 at 11:18 | #89

    Should read:

    all the producers and returns the full value of their product to them

  90. TerjeP (say Tay-a)
    January 12th, 2010 at 12:41 | #90

    Fran – accountable for so many things that they are effectively accountable for nothing. Politics suffers from an excess of product bundling which in a monopoly provider means almost no choice at all. For instance if I vote for the Greens does it mean I want there social policy, economic policy and environment policy or just that I like their drug policy. Politics is a poor means of deciding on most things. Especially things that can be readily decided in a market.

  91. Fran Barlow
    January 12th, 2010 at 12:46 | #91

    @TerjeP (say Tay-a)

    That objection Terje, is one based on technical rather than organisational feasibility. Accountability, tranparency, equity and so forth fit every near optimal model of human organisation.

    I’m ready to agree that the processes we currently adopt to (at least notionally) approach these ends are fundamentally flawed.

  92. gerard
    January 12th, 2010 at 12:48 | #92

    When a public institution is acting to selfishly maximize its gains at the expense of society, with a pathological disregard for all other considerations, it is failing in its institutional purpose.
    When a corporation doesn’t act to selfishly maximize its gains at the expense of society, with a pathological disregard for all other considerations, it is failing in its institutional purpose.

  93. TerjeP (say Tay-a)
    January 12th, 2010 at 12:53 | #93

    Gerard – what if it is maximizing it’s gain whilst also producing a net benefit to society which for most corporations is the reality. Is it still failing it’s institutional purpose?

  94. TerjeP (say Tay-a)
    January 12th, 2010 at 12:54 | #94

    Fran – so I’m technically right then?

  95. Fran Barlow
    January 12th, 2010 at 13:12 | #95

    @TerjeP (say Tay-a)

    No … your error is to elevate a technical flaw to the status of a commentary on organisational feasibility.

  96. TerjeP (say Tay-a)
    January 12th, 2010 at 13:20 | #96

    I’d say your error is to confuse feasibility with practical reality.

  97. Michael
    January 12th, 2010 at 13:21 | #97

    @TerjeP (say Tay-a)
    You make a good point about bundling. I would add that the opposition in a two party state has a vested interest in bad government and poor performance so it can hurry up and get it’s nose back in the trough. The coalitions craven flip flopping on climate change is a prime example.

    I’d prefer to be able to make choices in a system that has proportional representation, a free press that wasn’t dominated by powerful players like Murdoch as well as a market system. Quite a lot of life aren’t tradeble yet and markets are riddled with externalities.

  98. Fran Barlow
    January 12th, 2010 at 13:24 | #98

    @TerjeP (say Tay-a)

    I’d say your error is to confuse feasibility with practical reality

    Then you would be using an eccentric language. The two cannot be separated

  99. gerard
    January 12th, 2010 at 13:44 | #99

    Gerard – what if it is maximizing it’s gain whilst also producing a net benefit to society which for most corporations is the reality. Is it still failing it’s institutional purpose?

    No. It is only when it limits its own gain for the good of society – or the environment, or the future of humanity – that it fails. The social benefit that it allows the resources under its command to create must be limited to the point of its own maximum private profit. In a like manner, the social cost that it allows the resources under its command to create is likewise limited only by considerations of profit. There is no responsibility to anything else.

    Unsold H&M clothes found in rubbish bags as homeless face winter chill

    The clothing megastore H&M has found itself at the centre of an angry protest after one of its leading outlets in Manhattan was accused of cutting up unsold garments and dumping them in rubbish bags on the street…

    Rubbish bags full of pristine clothes were found by a graduate student of the City University of New York, who came across them one night as she walked to the subway.

    The student, Cynthia Magnus, tracked them to the 34th Street H&M store, a popular venue for tourists and New Yorkers in the centre of Manhattan.
    Inside the bags were gloves with the fingers cut off, socks, patent leather shoes with the instep cut up, and warm men’s jackets slashed across the body and arms. “It was a very frigid night, and there were bags upon bags of warm winter clothing not 50 feet away from where a homeless man slept on cardboard boxes,” she said.

    According to the Coalition for the Homeless, the number of people sleeping rough in New York city has reached its highest level since the Great Depression of the 1930s. There are thought to be about 39,000 people who do not have a home, including more than 10,000 families and 16,500 children.

    Homelessness has been exacerbated by the economic downturn, which has pushed the number of families in receipt of food stamps in the city to record highs. A cold snap has also meant outdoor night temperatures in New York of -10C (14F).

    Paradoxically, five blocks away from the H&M store is a group called New York Cares, which mobilises support for the community by co-ordinating volunteers wanting to help homeless and poor families in the city. It holds an annual drive that distributes 70,000 secondhand winter coats to needy individuals.

  100. Monkey’s Uncle
    January 12th, 2010 at 14:18 | #100

    gerard :
    When a public institution is acting to selfishly maximize its gains at the expense of society, with a pathological disregard for all other considerations, it is failing in its institutional purpose.
    When a corporation doesn’t act to selfishly maximize its gains at the expense of society, with a pathological disregard for all other considerations, it is failing in its institutional purpose.

    So the mere fact that governments are supposed to look out for the public interest, or that is their stated objective, is good enough to justify their moral superiority, regardless of whether or not they actually achieve that in practice? So organisations should be judged by their stated goals, not how they actually operate in practice?

    Also, the fact that some profits may be earned through anti-social or destructive activities doesn’t make profit inherently anti-social, any more than the fact that some workers earn their wages through activities that are harmful makes all wages inherently anti-social.

    You keep labouring the point that corporations are self-interested and out to maximise their profits rather than look after the public good. How does that make them any different from most other economic actors? Do most workers go to work simply for the good of society and not because they want to get paid? Do most people who benefit from public spending simply want what is best for society rather than to simply get what they can for themselves? Are governments only interested in looking after people and not increasing their own power and control?

    Please tell me who is looking out for the greater good and not just doing what is in their own interests?

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