21 thoughts on “Monday Message Board

  1. JQ: am wondering whether you and others see a confluence up ahead between the current financial crisis, atmospheric warming, and peak oil?

  2. Jrbarch, I am happy to offer my own forecast. The financial crisis will fix both global warming and high oil prices. All the kerfuffle over global warming is nothing more than conspicuous consumption by an increasingly affluent middle class. Once they have more pressing problems to worry about, like whether they have a job or not, the problem will be quickly forgotten. A financial crisis induced recession will also be quick to see oil prices fall.

  3. How do we prevent a meltdown of the financial economy (FE) next time?

    One option is for regulators to give explicit price signals to lenders about the systemic risks facing the FE. For example, regulators could impose a systemic risk tax (SRT) on lenders who were adding unacceptable additional risks to the FE in a way that might lead to future systemic failure of the system. Perhaps the SRT could be a percentage of the nominal debt value of the risky products that have been issued to date by the offending lender or those that might be issued in the future.

    This seems the right role for regulators: individual lenders have neither the inclination nor the incentive to be concerned with system-wide risk in the FE.

    Of course this assumes that regulators can (a) assess the overall risk profile of the FE, (b) determine when and where failure is likely to occur, (c) determine the riskiness of products and how they contribute to the risk profile of the FE, and (d) act quickly enough to reduce the level of unacceptable risk. That might be tricky, although the risk profile of the FE during the last 12 months (and the products that contributed to it) is a clear empirical benchmark for what an unacceptable profile looks like.

    The advantage of a SRT is that its using market mechanisms to manage the risk: if the SRTs are imposed fast enough and high enough then the supply of risky products and their derivatives will fall, relative to other prducts. The operational challenge is the same that central banks face in managing inflation targets with monetary policy: mistimed entry and under/over shoot of the cure.

  4. Here is something I call Ikonoclast’s First Law. I like to claim credit for it though of course it may be an unconscious plagiarism.

    Ike’s 1st Law: Every rule introduced to correct an anomaly will create two more anomalies.

    Perhaps it’s just a corollary of “Keep it simple stupid.”

    I’d like to see financial instruments limited by law to a set of basic instruments necessary for market operations and deals in the real economy. I honestly doubt that all of the current range of instruments is needed for the real economy. Many of them seem designed just to play games (high stakes games) in the casino economy… er um I mean “financial economy”.

    Governments create money (fiat currency) and need to keep as much control as possible over that fiat currency in order to maintain its integrity. We must accept the fact that currencies have to be traded against each in a global economy but should not the number of other instruments (or weapons) with which speculators can attack currencies and swindle other operators in the finacial sector be limited in some way?

    The Lehman Bros process which JQ mentioned in another post sounds just like a swindle to me. When are we (as a global community) going to call a spade a spade and a swindle a swindle?

  5. Sub prime and the quangos/GSEs are at the heart of the current crisis. (esp since Clintons update,allowing In 1995, Freddie Mac began receiving affordable housing credit for for buying subprime) securities

    Unlike normal banks in the USA, this statist wholesale mortgage banks did not have to comply with 3% asset ratio and often went below it (and when you are dealing in the trillions its a big deal)

    SO with hindsight if you could go back in time and change this would you? if you could have changed the implicit government guarantee would you? and going forward should these quangos be run down and closed?

  6. Steve – pretty much every country has one (or more) forms of trac-favored savings.

    In Australia there’s superannuation and the capital gains tax exemption on first homes.

    In the US, there are 401 plans and various other retirement savings schemes and tax deductibility for home mortgage payments.

  7. Sean I was referring ot this post:


    sean Says:
    September 20th, 2008 at 2:54 am
    No 24: “ computer models are the BIG problem here, academics have this thing in their big heads that maths is some sort of science, and some of them take it even further and even think economics is a science too.�

    No 36: Sean: “SO sack the risk managers, close down 90% of local statistics office, stop awarding prizes for economics, stop recruiting risk takers from economics depts at our universities, in fact a lot less economics from universities please, Im sure JQ can sell his goods elsewhere, and we will be making a start. “

    Looking at it again I admit I have grossly and unfairly misrepresented your position.

    I apologise unreservedly for doing so and will attempt to to behave better in future not only towards you but towards others.

    I can only say, and this is no justification for my intemperate words, that I was not consciously and deliberatily lying.

    I misremembered and mischaracterised your post for which, once again, I opologise.

  8. So basically (and inviting improvement here),

    The Gramm-Leach-Bliley Financial Services Modernization Act repealed Glass-Steagall and removed long-standing distinctions that existed between insurance companies, banks, and investment services.

    This put Investment Banks in the Insurance business, which had been regulated at the State level and now required oversight at the Federal Level, but what we had was the Office of Thrift Supervision.

    Investment bank Morgan Stanley went to the insurance giant AIG and innovated the idea of CDOs, derivatives (financial instruments) designed to securitize risk against credit defaults.

    AIG built an essentially unregulated A.I.G. Financial Products division in London to sell CDOs, which went crazy while the “supervising” Office of Thrift Supervision looked on like Sarah Palin in a Katie Couric interview.

    The market in unregulated CDOs was massive, becoming $62 trillion in size (according to the International Swaps and Derivatives Association) and larger than the entire world Stock Market itself, resulting in tons of hollow insurance instruments with insufficient deposits (premiums) distributed globally; when they started to fail, their linkages made them a row of dominoes.

    Thus there’s more “insurance” ($62 trillion) than there is “stuff” (the world market) — but it is has nothing behind it.

    Greenspan resisted writing any regulations for the Home Ownership and Equity Protection Act enacted by Congress in 1994 because he believed “Lenders are now able to quite efficiently judge the risk posed by individual applicants.”

    Bush pushed for zero-down mortgages.

    The world’s two largest bond-analysis providers, Moody’s and Standard & Poor’s, relaxed standards for evaluating the securities of their customers so they could grade them AAA (and in July were found by the SEC to be “accessories” in the financial crisis).

    The SEC didn’t provide oversight of the Investment Banks.

    Inter-bank credit froze, the Investment Banks were destroyed — and now you want to give me a $Trillion bill.

    What it looks like to a layman: A closed knit group of institutions, like the people on a cul-de-sac, and absent due-diligence anywhere, all issued a HUMONGOUS amount of insurance to each other for a storm they didn’t believe in (blue-chip triple-A ratings mean “super-duper-safe”) but bought and sold tons of as if they did. And then the storm came (which it’s why it’s called a business cycle) and they watched their investment bank houses blown away and realized they didn’t have deposits to rebuild.

    Conclusion: We don’t understand insurance, at least derivative insurance instruments, and there’s inadequate insurance regulation at the federal level.

    Question: When do we get something like the CDO Clearinghouse that John Quiggin recommends?


  9. I have sat here and read your blogs wondering how I could explain why I think the Neoliberal ideology of minimal government aren’t as flawed as our blog master seems to imply by his various thoughts in the later week.

    From what I can see Neoliberalism is a political ideology whose birth arose as a perjorative. So its existence as descriptor of economic liberalism had come about by the left arm of politics who seeked to label it as the cause of many of our social and economic problems. It is based on the asumption that economic liberalism is about greedy individuals and corporations vs the assumed altruistic behaviour of the collective political ideologies.

    I would like to point out that JQ suggested that Neoliberalism was agnostic on matters of freedom and liberty for individuals. I would dispute this and suggest that freedom and liberty are more likely in a free market.

    You may think it is a dichotomy that Neoliberals views coudln’t possibly hold both the idea of minimal government and freedom and liberty for individuals at a level of equal importance. I however, think it is quiet possible (synergistic) to have a minimalist government,which would naturally result in the allocation of, or a springboard for, greater liberty and freedom for individuals than one that involves larger more imposing government regulating our lives. It is hard to accept that at its origins economic liberalism never had the qualities of freedom and liberty at heart of its desire for a minimalist government. Of course you may disagree.

    Perhaps, just maybe, labelling Neoliberals agnostic to freedom and liberty has something to do with the coming of exitence of the word “Neoliberal”. Maybe this was unjustified.

    I see many examples “worse case scenario” in history and currently in our world of countries where powerful government regimes have brought famine, death and misery to its people. Governments, illegitamite or not that control the money, resources and the threat of violence over their people are still in existence even in 2008.

    So why is that I think less government works. I am going to use a physical example to explain my thoughts:

    Three physicist in 1987 Bak, Tang and Weisenfeld played the sand-pile game. “They tried to imagine what would happen if someone were to sprinkle grains of sand one at a time onto a table top. As the grains piled up , it seemed clear that broad mountain of sand should edge slowly skywards, and yet things obviously could not continue this way. As the pile grows, its sides become steeper, and become likely that the next small grain will trigger an avalanche. Sand would the slide down the hill to a flatter region below making the mountain smaller not bigger. As result the mountain should alternatley grow and shrink, its jagged silhouette forever fluctuating”. Like many physicist they then created a computer model of this scenario and tried dropping one grain of sand at a time. They found there was no typical avalanche as some involved one grain others thousands. The trigger could cause a small avalanche or a cataclysmic rection involving millions.

    What came out of the experiment was that hypersensitive state to which the computer sand pile organises itself is known as the “critical state”.

    This concept of critical state is applied in our society for example when back burning is done on our vast bushlands simply to minimise the risk of larger more destructive fires in thicker bushland.

    So here goes my analogy, the greater the powers of and size of government the greater the critical state the bigger the fall. So the government keeps filling the holes but eventually the leaks come back. How big the mess is depend on the size of the baggage.

    In a market economy its a quick backburn and impact is minimal.

    You ever heard someone say ” I could only put up with so much before I lost my temper and had to do something about it”.

    A book by Paul Kennedy ” The Rise and Fall of the Great Powers” he laid out the idea that the large scale historical rhythm of our world is determined by the natural build up and release of stress in the global network of politics and economics.

    So in a world organised in a critical state the meaning of the individual does become more ambigious. In our social and cultural networks there can be no isolated act, our world is designed not buy us but by the forces of nature. Even the smallest forces can have a devestating effect.

    So the existence of government I think is important. I am certainly not an anarchist. But how much leverage we give our governments will determine how great the critical mass and ultimately the size of the potential disasters that follow. In fact this idea of critical mass may put the CRA and Gramm-Leach-Bliley Act and any other damn government regulation in a more demeaning light.

    Give me the smaller fire to put out any day.

  10. After Katrina in this country, it doesn’t seem reasonable to argue for even less government.

    Absent something like a Food & Drug administration, you can’t even buy milk without wondering if it’s really poison (see China).

    If your argument is that regulations and govt fail — for instance, the failure of the SEC to monitor the IBanks (it could have and should have), you’re saying something different and I agree we need to fix.

    I’m willing to pay for redundancy, which is what we used to have with our intelligence agencies — they watched each other as well as everything else and it was very difficult for any one group within an agency to go “rogue” (3 days of the Condor gives you a sense of what this means).

    The market works when the incentives are built correctly — and we need to build in incentives to keep risk takers from racing for the bottom.

    To enable the largest bond raters to take money from their customers for rating them is just bonkers. “I’ll take a AAA please, or buy elsewhere.” But again, it takes a regulation to impose that, or you get what we have.

  11. it should be slower, the angels are spilling into the keyboard cracks, the pins are jamming the hard drives.

    society without government quickly becomes gangdom. for instance, consider parliament: the people’s representatives have long been dominated by gangs, no less gangs for being called ‘parties’. commercial societies become dominated by gangs called cartels, if they wear a suit, or gangs called ‘mafia’, if they wear a gun.

    people can only free themselves from gang rule by organizing so that the numbers of the people can offset the financial power of the rich, and the military power of the thugs.

    longing for unregulated markets and unsupervised activity is simply adolescent fantasy. the best we can hope for is to escape gang rule, through democracy.

    but we are too far gone, toward resource exhaustion and environmental collapse. expropriation of goods at gunpoint will be the theme of economics for the next 50 years.

  12. ‘In all, 65 Republicans joined 140 Democrats in voting “yes,” while 133 Republicans and 95 Democrats voted “no.”‘

    Does voting usually play out like this in America. Could you imagine so many labour and liberal members crossing the floor on anything. Still some in congress are blaming partsanship for it not passing. Just going by those numbers such a statement seems dumb.

  13. To Al loomis; Sad to say I have to agree with your post 14. I can’t see it going any other way now.

    We passed the “Last Chance Saloon” in the early 1970s when the capitalists (and the Western middle class more generally) ignored the warnings of scientists like M. King Hubbert and the Club of Rome group… along with the pioneers of Climate Change modelling.

    Of course, the publicity machines of the corporations geared up to drown out the scientists’ warnings. To this day the corporations haven’t given up. Witness the “clean coal” sophistry and the endless “not yet” arguments about dealing with CO2 emissions.

    Soon we will see the empirical proof that corporate capitalism is dysfunctional; so dysfunctional it can wreck a planet.

  14. Corporate Capatalism wouldn’t be so prominent if it were not for the existence of big and powerful governments of our world. Coroporate captalism wouldn’t last a minute in a free market, they would have no one to buy off, only the truly brilliant service and product providers would survive.

    Athropogenic Global Warming is a diagnosis made by exclusion. ie. Its not A or B or C or D so therefore it must be E by exclsuion. The green movement has created a brilliant communist style propaganda machine that makes all of us think we don’t deserve the earth. According to “Greena” from the “planet slayer” program sponsored by our government enterpises, I only deserve to live for 1.5 years. “Planet slayer” and “Greena” is a tool produced to indoctrinate our kids with misinformation about the environment.


    I have no reason to oppose the nurturing of our environment but I am a meliorist. I reject rubbish like this and its scare mongering. It takes away from rational decision making on important issues about how we can responsibly look after our environment regardless of wether the AGW issue is and issue or not.

    The AGW issue, irrational birth and propagation has created a new carbon trading scheme that will end up just like our financial system. The government controls the power, taxes power and dishes our credits on the same principles our financial masters dished out fractional banking policies.

  15. Is John Quiggin’s site the least reliable in the entire Australian blogosphere? I think so.


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