A reader has pointed me to this fascinating site showing the impact of the Mont Pelerin Society on Iceland. According to the material prepared for its 2005 conference in Reykjavik, the Society’s intellectual influence directly guided those responsible for making Iceland what it is today.
- Comment
- Reblog
-
Subscribe
Subscribed
Already have a WordPress.com account? Log in now.
John Quiggin 
Ben S,
Very nice that you found Lewis´ article illuminating. Alas, I have to emphasize that I did not refer to Icelanders as a nation when I wrote about “the Icelandic free market fundamentalists”. No, the fishermen background etc. provides part of the explanation for why Gissurarson, Davíð Oddsson,Þorsteinn Pálsson, Geir H. Haarde etc. et al. succeeded in turning Iceland into a Ponzi-style hedge fund.
I find it very instructive that the very same Mont Pelerin people who lauded Iceland as the brilliant vindication of their ideas are now in no hurry to take any responsibility for the disaster. Instead, they blame outsiders: European and US Central Banks, Gordon Brown etc. etc. – anything but themselves. And these are the people whose bailout critiques we should take seriously? Instead of accepting their own intellectual bankruptcy, they are busy organizing a moral/intellectual bailout for themselves.
Chacona: You hit the nail on the head; The situation was very much a ponzi scheme. I would content though that the inflated asset prices in the US gave many people an inflated sense that assets prices would just keep on rising. That it was a no risk investment with amazing rewards. Anyone blaming this on a free market has to ignore two very big elephants in the room: Fannie Mae and Freddie Mac. Also having a poet for your central banker… not such a good idea.
Alice: The fact that you refuse to accept that I arrive at my belief in a free market not from compassion but from callousness (after I explained how I have arrived there from compassionate grounds) is typical of the narrow mindedness I have come to expect from the left. At least the conservatives are willing to concede that libertarian ideals are not inherently evil (although they believe that we are wrong on social issues).
I don’t believe that you have no heart even though the ideals in which you believe: protectionism and tight controls over the market have, in the very recent past, lead to starvation, deprivation and death of millions. In spite of this I still believe you have compassion but your read on the situation has lead you to different conclusions (in which I strongly disagree). I would recommend that in future you stop labeling people as fascists, nazis etc and try to gain a deeper understanding of where people are coming from. It’s intellectually lazy to simply label someone and neglect their argument.
I do have compassion for the people of Iceland. They are not about to starve though. Their quality of living is ranked one of the highest in the world. They have plenty of natural resources in fishing and power to keep them from starving or freezing. What will happen is that their savings will be worth… well worth less if not entirely worthless. These savings and investments of theirs were never actually worth what they thought they were worth anyway.
My amateur read on the situation is that, should they return to fishing as they have in the past, their debts will be paid of relatively soon and the fact that the Krona is so cheap means exports will be worth a ton (although they would surely convert to the Euro soon). Of course if world governments stop fiddling with the market and let this crisis find it’s bottom then we will all be a lot better off much sooner.
I would speculate that the asset class that has had the greatest crash in Iceland is libertarian books. Atlas Shrugged, Road to Serfdom and Free to Choose, and the other ‘Catcher in the Rye’ transformative books of Neo-liberalism have probably reached their long run price in the Icelandic second hand book market. Fortunately, they were probably brought outright; hence their collapse in value will not have contributed to Iceland’s debt crisis. Unfortunately, the contribution from reading them is another matter.
Alice Says: March 19th, 2009 at 4:46 pm
C’mon Alice,
Andrew Norton is a decent fellow. I happen to think he is mistaken in his attachment to liberalism, both financial and cultural. But he puts up the strongest case around for these social arrangements.
The CIS has certainly dropped a clanger when it started to give aid and comfort to Global Warming delusionism. But it fulfills a valuable function in critique of bureaucratic statist institutional follies and knaveries.
Government power does sometimes flow out of the barrel of a gun, even in a democracy. It is not always obvious that motivating people by fear is better than motivating them by greed.
Remember, both the catallactic firm and the bureaucratic state are both human institutions, manned by both saints and sinners but mostly in-between poor forked creatures such as ourselves.
Moreover Pusey’s criticism of liberalism is very poorly constructed when measured against high scholarly standards. He is not an economist and appears not to care about the validity or applicability of such knowledge to the problems he addresses.
And on the question of the causes of the GFC, lets not forget that Ethnic Leftist social engineering was a big factor, although not as big as Economic Rightist financial engineering.
Ben’s suggestion that the icelanders return to fishing to fix their economy….you mean the one that existed before the economic vandals with their Monty Pelican ideas decided to turn Iceland into a mass experiment?
How many times does the test tube have to explode and how much damage do they get to do before they get thrown out of the lab? Warn me if they get in here (the desperate try hards).
I will get in early,(find my own worms rather than eat theirs) and take up fishing.
Jack Strocchi
Ill concede a point
“it fulfills a valuable function in critique of bureaucratic statist institutional follies and knaveries.”
In that sense yes, we all know the public sector has its share of racketeers and heinous B……s as much a the private sector.
Jack, you cant for one moment though, not recognise that CIS has overextended its useful function and is courting the votes of every conservative fringe lunatic in town. I might not object to that, the shooters party does the same thing but I do object to the CIS portraying itself as “scientific” or “academic” or “objective” or “unbiased”. Rubbish. It is a political rag and most people with half a brain wouldnt use it as well…toilet paper. There are plenty of them, though, in JQs blog that use its ‘publications’ to practice comprehension and art of learning lines.
Well, I guess they have to start somewhere…still it might have been better if they started with “Here is Jack. See Jack run”.
Alice whom forced who to give up fishing and become bankers? People voluntarily did this. Mount pelerin had nothing to do with what Iceland became. They may have (falsely) held it up as a bastion of free markets but that doesn’t mean they had anything to do with the voluntary decisions of people in Iceland.
free markets involve freedom by their nature. That is, allowing people to voluntarily decide what they are to do with their time, labor and talents. With freedom comes responsibility. You can’t make bad decisions and expect things to go right. Unfortunately for the Icelandic people they were lead astray somewhat by the grossly inflated property market in the US. A market that I have contended (and no one has of yet here even attempted to disprove) was inflated by government action. Had the property market not been distorted by government assurances and misguided social programs then we would have seen a very different situation.
105# Oh and no insult to your name intended Jack. I could have used John but then thats JQs name!.
Ben #107 House market in US distorted by regulation – it was distorted by the profitability of CDOs and an explosion of risky lending when you can play pass the parcel with them from one bank to another. Last bank holding them when the music stops, explodes.
Lack of regulation Ben. Practice saying it and swallowing it. It will get easier in time.
What gave these entities the confidence to take such large risks? It was government intervention in the guise of the U.S. Department of Housing and Urban Development:
http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html
“Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more “affordable” loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.”
So it was only through incentives from HUD that the Government entities of Fannie and Freddie took on these loans which resulted in:
“Today, 3 million to 4 million families are expected to lose their homes to foreclosure because they cannot afford their high-interest subprime loans. Lower-income and minority home buyers — those who were supposed to benefit from HUD’s actions — are falling into default at a rate at least three times that of other borrowers.”
How can you blame a free market when:
“Fannie and Freddie finance about 40 percent of all U.S. mortgages, with $5.3 trillion in outstanding debt. Owned by private shareholders but chartered by Congress, they are exempt from state and local taxes and receive an estimated $6.5 billion-a-year federal subsidy because they can borrow money more cheaply than other investors. In return, they are expected to serve “public purposes,” including helping to make home buying more affordable.”
This is clearly a large (40 percent) government distortion in the market. It was government intervention that clearly lead the charge into the risky lending practices by providing incentives and spearheading policy through Fannie and Freddie.
Ben S,
Fair enough, but there is no need to accept the self-serving interpretation on the role of the government that is now, not surprisingly, promoted by our friends in the Mont Pelerin Society. One of the most important recent examples of this genre is the article John B. Taylor wrote for the WSJ, and which he presented at Mont Pelerin meeting a little while ago, see:
John B. Taylor: “How Government Created the Financial Crisis – Research shows the failure to rescue Lehman did not trigger the fall panic.”
http://www.montpelerin.org/documents/MPS%20NYC%2009%20Papers/John%20Taylor_How%20Government%20Created%20the%2
http://online.wsj.com/article/SB123414310280561945.html
I have pointed out (on another blog forum) that Taylor does not present us any research whatsoever supporting his prefixed conclusions, either in the above article or in the article on which the WSJ/Mont Pelerin stuff is clearly based, namely, Taylor´s
“The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong” (Nov 2008)
The only methodologically acceptable way to provide such evidence would have been
a comparative (Bayesian etc.) analysis of the merits of two rival hypotheses, the first being his own hypothesis and the other something in the spirit of Minsky et al. Alas, Taylor never bothers to formulate that alternative hypothesis and automatically views all the empirical stuff as evidence for his own ideas. That is, as showing that all would have been just fine if the Fed had followed Taylor´s Rule. Or, to put it yet another way, the very dead Wall Street scheme of things can still be revived back to life, if only the buyer (= taxpayer) feeds it with Dr. Taylor´s very own medication.
As I would be the last person to deny that there is much to be learned from von Hayek et al., I have no wish to dismiss John B. Taylor as an economist either, of course. But when I read the above stuff, I cannot help wondering whether it is a matter of self-delusion or deliberate obfuscation.
Sure, the governments do bear a heavy responsibility for creating the whole mess, but where is all discussion of the way governments (and other state institutions) permitted the “financial industry” to “regulate itself”?
All this is absent from Taylor et al. for the simple reason that it would give away the game: the role of Mont Pelerin Society (and similar think tanks) in creating the very system that has now collapsed. Indeed, while Oddsson is not an economist by training, he was no latecomer to Mont Pelerin gospel: Oddsson´s right-libertarian activism dates back to the time when he studied law in university.
And Fannie Mae and Freddie Mac? – I think Randall Dodd, a derivatives expert, gives a much better intro on this controversial topic in his “Subprime: Tentacles of a Crisis”
(Finance & Development December 2007):
Click to access dodd.pdf
Ben S # says
“Fannie and Freddie finance about 40 percent of all U.S. mortgages, with $5.3 trillion in outstanding debt. Owned by private shareholders but chartered by Congress”
So the private sector, receiving subsidies from the public purse at the same time, caused the housing crisis, by your logic. I dont see that it was regulation at fault (unless you mean the broad charter of Congress Ben.)
That is like saying a stop sign caused a car accident. It ignores the drivers responsibility completely.
Apparently the first url that goes with John B. Taylor: “How Government Created the Financial Crisis – Research shows the failure to rescue Lehman did not trigger the fall panic” does not work. Never mind, as it was excess baggage anyway: the article in these two urls is the same.
111# Chacona – it is deliberate willful obfuscation in my view. That is my primary objection to it. Attempts to deceive quite rampant at a time we need sound governance.
Alice they are giant institutions created by the government. The government distorted the usual market signals in order to pursue a social policy which lead to bad outcomes for the people who they were trying to help.
Your simile does not hold because what really happened was the government ripped out the stop signs and told the driver to floor it. If you leave the market alone then behaviour which increases wealth for everyone is rewarded and risky behaviour that leads to problems like these are punished.
I am obfuscating nothing. It is plain that government intervention had an impact on this problem.
Alice,
Well, in some cases it is probably self-delusion, in other cases deliberate obfuscation. But if I do not have sound evidence for the latter interpretation, I must give the benefit of doubt and assume the former. Not least because we should never underestimate the power of our fallibility, although intellectual and moral arrogance is often a close contender.
Of course chacona you mean self-delusion, obfuscation or, the other person is right? If you didn’t even entertain the possibility that the other party was correct then you are certainly not living by the ideals you mention in 116 and are guilty yourself of intellectual and moral arrogance.
Ben S,
The seeds of your disaster lay in the Ginnie Mae privatisation of Fannie Mae in 1968 (privatisation – Pelerin remedy for everything from carbunkles to baldness).
For three decades prior to 1968 Fannie Mae was very successful.
I also note it was Ginnie Mae (the Johnson administrations privatisated model) that invented the mortgage backed security…
Low and behold Freddie Mac was created in 1970 to provide competition to Fannie Mae and also securitize mortgages. The mortgage backed securities were pooled into an SPV in an offshore tax haven country…shouldnt alarm bells have started ringing at this point of shifting the risk to an empty vessel in a tax haven?
So other private Wall street engineers could see how well the private engineers were doing tearing into the safer and more useful functions of Freddie Mac apart and making motza profits…low and behold the Wall street titans all pile into the same market just for the ride.
It was a privatisation fiasco that started it.
Thanks for that link Chacona.
Johnson should never have privatised Freddie Mac to start with. They should never have listened to the free market, privatisation spin merchants. They (the private sector warlords) made their money and now they fund willful falsities, lies, obfuscations and stink tanks.
The party they want isnt a party everyone gets an invitation too.
Ben S,
No, you do not seem to have noticed that I spoke of “the power of our fallibility” that clearly implies that I share this all-too-human frailty, too. But in this case, given the evidence and arguments, sure, I guess and I hope that the self-delusion and obfuscation is on the other side of the debating room.
However, note that I have not said anything about you: “self-delusion” and “obfuscation” refer to people who, given their professional commitment to the issues, must have known better. Hopefully this is not the case with you?
Ben S,
(from Chacona’s excellent link)
In 2003, the government-sponsored enterprises were the source of 76 percent of the mortgage-backed and assetbacked issuances; “private label” issues by major Wall Street firms accounted for the remaining 24 percent, according
to Inside Mortgage Finance. By mid-2006, the government sponsored enterprise share had fallen to 43 percent, with private label issues accounting for 57 percent.
Among the large
private label issuers were well-known firms—such as Wells Fargo, Lehman Brothers, Bear Stearns, JPMorgan, Goldman Sachs, and Bank of America—as well as several major lenders to high-risk subprime borrowers, such as Indymac, WAMU,
and Countrywide.Along with this radical, and rapid, shift in market shares came a similar change in underwriting standards.
Whereas
Fannie Mae and Freddie Mac were almost entirely “prime” mortgage lenders, the private label share grew in large part through the origination and securitization of high-risk subprime mortgages as well as “Alt-A” mortgages, which were made to borrowers who were more creditworthy than subprime customers but presented more risks than prime borrowers.
The rise of subprime mortgage origination and securitization created a problem that had not arisen in markets centered on government-sponsored enterprises.
The key to moving subprime mortgage debt through the market was to divide up the risk, creating low-risk investmentgrade segments and higher-risk (lower-rated) segments from the pool of mortgages. To do this, Wall Street used the collateralized debt obligation, which was created in 1987 by the now defunct investment firm Drexel Burnham Lambert as part of its junk-bond financing of leveraged buyouts.
Ben, give up trying to blame the GFC on the government. That view is negligent.
It seems the GFC was the result of a chain of events stretching back to 1968 with the privatisation of Freddie Mac (why bother? It was working well) and ending with a new twist on an old theme (high risk CDOs) developed and flogged by the original junk bond dealers.
Last paragraph above should read Fannie Mae, not Freddie Mac.
chacona Says: However, note that I have not said anything about you: “self-delusion” and “obfuscation” refer to people who, given their professional commitment to the issues, must have known better. Hopefully this is not the case with you?
This I declare: I am convinced that it is morally unjust to coerce human beings into doing things against their free will. With this in mind I am plagued with subjectivity. Whatever I say will come from the foundation that it is best to leave people to do as they please. I am at heart anti-coercion and anti-state. Until someone proves to me that I am wrong on this, my arguments will be coming from this world view.
Although it may be possible to find utilitarian arguments against voluntary action (I haven’t seen any that are particularly convincing) I am at this stage convinced there is no moral argument for limiting people in this way. This is the ground on which my convictions stand and from which all of my arguments issue.
However I try my best to temper this idealism of mine by trying to fully understand the point of view of the other party and appreciating where they have come to arrive at this point. It is pointless to enter a discussion simply to point score. I want to share my beliefs with others and sharpen my arguments against counter arguments. If you are unwilling to even concede the possibility that you might be wrong then arguing with others is pointless.
Sorry chacona,
I missed your post at 111 before. Having a look at the article I decided to dig up the paper on which I think he bases his arguments.
It’s here: http://www.stanford.edu/~johntayl/FCPR.pdf
I haven’t ready it entirely but a quick preview shows he seems to be saying that the crisis was caused by the fed’s policy of keeping interest rates artificially low. He also makes the point that: The government
sponsored agencies Fannie Mae and Freddie Mac were encouraged to expand and buy mortgage
backed securities, including those formed with the risky sub-prime mortgages.
ben,
do you draw a line at anti-social violent behaviour, or say, speech or action that can lead to violent unrest?
#123
Ben – it doesnt matter what evidence you get you just twist it into some other “fault of the governments” when your first argument “blaming the government” falls over. Nice twisting – worthy of Einfeld.
It was the private coorporations that made a mess of the lending markety in the U.S. market. I will grant you three faults of the governments though (and only three):
1) to be stupid enough to listen to the free efficients markets rubbish that came out of the Chicago School in the 1960s, letting it infect their Treasury outlooks and rushing off to “privatise” a perfectly good system in Fannie Mae.
How appealing it must have seemed to Governments at the time (1970s on) – the nonsense that the private sector and private markets would magically do the job of government for them and do a better job of it.
2) For being stupid enough to de-regulate the financial system to the extent they did.
3) For not reigning the boom in sooner. Greenspan raised the interest rates in measly .025% increments after the 2000s but he should have started sooner and not tapdanced.
Yet for none of the reasons you name…and the main fault was the poor shady practices of private unfettered junk bond dealers, Wall St CEOS and their spivs and spindoctors.
Ben – Ill say it again.
Fannie Mae and Freddie Mac were almost entirely “prime” mortgage lenders, the private label share grew in large part through the origination and securitization of high-risk subprime mortgages as well as “Alt-A” mortgages, which were made to borrowers who were more creditworthy than subprime customers but presented more risks than prime borrowers.
The rise of subprime mortgage origination and securitization created a problem that had not arisen in markets centered on government-sponsored enterprises.
Ben # 122 says
“This I declare: I am convinced that it is morally unjust to coerce human beings into doing things against their free will.”
That is at the very heart of your denial of facts and use of obfuscation and falsities (and those others like you). You will use any argument and you are willing to sacrifice inconvenient truths along the way, to impose your fervent beliefs on others wont you Ben?
alice i have to say you are getting some things arse about face here,
principally you separate government and private capital into two camps which is the first mistake
and secondly you refer to greenspan as part of the government which of course is related to the first mistake,
the fed is a private bank
its chairman acts in concert with the political mouthpeices for private interest
we have to establish a realistic ground to work from, and the dualistic private versus government one is a complete furphy
ignore ben, his worldview is inaccurate and discredited
Ben S,
Well, apparently I am such a poor writer that my message does not reach you. So, maybe I should try again: as a fallibilist I take that all finite beings are fallible (and that we have no good reasons to believe in any non-finite beings, for that matter). It follows ineluctably that I am fallible creature, too.
Given this, how can we ever judge who is right and who is in error in any case under discussion?
Clearly, we cannot decide this with any epistemic certainty, but we do have something called “evidence” and “reasons” that are our best shots in trying to separate what is true from what is false.
In the case under discussion, I think that the evidence and the reasons are very much on the side of those who say that the ideology of “free markets” has been a part of the problem, not a solution to those problems. Of course, that evidence can be challenged and should not be accepted uncritically. It is just that vis-a-vis the strange case of Iceland etc. the usually so vocal contingent of right-wing libertarians has been uncommonly evasive, when not in denial pure and simple.
As for those libertarian beliefs, well, I am a libertarian myself! Alas, my brand of libertarianism does not deny the existence of systemic (sometimes global systemic) problems that cannot be addressed individualistically. There are problems that can be successfully tackled only by adopting a “we” attitude – and by creating institutions, policies etc. that are capable of turning that “we” approach into effective action. As a libertarian by basic beliefs and values, I very much hope that this would mean collective action based on voluntary and rational assent, but knowing the realities of this world, I know that often we have to accept that the institution is a state or something similar. It is not nice, but one has to be realistic and do what can be done under the circumstances.
Moreover, I reject ethical egoism and stress the role of solidarity and equality as values that are as important as freedom (liberty, I do not want to be too pedantic here) for social justice.
But, yes, the autonomy and integrity of individuals are values that are very close to my heart. I know that these values are likely to bias my thinking in various ways and hence I try to be self-critical and learn from those who think differently. Which means that I welcome the opportunity to have an exchange of views and opinions with you, too.
By the way, that same attitude extends to members of the Mont Pelerin Society, when they show willingness to discuss openly their own role and views. Just recently, Deepak Lal, in his Presidential Address to Mont Pelerin Society, raised questions that I would gladly discuss with him – or with anyone sharing his way of thinking. See: “Mont Pelerin Society – A Mandate Renewed”, http://www.econ.ucla.edu/lal/
But should we provide a bailout for those activists within the MPS that have played an important role in creating this disaster – and are now trying to find ways to evade their own responsibility? Well, no!
I sent the Michael Lewis article on Iceland’s financial follies to Steve Sailer for comment. A couple of days later he came out with the following, comparing Iceland’s follies with Wall Streets knaveries:
I think the same can be said for many of the Mont Perelin society’s afficionados. THis is roughly the difference bw idealised economic theory and real world business practice. It is interesting to note that neither Mises or Hayek were notable successes in the world of business or ministerial officialdom. Whereas Keynes was a very sharp investor.
The Mont Pellies were kind of other-worldly.
By contrast the Big Players in the GFC have pretty much all gotten clear without serious harm, when averaging out their final net position over the number of years they were playing for high stakes.
– Paulson has just bought into a gold company in South Africa.
– Rubin, one of the 10 most unethical people in business, just got a massive CitiBank payout.
– Madoff had the longest and richest ride of any scammer in history
– Bears Sterns, Merrill Lynch, Lehman Bros, Saloman Bros despite being scandal-ridden and bankrupt have all been taken over and bonused-up with all the failures getting golden parachutes.
– Citibank, AIG, Goldman Sachs and Morgan Stanley executives have all prospered from their knaveries and follies, largely at taxpayer expense.
If you give Big Swinging Dicks free time in the Money Pool dont be surprised if they drain it dry then p*ss in it.
We had our own version of Mont Pelerin society and Iceland: Hewson and FightBack. Hewson was a highly qualified free-market economist. But he turned every thing he touched into rubbish. Alot of good his theories did him.
By contrast Keating at least understood the importance of real world business wheeling and political dealing. He never got “married to the position” of financial or cultural liberalism. (That didnt mean he was right to have an affair with them.)
Hewson and the Mont Pellies are a bit like those people in the John Cale wrote about in the Songs for Drella:
i am sure i read somewhere in the last few days that keynes’ father had to bail him out at some point
Alice,
Which facts am I denying? I am simply stating that any argument blaming a free market economy doesn’t take into account the fact that 40% of said market was owned by government agencies. You sure can blame a mixed economy and make a case that it would be better to have tighter control through regulation than what was happening but you cannot claim with any honesty that it was a free market.
smiths @ #124: I find much wisdom in the adage: Sticks and stones will break my bones but names will never harm me.
I know I am in a minority on this as many would ban speech that incites violence. For me this takes the onus away from the dude who throws the first punch which is where the blame should lie.
chacona I’m not sure I follow you at 129. I don’t know which of my various posts that was a response to. My post @ 122 was owning up to my own fallibility and that was my only point really.
I can answer this though:
But should we provide a bailout for those activists within the MPS that have played an important role in creating this disaster – and are now trying to find ways to evade their own responsibility?
An emphatic no. Anyone who said at the time that what Iceland was doing is a viable thing and emblematic of responsible free market behaviour was very wrong. It once again comes back to freedom tempered with responsibility.
ben,
do you believe in the existence of society?
This is getting abstract. Yes. Ideally a society should be based on voluntary interactions but yes I do believe in the existence of society.
Ben
Neither Freddie Mac or Fanny Mae could be seen as government agencies. They had been “privatised” or were “private” (as in the case of Freddie Mac) a mentioned above. Is Telstra, by your definition a government agency because it is subject to some government regulations (in the case of Fannie Mae and Freddie Mac – a congress charter, but notwithstanding run by the private sector – with I might add some public subsidies).
You insist on saying 40% of the market was owned by government agencies. Wrong – completely.
Fannie Mae and Freddie Mac’s loans were PRIME not subprime. It was the subprime loans that brought down the market. These were developed by private institutions like Drexel Burnam Lambert, the same firm that had a hand in developing CDOs with tranches of suprime loans in them. One Michael Milken at Drexel Burnam Lambert, already brought down markets in the 1980s with these junk bonds and ended up convicted of securities law violations and a bankrupt – likely along with a lot of investors they preyed on (Yet another ponzi scheme care of the financial whiz kids).
I posted it up there and notwithstanding your figure of 40% government agencies “owning the market” which is incorrect anyway, that still leaves 60% private institutions, and that 60% were the ones who bundled exploading bad loans and played pass the parcel with them (round and round and round they go and where they stop nobody knows).
Blatantly wrong information Ben S. A falsity. An obfuscation. An untruth. A fabrication. A deceit, A tall tale and and a dizzying display of denial.
Quite impressive that you are still in here batting away.
Do you get paid per post by any chance?
Smiths,
“the fed is a private bank
its chairman acts in concert with the political mouthpeices for private interest”
Point taken. One likes to think they act in the best interests of the economy, but I temporarily took leave of my senses…..an oval table around which the money men ponder…?
We cant ever forget Mr Robert Gibsons deeds can we?
Smiths says
“principally you separate government and private capital into two camps which is the first mistake”
Yes Smiths you are right on that too. I am trying my best to call for a distinction between the two (as in the prior superior – yet not perfect – nothing is – notion of a public sector with a public purpose distinct from a private sector with a private purpose – which is how it should be if they want to repair some of this mess).
Yes – the modern reality is, the public sector has been shot to pieces, is full of holes and looks like swiss cheese with some nasty rodents feasting on it (thanks to that odious Chicago School in my opinion).
Alice – the Chicago School merely pointed out the massive failings in Government intervention and control. It’s popularity grew in the 1970s when in western countries the role of government continued to expand: the failings were evident to most people.
The public sector is decidedly inefficient in providing services at the public’s expense. It is anaemic to change. It is dominated by union control. Productivity is ignored in place for a gentler version of work. The public sector needs a radical overhaul to work efficiently and effectively.
But Alice the influence of Fannie and Freddie being Government Sponsored Enterprises was leading to a distortion in the market. It meant that investors had too much trust in the government bailing them out as they were considered “too big to fail”.
Alan Greenspan understood this back in 2004 and testified as much in the Senate Banking committee.
“Even though the federal government does not guarantee the securities of Fannie Mae or Freddie Mac, Mr. Greenspan suggested that their special status as ”government-sponsored enterprises” and their huge size would make it difficult for Congress to avoid a bailout in the event of a financial calamity. ”It’s basically creating an abnormality, which the system cannot close around, and the potential of that is a systemic risk in — sometime in the future, if they continue to increase at the rate at which they are.””
This is a clear case of the government causing a disturbance which no doubt helped fuel the problem.
Ben – give it up. You are making yourself look silly.
You too Sean.
Alice,
Just respond to the points made. Ben S has made a very important point which I would like to hear your thoughts on.
I refer you back to my point at 138 but it is incredilby tiresome repeating myself Sean. Do not ask again.
Alice – I just read your comments. My reply is below.
As a market participant I cannot believe what you have written you view as correct.
Let us start with Drexel. Drexel is gone. Collapsed. It collapsed because of Milken. It collapsed nearly 20 years ago. Drexel HAD NOTHING TO DO WITH SUBPRIME MORTGAGES. I know that it is in caps but it is important. Drexel was in junk bonds – corporate bonds for small or poor credit rated companies. They then sell this to the market. This was done in the 1980s and then Milken got arrested. Drexel were involved in trading but focused on Corporate bonds NOT the mortgage bonds.
Mortgage securities trading was an innovation by Fannie and Freddie who started the securitisation process in the early 1970s and by Salomon Brothers who were trading Mortgage Securities since the late 1970s.
Fannie and Freddie had the profits privatised and had their losses subsidised by the Government. It was a guarantee that meant they were prepared to underwrite (effectively own) that 40%. Had Fannie and Freddie not got this guarantee it would never have pushed subprime debt.
Fannie and Freddie, let me repeat, pushed the expansion of subprime borrowing by underwriting it. They got a fee and any loss was picked up by the US Federal Government. Had they not existed we will not be in this mess in the first place.
I might also add Ben and Sean, by the very fact I debate with you actually gives you airplay for your “idealistic views.’ The idealism of youth is attractive but rarely useful in a practical sense. Still, such idealism serves its place, to help you discover that the world is not as straightforward as you think and people cannot be bent to some “ideal world” as easily as you think either.
What will go on happening is the word “order”; a word fundamental to the smooth functioning of the society or economy we live in. Despite your lofty ideals, the market has proved itself of late, ill equipped to provide that order. In terms of the essential aspects of government intervention in order, in regulation, in income redistribution, you should also not ignore the words of President Kennedy – “if we cannot look after the poor, then God help the rich”.
Thankyou for patronising me.
Can you read comment 20 in this thread: https://johnquiggin.com/index.php/archives/2009/03/06/weekend-reflections-116/#comments
The come back and say that I am idealistic.
Sean# G
Had Fannie and Freddie not got this guarantee it would never have pushed subprime debt.
I repeat
Both Fannie and Freddie were in prime loans not subprime loans. The private sector developed the taste for subprime loans.
Sean of the Dead?