Comments on: A Doomsday Cycle

By: Brendan McHugh

Brendan McHugh — Wed, 03 Mar 2010 00:42:32 +0000

Could the precipitation of another great depression possibly lead people to see that Small is Beautiful?

By: D.W. Sabin

D.W. Sabin — Tue, 02 Mar 2010 22:40:58 +0000

Am I mistaken or did I hear that the current plan for improved regulation will place the Regulatory Agency within the FED….. with the idea that it must be “independent”. Independent from whom one might wonder.

By: The Reticulator

The Reticulator — Tue, 02 Mar 2010 13:20:49 +0000

” The only other alternative is to increase government control over those entities whose failure threatens everyone.”

You have just made a powerful case against the further nationalization of health care, where “those entities” are human individuals.

By: The Reticulator

The Reticulator — Tue, 02 Mar 2010 13:18:48 +0000

“Corporate interests own our politicians, our courts”

If only this were true.

By: Bruce Smith

Bruce Smith — Tue, 02 Mar 2010 00:26:32 +0000

In the United States the economic and political systems are dysfunctional because of their corruption by corporations. The Democratic and Republican Parties are heavily corrupted and can no longer be trusted. The only option is to build a new party which I would call the Center Party since its aim would be to build a platform that avoided the Principal – Agent problems of Big Government and Big Capitalism.

By: rex

rex — Mon, 01 Mar 2010 23:50:25 +0000

“…the solution is clear: break them up.”

Mark it is fine idea, I am 100% there with you, but I do not see anything short of a revolution that could accomplish this. Corporate interests own our politicians, our courts, and it appears that any populist political movement will be subverted. If you can see a path, I love to hear it.

By: Bruce Smith

Bruce Smith — Mon, 01 Mar 2010 15:16:54 +0000

The responsibility for creating credit needs to be transferred to a democratically accountable body that can then auction out credit parcels to private banks to ration out for socially optimal objectives.

By: John Médaille

John Médaille — Mon, 01 Mar 2010 13:28:34 +0000

Roberto. That is correct. In our system, money is created as loans.

By: Roberto

Roberto — Mon, 01 Mar 2010 12:50:05 +0000

John, am I correct to infer that what you mean by “a system where a private group of citizens can create money” refers to credit?

By: John Médaille

John Médaille — Sun, 28 Feb 2010 21:04:13 +0000

The gov’t doesn’t set interest rates, except for money that it lends. The rest of the market is private. What the Fed does is try to influence the amount of money the banks can create. The fault is not with the Fed, it is with a system where a private group of citizens can create money. IN fact, they create about 95% of the money in circulation. The current doesn’t need to be reformed; it needs to be abolished.

By: Ethan C.

Ethan C. — Sun, 28 Feb 2010 21:02:00 +0000

There’s another element to add onto this: *why* did the institutions pursue such risky schemes? Even with the implicit government guarantees that they had, it was still dangerous for them. As folks like Lehman Brothers found out, it’s not always good to be at the mercy of the government.

David Layman (“Spengler” at First Things) has argued (here) that the reason the financial industry created all the additional high-risk derivatives, like MBSs and CDOs, and pretended that they were not risky is because they needed unrealistically high return rates to meet the obligations of retirement funds.

When retirement funds require a return of 8-9%, there needs to be a product out there that can achieve that. There weren’t enough high-return low-risk securities out there to meet demand, so the market turned to the only place with supposedly “guaranteed” high returns: real estate. The idea was to turn real estate into mortgage-backed securities, so that mutual funds and retirement funds could cash in on the housing boom. But because those entities were required to only invest in safe, highly-rated securities, the ratings agencies were deputized to rate all of those MBSs as highly as they could.

This was great at first. As the housing boom and the retirement funding boom both continued, there was more and more demand for MBSs. That’s why mortgage brokers had such a high incentive to sign up anybody they could find, no matter how broke, for a mortgage. The retirement funds were buying up everything in sight, and the ratings agencies were greasing it all up with AAA ratings.

So yes, we need loads of reform to discourage big banks from thinking the government is going to guarantee them against risk. But we also need to figure out how to cope with a retirement flood without having to manufacture trillions of imaginary dollars in derivatives and then pretend that they are safe bonds.

By: polistra

polistra — Sun, 28 Feb 2010 14:13:07 +0000

The simple solution would be to take the Fed out of the business of setting interest. As it stands, the criminals have access to a privileged source of better-than-free money, which they can then use to generate all sorts of frauds and crimes…. (Derivatives, Carbon Credits, etc) … while the honest people have to borrow through other channels, where money is either exceedingly scarce or exceedingly expensive.

The whole point of having interest rates was to apply normal supply-and-demand discipline to both borrowing and saving. Until this is restored, all the money will remain in the criminal sphere.

Won’t happen, of course, because the criminals have total control. As demonstrated nicely when 70 occupants of the Senate confessed their role as accomplices in bribery by re-confirming Bugsy Bernanke.