Why Did So Many Fail To Predict The Crisis?

[Buckeroo]

Obviously the collection of taxes and distribution of public goods.

But the main Government intervention as far as the financial sector, should be in the control of bubbles. The derivative and credit expansions are really the main problems here and could have/should have been contained in the first place.

Why weren't they contained? There is no excuse, except that guys like Greenspan believed that even after a bubble bursts, the economy would have generated enough growth (in the bubble phase) to offset the negative impact of that burst (at least that is how these guys justify it after the fact).

No good blaming the fall guys - the momentum for continued credit growth was because of us, the general public. If Governments tried to curb people spending because they were racking up debts, they would be voted out. Treasury, even though Governments say they are independent, always take into account the party line.

And yes regulation was & still is, very poor, but still no Government wants to tackle it. Even our own Government, knowing the consequences, has set up its own sub prime lending risk just to keep the construction industry happy during the downturn. They don't want to upset anyone and that's the problem.

As I said, I still reckon the only way out is to allow a free market correction. This way, Governments aren't responsible and their role would be to ensure that our social system is maintained to assist people who fall on hard times.

Cheers

 

[MRC & Co]

No good blaming the fall guys - the momentum for continued credit growth was because of us, the general public. If Governments tried to curb people spending because they were racking up debts, they would be voted out.

So how are free markets going to work if credit growth is because of greed?

If the Government reigned in credit, they would not be voted out, they have altered credit conditions numerous times without 99% of folk even noticing.

Anyways, not really a debate I want to get into.

Cheers

 

[Mr J]

As I said, I still reckon the only way out is to allow a free market correction. This way, Governments aren't responsible and their role would be to ensure that our social system is maintained to assist people who fall on hard times.

The public as a whole does not understand this, which is why all governments are trying to play 'hero' and save the world from the 'GFC'.

 

[wayneL]

FYI

The current meme is that the free market has failed, that laissez faire economics is responsible for the current malaise.

That's total nonsense.

http://mises.org/Controls/Media/MediaPlayer.aspx?Id=3952 (audio file)

More at http://mises.org Do a search.

 

[Mr J]

Wayne, you may as well just write the rest in French. :

 

[wayneL]

A real free market in action:

http://en.wikipedia.org/wiki/1921_recession

La récession 1921 était une récession déflationniste extrêmement pointue après la Première Guerre Mondiale. Elle a duré jusqu'en 1923. L'ampleur de la déflation était non seulement grande, mais grande relativement au déclin de accompagnement dans le produit réel. [citation requise] les économistes et les historiens autrichiens d'école arguent du fait que la récession 1921 était une correction nécessaire du marché, exigée pour machiner les réalignements massifs exigés de l'affaire privée et de l'industrie suivant la fin de la guerre (qui avait marqué une période des déformations de masse de gouvernement aux marchés libres). L'épisode 1921 est choquant en termes de sévérité de la diminution et pour la nature rapide du rétablissement.

::

I bet nobody heard of the 1921-23 depression. More details in the audio file I posted.

 

[Temjin]

Yeh, I agree with nearly all you say Knobby.

'Free markets', do not work. There was too much freedom allowed in this mess, which is what caused it in the first place. But it is very hard to find any kind of balance, regulatory authorities really do need to be more proactive, automomous and dynamic.

Most people seem to think "free market" as in that there are absolutely no "regulatory" body and that every businesses would do everything in their power to fraud or monoplise everyone else at their expense for their own good.

That is just plain wrong.

A free market, in which the Austrian economists believed, (and based on my interpretion) is that the process of price discovery is totally free and unhindered. There should be no protectism or flavourism of ANY KIND, period. And that all prices, wages and profits are determined not by the arbitrary whim of the rich or the poor, or not by anyone's greed or needs, but by the law of supply and demand. Voluntary participations amoung all participants who would seek mutual benefits from the decisions they are making.

However, a free market will still require a regulatory body to oversea the rules and laws needed to prevent acts of fraud. That is, acts that violate the principle of personal liberty in which a person's own rightful property is unlawfully "stolen". The rules and laws SHOULD BE determined by democratic means.

Now heading back to reality, do anyone of you see this in practice in real life??

Of course no, there are far too many vested interest parties (both on government, corporate and individual levels) who would DO ANYTHING to maintain their "properties" at the expense of others. Pure greed.

Now we get to the point of those blaming free markets for the GFC. For example, how the free market let loan apprasiers to skip diligence standards and provide loans to people who certainly would not be qualified for it under "normal" circumstances. Or how investment banks are allowed under the "free market" to lend out so much and under-estimate the risk while holding very little equity and in addition, becoming so big that they represent systematic hazard to the financial industry. Or maybe how the free market allowed speculators to play on the stock/future markets that pushed up or down the market in an irrational way (oil price shock, blaming short sellers).

However, EVERY EXAMPLES OF THESE "free market failures" are merely a consequence of something bigger. That is, the free market was NEVER ALLOWED practised in the first place.

The government regulatory bodies had DIRECTLY intervened with the supply and cost of money by allowing businesses to borrow at a rate that would otherwise be considered "too low" under freely market determined rates. This create so much distortion to the market that people have totally miscalculate the level of risk they should be taking and ultimately, used the "cheap" money on something that would not have been profitable at all, and/or sustainable in the long term. This of course, distort other market players who would otherwise think it's "normal" because the opportunity was available to them. (i.e. young 18 yrs old kid borrowing few hundred ks with only $20,000 deposit with little work history or market speculators who borrowed huge on margin to play on ever rising asset prices)

In essential, and to repeat this again, the free market DID NOT FAILED because there was never a free market in the first place. At least not in the modern economy.

There will never be a set of "perfect" regulations that would totally get rid of frauds and thieves. This is because we are all humans and greed has always been with us.

The saddened fact is that the governments continue to attack the "free market" for problems that they intentionally (or unintentionally) created themselves. They would then intervene with what the free market would have done by rewarding those who fail to utilise the resources in an effective way and punish those who can.

Again, I am not saying we should NOT regulate the economy and let frauds to run rampage. What I am saying that the intervention policies that are being used right now to "solve" the crisis is nothing more than creating even more distortions to the market and prolonging the downturn.

The next thing we should do is to jail all those bloody central bankers who KNEW they are committing fraud at the highest level but are getting away because they are in a position of power. (It makes Madoff's fraud pales in comparsion)

 

[Knobby22]

Temjin

What do think of the freeing up of the banks under Bush that allowed banks more financial freedoms that were limited after the last depression?

 

[Buckeroo]

So how are free markets going to work if credit growth is because of greed?

If the Government reigned in credit, they would not be voted out, they have altered credit conditions numerous times without 99% of folk even noticing.

Anyways, not really a debate I want to get into.

Cheers

Moderation my dear Watson.

If Governments don't want bubbles, then they have to regulate. Back in the 80's when I purchased my first home, I had to save 30% of the value of the house. It was the only way the banks would give me a loan and it ensured that I had equity to help buffer the economic ups & downs. Who saves for a house these days?

If Rudd decided to apply this same principle, would people still vote for him. The first thing you would hear is housing affordability has gone through the roof blah blah blah.

Anyway, greed is ok, but you have to be prepared to take the good & the bad. If you want to enjoy the benefits of a bubble, then take your medicine when the bubble bursts. Prudent people tend to save when the bubble is forming, so they are ready & prepared when it happens.

Cheers

 

[Mr J]

If Rudd decided to apply this same principle, would people still vote for him.

You think so? I would think there would be a massive whinge at how hard it had become to earn the 'Australian Dream'. Why would people suddenly respect hard work, saving and earning after experiencing the credit spend-money-like-water environment? As a hot actress once said, the mob is a fickle bunch.

 

[Temjin]

Temjin

What do think of the freeing up of the banks under Bush that allowed banks more financial freedoms that were limited after the last depression?

I know what you are trying to stir up and this discussion can be quite controversary and is probably beyond my understanding of the whole free market concept to explain.

Yes, we all know (assuming!!) that Alan Greenspan had increased the debt-to-net-capital ratio for the FIVE investment banks from 12-to-1 to up to 30 or even 40 times in 2004. This was after the SEC created the 12-to-1 rule in 1975 as part of regulatory policy to mitigate the inherent risk of the fractional reserve banking. (which from an Austrian economic point of view, is fraudent and should never have been practicised from day one, or at least not in current form)

And of course, we all know what happened to these big five banks. Ironically, when Alan Greenspan enacted these exemptions, he claimed that it was to regulate them even more because these rules would strengthened the oversight of the securities market, where prior to their adoption, there was no formal one. It was claimed that it is now easier to oversee the market and ensure better management of risk.

Any person would simply see this was a failure of the free market because they were allowed to ramp up their leverage so high and created a huge systematic risk. Naturally, the people wanted MORE regulations in order to prevent it from happening again. (as if we don't have enough already, just check how many agencies/firms/people employed in the regulatory industry!)

Here is a quote from Mises

Public opinion has become convinced that such happenings are inevitable in the unhampered market economy. People did not conceive that what they lamented was the necessary outcome of policies directed toward a lowering of the rate of interest by means of credit expansion. They stubbornly kept to these policies and tried in vain to fight their undesired consequences by more and more government interference.

In other words, the low interest rate policies set by the central bankers (REGULATION!!!!) because they BELIEVE it would be beneficial for the economy, had actually distorted the rate of credit expansion and allowed for the return for more booms and busts. When banks failed as a result of it, the public would look to blame the free market due to some regulatory changes but then NEVER QUESTION why they really failed in the first place. They only seek to understand the consequences but don't look at the cause.

They question how free market had failed but do not realise how the central banks manipulation of interest rates was actually responsible for the bust!

If only market interest rates were left DETERMINED by the FREE MARKET, then there wouldn't have been any unhampered rapid expansion of credits and the banks would not be fooled into expanding credit so fast.

If we want to solve this, they should just get rid of the central banks and let the market determine the interest rates! But of course, you can imagine what will happen next. Big bust! Unhappy bankers! And these unhappy bankers will cry for bail outs / intervention to the votes-hungry-politicans.

The core issue has never been the regulation of capital reserve requirements or lending criteria from the banks, but rather the issue was that the government INTERVENED with how credit should have been priced. The former wouldn't happen if the latter didn't.

I believe that the banks would be perfectly be capable of setting their own capital reserve requirements, etc if the markets were truly free. Why would they be crazy enough to increase their leverage ratio to 50 times (for more profit) if they know a tiny default on loans would bust them out?

Of course, investment banks are doing it now because they KNOW that they will not be allowed to fail. Moral hazards at its worst thanks to all these regulations.

 

[Buckeroo]

You think so? I would think there would be a massive whinge at how hard it had become to earn the 'Australian Dream'. Why would people suddenly respect hard work, saving and earning after experiencing the credit spend-money-like-water environment? As a hot actress once said, the mob is a fickle bunch.

Yep - couldn't agree more and I'm thinking the mob may not have much time to wait before they find out what life's like without the frills.

Cheers

 

[Glen48]

http://news.bbc.co.uk/2/hi/business/8142838.stm?ref=patrick.net
Hers some thing else they forgot to think about.

 

[Julia]

I'm not sure this is the right thread, but here is a very interesting discussion between Professor John Quiggan (main address), Steve Keen and Guy Debelle.

Just under an hour but really worth listening to:

http://www.abc.net.au/rn/bigideas/stories/2009/2663111.htm

 

[Buckeroo]

I'm not sure this is the right thread, but here is a very interesting discussion between Professor John Quiggan (main address), Steve Keen and Guy Debelle.

Just under an hour but really worth listening to:

http://www.abc.net.au/rn/bigideas/stories/2009/2663111.htm

Can you give us a quick summary Julia? Bit long for me - got to wash the dishes & put the kids to bed!

Cheers

 

[Julia]

Buckeroo, here is the header for the programme:

New Times New Approaches: exploring Australia's economic options

The global economic situation in 2009 is complex and rapidly changing. It's been the subject of much debate and speculation both locally and internationally, but what do we really know about the implications for Australia, now and in the future?

Essentially each of the three speakers gives their summary of why they consider the GFC occurred, and then offers their views about the efficacy or otherwise of the remedial measures applied by governments. Then they give the expectations for the future.

There is some disagreement amongst the three speakers which adds to the interest. Well worth making the time for if you can.

 

[Buckeroo]

Buckeroo, here is the header for the programme:



Essentially each of the three speakers gives their summary of why they consider the GFC occurred, and then offers their views about the efficacy or otherwise of the remedial measures applied by governments. Then they give the expectations for the future.

There is some disagreement amongst the three speakers which adds to the interest. Well worth making the time for if you can.

Thanks Julia - you've convinced me, will have a look this weekend

Cheers

 

[joeyr46]

We should be asking now why so many are convinced everything is back on track (albeit at a slower pace) and failing to see the problems that still exist or have actually got worse, Higher unemployment more debt both public and government and less profits in real economy as opposed to in banking which produces nothing for real economy although important in it,s own right.
Looking at charts nothing actually looks bullish on the long term charts but neither has anything reached or formed a bottom. Given the magnitude of the correction and the break of long term trend lines in many things and supposed V bottom. Have heard about this phenomenon but have never seen it happen.
So why are so many saying things are good again and a new bull market are they using the same tools as last time

 

[Timmy]

We should be asking now why so many are convinced everything is back on track (albeit at a slower pace) and failing to see the problems that still exist or have actually got worse,

My perception is this is not the case at all, quite the opposite. Most of what I read on commentary/blogs/forums is extremely bearish and pessimistic.

 

[joeyr46]

My perception is this is not the case at all, quite the opposite. Most of what I read on commentary/blogs/forums is extremely bearish and pessimistic.

Try the mainstream press Financial review and daily papers worst I've seen is expecting small consolidation and then continue even Krudd and Henry are being criticized for being too cautious and told to reign in the stimulus package and of course were starting to get share issues like Myer that usually happens at tops