Greenspan Says He Was Wrong On Regulation
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Even Greenspan seemed genuinely perplexed yesterday by all that had happened, hard-pressed to explain how formerly fundamental truths about how markets work could have proved so wrong.
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“When bubbles cause huge problems is when they cause the financial sector to seize up,” said Frederic S. Mishkin, a Columbia University economist and, until recently, Fed governor. “The right way to deal with that kind of bubble is not with monetary policy,” but with bank supervision and other regulatory powers.
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While endorsing some expanded regulation yesterday, such as requiring the companies that combine large numbers of loans into securities to hold on to significant numbers of those securities, he also repeatedly retreated to his libertarian-leaning roots, and warned of the dangers of overreacting.
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“I made a mistake,” Greenspan said, “in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”
The key is to strive for properly functioning markets. Unfortunately that does not mean allowing those that give large payments to politicians to foist huge risks on the economy by exempting themselves from sensible regulation. I guess some people get confused that the benefits of “free markets” are not the same as standing back and allowing powerful interests to manipulate markets and risk economies. The benefits of a free market are provided to the economy when the market is free not when large, powerful organizations are allowed to exert undue influence on markets.
I don’t really understand how people could think “free markets” are about letting special interests be free to manipulate markets. It is not really something that should be confusing to people that have thought enough to have an opinion on the benefits of free markets. The dangers of monopolies and business people conspiring to extract benefit (for those in the cartel, trust, conspiracy…) by manipulating the market was well know from the initial minds putting together capitalist theory. And the obvious method to allow the benefits of the free market to be maintained was regulation to prevent those that sought to manipulate the market for their benefit.
And the dangers of overly leveraged financial institutions should be obvious to anyone with a modicum of understanding of financial history. Then make those overly leveraged financial institutions large (too be to fail) types and you really are asking for disaster. Add in a extremely large use of debt by the public and private sectors (living beyond your means). Then throw in encouraging reckless short term thinking by providing enormous cash bonuses for paper potential profits and you really have to wonder how anyone could think this was not a perfect design to assure a financial meltdown.
Related: Too Big to Fail, Too Big to Exist – Fed to Loan AIG $85 Billion in Rescue – 2nd Largest Bank Failure in USA History
Treasury Now Favors Creation of Huge Banks, New York Times, 1987:
The Treasury plan, which would permit the acquisition of banks by large industrial companies, was also endorsed by Alan Greenspan, in an interview before President Reagan nominated him this week to be chairman of the Federal Reserve Board.
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Mr. Gould acknowledged that any policy promoting the creation of very large financial institutions encounters deep-seated sentiments that date from the founding of the Republic. But he thinks the nomination of Mr. Greenspan could provide an important stimulus for change. Mr. Greenspan contends that many of the laws restricting commercial banks severely limit their ability to adapt to a changing marketplace.
The Reagan Administration has met frustration in its efforts to lessen regulation of banking, largely because Paul A. Volcker, the current Federal Reserve chairman, has firmly opposed any move that would begin to break down the barriers that prohibit large nonbanking companies from owning banks. Mr. Volcker has also been rather grudging in his support of changes that would allow interstate banking and the underwriting of securities by banks.
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”We have been the beneficiaries of living in a relatively insulated big economy, and only recently have we found out that the Japanese can make automobiles better than we do,” said Hans Angermueller, vice chairman of Citicorp. ”We are discovering that the same thing may apply in the financial services area, and to meet that challenge, we need to get leaner, meaner and stronger. We don’t do this by preserving the heartwarming idea that 14,000 banks are wonderful for our country.”
The New York Times web archive is a great resource for viewing the historical trends to turn away form the capitalist ideas of free market competition and instead move toward large market dominating banks. You get the impression from people talking about “free markets” that they have never actually read Adam Smith, Ricardo, Mills…
Related: Ignorance of What Capitalism Is – Not Understanding Capitalism – Canadian Banks Avoid Failures Common Elsewhere – Monopolies and Oligopolies do not a Free Market Make – Estate Tax Repeal
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re: New Rule: If your company is to big to fail, your company is too big to exist. The next Prez. needs to split up huge companies like we did with AT&T.
Exactly right. Companies too big to fail have massive negative externalities that should be managed through regulation. And the discussion (see link) of this claiming that the huge, anti-capitalist, companies that exist now are not monopolies and therefore anti-trust laws should not be used makes no sense. Anti-trust laws are not for monopolies. Trusts were huge anti-competitive organizations that sought to eliminate the free market and extract benefits by distorting the market. Those laws were adopted not to regulate monopolies but to regulate anti-competitive behavior.
The free market theory formulated by Adam Smith et.al. was based on perfect competition where no one entity could influence the market. In reality that is not possible but approximations of it can exist (we are far from such a state today, however). Fine, the anti-capitalist large corporations are not monopolies – they are oligopolistic that can still extract profits through their ability to distort the free market. Is the fact they are not a monopoly really that relevant?
Enforcing rules that prevent businesses from using their size and power to extract outsized profits is the right thing to do. Anti-trust laws are the proper tool. when politicians are paid lots of money by people with the gold to allow them to cripple the free market and create large corporations that profit, not by competing in a free market, but by manipulating the market that is a bad practice. It won’t change until people stop electing politicians that reward those that pay them for favors. And that is unlikely to happen anytime soon.
What we can hope is that there is some limit on how egregious the favors politicians grant those paying them money are. Maybe this latest escapade (and the costs of those favors to bankers) will cause a reduction in the favors granted. I don’t have high expectations for the changes though.
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Chatting with Obama by Bill O’Reilly
I really wish people understood capitalism. Capitalism requires regulation. It was known to all the economist in Adam Smith’s time that the government must regulate or powerful forces that would not allow the free market to function as it should – which destroys the potential of capitalism. This is not some minor point, it is absolutely essential to the theory of how capitalism provides value to society.
The ignorance that equates allowing manipulation of the market by powerful forces undermining capitalism (which is supported by those that claim to support capitalism – “regulation distorting free markets”) with disrupting the free market annoys me. I know I should accept that ignorance is just rampant but sometimes I can’t get over it. I truly support capitalism and seeing it abused by so many ignorant pundits and politicians is distressing.
And when those with influence constantly reinforce ideas based on ignorance then many, that can’t think for themselves, accept idiotic ideas like “free markets” should allow oligopolies to consolidate reducing the benefits of capitalism, that polluters should be allowed to push negative externalities onto the public, that allowing trust fund babies to receive massive inheritances is good (capitalism is meant to reward those that contribute, not reward those who were related to someone useful) and that the inheritance tax is bad (it is the BEST tax that exists, arguably along with taxes on negative externalities) and on and on.
The idiotic idea that government regulation of markets is interference is equivalent to saying police interfere with freedom by enforcing laws against violent crime. Yes the watchmen must be watched. You can have bad policing and bad regulation; but the idea that policing the free market, in itself is wrong, is so ignorant we have to stop accepting such claims as if they were anything but ravings of radicals or ignorant people (or people that are both).
By the way I am using ignorant with the sense of “lacking knowledge or comprehension of the thing specified.” Sometimes the word is used to claim the other person’s opinion is wrong, which is not an accurate way to use the word. It is my opinion that those espousing crazy ideas like, free markets are those without regulation, don’t understand capitalism is based upon the idea of perfect competition. If they do, but have decided that fundamental aspect (along with negative externalities, rewards based on who your parents are instead of what you produce…) of capitalism is wrong, but they have a new theory that somehow updates capitalism I am waiting to hear about it. I am basing my guess of their ignorance on their statement seeming to be completely disconnected with capitalist theory.
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In response to: Fair Use Rights by David Bradley
Copyright is a taking of a public benefit for a private entity. This was put into law in order to increase the total public benefit. The idea was that taking from the public to provide the creator a limited-term, exclusive, government-granted, right to their work would encourage individuals to invest their time in creating works that would benefit society.
So the debate is properly about how great the taking from the public should be. It seem to me the current situation is completely corrupt. Many of the actions are taking public benefit to provide to the private entity where no possible public benefit exists. Extending copyright periods of long ago created works, where obviously the public is harmed purely for private benefit. No possible argument can be made that their is a payoff to the public for this taking.
If you wanted to take such an action and made it only for new work then their could be an argument that now a creator knows they have 100 years of government provided rights and therefore investing more time and effort in their work creates new and better work. I don’t believe this argument but at least it is possible. The current actions though are mainly about large companies using government to take from the public to provide themselves private benefit with no corresponding public benefit.
Lawrence Lessig is the person who has the best insight in this area, in my opinion: The Value of the Public Domain.
Dr. Deming published his seven deadly diseases of western management a couple decades ago. I would add 2 new diseases: Excessive executive compensation and a broken intellectual property system.
Fair use is the right to reference (and quote limited portions of) works that have been granted government copyright protection. This is integral to the whole idea of creating the greatest public benefit (even while providing some government imposed limits on public rights to the creator). The large companies now are using lawyers to greatly increase the harm to society by expanding the taking of public benefit. They threaten and scare many into paying fees (or completely avoiding works that have been granted limited government granted copyright rights) where none are are rightly due (see Lawrence Lessig for examples). This causes great harm to society for the private benefit of a few. This is an obvious failure of government. Those countries that are successful at adopting more sensible systems are going to have a great advantage over those countries that chose to continue to increasingly bad practices of harming society to benefit a few private interests.
Related: What is Wrong with Copyright Taking Public Good for Private Special Interests – Innovation and Creative Commons – Diplomacy and Science Research – More Government Waste – Crazy Watchmen – General Air Travel Taxes Subsidizing Private Plane Airports – China and the Sugar Industry Tax Consumers
Pretty much everyone (certainly the vast majority of regulators and politicians) have no clue about capitalism. The concept that a “free market” should be allowed to operate is theoretical, based on “perfect competition” (which essentially means zero barriers to entry). Obviously the politicians support, not capitalism (which would require regulation of imperfect markets (and certainly not support consolidation past the point of many competing companies), but the idea that those with the gold make the rules. Natural monopolies (like gas distribution, electricity, likely internet infrastructure…) should be fully regulated companies which then have the infrastructure accessed by multiple competitors (none of which own the natural monopoly – of course).
With some market that is even remotely in the area where a capitalist free market was in place, it is very simple to not have to deal with companies that treat customers horribly (like Verizon, Comcast, Time Warner Cable…) you just chose another company to deal with.
But these companies want to have the government allow them to create a monopoly (or something extremely close) and then claim to be in favor of capitalism (and further make ludicrous claims about what capitalism would suggest about regulation in oligopolistic markets). These ideas is so laughable that if politicians had even a sense of economic understanding they would adopt the appropriate capitalist response (for government).
Obviously, regulation is required as the market moves away from the area of “perfect competition.” When some huge company wants to buy some other huge company (say creating greater than 10% of the market combined) this would be rejected. If the market is a natural monopoly where the free market is not the proper capitalist market (such as one where the government would allow the proper capitalist response to players in the market attempting to break the free market by gaining to much control), then, of course a regulated natural monopoly would take on that economic task. This is not really complicated stuff.
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Singapore’s Social Entrepreneur Diana Saw makes things Bloom in Cambodia
The decision was swift as it was simple: move to Cambodia to provide jobs for poor women. I first
visited Phnom Penh in April 2006 and was back the next month to look for a house.
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I approached the job placement arm of an NGO in Phnom Penh (PP). There are many NGOs who train poor Cambodians, but what this country needs is jobs. You can train people all you like, but if no one employs them, you’ll have frustrated skilled people who are unable to use their
skills.
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Bloom has a savings plan for staff. Every month staff are encouraged to put away a percentage of their income which goes towards buying a sewing machine. Bloom will then subsidize the cost of the machine. With the machine, workers will be able to become small business owners, supplying bags not only to Bloom, but to other sellers, like small shops in the tourist markets.
Related: Bloom Bags Blog – Using Capitalism to Make the World Better – Make the World a Better Place – Kiva – Provide a Helping Hand – Aim for everybody to gain: workers, customers, suppliers, shareholders… – Obscene CEO Pay
- We believe in the right of all people to a decent life, free of poverty, and with access to education
- We believe you can be rich by helping the poor
Horatio Alger Multiplied by 1.3 Billion
“My mother and father went through the Cultural Revolution,” Mr. Feng said. “They had no chance.” He continued: “When I was in grammar school, the Cultural Revolution ended. When I graduated from university in 1992, that was the year of real reform. Deng Xiaoping encouraged students to go into business and become entrepreneurs. Before then, if you wanted to be an entrepreneur, you would sink like a stone. But after that, anyone could be an entrepreneur.”
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But look at what else happened: motivated by the prospect of wealth, people started companies. And as those companies succeeded, millions of new jobs were created.
I have written about the importance of capitalism to improve life for people around the globe. I have also discussed how many don’t understand what capitalism is (the general idea that capitalism is largely about those with the gold making the rules, which it is not).
Capitalism fundamentally is about allowing market to determine how to allocate resources (and government protecting that function along with others such as providing security, regulating externalities…). There are serious problems with in the USA in this regard – with enormous political favors granted those giving politicians enormous payments and oligopolies restricting the market from working properly. The government fails to properly regulate oligopolies, as dictated by capitalism – to prevent the markets to be dictated to by organizations pursuing their own interests, again due to large payments to politicians by those favored by preventing capitalism from working (either that or just a co-incidence that those making big payments just happen to give to politicians legislating [and overseeing regulators] against capitalism).
Just to state the obvious, Chinese government policy and practices also conflicts with capitalism frequently.
Related: Estate Tax Repeal – What is Wrong with Copyright Taking Public Good for Private Special Interests – Bill Gates: Capitalism on the 21st Century – The Future is Engineering – Making a Difference – Diplomacy and Science Research
Creating a World Without Poverty by Muhammah Yunus (founder of the Grameen Bank and 2006 Nobel Peace Prize recipient). Giving people the opportunity to advance economically is something I see as very important. It is hard to imagine in the USA when those that are seen as poor have air conditioning, indoor plumbing, cars, TVs, electricity… but billions of people would love to approach such material wealth.
When you really have to struggle to put food on your plate or get clean water economic concerns are critically important. Economic progress may well decide whether your children live or not. Muhammah Yunus’ new book is a good read to hopefully encourage more people to realize there really are much more important things than your fourth pair or shoes (to say nothing of you 20th pair) or expensive wine or a newer car or…
Microfinance is a great system where those that have been lucky to receive material wealth can help provide opportunity to others. Loans of $200-$500 can make a huge difference in an entrepreneurs life. Just giving them the chance to use their intellect and hard work to create a life where they can get raise themselves slightly can change their lives, their children’s lives and together with others perhaps their community.
Trickle Up, Kiva and Grameen Bank are three great ways to help give entrepreneurs a chance to improve their lives. As I have mentioned before if you are a Kiva lender add a comment with your Kiva page and I will add a link to: Curious Cat Kiva Supporters. I will say I am happy with the success of this blog in general, the thing that disappoints me is how few links we have on that page.
Related: Microfinancing Entrepreneurs – Interview with Mohammad Yunus – Trying to Keep up with the Jones – Providing a Helping Hand via Kiva – Curious Cat Science and Engineering blog posts on appropriate technology
Bill Gates Issues Call For Kinder Capitalism:
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Among the fixes he plans to call for: Companies should create businesses that focus on building products and services for the poor. “Such a system would have a twin mission: making profits and also improving lives for those who don’t fully benefit from market forces,” he plans to say.
Related: Appropriate Technology – Using Capitalism to Make the World Better – Data Visualization Example (Hans Rosling) – Design for the Unwealthiest 90 Percent