LongPrime

I think that what happened to the PIIGS is that they took the accounting technique of Special Purpose Vehicles, from America while the obvious was ignored. Very much as what happened to the USA's mortgage and financial bubble; Bankers and Politicians looked only at the spreadsheets and not at the real world.

Bogney

What? You mean people will misbehave when given loads of money and few restrictions on how they can use it to make more money. People might even get greedy? Greenspan and I are shocked. Actually, nice posts on this thread by all.

Lergnom

Adam Smith used the example of a party wall to note that no one is completely free of obligations to others. In his example, a person can be forced to maintain a party wall for the benefit of others. This speaks of understanding that humans will do things that harm others and that these actions will occur and that they can and should be reined in by society. His writing about economics showed the same sense of government involvement with an understanding of its limits. The government can't make a market dance to its tune but government is necessary to prevent bad from happening. This lesson was completely lost on the GWBush administration. As the head of the SEC, a former GOP congressman from SoCal admitted after the debacle, the experiment failed. He meant specifically the belief - which was influenced by evangelical ideas - that markets will self regulate and that whatever destruction they inflict will be beneficial and contained.

We still see versions of this idiocy in the liquidationist thinking put forward by some conservatives: let them all fail. Really? The solution is to inflict massive poverty and despair on millions more Americans, to drive the country and perhaps the world into depression? Yep, because the destruction caused by markets is God's will.

It is in this context that the baby-like crying about stimulus debt occurs. There have been millions unemployed by these policies of not only deregulation but no regulation. The cost to the economy, to GDP, to tax receipts, to human lives is many multiples of the cost of stimulus funding. It is as though they want to hurt people.

dstark

We are in a Catch-22 situation. The policies of the last decade by both the public and private sector have led us to this mess.

http://www.businessinsider.com/henry...ot-hold-2010-5

"The longer the fiscal correction is postponed, the greater the adjustment needs become and the higher the risk of reputational and confidence losses. Instead, the swift implementation of frontloaded and comprehensive consolidation plans, focusing on the expenditure side and combined with structural reforms, will strengthen public confidence in the capacity of governments to regain sustainability of public finances, reduce risk premium in interest rates and thus support sustainable growth."
This is a man who wants some serious austerity. No garden-variety cuts here and there. And that brings us to the heart of the problem. That chart a few pages above showed the large fiscal deficits involved. If those are tackled seriously, it will put many countries into outright recessions and reduce the growth in others. Some, like Greece, will be in what can only be called a depression.
The entire eurozone †is in for a double-dip recession, if it is not there already. And one country after another is going to have to convince foreigners to buy its debt. But if they make the cuts, their GDP will fall, ironically increasing their debt-to-GDP ratio and making investors demand even higher rates, which becomes a very vicious spiral."

tega

Either you don't understand what markets are (which is doubtful) or you are deliberately defining the role of markets to fit your political view (which wouldn't be the first time).

Markets self regulate, collusion of government and corporation (which does not represent a true market) does not self regulate because it will be in the interest of both entities to stick it to the tax payers.

DocT

Greenspan Arrogance Set Up U.S. for Big Fall: Roger Lowenstein

May 7 (Bloomberg) -- In a newly released transcript of a Federal Reserve Board meeting in March 2004, former Chairman Alan Greenspan argues against disclosing too much to the public lest the Fed “lose control of a process that only we fully understand.”

This statement ranks as a sign of monumental arrogance. It was Greenspan himself who didn’t understand -- much less “fully understand”-- that the Fed’s lax mortgage regulation and easy monetary policies were setting America up for a disastrous fall.

The context of Greenspan’s remark was a discussion over how much to reveal about the Fed’s thinking on monetary policy in general -- not on mortgages in particular. But mortgages were part of the Fed’s monetary deliberations.

At the same meeting, Jack Guynn, the president of the Federal Reserve Bank of Atlanta, warned of “growing concern about potential overbuilding and worrisome speculation in the real estate markets, especially in Florida” and buyers were “freely admitting that they have no intention of occupying the units or building on the land but rather are counting on flipping.”

Had the Fed publicized such concerns, it might have led to a crackdown and forestalled millions of bad mortgages that would be written over the following 2 1/2 years. Instead, the Fed released minutes with sanitized phrases that had been stripped of alarming language.

Mistakes of Regulators

Greenspan’s imperial presumptions remind us that no new law can prevent future regulators (or, for that matter, future bankers) from making mistakes. And as Congress heads toward the final phase of legislating reform, it should drop the pretense that it can control the actions of government officials.

Democrats and Republicans have been squabbling for weeks over how to ensure that bailouts don’t happen in the future. Various bills would attempt to tie the government’s hands.

This emphasis is misplaced. We can’t hope to forecast the particular crises that will arise. Much less can we prescribe how officials will respond. Rather than dictating how government reacts to a financial disaster, we should aim to minimize the likelihood that one recurs, and limit the panic if it does.

The best way to do that is to discourage leverage. In other words, the federal government should make it expensive for banks to assume too much risk -- whether on or off the balance sheet.

Limitless Supply

In a perfect world, markets would perform this function. Theoretically, a bank with too much debt would be punished by sharply higher borrowing costs (or by a cessation of credit altogether). But in the just-ended economic cycle, lenders and investment banks were extended cheap credit as if the supply were limitless.

In the 1990s and 2000s, new-age financial theorists argued that, thanks to modern risk-management tools, the traditional fear of leverage was outmoded. Even the Securities and Exchange Commission bought into this nonsense. In 2004, it chose to lessen capital requirements on investment banks so long as the assets they owned were “liquid.” The upshot? The “liquidity” of their assets, including mortgage bonds, proved to be ephemeral. Their debts proved permanent and crushing.

And post-crash, when the International Monetary Fund looked for indicators that predicted which banks would fail, it found, lo and behold, that the “basic leverage ratio” was the most reliable guide to a bank’s survival. To paraphrase a warning from the drug culture, “debt kills.”

Step Forward

The overhaul bills go a long way toward corralling off- balance-sheet risk by insisting that derivatives trade on exchanges, where they would be subject to margin or collateral requirements. This is a big step forward.

Until now, though, the proposals have suffered from a glaring hole: There has been no hard language to restrain borrowing. Bills in the Senate urged the creation of a new “systemic risk regulator” to monitor debt. The House bill went a step better, limiting leverage to 15-to-1, but only for banks judged to be systemically important.

Senator Jon Tester, a Montana Democrat, has offered an amendment that gets even closer. Banks would be charged an insurance premium on every dollar of assets less their equity. The net effect is a charge on each dollar of borrowings.

The Federal Deposit Insurance Corp. has been levying such a charge, temporarily, but typically it charges a premium only on deposits. The Tester proposal would, permanently, impose premiums on all bank liabilities.

Reckless Borrowing

With one further tweak, the bill would truly restrain reckless borrowing. The premium rate should rise with a bank’s leverage ratio. In other words, a lender or investment bank that is leveraged 20-to-1 should pay higher premiums per dollar of debt than one that is leveraged 10-to-1.

Although Congress is focusing on the size of banks, big banks aren’t more unstable than small ones. But highly leveraged ones are. Moral hazard -- the awareness of the potential for a government bailout -- encourages excessive lending. So it’s appropriate for the government to offset the risks that it has helped to create by imposing costs on riskier firms.

For this to work, Congress must insure that leverage is measured accurately; that means a crackdown on banks that use swaps or repurchase agreements to mask their obligations. Also, creating a new systemic-risk regulator seems wasteful and naive. One such regulator (the Fed) is enough -- if only it would do a better job.

Fed Chairman Ben Bernanke came into office promising more transparency. The Greenspan tapes confirm that Bernanke was on the right path: Openness is better.

Finally, the Senate bill would narrow the Fed’s charter, so that it would regulate only big banks. Bad idea. The Fed is too close to Wall Street as it is. At least, as currently structured, it is exposed to all views. In 2004, the Atlanta Fed tried to warn the Federal Open Market Committee of the dangers in mortgages. Too bad they didn’t listen.

Lergnom

tega, if that post made any sense then it was only to you.

Markets act. They sometimes are benevolent and sometimes destructive. The belief of the Bush administration and particularly of the people appointed by Bush to regulate was that the markets would be benevolent or only destructive within a range. They believed that self-interest would provide sufficient incentive for the participants in a market to keep the destructive powers harnessed within an acceptable range. They were wrong. They were completely wrong.

If you're somehow defining a market as this free thing, then you don't know what a market is. A state monopoly is still a market, as is the black market that generates. A socialist state is still a market - many markets of course.

dstark

DocT...good link.

I hope that stricter leverage rules come into place. Stricter leverage rules will help in a big way.

NonAntiAnarchist

I think you just proved tega's point...