Watching this legislation to bail out Wall Street and banks clear the House has shaken my faith in true capitalism. I thought Wall Street was good at one thing: making and managing money. But like the folks in Washington D.C., most of them are just incompetent. With this headline from The New York Times I’m reminded of the Holiday Inn Express ad below.
Need I say more? Anyway, if you’re looking for sharp, incisive and understandable commentary on the current credit crisis and the nationalization of Wall Street, I recommend three bloggers — each one exceptional in their own unique way: Paul Kedrosky, Barry Ritholz and Cody Willard. Cody, despite his email blasts, has totally won me over with his witty, precise and scathing commentary. He speaks what I think.
This is not a failure of capitalism, but yet another example of how government interference in the free market can cause financial troubles on a massive scale, and maybe even the collapse of a currency. The government should have never set up Fannie Mae and Freddy Mac and the government should have never convinced banks to buy up their shoddy products. At the same time, the government shouldn’t have forced banks to give loans to people who couldn’t afford them, and at the same time force banks to give everybody the same access to loans. The combination of all of these things led to the obvious result.
@Tom Utley,
You might have a point but in the end these actions completely undermine the capitalistic system. Maybe I am feeling a bit dejected at the whole turn of events.
Om, happens every few years – remember the Latin American debt crisis, the credit card crisis, the Asian crisis,now the mortgage crisis …this time it’s just bigger. Unfortunately, it seems like Wall Street pouts, the Dow drops a 1,000 over a few days and we panic once again.
It’s nice to see a Technology Blog that FINALLY isn’t in bed with the extreme left! Thank you!
I have similar feelings, in that I am extremely disappointed in this unfolding disaster in the financial markets. In the end, letting the unregulated swaps market grow to the extent that it did was a mistake. The participants took on too much risk, and they brought down the system.
I would not give up on capitalism. Rather, I hope we have all learned the lesson of why regulation is necessary. Somebody has to set and enforce house rules, or the inmates end up running the place. Or something like that.
Fanny Mae was created as part of the New Deal and did just fine for 30 years, then it was _privatized_. Freddy Mac was only created because Fanny Mae was privatized and lost some of its powers. On can argue the merits of Capitalism vs. Socialism all one wants, but it has been proven again and again is that Capitalism without regulation is as much of a real-world failure as Marxism. Free Market does not mean freedom from regulation, it means freedom of entry for willing competitors. Laissez-faire is a bad joke. Economic policy should not be religion. It is not a matter of having faith in an economic theory, it is about doing what will actually produce results in the best interest of the general public.
I have been asked to consult on the new banking rules for Mortgage lending, and have innovated a new strategy for loan underwriting – it is quite innovative. Are you ready, here it is:
You write the loan, you hold the paper.
Our problems have less to do with specific regulations or business practices being allowed or encouraged, more to do with public- and private-sector players failing to identify possible sources of failure, or failing to analyze and react to readily available warning signs. The failures have come from conflicts of interest and laziness – both correctable problems.
Many people knew in 2005 that sub-prime mortgages were going to be a problem. Some sponsored legislation then to avert the outcomes we see today. Those opposed to the legislation were better organized, and our society had grown to (and continues to) allow political corruption that allowed the opponents to stop critical reform. If we can’t fix political lobbying we’ll never be safe.
Plenty of investment managers knew that problems would eventually destroy the investments they were making. 2-and-20 compensation was enough to keep the hedge funds looking for greater fools, and most of the retail advisers are just product pushers who can’t understand the fundamentals of the assets they’re recommending, and might not care if they could. They all thought their job was staying with the herd. Then the music stopped, and it turned out that naive investors and tax-payers were the final fools.
The solution is that we must each take more responsibility for our decisions, whether we’re deciding whether we can afford that mortgage, evaluating the advice of our investment adviser or casting our ballots. And we need to convince our friends to get smart, too. Less time on Valleywag, more time on GigaOM. OK, that was pandering, but you get the point.
True enough that this could have stopped with the consumers of the loans – if the greater majority of borrowers would have read the closing papers…well, they may not have been continually written. But, many folks who took the financing knew in advance of the financing that they could never afford ANY deal.
In some cases, in certain areas, it was more difficult to pass a credit check for an apartment than it was to get an ARM.
I agree with Jesse! This is a complete failure of leadership and governing, whether it is federal government, congress, democrats and republicans everyone failed in their duties. We need capitalism but it should not be a free run. Now the favorite talking point of the right is it is all the left leaning social policies started by Carter that started this mess. Hello? GOP was in majority for most of the time, GOP had their president 20 years out of 30. If the whole idea is that government tied the free enterprise’s hand into these bad loans.. why did not affect each and every company in a same way? some of the banks have wriggled out of this mess in a OK way. At the end, it is compounding effect of illogical policies and laissez-faire attitude of government that caused this. Question shoudl turn to having sensible and enforceable regulations and accountability of our representatives and the private entities. We cannot rely on Darwinism to define the market, not that there is anything wrong with it, but expectation of public is completely different than the nature. Our current system is so complex and intertwined that one person’s mistake can affect other person. Very similar to having laws to protect against household theft, we got to have regulations to protect one’s trust in the system. Can the people argue for free market argue for removing the FDIC insurance cover for the individual accounts? If that cover is going to stay, government needs to and should make sure those banks operate under certain regulations. Should there be social agenda in it? Well I can argue that it is not required, but politics require that some social net is required for the poor and needy (we are all humans!). Main thing is keeping limits on all different things, making sure fiscal policies do not result in deficits. But a party that supposedly fiscally conservative has not shown the discipline! I dont know I am very much disappointed with every politicians and the wall street system.
I think it has nothing to do with capitalism, or any man made system also known as economy. The fallacy sets in if we think we are above it all and it’s about survival of the fittest. In an interconnected complex system if the fittest dies, the system will swing and go on. Nature doesn’t care how fit you are if an event wipes you out, there is only one fittest, Nature itself.
So to prevent this swing they try to stabilize the system, before it takes everything around it down. Will it work, no idea. Since this is not a truly complex system, there is inequality build in.
Might also want to read:
http://www.washingtonpost.com/wp-dyn/content/article/2008/1/01/AR2008100101149.html
This result was extremely disappointing. America is now stuck with another trillion dollars of debt. Great job Congress!
Jason Kiesel
Founder & CEO
http://www.freedomspeaks.com
It is China! It is about the failed trade policies.
I have a totally different theory for the credit crunch.
I think this whole mess started in 80s when manufacturing started moving out of US into China for every known good that is consumed. Manufacturing based economy has always been more stable than service based economy for the last few centuries. Look at how UK’s economy has progressed (or rather regressed!) in last few centuries. It was at its top when its main economic engine was manufacturing.
Starting with the 100% free trade with no strings attached theory, doing business with China in a big way was the most significant change in US’s economic history. China, with fewer regulations on environment and human rights and a disciplined labor was easily able to out produce the west.
With a service based economy (it is sort of higher order in the economic food chain), there is always more volatility and room for error. It is not based on hard infrastructure, but only on information technology.
When things work fine (increasing home prices), the service based economy works fine. But once you have a slight decrease, it can hit you with a force that can have a catastrophic domino effect. Service based economy can result in easy hires and fires, easy booms and busts and simply makes one more greedy.
While service economy is essential, it has to be based on substantial manufacturing base that it can work on. You need a strong base.
This is not an issue with capitalism or socialism. It is an issue with
failed trade policies that date back to 80s. The only solution now and at any time is ‘fair trade’ and not ‘free trade’. Fair trade is something that matches the key parameters and adjusts the price accordingly, whereas in a ‘free trade’ the only thing that matters is the final price, quality and demand/supply.
Jim Anderson, Editor of the Silicon Valley Bank summarizes it well IMO: “Forget Wall Street, Bail Out Congress”. I find it very sad that the people responsible for imposing transparency on our financial firms ( including the Federal Reserve), after letting things run wild in the name of home ownership for the last 15 years, are not only fingerpointing someone else and washing their hands, but voting in favor of even less transparency and even more debt.
http://www.uptilt.com/functions/message_view.html?mid=1785387&mlid=3626&siteid=255&uid=5625a6fe36
We only need more regulations to the extent that they serve more TRANSPARENCY, and starting with the FED.
@Om
Glazed at Cody’s writing. OMG, he needs a basic math education. Ideology won’t help preventing this from happening again in the future.
Sorry talking about capitalism and socialism is just nuts. Today we have math terms to describe and understand these systems. Get over it, the 18th century is past.
http://apple20.blogs.fortune.cnn.com/2008/10/05/has-steve-jobs-built-a-secret-macbook-factory/
Is innovative manufacturing as predicted by some for Apple the future for long term solution to America’s financial problems?
From the trade policies around the world, including China and Columbia just to start with, the greed factors, the incompetence in Washington and Wall Street facts; include all of this and what does the public once again have? More debt! This is always the reality, the public foots the bill. Eventually, with enough of this kind of thinking that the people will keep footing the bill, it will collapse our currency. All economies have a braking point, even the strongest ones.
It is the peoples responsibility to start providing oversight, and we seemingly have no collective desire to do take on the task.