I am a fan of Goldman Sachs. It is one of the few individual stocks I own, running against all my standard corporate finance professor ‘buy index funds!!’ instincts. Although we have had a surfeit of bankers and a surfeit of talent in financial engineering rather than, say, robotics, it is very scary to see the “silver linings” analyses talking about how it is such a good thing that smart Harvard or MIT students will no longer go to Wall Street, but will instead enrich elementary education or nursing or mountain-guiding. While they might not be efficiently deployed in finance, it is a mistake to rejoice that the credit crash, deficit, tax rates, and other disincentives to innovation through risk-taking will push, through sheer lack of opportunity, smart people into things that do not take full advantage of their talents to the ultimate benefit of everyone. I do a lot of development finance in the developing world, and the misallocation of talent simply from inability to supply opportunity is heartbreaking and worse.
The work of allocating capital in the capital markets, if not precisely God’s work, is so crucially important to men and women on earth that there is something wrong with these days having to defend it. The little pieces of paper are vastly more efficient to steering rivers and seas of capital to and among enterprises — little gates and sluices in which small movements on paper can create immense movements in real life — than trying to do it by, what exactly? Physical occupation of the premises as the sign of ownership? Holding of hostages as collateral for a loan? So I am untroubled by Goldman bankers getting rich, provided that their services serve efficient allocation; the problem is rules of a game that reward many wrong things and turn investment banking into a combination of crony capitalism and moral hazard. Goldman’s current bonus pool is in large part a transfer, via yet more subsidized risk, from taxpayers to the firm; I trust in God and Blankfein that a goodly share of the booty will eventually wend to we shareholders. But booty it is.
The problem here is not, and never has been, finding yet another little political fix to stick on top of the existing set of mis-allocation rules. A “political offensiveness” tax, perhaps, under the socialist-sounding name of ‘excess profits’ or the capitalist-sounding name of ‘clawback’? It’s neither, or both, of course. The fixes-on-fixes eventually become flow-throughs to politicians like Chris Dodd; they permanently shift capital allocation into political allocation; and above all they don’t efficiently allocate capital. Unless of course you’re Senator Dodd. The answer has to lie at creating level playing fields at the base level, so that risk and return correlate for private parties, and they don’t have to apologize to anyone for the risks or the returns or the losses.
This is why Goldman Sachs’s cynical and tone-deaf small business program should serve as a wake up call for what business our capital allocators seem to think they are in. At $500 million, the amount is paltry — 2.5% of the Goldman compensation pool or that ballpark. And it does not even go to small business as such. As the Wall Street Journal reports this morning (Deals and Deal Makers, Mike Specter, C5, November 19, 2009, I’ll post a link later), none of the small businesses emailing and telephoning in desperation for financing will “receive a check from Goldman Sachs.” Instead:
“Goldman will spend $200 million on education and training programs, while funneling $300 million to so-called community-development financial institutions which largely serve historically disadvantaged communities that have had trouble accessing capital.“
One does not have to be a populist of the right or left to sniff that this is a ham-fisted PR program backed by miniscule funding. Nor is this simply (as the quite interesting FT feature today on Goldman suggested) an ordinary case of Goldman corporate charity, of which it traditionally has done a great deal. If it were, it would be much less problematic.
The much more important point is not what charity means — it is what high level business and finance have come to mean, when Goldman Sachs urgently decides that it needs to ”give back“ a sliver of what the taxpayers gave by giving it to ... community organizing. It’s not corporate charity; it is protection money, clumsily done because unlike, say, Fannie and Freddie, Goldman is not used to doing it. The message is that the future of the economy lies in crony capitalism and tending to the government relationships that happen, in this administration, to be community development institutions. Even if the GSEs, Fannie and Freddie, showed what a splendid business model could be had tending to the care and feeding of Congress, its embrace by supposedly non-GSE Goldman Sachs shows us the way. Apparently it will be a very efficient political capital market indeed.
(PS. Note to journalists ... might any of the community-development institutions turn out to have ACORN ties? I have zero idea whether this might be so. Given the long-standing relationship of ACORN to the banking world via precisely these kinds of institutions, however, one should at least wonder. And I at least would be curious to know whether Goldman thought vetting for this was a consideration. Would Goldman consider this a bug or a feature in dealing with the current powers that be?)
LN says:
Financiers are not necessarily paid in direct proportion to the social benefit they produce. Economies of scale and winner-take-all tournaments can create conditions where the personal gain created by a smart graduate taking a job at Goldman Sachs is greater than the corresponding societal gain. And that doesn’t even take into account the existence of zero-sum games.
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November 19, 2009, 7:25 pmLN says:
And really, this idea that the Obama administration is a bunch of community organizers who are bullying Goldman Sachs into ham-fisted PR moves is silly. Goldman Sachs has extraordinary political power and is extraordinarily well-connected. I’d wager that the number of people in the Treasury Department with ties to Goldman is,uh, somewhat larger than the number of people with ties to ACORN. What do you think?
With unemployment at 10%+ and rising, the claim that Goldman Sachs is setting profit records simply because they are allocating capital more efficiently than ever before rings somewhat hollow. Hence the need for a PR maneuver.
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November 19, 2009, 7:32 pmMPS says:
Agree with LN. The problem in my mind is it seems finance firms like GS take far more than they add value.
I think this underlies the gut reaction against (reports of) GS bringing in so much income by super-fast trading. Microsecond trading doesn’t provide meaningful liquidity, nor meaningful investment. It seems to me the only “service” being provided is to act as a broker — to parties that already have brokers. Human resources devoted to this practice are wasted from the perspective of the economy as a whole.
On the other hand, I don’t think one should blame GS for exploiting opportunities to make money. I would think this misallocation of resources could be handled with little effect to the function of markets by simply requiring that any asset be held for one second (or whatever) before it can be sold. As for the overcompensation in the financial sector, it seems to me a large portion of the blame lies with investors, who are willing to pay what are apparently exorbitant rates for investment management.
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November 19, 2009, 7:37 pmSteve says:
I cannot comprehend the sort of mindset which holds that if smart people go into a field other than finance, they are by definition being underutilized by society. The idea that if someone is making a million dollars, they must be making the world a better place much moreso than someone making one-tenth of that amount, is so ludicrous that one would assume it was a Stephen Colbert parody.
We look back a hundred years and praise people like Henry Ford who had the insights our society needed to take the American economic engine to the next level. A hundred years from now, will we look back and heap similar praise upon, say, the inventor of the credit-default swap? Color me skeptical.
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November 19, 2009, 8:05 pmRPT says:
Goldman Sachs + ACORN? ACORN forcing Goldman Sachs to do something? Is this serious?
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November 19, 2009, 8:12 pmDavid Welker says:
Kenneth Anderson:
With respect to your theory that these markets allocate resources efficiently, I have two words for you:
“housing bubble”
With respect to your theory that MIT and Harvard students could not be using their intellectual talents more productively elsewhere, I have one word for you:
“technology”
A lot of what is called “financial innovation” isn’t actually innovative at all. You may not be aware of this, but the house of cards came tumbling down on that. What you call “financial innovation” I call “a bubble.” In contrast, innovations in mechanical, electrical, civil, or computer engineering are real innovations. Innovations in computer science, bioinformatics, pharmaceuticals, medicine, or the traditional physical sciences are real innovations. We probably would all be better off if these MIT and Harvard grads used their talents there, instead of wasting them at Goldman Sachs.
Who knows, just maybe we would even be better off if these MIT and Harvard grads used their talents to teach promising students of equal intelligence and potential, but a poor social environment, in the developing world or in the United States.
I wonder what sort of hit Goldman Sachs would have taken if not for the bailout? Despite the brilliance of their MIT and Harvard trained employees, they did have significant counter-party risk at AIG, didn’t they? You would think they would be smarter than to invest in that house of cards.
Look, I do not want to go too far here. Obviously, Wall Street does need talent. But I, unlike you, still believe in the economics 101 concept of diminishing returns.
By the way, the idea that you should always diversify is based on the efficient market hypothesis. As Eugene Fama noted in trying to defend himself from those who blame efficient markets hypothesis for the current crisis, Wall Street doesn’t believe in efficient markets. (That defense of efficient markets hypothesis fails, because the beliefs of academics are probably more likely to translate into policy than the beliefs of Wall Street bankers, who will be viewed as self-interested. So, belief in the efficient markets hypothesis by academics is going to make regulators hesitant to interfere with the oh-so-perfect “invisible hand” of the market as it engages in its “efficient” allocations. So maybe the efficient markets hypothesis can be blamed whether or not Wall Street believes in it or not. But I digress.) Eugene Fama’s defense of efficient markets hypothesis on the grounds that no one on Wall Street believes it brings up an interesting question. Who should we listen to? People with money at risk or academic theorists? (Actually, I don’t actually buy the fact that people don’t invest their money foolishly. Can you say “housing bubble?” But I thought it would be fun to use the libertarian argument that markets always know best against the efficient markets hypothesis, for fun.) Does Warren Buffet invest primarily in index funds? Is his success in investing primarily luck? I don’t think so.
I for one think you are quite right to invest part of your portfolio into Goldman Sachs rather than an index fund. However, with respect to your suggestion that the the disproportionate number of MIT and Harvard grads going off to careers working on Wall Street was socially beneficial, I think your completely off your rocker.
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November 19, 2009, 8:17 pmNickM says:
They were smart enough to invest sufficiently in the U.S. government that they have effectively purchased insurance against business losses.
Nick
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November 19, 2009, 8:25 pmBob from Ohio says:
Goldman Sachs is a cancer on America. It helped to create the banking panic and by corrupt political power, survived and is using our money to reward its fat, overpaid executives and traders.
Meanwhile real people suffer.
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November 19, 2009, 8:27 pmDavid Welker says:
Nick,
Yes, but their investments in the actual market doing their job of “efficiently” allocating capital didn’t work out so well. It doesn’t take a genius to receive a bailout. So that isn’t an argument for how it is socially beneficial to having a disproportionate number of MIT and Harvard grads working at Goldman Sachs, is it?
But far be it for me to question the wisdom of the “invisible hand.” If the “invisible hand” of Wall Street wants to invest a huge amount of resources into a housing bubble, that must be an “efficient” allocation of resources. Because that is what Wall Street does, by definition. It “efficiently” allocates resources.
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November 19, 2009, 8:31 pmloki13 says:
David Welker–
That’s not exactly true. There’s some very good resaons for this that have absolutely nothing to do with the EMH (strong or weak):
1. Diversification, in and of itself, lowers risk. Eggs-basket; you get the idea.
2. I think you’re trying to get at the idea of index funds specifically (as opposed to diversification)- there’s several good reasons for these for average incestors–
a. Lower transaction costs.
b. Information assymetry (even assuming inefficiencies in the market, it is unlikely that someone who does not invest on a regular basis will outperform the market).
c. Empirical studies that show that in the long run, you are unliklely to outperform the makret.
I agree with much of what you wrote, but not this.
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November 19, 2009, 8:33 pmSteven says:
Goldman Sachs is simply buying information. By loaning money to small business, they will gain access to the small business’s financial information.
There is also a good chance that the loans will be convertible, so GS may choose to exchange the debt for equity. If a small business issues an IPO, GS will be there to initiate the deal, underprice the offering price, and investors will be very happy.
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November 19, 2009, 8:50 pmGD says:
Since the events of last year, the best source of profits is to invest on Capitol Hill (to preserve implicit bailout guarantees, obtain stimilus funds, explicit government bailouts for favored businesses). Small business would do fine in a world of free enterprise, but cannot (and generally doesn’t want to) compete in this new world of “business”. Small business now pays the taxes which are funneled to the TBTF institutions, automakers, politically connected, etc. Perhaps a sign of guilt from GS for their role in destroying much of what was left of entrepreneurship/free enterprise?
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Frank G says:
“A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money.” — Warren Buffett
Of course, this just underscores David’s point about diminishing returns of putting too much brainpower into finance instead of science and engineering. It should be intuitive that moving around numbers on the spreadsheet can only accomplish so much for the economy compared to engaging in research & development.
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November 19, 2009, 9:38 pmDavid Welker says:
loki13,
Of course, some degree of diversification is beneficial regardless of whether the efficient market hypothesis holds or not. But you could not come to the conclusion that you should always be totally diversified without believing in something like the efficient market hypothesis. After all, if markets are inefficient to some degree in an identifiable manner, it would make sense to become somewhat undiversified, even if only to a small degree, in order to take advantage of such opportunities, assuming of course you have the ability to identify such instances (which most people do not).
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November 19, 2009, 9:56 pmCurt Fischer says:
I agree with David Welker and Steve here. Sure, the efficient distribution of capital to all branches of our economy is an important process. What’s the evidence that Goldman Sachs’ distribution was efficient? You seem to simply assume that the way Goldman Sachs’ distributes the capital is the best:
...that is quite a loaded sentence. Some might argue that factors like the credit crash, the deficit, and tax rates are disincentives, but to risk-taking that is unlikely to lead to “innovation”. Therefore, if those factors push people away from finance, it might result in greater innovation even though “risk-taking” is lowered.
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November 19, 2009, 10:00 pmDavid Welker says:
I should hasten to add that I am not here recommending that ordinary investors, whose time is usually better spent doing productive work and living life, should decide that they themselves should attempt to take advantage of inefficiencies in markets. Also, not all inefficiencies, even obvious ones, imply easy investment opportunities. A lot of people recognized that there was a housing bubble building. But, the problem in terms of taking advantage of that knowledge is one of timing.
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November 19, 2009, 10:06 pmManju says:
goldman has had a social venture capital arm for a few years now. this sounds like an extension of that and 500M isn’t a small amount for thay type of fund. It may be still be cynical, but treating america’s inner cities like a developing economy is a real biz that makes money, as anyone who has walked around harlem over the last decade or so knows.
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November 19, 2009, 10:17 pmRicardo says:
GS is a top-tier investment bank, I doubt dealing with the kinds of businesses who consider $500 million a lot of money is part of a strategy to get new clients. It already has a very impressive business development machine set up to snap up small growing firms which are moving into the ranks where they would make a good potential client. Probably these days, I bet clients come to them more often than they pursue clients. They are the only guys who we can be pretty sure will still be around in five years.
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November 19, 2009, 11:40 pmSenatorX says:
Who doesn’t admire the king of the vampire squids?
Anyway great buy of GS if you didn’t own them all last year and bought them when they were almost toast at ~50$ a share and going down. When Obama said buy stocks for the long term you should have bought GS (his market agents? And best campaign contributors). They will trade thier way to victory! How many days have they traded wrong this year?
The story: there is and was no REAL crisis, just a momentary lapse of confidence so now that we have re-invigorated all the animal spirits (thanks to ?...) all is well. Risk is back as it was pre-crisis and life/profits go on.
What’s the P/E on Goldman now? It might not be quite the trade right now as it was earlier this year. Survive? Yeah probably. Rocket up from here? Eh.
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November 20, 2009, 12:18 amSenatorX says:
Hrmmm where did my post go?
I’ll sum it up: buying the king vampire squid at 50$ a share was a great deal. Owning them at 175... Eh.
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November 20, 2009, 12:32 amAmerican Psikhushka says:
The notion that Wall Street is sucking up all our societal talent — and that we don’t have enough engineers, computer scientists, etc. — is a false one. We have plenty of unemployed and underemployed engineers and computer types.
The problem is less capital formation — using excess income to start businesses. And the cause of that is high taxes. More money left in the hands of the people that made it, more capital formation. Also the higher taxes are, the weaker the private economy is, so there is less money to be spent on the innovations that engineers, computer types, etc. create.
Special loans would be limited in effectiveness. As we saw with the housing bubble, making loans without regular common-sense guidelines results in a lot of bad loans. There is already plenty of money waiting to be lent out through traditional channels.
Solution: Cut taxes drastically.(And make sure they are paired with spending cuts, cutting taxes without cutting spending just drives the country deeper in debt.)
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November 20, 2009, 1:53 amAmerican Psikhushka says:
MPS–
Agree with LN. The problem in my mind is it seems finance firms like GS take far more than they add value.
Depends on what we’re talking about. As far as bailouts, no one should have been given bailouts.
If we’re talking about the banking and invesment services they provide, that is the business of their customers. And their customers tend to be very wealthy and/or sophisticated, so if they are not receiving commensurate value they should go elsewhere.
I think this underlies the gut reaction against (reports of) GS bringing in so much income by super-fast trading. Microsecond trading doesn’t provide meaningful liquidity, nor meaningful investment. It seems to me the only “service” being provided is to act as a broker — to parties that already have brokers. Human resources devoted to this practice are wasted from the perspective of the economy as a whole.
Quick, high-volume trading is the definition of good liquidity. It lets the individual investor sell or buy a security quickly and at the best price possible.
As far as the other issues go there shouldn’t have been any bailouts so they shouldn’t be trading with taxpayer money. If they were only trading/etc. with their or their clients funds that would only be between them and their clients, who tend to be wealthy and sophisticated.
Regarding trading in general, short term capital gains taxes are a bitch. If they do it successfully and profitably, great. If not the clients should pull their money out. Again, we’re talking about a sophisticated clientele that should know better.
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November 20, 2009, 2:10 amAmerican Psikhushka says:
Steve–
I cannot comprehend the sort of mindset which holds that if smart people go into a field other than finance, they are by definition being underutilized by society. The idea that if someone is making a million dollars, they must be making the world a better place much moreso than someone making one-tenth of that amount, is so ludicrous that one would assume it was a Stephen Colbert parody.
Actually, someone making that much pays a lot more in taxes. So if one believes taxes benefit society then they would be contributing more than someone making one tenth that amount. Assuming a 45% overall tax load (being very conservative) that amounts to $450,000 vs. $45,000.(Of course past a certain point taxes don’t make society better off, they make the economy weaker and decrease societal wealth.)
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November 20, 2009, 2:18 amRicardo says:
The problem is most certainly not that people do not have enough wealth or income to create capital. There is plenty of wealth around. The problem is that too much of it is being invested in Treasury securities as opposed to private business ventures. The reason is lack of confidence and a high perception of risk. Cutting taxes will mitigate these factors to the extent it instills confidence through expectations of a boom in business activity.
I’m always puzzled by these kinds of arguments. In the late 1990s, there was arguably too much capital formation driven by the tech bubble. Does it follow that people had too much income to invest because taxes were too low? Or does the argument only work one way?
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November 20, 2009, 2:30 amAmerican Psikhushka says:
David Welker–
With respect to your theory that these markets allocate resources efficiently, I have two words for you:
“housing bubble”
The housing bubble wasn’t the markets’ fault. The bubbles — the tech/stock bubble, which then migrated to the housing bubble — come from the central bank increasing supply of money and credit. This inflates the value of some assets and creates all kinds of other economic distortions. Government intervention in the form of encouraging risky loans also contributed to it.
Actually, I don’t actually buy the fact that people don’t invest their money foolishly. Can you say “housing bubble?” But I thought it would be fun to use the libertarian argument that markets always know best against the efficient markets hypothesis, for fun.
I’m libertarian and I don’t believe in the strong forms of the EMH. There are some inefficiencies. Markets are great, but they’re not completely efficient.
I for one think you are quite right to invest part of your portfolio into Goldman Sachs rather than an index fund. However, with respect to your suggestion that the the disproportionate number of MIT and Harvard grads going off to careers working on Wall Street was socially beneficial, I think your completely off your rocker.
See my comment above, there are plenty of unemployed and underemployed engineering, computer science, etc. grads.
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November 20, 2009, 2:34 amreadery says:
To the contrary, I’m grateful that capitalism is re-allocating talent to more productive uses and to more direct contributions to the economy. It’s not clear whether many new financial instruments actually added value; they may simply have diverted funds from the real economy of productive goods and services to a casino conducting side bets on the real economy with little economic significance or value and great potential to disrupt if the casino goes awry.
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November 20, 2009, 2:56 amAmerican Psikhushka says:
Ricardo–
The problem is most certainly not that people do not have enough wealth or income to create capital. There is plenty of wealth around. The problem is that too much of it is being invested in Treasury securities as opposed to private business ventures. The reason is lack of confidence and a high perception of risk. Cutting taxes will mitigate these factors to the extent it instills confidence through expectations of a boom in business activity.
Cutting taxes leaves more money in the hands of both potential entrepeneurs (including those who wouldn’t qualify for traditional loans) and their potential customers. Economic and investment uncertainty would also be helped by creating an environment more conducive to investment and economic activity.
I’m always puzzled by these kinds of arguments. In the late 1990s, there was arguably too much capital formation driven by the tech bubble. Does it follow that people had too much income to invest because taxes were too low? Or does the argument only work one way?
The malinvestment came from economic distortions caused by too much money and credit being created. This didn’t stop after the tech and general stock crash, so the money was just funneled into the housing boom. See the first graph here. The steep line continued unabated from the late 90’s until now. Now we have plenty of money — being steadily devalued — but there is less economic activity due to higher taxes and the malinvestment from the housing boom.(And the uncertainty you mention, fueled largely by anticipation of more increases in taxation and regulation.)
But generally the lower taxes are the better it is for the health and growth of the economy. The distortions caused by central bank manipulation are a separate issue.
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November 20, 2009, 3:07 amRicardo says:
American Psikhushka, I know where you are coming from. However, if you think that central bank manipulation is necessary for malinvestment, you should refer to Vernon Smith’s famous bubble experiment. Bubbles appear to be a natural consequence of having liquid markets in hard-to-value assets, contrary to the standard Austrian view that they are caused primarily by fiat money and too-low interest rates. Monetary policy can be a factor but it is by no means the primary factor or even the most important factor in asset bubbles.
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David Welker says:
Nonsense. A mere increase in the supply of money and credit would not force anyone to invest those funds in the housing sector instead of say, semiconductor factories, or on research and development, or on pharmaceuticals, or biomedical engineering, or any number of other sectors of the economy. When we talk about a “housing bubble” we are talking about over-investment in the housing sector relative to other sectors.
Look, of course if the money supply increases too much, you can have over inflation of the money supply. But that didn’t occur. What you have here is an example of the markets failing to allocate resources efficiently.
Indeed. I don’t exactly disagree that markets are great, within limits. That doesn’t make you a libertarian. What makes you a libertarian is not that you think markets are great, but rather that thinking markets are great and government is bad is basically a matter of religion.
That is the point. Markets lead to the inefficient allocation of talent from places like MIT and Harvard compared to where they are most socially valuable. There is hardly anything that we humans can do that is more socially valuable than technological innovation, because technological innovation enables us to overcome the problem of scarcity.
Can you say contradiction? You argue to me that the housing bubble was caused by too much money and credit. Now you are arguing to someone else that the problem is too little capital.
But, if someone has a good business idea, especially if they are already successful entrepreneurs with a track record of success who, therefore, pay a significant amount in taxes, then they should have access to credit markets to fund their expansion ideas if they are worth funding. Assuming, of course, that credit markets are efficient. So, you must be arguing, without realizing it of course, that credit markets are inefficient. So, why do we have all those MIT and Harvard grads working on Wall Street again?
You can’t argue out of one side of your mouth that the problem is too much capital, and then argue out of the other side of your mouth that the problem is too little capital. Well, you can. And you just did. But you shouldn’t.
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November 20, 2009, 8:30 amAnon says:
“Note to journalists ... might any of the community-development institutions turn out to have ACORN ties?”
ROTFLMAO!
How about, “note to other bloggers.....”? “Journalists” aren’t going to uncover squat when it comes to ACORN.
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November 20, 2009, 9:04 amYasha says:
Isn’t this really about buttering up the members of the Congressional Black/Hispanic Caucuses with some inner-city giveaways, to keep those Congressmen from hammering GS when the next piece of regulation legislation comes down the road? Can we dust for Chollie Rangel’s fingerprints?
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November 20, 2009, 10:58 amShelbyC says:
If someone is making a million dollars, they’re making the world a better place for somebody, to the point thay they’re willing to pay them a million dollars, or 10 times what anybody is willing to pay the guy making one-tenth that amount. Now that somebody might boil down to being corporate fatcats, cancer patients, or soup consumers, depending what the person does to earn a million dollars, but they’re doing something that somebody wants done.
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November 20, 2009, 11:14 amDavid Welker says:
I heard that the Mafia used to pay good money to kill people.
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November 20, 2009, 11:22 amShelbyC says:
Or just thinking that markets tend to allocate resources better than government.
Money and capital aren’t the same thing.
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November 20, 2009, 11:22 amDavid Welker says:
Do they?
So, if a drug cartel pays to kill someone, is it allocating resources better than government? If someone pays a prostitute, are they allocating resources better than government? If someone gambles away their life savings, are they allocating resources better than the government?
That is just nuts. Markets do not always tend to allocate resources better than government. It depends on the context. You really should try to think more clearly, and with fewer generalized assumptions.
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November 20, 2009, 11:32 amShelbyC says:
Surely you’re not implying that because wanting someone dead is wrong, what people want doesn’t matter? Or maybe you just think all resources should be directed toward activities you think are “socially valuable”?
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November 20, 2009, 11:34 amDoc Merlin says:
No, its not this at all. You miss it entirely, thats just how its marketed. The house health care bill doesn’t apply all of its mess to two groups, small businesses and to unionized businesses. Unionized businesses are a bad bet, so the smart money is on very high small business growth relative to large businesses. You will also see lots of businesses chaining their businesses under a holding company in order to benefit from economy of scale while still avoiding the healthcare bill. Its not crony capitalism; its playing to the fact that congress can with minimal effort completely change the way the economy works in the US.
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November 20, 2009, 11:37 amShelbyC says:
Geez, do you even bother to read the things you’re responding to? I responded your assertion that being a libertarian means “...thinking markets are great and government is bad is basically a matter of religion” by saying that it could mean thinking that markets tend to allocate resources more efficiently than government. You responded by saying that markets don’t “always tend to” allocate resources more efficiently than government. Saying “always tend to” is just non-sensical, “always” and “tend to” mean two different things. One of us isn’t thinking clearly, but it’s not me.
And I’m not sure what the point of the rest of your response is, are you saying that we should tax people to keep the money out of the hands of drug dealers so they don’t use it to pay people to commit murder?
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November 20, 2009, 12:07 pmCash says:
Too much of what Wall Street does doesn’t add value as evidenced by shareholders not seeing the appropriate risk-adjusted return on their capital.
The most innovative thing Wall Street has come up with is getting shareholders to let them gamble with house money.
No matter how much Goldman earns, the employees cream off so much in compensation that there’s not enough left to compensate the shareholders. Last fall, when Buffet agreed to step in and save Goldman, he took preferred shares paying 10%. He’s no chump.
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November 20, 2009, 12:08 pmDavid Welker says:
No, what I am doing is illustrating that your point is completely unnuanced. That someone wants something doesn’t tell us anything, other than that they want something. What they want could be good or evil or neither. It could be useful or useless.
That is just a fact. And it has nothing to do with how “all” resources should be directed. It does have something to do with how “some” resources should be directed, however.
You should not put impulsive wants on a pedestal and worship them like some sort of idol. There is a place, of course, for satisfying individual impulses. But there also needs to be a place for public investment in public infrastructure that benefits everyone and does not exclude anyone. There also needs to be investment in everyone, regardless of social class.
You need both the private sphere and the public sphere working separately and together.
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November 20, 2009, 12:19 pmShelbyC says:
I don’t. I satisfy them, and in exchange other people satify my impulsive wants. Works pretty good.
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November 20, 2009, 12:25 pmNickM says:
You’re arguing as if I meant the opposite of what I said.
Also, it may take a genius to set up a series of bailouts one step removed from yourself, so that your profits are guaranteed but the government doesn’t have a plausible claim to sending in its special paymaster to oversee you. Certainly no other firm has managed to pull that off.
Nick
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November 20, 2009, 12:36 pmDavid Welker says:
Fine. That doesn’t mean that “all” resources should be devoted to such impulsive want satisfaction. Nor does it imply that all wants are good.
It sounds like you have basically given up on the argument.
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November 20, 2009, 12:41 pmShelbyC says:
I’m not sure what you’re arguing. I wasn’t arguing that all wants are good, I was arguing that in general the purpose of the economy is to satify wants (or needs) and and that the guy making a million dollars was satisfying 10 times the wants or needs as the guy making 10 times that much.
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November 20, 2009, 1:12 pmFound: Someone Who Thinks Wall Street Is Moral. « says:
[...] You’re right, Kenneth Anderson. Allocating capital isn’t precisely God’s work. It isn’t in the same zip code either. In fact, you might even say it’s notably far removed from the endorsement of any particular deity or brand of morality. [...]
Ryan Waxx says:
Free hint: You can shift a thousand geniuses over to technology, then we can all watch the inventions gather dust in the patent office because there was no venture capital. Oops!
And before you break out the usual strawmen, no I’m not literally claiming that venture capital is going to disappear even if we hire high-school graduates to do Goldman-Sachs’ work... but I’d like to point out that no country with a modern economy does so, and suggest that this just might not be a coincidence.
2nd free hint: Half-delusional arguments likening finance companies to mafias hiring hitmen just goes to show how much the arguer is basing his worldview off of hollywood movies. Ever wonder why in hollywood, you always have companies hiring hitmen and gangsters, despite how laughable that claim would be on your local newspaper? Because like certain commenters, hollywood scriptwriters have difficulty vilifying profit-seeking properly without the use of such outrageous props.
Far be it from me to interrupt the fashionable bashing of the unforgivably rich, but it seems to me that as far as morality is concerned, it’s at least as moral to make one’s money providing services people are willing to pay for as compared to having government route confiscated money your way like politicians do. And yet to people of a cretin mindset, the latter are the more trustworthy and pure.
No, that wasn’t a typo.
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November 20, 2009, 7:00 pmDavid Welker says:
Who equated finance companies to mafias? You are seriously confused.
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November 20, 2009, 7:48 pmpc says:
While that would be nice if it were true, alas, it is not. Goldman is making money hand over fist because they were given a life line by former Goldman CEO — and at the time Treasury Secretary — Hank Paulson. Goldman’s biggest i-bank competitors are now gone.
Well, a clawback could be something as simple as getting the tax payer money that was funneled through Maiden Lane III back from Goldman.
@SenatorX:
Heh.
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November 20, 2009, 8:24 pmmarkm says:
Whatever Goldman-Sachs failures may be, I very much doubt that they’ve already forgotten the housing bubble and are selling mortgages for less than 10% down again. The FHA *is*:
http://www.nytimes.com/2009/11/20/business/20limits.html?hpw
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November 20, 2009, 8:24 pmAmerican Psikhushka says:
readery–
To the contrary, I’m grateful that capitalism is re-allocating talent to more productive uses and to more direct contributions to the economy.
Not quite. There are already a bunch of unemployed and underemployed engineers, computer types, etc. Engineers don’t create jobs and prosperity, a healthy economy does. The way to get there is to cut taxes and spending, not increase them.
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November 21, 2009, 4:58 amAmerican Psikhushka says:
Ricardo–
However, if you think that central bank manipulation is necessary for malinvestment,
I didn’t say manipulation/etc. was necessary for malinvestment. It does increase the frequency and severity of bubbles, which in turne means more malinvestment. The flood of money has to go somewhere. In the case of the tech stock bubble, there were some very innovative and successful companies that experienced phenomenal success in the beginning — the dozens of millionaire employee stockholders at Microsoft, for instance. This drew a flood of invesment to the point where people with little more than business plans were going public, with their stocks rising hundreds of percent after the IPO.
Monetary policy can be a factor but it is by no means the primary factor or even the most important factor in asset bubbles.
Business cycles are unavoidable, central bank manipulation makes them more violent and increases the amount of malinvesment.
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November 21, 2009, 5:10 amAmerican Psikhushka says:
David Welker–
Nonsense. A mere increase in the supply of money and credit would not force anyone to invest those funds in the housing sector instead of say, semiconductor factories, or on research and development, or on pharmaceuticals, or biomedical engineering, or any number of other sectors of the economy. When we talk about a “housing bubble” we are talking about over-investment in the housing sector relative to other sectors.
See my post above. The flood of money being created has to go somewhere. First it flooded into tech stocks due to the high returns of genuinely successful companies like Microsoft, to the point where everyone was looking for the next big thing and buying and funding a lot of overpriced assets and junk.
Then after the tech crash people were looking for more “real” assets and saw some of the high returns people were making buying and refurbishing real estate — which, like the tech boom, were genuine in the beginning. But just like the tech boom a lot of things became overpriced and a lot of junk was funded.(Of course the central bank and government were fueling this all along with more money, credit, and pressure to make bad loans.)
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November 21, 2009, 5:19 amAmerican Psikhushka says:
David Welker–
Look, of course if the money supply increases too much, you can have over inflation of the money supply. But that didn’t occur. What you have here is an example of the markets failing to allocate resources efficiently.
No, you had normal business cycles grossly magnified by a flood of money and cheap credit and government pressure to make bad loans.
What makes you a libertarian is not that you think markets are great, but rather that thinking markets are great and government is bad is basically a matter of religion.
Ad hominem. Religion is based on faith, my belief in libertarian economics is based on evidence and logic. Goverment has to be funded. Big government requires a large amount of taxes to exist. This large amount of tax weakens and drains the private economy, causing it to slow down, stagnate, and in some cases shrink. The extreme example of this is communism whenever it has been attempted.
That is the point. Markets lead to the inefficient allocation of talent from places like MIT and Harvard compared to where they are most socially valuable. There is hardly anything that we humans can do that is more socially valuable than technological innovation, because technological innovation enables us to overcome the problem of scarcity.
What you’re saying doesn’t necessarily follow. First of all, the fact that there are unemployed and underemployed engineers etc. — some from good schools, maybe not top 10, but good ones — indicates that there doesn’t appear to be a major shortage of engineering talent. It indicates that the economy isn’t growing to absorb them.
As far as innovation goes, innovation generally occurs where it is rewarded. That’s why a lot of the world’s technological and other talent come here.(Or used to, unfortunately this may be changing.)
Can you say contradiction? You argue to me that the housing bubble was caused by too much money and credit.
The housing bubble was fueled by the creation of money and credit. And government encouragement to make bad loans.
Now you are arguing to someone else that the problem is too little capital.
The bubble burst and the economy has slowed down to work out the consequences of all the malinvestment that resulted. Unfortunately this process is being delayed because the government is increasing spending rather than decreasing it. Capital formation and capital invesment have slowed down because of the slowing economy and uncertainty due to the increased taxes, regulation, etc.
It comes down to a healthy economy. You can’t have a healthy, growing economy with a heavy tax load. You also can’t have a healthy economy with violent business cycles and bubbles forming and bursting due to money and credit creation. The solution: establish a healthy economy by cutting taxes and preventing the central bank from increasing the money supply.(Have a stable currency.)
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November 21, 2009, 5:51 amAmerican Psikhushka says:
Cash–
Too much of what Wall Street does doesn’t add value as evidenced by shareholders not seeing the appropriate risk-adjusted return on their capital.
That’s the thing, the remedy for this is to sell the shares if the return isn’t there. Or change management if you have enough shares.
The most innovative thing Wall Street has come up with is getting shareholders to let them gamble with house money.
If you’re talking about investors, they have themselves to blame. Especially a wealthy and sophisticated clientele like Goldman’s. I learned about money and investing exactly so I wouldn’t have to hire somebody to do it for me. A clientele like Goldman’s can certainly afford to consult with a couple different fee-only financial planners if they don’t want to learn how themselves.
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November 21, 2009, 6:02 amAmerican Psikhushka says:
David Welker–
No, what I am doing is illustrating that your point is completely unnuanced. That someone wants something doesn’t tell us anything, other than that they want something. What they want could be good or evil or neither. It could be useful or useless.
Straw man, generally we have criminal and civil laws against people pursuing “evil” wants. And “useful” is a matter of opinion, so generally government is kept out of it — modern art, for example.
You need both the private sphere and the public sphere working separately and together.
As long as you realize that if you have a big “public sphere” you will have a weak and sickly economy with high unemployment, less innovation, little or no growth, etc. Big government has to be paid for with high taxes, which saps the prosperity and job creating abilities of the private economy.
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November 21, 2009, 6:13 amDavid Welker says:
No, your belief in libertarian economics is really religious. You just deceive yourself into thinking it is based on evidence and logic.
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November 21, 2009, 10:55 amDavid Welker says:
So, if you had a lot of money lying around, would you invest it badly because the government encouraged you to?
Of course not.
Like I said, your belief in libertarian economics IS religious. Otherwise you would not adopt such bizarre stories.
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November 21, 2009, 10:57 amManju says:
If the govt provided a platform (fannie and freddie) allowing me to sell the investment before it went bad, i would.
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November 21, 2009, 2:53 pmDavid Welker says:
Manju,
Well, Fannie and Freddie don’t buy subprime mortgages, the main source of the mortgage bubble and whose standards are much lower than the prime mortgages that Fannie and Freddie buy.
So, the “invisible hand” (and not Fannie and Freddie) is just going to have to take blame for those subprime mortgages, which fueled the housing bubble.
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November 21, 2009, 3:31 pmAmerican Psikhushka says:
David Welker–
No, your belief in libertarian economics is really religious. You just deceive yourself into thinking it is based on evidence and logic.
Wrong. Libertarian and Austrian school economists warned about the tech bubble, the housing bubble, all the irrationality in the real estate financing market, etc. And lo and behold what they warned against came to pass. Not only did they make predictions, they logically explained why these things would happen. Libertarian economics also explained why true communism/socialism would stagnate and collapse — before it happened. That’s called evidence and logic. It may not be as exact as physics/etc., but it does pretty well for a behavioral science like economics.
So, if you had a lot of money lying around, would you invest it badly because the government encouraged you to?
What underlied the whole housing boom was the flood of money and cheap credit — this caused prices to rise for an extended period, making everyone think there would always be buyers. Also, lenders were pressured to make or buy loans by the Community Reinvestment Act. These factors — the flood of money and cheap credit, and the pressure to make risky loans — were government intervention and manipulation. Were some mortgage brokers, investment banks, ratings agencies, etc. mistaken, misleading, dishonest, etc.? Sure. So sue and/or prosecute them. But it would not have gotten as outlandish and gone on for so long without government intervention and the market distortions that caused. And note that libertarian and Austrian economists were warning about this all along — logically explaining why it was wrong and going to result in a crash.
So, the “invisible hand” (and not Fannie and Freddie) is just going to have to take blame for those subprime mortgages, which fueled the housing bubble.
Wrong. Government intervention and manipulation — the creation of money and cheap credit and the encouragement to make riskier loans — fueled the housing bubble. There are market and business cycles naturally. But they get magnified and exaggerated by government intervention and manipulation. It isn’t a “market failure” if the government is responsible for it.
Let’s review: Libertarians and Austrians predicted the housing bubble and the crash and logically explained why it would happen — before it happened. How exactly is my belief in that school of thought “religious”? Sounds as scientifically rigorous as behavioral sciences get.
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November 21, 2009, 11:11 pmDavid Welker says:
Pretty much any liberal economist could tell you there was a bubble. So, this hardly constitutes proof of the special validity of so-called libertarian economics.
This argument fails logic 101 as evidence for preferring libertarian economics. If this is the reason that you believe in so-called libertarian economics, it shows that your beliefs are based on ignorance.
More fact-free nonsense.
The Community Reinvestment Act was passed in 1977. But, it is supposedly responsible for a housing bubble in 2008. Right.
This argument fail plausibility 101.
An increase in the supply of money and credit would explain why their was more investment overall in the economy. That would not explain why “rational maximizing agents” overwhelming chose bad investments in the housing sector in particular, compared to other sectors.
I mentioned this earlier. But even so, you once again have failed to take this into account. Which shows you are a slow learner.
Once again, your argument fails logic 101. An increase in the supply of money and credit would not explain why a housing bubble formed now. And it definitely would not explain why a technology bubble formed during the Clinton era. I am waiting for your explanation of how the fictional “Technology Reinvestment Act” is the real reason for the technology bubble.
Your argument has so many blatantly obvious holes that I can only conclude that you concocted these lame arguments in a desperate attempt to defend your preexisting beliefs in “libertarian economics.” Either that, or your thinking fails to have any semblance of basic logic, rigor, or knowledge of basic facts such that obviously wrong arguments are persuasive to you.
Either way, I think I have conclusively demonstrated that your belief in libertarian economics is more a matter of religion than analysis of facts and logic. Or in the alternative, that you are very ignorant and illogical. But really, I think the more sympathetic explanation is that you believe what you believe, and these arguments are a quick and dirty attempt to justify your preexisting beliefs, which are in all probability impervious to either facts or logical argument.
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November 22, 2009, 1:05 amAmerican Psikhushka says:
David Welker–
If this is the reason that you believe in so-called libertarian economics, it shows that your beliefs are based on ignorance.
You sound like you aren’t reading my posts very closely. Or, to put it in your insulting and condescending parlance, you failed “reading comprehension 101″.
Libertarian/Austrian economists, writers, investors, etc. predicted the tech boom, the housing boom, and the current malaise. Plus a couple of the prominent Austrians predicted the failure and collapse of true communism/socialism.(At a time when some “mainstream” economists were still praising it.) True science is supposed to be predictive when possible, Austrian economics fits that bill pretty well for a behavioral science.
More fact-free nonsense.
No, more insulting gibberish from you. But I’ll point out your errors.
The Community Reinvestment Act was passed in 1977.
It was changed in 1989, 1992, 1994, 1995, 1999, 2005, and 2007. A former president of the Dallas Federal Reserve was quoted here saying:
“There was a lot of pressure from Congress and generally everywhere to make homeownership affordable for poor and low-income people. Some mortgages were made that would not have ordinarily been made.”
and
“When a bank made a decision to purchase mortgaged-backed securities, they would somehow determine if some of them were in zip codes covered by the CRA, and therefore they could get CRA credit.”
Note that affordable housing is a worthwhile goal, but putting people into loans that they won’t be able to afford — and will struggle and be made worse off to try to afford — isn’t a winning proposition.
But, it is supposedly responsible for a housing bubble in 2008. Right.
Look at the first graph on this page labeled “Inflation History”. Look how steep the line is during the 90s and 00s. Its the increase in money and credit in addition to the pressure to make bad loans.
An increase in the supply of money and credit would explain why their was more investment overall in the economy. That would not explain why “rational maximizing agents” overwhelming chose bad investments in the housing sector in particular, compared to other sectors.
Addressed in my posts above. Money flooded into the tech boom because of genuine early success by a lot of the computer and internet companies. After the tech crash, people were looking for “real” assets. Money then flooded into real estate where some people were making excellent genuine returns in the beginning. In both cases the bubbles were started by genuine high returns in the beginning. When money flooded in returns became self-fulfilling and later illusory, because the assets were highly overvalued.
I am waiting for your explanation of how the fictional “Technology Reinvestment Act” is the real reason for the technology bubble.
Didn’t make that argument. The common denominator of both bubbles was the increase in money and credit and genuine returns in the early stages in both sectors which attracted investment. The government pressure to make bad loans was only a factor in the housing bubble.
The rest of your post consisted of unsupported conclusions and ad hominem attacks, so I’ll ignore them.(Note to moderator: Please don’t ban Mr. Welker. He’s insulting, but pointing out his errors is amusing and educational.)
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November 22, 2009, 4:17 amAmerican Psikhushka says:
Anyone interested can get a crude idea of what I’m talking about by comparing the MCSI US REIT index against the Nasdaq 100. This graph shows that as the tech stocks crashed money then went into real estate — crudely represented by the REIT index — fueling the housing bubble.
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November 22, 2009, 4:23 amManju says:
This is false. F&F bought subprime. At one point they even held 48 percent of the subprime loans that were sold into the secondary market.
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November 22, 2009, 1:03 pmManju says:
David: let me premise my statement by saying I agree with you that there were failures of the lassez-faire type, especially the role of the largely unregulated derivatives market, but if your asking libertarians to own their falure it does no good to deny the huge role F&F played in the crises.
Regarding the CRA mandates, Fannie and Freddie may have had a mandate to increase the number of low income home buyers for 30 years, but the mandate evolved considerably. The Clinton admin, for example, pushed banks to extend home mortgages to individuals whose credit prevented them from qualifying for conventional loans while simultaneously pushing Fannie to ease credit requirements on loans purchased from these banks and other lenders. HUD wanted 50% of Fannie and Freddies portfolio be made up of loans to low and moderate-income borrowers. Everyone knew at the time that this meant considerably more risk , and down payment requirements were reduced as well, but the move was intended to increase the number of minority home owners , so everyone looked the other way.
By 2003 Fannie and Freddie accounting scandals began to hit the fan, fanned by the WSJ excellent reporting on the matter. McCain and Greenspan called for more regulation (blocked by the dems) and the 2 companies were asked to justify their government subsidy, which they did by pointing to their affordable housing mission. Around this time their subprime portfolios grew enormously.
Now Fannie and Freddie are not regular companies, they’re government sponsored and essentially make the mortgage market. They provided the liquidity for these subprime mortgages, and if they wanted more of them to justify their existence, the ibanks and lenders would produce them. Without this market lenders would have to bear the risk themselves and ibankers would have to rely on private investors, like hedge funds, to take the risks off their books.
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November 22, 2009, 1:14 pmDavid Welker says:
American Psikhushka,
Forget about the housing bubble for a second. Lets talk about the tech bubble.
Too much money chasing too few goods = inflation.
Too much money chasing investments in technology = technology bubble.
You haven’t addressed anything in your posts above. And this assertion is BS. A lot of money flooded into the tech sector because investors invested in a lot of dot com companies with no history of making money and no reasonable prospect of making money. In other words, greed overcame rationality.
One more time. Just for fun. An increase in the money supply should lead to inflation, but would not explain a bubble in a particular sector. In the case of both bubbles, inflation outside of the bubble asset class (technology or housing) was never that much of an issue.
In other words, your story fails.
Let’s talk about the housing bubble for a moment.
You know what should happen if the government is making investment in a particular sector inefficient? Money should be going to OTHER sectors. That is, if the government interferes in the housing sector, forcing lenders to lend to those they do not want to in order to lend to those they do want to, then their expected return on investment should DECREASE. This should lead RATIONAL investors to shift their investments into OTHER sectors, where compliance with such regulations is not an issue. That is, instead of leading to a housing bubble, such regulation should decrease investment in housing.
In contrast, if the government incentives such investment, in contrast, then you would expect investment to increase. A little bit. But you wouldn’t expect investors to increase their investments by a huge amount, unless the incentives were massive.
Anyway, if you are interested in actual facts (which I doubt) please feel free to read this short 3-page paper debunking the theory that the Community Reinvestment Act had a large impact on increasing loans to low-income borrowers. As the paper shows, CRA loans made up a decreasing percentage of loans to low-income borrowers and lower-income neighborhoods.
What we saw was ever irrationally increasing investment in housing, voluntarily undertaken by investors. The government absolutely never forced anyone to invest in housing instead of pharmaceuticals or utilities or other sectors of the economy.
Once again, your theories are not derived from facts and logic, but are contrary to facts and logic.
By the way, just because an assertion is ad hominen, that doesn’t mean it isn’t true. You economic beliefs are based on faith and not facts. =)
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November 22, 2009, 8:07 pmDavid Welker says:
Manju,
You are apparently correct about Fannie and Freddie with respect to their ownership of subprime loans. I was misinformed by this article by Paul Krugman. However, the claim that Fannie and Freddie did not invest in subprime loans appears to be contradicted by this Washington Post article.
However, the claim that the Bush administration’s policies with respect to Freddie and Fannie is responsible for the housing bubble is still not true. See this post from Mark Thoma.
Also, most importantly, the mortgages owned by Freddie and Fannie were obviously, by definition, not the loans that were owned by Bear Stearns or Lehman Brothers, whose failures precipitated the financial crisis.
But, of course, anyone who wants to blame government policy for contributing to the housing bubble will find me agreeing with them. In particular, government’s failure to regulate financial institutions had a large role in enabling the housing bubble and subsequent financial collapse.
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November 22, 2009, 8:41 pmManju says:
david: the argument that F&F wasn’t responsible for the crises seems to rest on the fact that they didn’t “lead the market down”, other firms failed first, and private firms held riskier loans.
the problem is that F&F are just so huge. even though they held a fewer percentage of subprime loans than others they still far and away held the most. they control trillions while the largest hedge funds control like 20–30 billionish.
they were able to amplify the crises like only the govt can. by providing government backing for loans they also increased liquidity for the worst loans out there: non-cra conforming subprime. in short, the govt distorted the market.
i think w/o F&F you’d have a larger long-term capital-management problem, the giant hedge fund bailed out by ibanks (orchestrated by Greenspan) because the fed was afraid of the systemic damage. since the rhetoric for the last probably 29yrs has been free-market fundamentalism: from Reagan’s moral arguments against socialism to Clinton’s neo-liberalism to the globalizaiton of the bush years adn the rise of china and india after the collapse of socialism, everyone assumes the failure was a market one...but the truth is we’ve always been a mixed economy, so it stand to reason that the reasons are well, mixed.
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November 23, 2009, 12:00 amAmerican Psikhushka says:
David Welker–
You haven’t addressed anything in your posts above. And this assertion is BS. A lot of money flooded into the tech sector because investors invested in a lot of dot com companies with no history of making money and no reasonable prospect of making money. In other words, greed overcame rationality.
No, investments in the early part of the tech boom were rational because you had some very successful tech companies that were earning tremendous returns and gowing at an alarming rate. The prices for these assets were bid up, but this was needlessly fueled by the creation of money and credit. This exhibits the Austrian concept that central bank manipulation magnifies and exaggerates normal business cycles. This is a simple logical chain, and that was the third time I repeated it.
And note that this logical chain is supported by facts. A lot of the big tech and internet companies did earn tremendous returns and grow at tremendous rates at the beginning of the tech boom. There was a lot of money and credit created over the period, as evidenced by the inflation graph I linked above.
One more time. Just for fun. An increase in the money supply should lead to inflation, but would not explain a bubble in a particular sector. In the case of both bubbles, inflation outside of the bubble asset class (technology or housing) was never that much of an issue.
Wrong. High returns and/or the promise of future high returns attract funds to a particular sector. This is a simple, documented concept in finance and investing. This was the situation in both bubbles. Also in the case of the housing bubble funds were also attracted to the sector because it was a “real” asset versus the “paper” nature of the tech sector that had just crashed.(Based on the premise that businesses with physical assets were “safer” or more “solid”. Of course any investment asset is risky if one overpays for it.)
You know what should happen if the government is making investment in a particular sector inefficient? Money should be going to OTHER sectors.
The government was devaluing the currency by creating more money and credit. It was making it easier for people to invest in overvalued assets.
That is, if the government interferes in the housing sector, forcing lenders to lend to those they do not want to in order to lend to those they do want to, then their expected return on investment should DECREASE. This should lead RATIONAL investors to shift their investments into OTHER sectors, where compliance with such regulations is not an issue. That is, instead of leading to a housing bubble, such regulation should decrease investment in housing.
Wrong. The government was making it easier to make bad loans. Here’s an example to illustrate: If I’m a car dealer I can sell a lot of cars if I approve everyone that applies for financing. But eventually a lot of the loans will go bad, and then either the bank buying the loans will cut me off or it will go out of business. That’s similar to what happened in housing.
Once again, your theories are not derived from facts and logic, but are contrary to facts and logic.
Wrong. I’ve listed a number of facts supported by evidence and common sense. Apparently you don’t understand even some simple concepts in finance and investing.(High returns attract investment to a sector; Loose credit practices result in lots of transactions, but also lots of bad loans.)
By the way, just because an assertion is ad hominen, that doesn’t mean it isn’t true. You economic beliefs are based on faith and not facts. =)
And yours are incorrect in addition to being immature and insulting. I’ve supported my statements with a number of facts and observations.
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November 23, 2009, 12:17 amAmerican Psikhushka says:
David Welker–
But, of course, anyone who wants to blame government policy for contributing to the housing bubble will find me agreeing with them. In particular, government’s failure to regulate financial institutions had a large role in enabling the housing bubble and subsequent financial collapse.
The CRA is regulation. And the Federal Reserve controls(regulates) monetary and credit policy. So there was plenty of regulation — and that magnified the bubble and crash. But your proposed solution is more of it....
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November 23, 2009, 12:25 amDavid Welker says:
Let me try AGAIN.
If a bunch of money floods into the market, then investors can invest that money in a lot of sectors. There is no reason for them to concentrate their money in technology. In fact, you would expect rational investors to diversify and spend the extra money in a lot of different sectors.
The government never forced these companies to concentrate their investments into technology (which was irrational) instead of diversifying (which would have been rational).
Okay. If you don’t understand THAT after having it repeated to you several time in several different ways, then you can’t be helped.
That is the problem. There was no reason to believe inflated promises of high future returns in most technology companies. People were irrational and did not bring enough scrutiny flimsy business models.
That a few companies succeeded (Amazon, Google, EBay, etc.) was precisely because they had good business models. But other companies had pie-in-the-sky business models. And it really is rather obvious, if you look at them. But it was incredibly profitable to some to push these companies out as IPOs and they were eaten up by a lot of naive investors who should have known better.
It is the same with housing. It was pretty obvious to everyone, liberals, libertarians, conservatives, even law professors like David Bernstein that the housing bubble was unsustainable just like the technology bubble.
Both of these bubbles were major market failures.
And it was also making it easier for people to invest in undervalued assets. How hard is this concept for you? Say you ran into some extra money. Are YOU going to invest in the overvalued assets or the undervalued assets? If you are rational, you invest in undervalued assets (i.e. not the vast majority of tech stocks and not the housing sector).
Why would a rational bank willingly make a lot of bad loans? A rational bank would not do so. Instead, a rational bank would lend to businesses in other sectors.
Well, it turns out that your “common sense” contradicts basic economic logic. For example, a bank is not going to knowingly make a lot of bad car loans, even if the car dealer would prefer that they did, unless it can securitize those loans and sell them to other investors. But, other investors are not going to want to buy a bunch of bad loans either.
The market failed because market actors failed to recognize that the loans they were making were bad. Their failure to recognize that these loans were bad were their own failures. No one forced them to make those loans.
First, you have actually provided very few facts. Second, your logic is a complete failure. You can repeat yourself over and over, but all you are doing is failing to address the basic issue if have brought up on multiple occasions. The issue will not go away just because you fail to address it.
If someone gave you an extra million dollars that you didn’t have before, you may invest it. But you have no good reason to invest it all into technology stocks or into the housing sector. Extra money does not explain the failure of the market to diversify. Got it? And guess what. No one had any reason to believe that either the technology bubble or the housing bubble would last. That was just a clear market failure.
Read the article I linked to. It is three pages. The percentage of loans regulated by CRA that went to low income individuals and neighborhoods actually decreased. Your insistence on blaming the CRA despite the fact that it became increasingly less important is not logical.
Another thing, all regulation is not created equal. That regulation X is bad does not prove that regulation Y is bad. I would be the last person to defend all regulations. I would also be the last one to condemn all regulations. Thinking that regulation per se is good or bad without regard to specifics is just plain stupid.
Anyway, I will let you have the last word. This has been amusing.
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November 23, 2009, 2:25 amAmerican Psikhushka says:
David Welker–
If a bunch of money floods into the market, then investors can invest that money in a lot of sectors. There is no reason for them to concentrate their money in technology. In fact, you would expect rational investors to diversify and spend the extra money in a lot of different sectors.
The fund did raise all sectors, it just raised technology the most because of the high returns, technological advncements, and media buzz. There was a bubble or overvaluation in stocks in general as well. A good reason to avoid indexing.(Diversification into overvalued securities is unwise.)
The government never forced these companies to concentrate their investments into technology (which was irrational) instead of diversifying (which would have been rational).
The government did devalue the currency by creating money and credit over the period. So they did contribute to the overall stock bubble in addition to the more focused tech stock bubble.
Your statements on rationality are in hindsight. The academic advice at the time would have been to index — the ultimate in “diversification” — when the indexes were overvalued as well. This would have been irrational too, if we’re going by valuation. And it would have led to losses.
That a few companies succeeded (Amazon, Google, EBay, etc.) was precisely because they had good business models. But other companies had pie-in-the-sky business models. And it really is rather obvious, if you look at them. But it was incredibly profitable to some to push these companies out as IPOs and they were eaten up by a lot of naive investors who should have known better.
Not at all. Not only did you have to be right about business models, you had to be right about price as well. So it wasn’t at all obvious. In fact Warren Buffett was quoted at the time that if he were teaching a class on investing he would have asked his students to value an internet company on the final exam. He said he would have failed anyone that claimed they could provide an answer — because the future earnings were that uncertain.
Both of these bubbles were major market failures.
No, they weren’t market failures. See above — there is always some uncertainty in valuing assets and investments.(Buffett sticks to assets he finds easy to value, he refers to them as “one inch hurdles” or something similar.) There is always some fluctuation in markets for investments, commodities, etc. Differences in opinions of valuation “make a market” as they say. The trouble occurs when the markets are grossly distorted by government intervention — like the creation of a flood of excess money and credit. This magnifies the cycles and fluctuations, making them more violent and extreme.
Say you ran into some extra money. Are YOU going to invest in the overvalued assets or the undervalued assets? If you are rational, you invest in undervalued assets (i.e. not the vast majority of tech stocks and not the housing sector).
See above.
Why would a rational bank willingly make a lot of bad loans? A rational bank would not do so. Instead, a rational bank would lend to businesses in other sectors.
The banks were being pressured to do it, see the quotes above. And note this was pressure from those with influence over regulation.
For example, a bank is not going to knowingly make a lot of bad car loans, even if the car dealer would prefer that they did...
If they were being pressured by those with influence over their regulation they would — and did.
...unless it can securitize those loans and sell them to other investors.
And I stated that the ratings agencies and/or brokers (and anyone pressuring them) bore some culpability as well.
The market failed because market actors failed to recognize that the loans they were making were bad. Their failure to recognize that these loans were bad were their own failures. No one forced them to make those loans.
No, the situation was caused by government pressure and intervention. The banks would have normally not made these loans. And they would have been priced higher because the Federal Reserve was artificially holding rates down.
First, you have actually provided very few facts. Second, your logic is a complete failure. You can repeat yourself over and over, but all you are doing is failing to address the basic issue if have brought up on multiple occasions. The issue will not go away just because you fail to address it.
Wrong. I have provided a number of facts. And I have addressed nearly all of your points.(I don’t address ad hominems and unsupported conclusions, except for example the ones in your paragraph above.) If I haven’t addressed something, name it.
If someone gave you an extra million dollars that you didn’t have before, you may invest it. But you have no good reason to invest it all into technology stocks or into the housing sector. Extra money does not explain the failure of the market to diversify.
The extra money was pushing up the overall market as well. So even indexing — the ultimate in “diversification” that academics recommend — would have been a losing proposition. It wasn’t a “market failure”. It was a failure of government policy and regulation.
Read the article I linked to. It is three pages. The percentage of loans regulated by CRA that went to low income individuals and neighborhoods actually decreased. Your insistence on blaming the CRA despite the fact that it became increasingly less important is not logical.
Wrong. These were long-term loans. The CRA and its proponents pressured the banks to make them. The loans remained a problem from the time they were made — that’s why we had and are having waves of foreclosures and a collapse in real estate prices.
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December 2, 2009, 11:21 am