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.

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.

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.

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.

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.

The government was devaluing the currency by creating more money and credit. It was making it easier for people to invest in overvalued assets.

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).

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.

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.

I’ve listed a number of facts supported by evidence and common sense.

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.

I’ve supported my statements with a number of facts and observations.

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.

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….

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.

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….

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.

David Welker: 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.

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.

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.

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.

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.

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. =)

David Welker: 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.

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.

David Welker: Well, Fannie and Freddie don’t buy subprime mortgages,

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.

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.)

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.

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.

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.

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.

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.

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.

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.

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.

David Welker: So, if you had a lot of money lying around, would you invest it badly because the government encouraged you to?
Of course not

If the govt provided a platform (fannie and freddie) allowing me to sell the investment before it went bad, i would.

And government encouragement to make bad loans.

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.

Religion is based on faith, my belief in libertarian economics is based on evidence and logic.

No, your belief in libertarian economics is really religious. You just deceive yourself into thinking it is based on evidence and logic.

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.

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.

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.)

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.)

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.

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.

http://www.nytimes.com/2009/11/20/business/20limits.html?hpw

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.

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.

A “political offensiveness” tax, perhaps, under the socialist-sounding name of ‘excess profits’ or the capitalist-sounding name of ‘clawback’?

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:

How many days have they traded wrong this year?

Heh.

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.

Who equated finance companies to mafias? You are seriously confused.

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.

David Welker: 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.

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.

I don’t. I satisfy them, and in exchange other people satify my impulsive wants. Works pretty good.

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.

David Welker: 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.

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

David Welker: You should not put impulsive wants on a pedestal and worship them like some sort of idol.

I don’t. I satisfy them, and in exchange other people satify my impulsive wants. Works pretty good.

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”?

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.

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.