Cafe Hayek: Bear Stearns debacle

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March 26, 2008

Bear Stearns debacle

Russell Roberts

Here is my piece on the Bear Stearns debacle that aired on NPR's All Things Considered. I argue that the government's role creates a moral hazard problem and creates political pressure for a homeowner/lender bailout as well as raising the probability of increased regulation of investment banks. Arnold disagrees with the moral hazard point:

Bear Stearns was liquidated in a hurry. The market was in the process of liquidating it and forcing it to sell its assets for less than what I believe they were worth. I believe that both J.P. Morgan and the taxpayers are going to make a profit at Bear Stearns' expense. I don't see this as creating moral hazard.

My reasoning is that the government is playing with prices. The Fed and the Treasury originally wanted a price for Bear Stearns of $2 a share to make sure that Bear Stearns execs didn't make "too much" from the transaction. Then the shareholders balked and JP Morgan agreed to pay $10 a share. But even that price would have been higher if the Fed hadn't guaranteed $29 billion of the $30 billion in Bear Stearns assets that are in subprime mortgages. So Bear Stearns isn't paying the full price for its failure.

I assume Arnold is arguing that Bear Stearns is "really" worth more than that but I don't know how you can know that if no one else seems eager to buy them. One of the stranger parts of this episode is why JP Morgan was given the access to what now appears to have been a sweetheart deal of $2. Would no one else wanted to bid at that rate? Especially now that JP Morgan is still willing to go through with the deal at five times the original price.

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Comments

One of the most amazing things of all this to me is how some of the world's best financial minds at a big firm like Bear Stearns could not see this coming. I can point to articles 5 years old or more from lowly fiancial reporters that foresaw this. So how could they accumulate all these overvalued assets of just ridiculous proportions as I understand it and think everything was going to some how work out OK? Is this blind greed taking over all sense of rationality or do some small few actually profit from this by getting out while the getting is good?

It seems to me that there is an argument to be made that the general group of CEO's running our banking and financial institutions are guilty of the one of the greatest degrees of professional incompetence ever displayed in modern history.

If some one is an advocate of liberalized markets I can only assume you would be furious with our financial sectors leadership for calling into question the efficiency of liberal markets.

Posted by: muirgeo | Mar 26, 2008 4:12:18 PM

Could you guys please explain why this 'bailout' is always presented in the media as being funded on the backs of taxpayers? How?

The Fed doesn't spend taxpayer money, that's Congress. If Congress legislated a bailout then that would be a bailout on the backs of taxpayers.

The Fed, as I understand it, is trading treasuries for mortgage backed bonds. Presumably these are treasuries they purchased in their open market operations. It seems to me all that could do is drive up interest rates on treasuries which, at this particular time, doesn't seem to be much of an issue as treasuries yields are at all time lows.

Posted by: Marcus | Mar 26, 2008 4:21:16 PM

Marcus,

If the fed gave every home owner who ill financed with some subprime loan a re-finance package with a 3% fixed rate loan would THAT be a bailout? They'd have the house as collateral right?

You said mortgage backed bonds...You mean pieces of paper that say a $250,000 dollar house is worth $ 750,000?

You think you are uneffected by the dollars devaluation or the real rate of inflation resulting from the Feds printing money like candy?

Posted by: muirgeo | Mar 26, 2008 4:35:54 PM

You think you are uneffected by the dollars devaluation or the real rate of inflation resulting from the Feds printing money like candy?

Of course not, but devaluing the dollar affects holders of dollars, not specifically U.S. taxpayers.

U.S. taxpayers may be a subset of 'holders of dollars' but 'holders of dollars' is a much larger group than U.S. taxpayers. For example, China holds a trillion dollars in cash, as I understand it.

Posted by: Marcus | Mar 26, 2008 4:40:31 PM

The Fed is the key to all of this.
This is entirely their mess. In the face of legitimate growth and stable prices, the Fed began mismanaging the money supply over a fear of inflation. They killed growth, killed housing, and killed all appetite for risk. They have yet to get us back to even.

They so killed risk-taking that no one would step forward and purchase these various debt products even at a fraction of their stated value. Every one feared the Fed would wreak more havoc once they owned the bad assets.

Only when the Fed stepped up and said, this was our fault, so we'll make good on Bear's bad assets and we'll open our window to others with bad assets, did a buyer emerge.

Goverment intereference in the markets is never good, but if government creates the mess, market participants always look to the government to fix it.

Posted by: REW | Mar 26, 2008 4:42:42 PM

It's hard to agree with Arnold that Bear's assets would have been sold below market value. Nobody is trading them at all right now and institutions are increasingly less willing to accept them as collateral for repos. Without trading, there is no reliable price for the debt. BTW, does anybody know if that $30 Billion in MBS's and CDO's the Fed is essentially taking on its books, the notional or the best guess at the Market value? I'll bet it's the not MV because there is no MV.

There's already a massive bailout of lenders and borrowers underway.

The cap on the size of mortgages that Fanny can buy has already been lifted in order to reduce the mortgage rate for a larger number of mortgages. The Fed is doing its bit by hacking away at the Fed Funds rate in an effort to drive mortgage rates down and making borrowing cheaper for banks by lowering the discount rate to maintain the fiction of their solvency. Meanwhile, Paulson (otherwise known as "the other one"), is busy publicly begging borrowers to not walk away from their mortgages and encouraging them to refinance arms with fixed mortgages. It's pretty clear that the Fed and Treasury are giving the same bad borrowers a window in which they can refinance to fixed mortgages while the Fed inflates the housing market by stoking inflation in general. The only problem with stoking inflation, of course, is that if you don't stoke it "just right", expectations of future inflation change and that second derivative will kick you in the head like an angry mule.

Posted by: Methinks | Mar 26, 2008 4:48:38 PM

Marcus,

This is on the backs of the tax payer in the following way.

The Fed has heretofore operated at a profit, due to its special relation with the Treasury and its unique status. That profit is annually returned to the US Treasury. If, due to these new deals, swaping less risky assets for more risky assets at unwarrented prices, the Fed begins to make losses, they will not be able to return anything to the Treasury, they may take money directly from the Treasury, and the US Gov will tax and borrower more than it otherwise would. So it is a little round-about, but it all comes back to the taxpayer in the end.

Posted by: scott clark | Mar 26, 2008 4:59:49 PM

Marcus,

The Fed has been lending to member banks and accepting CDOs as collateral. The fear is that the loans are based on the notional value of the collateral and that the borrowing bank will become insolvent and not be able to repay the loan. If this happens enough times and the Fed is stuck with enough of this near-worthless paper, the Fed itself may need a bail-out. Suddenly, we'll find ourselves watching congress using tax dollars to put together a bailout package and maybe even taking over the Fed.

Posted by: Methinks | Mar 26, 2008 5:00:06 PM

REW, this is largely the market's fault, not the Fed's. Credit spreads were at historically tight levels at the beginning of July 2007. That's not the Fed's fault.

Posted by: Methinks | Mar 26, 2008 5:10:36 PM

The rescue of Bear Stearns marks liberalisation’s limit, by Martin Wolf, Commentary, Financial Times: Remember Friday March 14 2008: it was the day the dream of global free-market capitalism died.

Great discussion at Economist's View.

Posted by: muirgeo | Mar 26, 2008 5:12:01 PM

Well done, Muirgeo. You finally found the appropriate thread for that article.

Posted by: Methinks | Mar 26, 2008 5:18:19 PM

Professor Roberts has it right. A few quick thoughts:

The price of $2 was arrived at taking into account a number of factors: 1) it’s not 1, which is close to 0, 2) Bear Stearns had no say in this whatsoever, 3) it was small, but not 0 or 1.

It apparently did not take into account various exogenous (and largely nonmarket) forces such as threat of shareholder class action lawsuit, judging from the $10 number which has emerged since.

Each member bank of the Federal Reserve is required to post real-time assets and liabilities for the Fed, and Bear presumably would have had to as well, being escorted to the discount window by JP Morgan.

You can back into the worst case scenario number (underlying the $2 price) by examining total exposure on Bear Stearns’ balance sheet, the number Morgan, Bear, and the Fed were presumably working from.

There are people not involved in the negotiations who know that number. I have not seen it, but would very much like to.

Posted by: Mesa Econoguy | Mar 26, 2008 6:19:02 PM

Marcus,

If the fed gave every home owner who ill financed with some subprime loan a re-finance package with a 3% fixed rate loan would THAT be a bailout? They'd have the house as collateral right?

You said mortgage backed bonds...You mean pieces of paper that say a $250,000 dollar house is worth $ 750,000?

You think you are uneffected by the dollars devaluation or the real rate of inflation resulting from the Feds printing money like candy?

Posted by: muirgeo | Mar 26, 2008 4:35:54 PM

Ok I'll bite ducky. If they still don't pay the refi, will you kick them out into street? Or another big government bailout?

Posted by: FreedomLover | Mar 26, 2008 6:49:45 PM

Russ --

I think if you look at it from the perspective of signaling. The Fed was concerned that had the deal not gone through on that Sunday before the Japanese Markets opened, we might have had a worldwide panic. By doing the deal, they avoided the panic. $2 was JP Morgan's price for going along with the deal that quickly.

Everybody expected the terms to change after the fact -- heck, the merger agreement itself has blanks in it! $2 was never a solid number. The important thing was that markets understood that the Fed was ready to interpose itself if necessary.

Posted by: cef | Mar 26, 2008 7:08:23 PM

Why no mention of Bear's bond holders? Bear's leverage ratio was 33:1. Seems like they were the real winners of the bailout. Shareholders lost a lot of their value, but these loose lenders will retain most of theirs. Despite being first in line for Bear's assets, they were worried that that the deal wouldn't go through.

Posted by: Dave | Mar 26, 2008 7:28:14 PM

Muriego, there is no doubt these institutions are driven by incompetent people. However, there is also no doubt that the government is driven by even more incompetent people - remeber Bernanke's "the subprime crises is contained"? Can you explain how would a financial sector containing both competent and incompetent people benefit from being regulated by totally incompetent people? I don't get the logic.

BTW: you simply cannot blame free market for this.
1) the money is centrally planned (even Greenspan admitted it)
2) there is huge moral hazard problem. The Fed just DEMONSTRATED it. Thinking people could foresee these credit problems, however thinking people could perfectly foresee government's reaction too.

In the situation with central planning of interest rates AND state-created moral hazard these problems PREDICTABLY occur. Free market makes people to use every effective way to get rich in the prevailing environment. If the environment contains incentives of moral hazard, you can be sure that sooner or later people find ways to exploit it. Is central planning your answer?

Except that such regulation would kill not only bad behaviour, but good one as well.

Posted by: andy | Mar 26, 2008 8:25:16 PM

Nearly everyone (except The Economist)confuses the party bailed out in this instance; it was JPMorgan and every other counter-party of Bear Stearns.

No one on Wall Street thinks they're the dumbest guy in the room. It's everyone else that is stupid. You can make a buck off stupid. The only worry used to be knowing when to stop. Now, you don't even having the timing problem.

Posted by: Michael Fernwood | Mar 26, 2008 9:44:02 PM

Someone might have already mentioned this but the deal was pushed by the New York Fed. Guess who sits on its board? The CEO of JPMorgan. That would seem to explain how it got access to such a sweet deal.

Posted by: Murraymises | Mar 26, 2008 10:00:40 PM

Jim Rogers is not pleased by neither I-banks' behaviour not by the Fed's. Although, he exaggerates about the 29-year old bankers with Maseratis and seven figure bonuses, he makes some good points.

Posted by: Methinks | Mar 26, 2008 10:45:34 PM

as always, sorry for the typos resulting in grammatical errors.

Posted by: Methinks | Mar 26, 2008 10:47:17 PM

scott clark,

Do you have any hard evidence for this statement?

"The Fed has heretofore operated at a profit, due to its special relation with the Treasury and its unique status. That profit is annually returned to the US Treasury.
Posted by: scott clark | Mar 26, 2008 4:59:49 PM"

The FED is privately owned and the owners are not all USA based, not at all.

The Grace report says that every single penny collected as income taxes (after paying IRS operating expenses) goes directly to pay the interest on the loans from the FED.

How does those two facts jibe with your statement?

Posted by: vidyohs | Mar 27, 2008 7:22:18 AM

Methinks wrote, "REW, this is largely the market's fault, not the Fed's. Credit spreads were at historically tight levels at the beginning of July 2007. That's not the Fed's fault."

Would you elaborate on that?

What I am seeing in the media today, including the link by muirgeo, is a lot of focus on how the government is stepping in to solve the problem but no analysis at all of how those same institutions promoted the problem to begin with.

Today David Wessel at the WSJ had this to say about policy makers, I kid you not, "It's messy, uncomfortable and undoubtedly flawed in many details. Like firefighters rushing to a five-alarm fire, policy makers are making mistakes that will be apparent only in retrospect."

So, as it turns out, policy makers are just as blind as anyone else. Only, they get a break.

Paul Krugman does the same thing. In a recent article he waxed romantically on how regulations could have prevented the Great Depression. Ignoring, entirely, the fact he is speaking with 20/20 hindsight. Something the regulators at the time would not have had.

The fact is, policy makers celebrated the housing boom until the bubble burst. Bush instituted the 2003 American Dream Down Payment Initiative which relaxed lending standards yet now we don't hear anything about that.

I'm not suggesting the market played no role in this, I just find it delusional that people armed with 20/20 hindsight blame the market and think policy makers can some how fly blind into the future more assuredly than anyone else.

If there is any truth to it at all its not because policy makers are better at it but simply that their policies will stifle innovation.

Posted by: Marcus | Mar 27, 2008 7:33:45 AM

I tend to agree with Marcus. While businesses are very human-like organizational structures, they take on the trait of responding to incentives laid out before it. If they find an area they can exploit (in the neutral sense of the word), they will do so.

There was a significant shift in the late 90's to make home buying easier for those who would not otherwise qualify for a loan of any other sort. Sure, there were a host of loans and financing schemes that arose to deliver on the government's promise. But the banks were not willing to risk everything in all cases in the beginning.

Thus, it permitted the loan brokering businesses to package and re-package loans and sell them up the food chain while obscuring a lot of the underlying risk. I would wager a bet that while many of the larger banks knew what they were holding, they didn't know the overall exposure they were holding in entirety.

Posted by: colson | Mar 27, 2008 11:19:23 AM

Would you elaborate on that?

Sure, Marcus.

First of all, we are in complete agreement about government intervention.

I'll explain what I meant: The interest rate at which lenders lend is determined by the risk free rate (for which treasuries is usually the proxy) plus a credit spread. Obviously, the riskier the borrower, the larger the credit spread.

Over the last ten years, credit spreads have been tightening, which amounts to lenders accepting a lower return for a given level of risk. While there may have been some government interference with subprime mortgages (some have argued that red-lining laws forced lenders to accept a lower return for high risk borrowers), there is no question that credit spreads tightened across the board as lenders competed with each other to make loans.

While credit spreads tightened, leverage increased. Leverage increases risk. For example: if a portfolio is levered 10 to 1, then a 5% decrease in the price of the assets held in the portfolio translates into a 50% reduction in the value of the portfolio. In addition to increased leverage and lower returns for a given level of risk, portfolio risk management became quit lax - at least, in my opinion. BTW, lower credit spreads, more leverage and laxer risk management are all related.

The Wall Street Journal's editorial page loves to blame Greenspan for lowering the Fed Funds rate to around 1% after 9/11 and, certainly, that did make money very cheap. However, the FED is not responsible for the decision to increase leverage, tighten the credit spread or reduce risk controls.

Government is also not responsible for borrowers making poor decisions, lying and outright fraud.

As you point out, nobody was complaining and seeking to regulate anything when everyone was making money in the housing market. Now that there are losses, participants are screaming that they should not be the only ones to bear them. We must share the losses with those who did not participate in these imprudent decisions. A perfect example of privatized profits and socialized losses.

The risk was taken by participants in the housing market - both borrowers and lenders - and the losses are rightfully borne by those same participants. The argument that government must step in because this "crisis" will hurt everyone is, in the words of Penn & Teller, Bullshit.

Posted by: Methinks | Mar 27, 2008 11:48:59 AM

Colson,

While it's true that government lowered "standards", that only means that it removed some regulation.

Market participants were not forced to lower their standards.

The lending institutions, not the loan brokers, repackeged the loans. ABS (asset backed securities) have been around for decades. They are not a problem. The question is: why would a buyer of a CDO not insist on knowing the assets underlying it? And if he doesn't know the underlying assets, then what gives him the comfort to leverage the portfolio of CDOs 10 to 1? Most importantly, why should anyone but the participants involved in this deal bear the risk?

Thanks to the government's socialist policies in response to this "crisis" (it's not a crisis but the government will make it one), bankers are walking away with quite a different message: We can do what we like, taxpayers will ultimately bear the risk and we will receive any gains. That's a pretty powerful incentive for a repeat of very same behaviours that got us into this pickle in the first place.

Incidentally,

If I were a bank owner, I would walk away with a very valuable lesson - is it better to offer a mortgage at a fixed rate of return or run the risk of interest rate increases and an increase in foreclosures? Neither is better and it's not a game theory question. It's a practical risk question answered by banks every day. There are many derivative products available to hedge interest rate risk. Banks generally borrow at the short end of the curve, which by definition, means they borrow floating. They tend to lend at a fixed rate at the long end of the curve. So, not only do they have a fixed/floating mis-match but they also have a duration mis-match. To capture the spread (profit) on that loan while reducing interest rate and curve risk, banks enter into swap and forward agreements and may also use use caps, floors and swaptions to hedge these two risks.

Posted by: Methinks | Mar 27, 2008 12:18:17 PM

Marcus,

There is NO 20/20 hindsight. Here is an article from 3 years ago that sounds the alarm bells
loud and clear. Back then when I cited it as a reference people just blew me/it off.

I still want to know how the most intelligent investors and CEO's could have been so blind and utterly incompetent. (serious replies only)

As far as the Fed and regulatory agencies it seems they are often the same group of beer drinking buddies as those they should be regulating. They caved policy to the desires of Wall Street and the Bankers to be able to take more and more risk rather then earning money the boring old fashioned way.

"A Lion like greed makes the show but it needs a tamer or things become not so fun."

That's a quote from me...I just made it up. Others can use it with permission. TY

Posted by: muirgeo | Mar 27, 2008 12:22:14 PM

I still want to know how the most intelligent investors and CEO's could have been so blind and utterly incompetent.

Hey, what's with the "intelligent people" all of the sudden? Weren't you calling these same people "Wall Street paper pushers" on every thread before this one? Which is it, muirdiot?

Here's the question keeping me up at night:

How is it that you couldn't get into vet school but managed to be accepted to medical school and are now licensed to practice on children? That seems like kind of a screwed up system to me. Why would we let people not smart enough to worm dogs graduate med school?

Posted by: Methinks | Mar 27, 2008 1:01:57 PM

Muriego, I think we should blame Fed for doing this. What is the reason for lowering interest rate? To facilitate credit. If the Banks found that the options they have are too risky, the Fed would lower rates even lower.
If the banks didn't facilitate credit, we would have to say that monetary policy was ineffective. The banks, unfortunately, did exactly what Fed wanted.

I don't get it - you say that tighter regulation would have prevented the problem when the banks did exactly what the regulators wanted?

Posted by: andy | Mar 27, 2008 4:53:22 PM

"Here is an article from 3 years ago that sounds the alarm bells loud and clear. Back then when I cited it as a reference people just blew me/it off."

That article doesn't demonstrate at all that regulators weren't cheering on the bubble.

Here's the thing muirgeo, your whole policitcal philosophy depends upon having the right person regulating the market (plus other problems I'll leave for later).

But if people can't regulate themselves why do you think they can elect somebody to regulate them for them?

Posted by: Marcus | Mar 27, 2008 5:46:59 PM

The lessons of Enron

" As we begin to look for ways to better monitor the financial system, it's important to remember that calls for more regulation after the Long-Term Capital Management collapse in 1998 didn't prevent Enron. And calls for more rules after Enron didn't stop the financial services sector from imploding in a cloud of greed in the past six months.

And while any new restrictions might seem like a good idea in eye of the storm right now, they certainly won't prevent the next crisis -- whatever and whenever that is -- from overtaking us again some years from now, when we least expect it."

Amen.

Posted by: Mesa Econoguy | Mar 27, 2008 6:04:49 PM

Markets don't fail, they blowback.

Posted by: Sam Grove | Mar 27, 2008 6:57:45 PM

Amen.

Posted by: Mesa Econoguy

Mesa,

Were there any similiar big failures or massive scandals from 1940 to 1965 like we've seen since Reagan.

Maybe I'm wrong but I get the impression that good oversight during that time keep failures and corruption to a minimum increasing confidence in the markets and spurring stable strong economic growth.

Posted by: muirgeo | Mar 27, 2008 7:57:15 PM

But if people can't regulate themselves why do you think they can elect somebody to regulate them for them?

Posted by: Marcus

Couldn't I use the same felonious argument to say why have police? Sure police can be corrupt too but better to have them then not.

Posted by: muirgeo | Mar 27, 2008 8:02:02 PM

I'm just an undergrad marketing student looking forward to a master's in economics next, so I'm no expert...

But I am writing an essay currently on pain in the market place. There were a long chain of actors leading up to this mess, from Congress, the media, the lenders, the borrowers, the appraisers, etc...

Any one of those individual groups could bear responsibility, or they all could. However, pain serves its purpose in the marketplace.

If those who acted poorly are spared the burden of the pain they created for themselves, they will continue such behavior in the future. In fact, there will be an increase in this behavior by others.

US airlines were vulnerable because they had the "safety" of knowing the government would shield them from the pain of liability from a terrorist attack. And sure enough, they were bailed out. Had our government not had a decades long record of acting as a hammock, liability minded airlines would have prevented 9/11 from ever happening.

That event was conceivably one of the worst pains a market could face. But we did not learn its lesson because the safety net stepped in yet again.

Posted by: grunyen | Mar 27, 2008 8:08:18 PM

Had our government not had a decades long record of acting as a hammock, liability minded airlines would have prevented 9/11 from ever happening.

Not to mention the official policy of giving in to hijacker demands.

Posted by: Sam Grove | Mar 27, 2008 8:40:49 PM

Couldn't I use the same felonious argument to say why have police? Sure police can be corrupt too but better to have them then not.

Sure you wanna go there?

"Employing FBI "Return A Record Card" data, this study examines the impact of municipal police strikes on reported rates of burglary, robbery, larceny, and auto theft in 11 U.S. cities. Relationships reflecting the view that police presence is essential for crime prevention and social order are examined for variation duration of police strike, city size, and offense category. Overall, analysis yields very limited support for the police presence argument, suggesting that strikes have neither a significant nor a systematic impact on rates of reported crime. Implications of findings for the formulation of police policy are discussed."
link

Posted by: Sam Grove | Mar 27, 2008 9:09:36 PM

Were there any similiar big failures or massive scandals from 1940 to 1965 like we've seen since Reagan.[sic.]
Posted by: muirgeo

The 1930s were THE failure.

Maybe you’re wrong?

Dumbass:

The Great Depression.

How stupid are you? Wait, don’t answer that.

Doctor, my ass…. Your patients must be dead by now.

Posted by: Mesa Econoguy | Mar 27, 2008 10:20:57 PM

As always, Pink Floyd lyrics provide the answer:
Me:
Money, it’s a hit –
Don’t give me that do-goodey-good bullshit
Here.
Muirgeo:
Encumbered forever, by desire & ambition,
There’s a hunger still unsatisfied
Our weary eyes still stray to the horizon,
Though down this road we’ve been so many times…..
Here.

Posted by: Mesa Econoguy | Mar 27, 2008 11:51:44 PM

Were there any similiar big failures or massive scandals from 1940 to 1965 like we've seen since Reagan.

In the beginning of 1950's the system was fully cleansed of bad companies, it takes some time for bad decisions to show.

Maybe I'm wrong but I get the impression that good oversight during that time keep failures and corruption to a minimum increasing confidence in the markets and spurring stable strong economic growth.

Look, this is like saying that if you jump from a skyscraper, there is no problem in the 100's stock. Nor in the 50's. Inflation causes these problems to be hidden - but these problems are build up for a long time. There was no incompetence in 2006. The incompetence was all done in 2007. No, there was incompetent lending in whole 2002-'s period, but low interest rates have hidden it. And the same is valid for the 1950's, money supply expansion simply prevented these failures to materialize. It has absolutely nothing with 'good oversight', because you just cannot guarantee that the oversight is going to be good.

You may guarantee that the oversight will kill the finance industry. Yes, if you don't produce, there are no failures. But if the enterpreneur cannot reliably predict that his businessplan is feasible, how the regulator can?

Posted by: andy | Mar 28, 2008 5:21:45 AM

More regulation will mean that large sections of the population simply won't have access to credit. This group will include the young, the lower income brackets and anyone without an exceptionally high FICO score.

We've already tried that.

Posted by: Methinks | Mar 28, 2008 10:17:47 AM

Couldn't I use the same felonious argument to say why have police? Sure police can be corrupt too but better to have them then not. - Muirdiot

Before we answer any more of your stupid questions about the financial industry's "wizardry", I want to see you answer my question:

Go on. Let's see an explanation, "doctor".

Posted by: Methinks | Mar 28, 2008 10:20:49 AM

Muigeo assumes that the failure of Bear Stearns is an example of market failure.
To us free marketers, this failure is market discipline. A free market is not a guarantee of ideal human behavior or success. A free market must allow people to suffer the consequences of bad or erroneous decisions.

This is a lesson for all people.

A government bailout is subsidized relief for bad decisions and a violation of market functioning.

Posted by: Sam Grove | Mar 28, 2008 10:42:26 AM

A free market must allow people to suffer the consequences of bad or erroneous decisions.

Posted by: Sam Grove

So in the free market who will be the first to try the latest drug claimed to cure insomnia when the last one another comopany came up with took 20 deaths to find out it's wasn't such a good idea.

That's how it would work with out an FDA (yes we can do better) and I suspect such inovation would suffer.

Would we have such clean air without catalytic converters?

Sam, I think you live in a world of non-market innovation that you take for granted based on assumptions that do not fit with historical facts.

Posted by: muirgeo | Mar 28, 2008 1:42:39 PM

So in the free market who will be the first to try the latest drug claimed to cure insomnia when the last one another comopany came up with took 20 deaths to find out it's wasn't such a good idea.

Are you trying to score a point or make one?

Have you any idea how many people die each year because they are unable to have access to drugs, in use in other places, because they have not received FDA approval?

You don't think pharmaceutical companies should bear risks for their decisions?

Why do they bother? They take the risk for the promise of profits. If they aren't sufficiently cautious about the promises they make for their product, then they suffer the cost. This makes them cautious.

There is no evidence of any NET benefit from having an FDA to replace liability.

When people die because of FDA decisions, no one at the FDA has to bear the cost. In fact, when government policy fails it tends to justify more government and greater subsidy. "Oh, it wasn't done right" or, "They didn't have enough funding.", etc.

You make a lot of claims about how things would work in a free market, but these are based on what I consider to be flawed premises. I don't even know how things would work out, specifically, in a free market.

What I do understand is that attempting to 'fix' things or make things work via political agency often produces perverse results, wastes resources, and produces a government so powerful that it enables some people, like the current administration, to use our resources are used in ways to which I have great moral objection.

There is no utopia. I make no claim for utopia. I don't even know what utopia would or should look like. I just operate from my comprehension of human behavior and motivations.

I understand that people are self interested. That's why I do not trust people with political power. Especially those with good intentions. Most especially, those who desire political power.

The idea that government and bureaucracies selflessly serve the common good is entirely lacking in either conceptual construction or historical evidence.

Posted by: Sam Grove | Mar 28, 2008 2:16:20 PM

It has been stated that as many as 100,000 people die each year due to medication errors.

That doesn't stop people from taking medications.

The FDA denies experimental use of drugs to attempt to save the lives of those with a medical death sentence and who are willing to take the chance.

Posted by: Sam Grove | Mar 28, 2008 2:52:06 PM

"There is no evidence of any NET benefit from having an FDA to replace liability."
Sam

There's not? Which country has the most innovative approach and successful production of new pharmaceuticals?

Aaaand....Which one has an FDA? And an NIH?

Posted by: muirgeo | Mar 28, 2008 4:24:01 PM

"I don't even know how things would work out, specifically, in a free market."
Sam

That's my point. With no real world examples it seems a faith based belief to me.

Posted by: muirgeo | Mar 28, 2008 4:26:18 PM

Which country has the most innovative approach and successful production of new pharmaceuticals?

Prove that this results from the existence of the FDA and not from the lack of price controls that exist in Europe.

Posted by: Methinks | Mar 28, 2008 4:45:25 PM

There's not? Which country has the most innovative approach and successful production of new pharmaceuticals?

Correlation and causation are two distinct things.

Usually, you call for government to protect us from corporate power, now you seem to be calling for government to protect corporations from liability.

Tell us how the FDA was responsible for the successful development of aspirin.

Not to say that aspirin is entirely benign, but if it were to be brought to the market today, a pharm company would have to spend hundreds of millions of dollars to gain FDA approval, a cost which necessarily must be passed on to consumers.

Tell us why the 'morning after' pill, or even birth control isn't available over the counter.

Posted by: Sam Grove | Mar 28, 2008 5:57:03 PM

Tell us how the FDA was responsible for the successful development of aspirin.

Not a good example. Aspirin preceded the FDA.

Let's see how if Muirdiot will even attempt to provide proof that the existence of the FDA results in more pharmaceutical innovation. And let's see if this proof is anything more than the usual convoluted bullshit. Somehow, I doubt it.

Posted by: Methinks | Mar 28, 2008 6:23:43 PM

Not a good example. Aspirin preceded the FDA.

Exactly my point.

Posted by: Sam Grove | Mar 28, 2008 7:04:13 PM

ooooh.... Sorry, Sam. Same question, different approach.

Posted by: Methinks | Mar 28, 2008 7:15:09 PM

Paging Dr. Kettle:

Sam, I think you live in a world of non-market innovation that you take for granted based on assumptions that do not fit with historical facts.
Posted by: muirgeo

Everything in this statement is exactly reversed, and/or wrong.

Posted by: Mesa Econoguy | Mar 28, 2008 7:22:17 PM

Which country has the most innovative approach and successful production of new pharmaceuticals?

Prove that this results from the existence of the FDA and not from the lack of price controls that exist in Europe.

Posted by: Methinks

I can't prove such a thing. I can only point to the association as supporting my position and negating yours. That's 2 points for me and 0 for you. (down ego...down boy...)

Why don't you point to a free market country that has shown as good developement of their phameceuticals. I think like maybe Uganda has a free market... well at least like no rules like you guys prefer. I wonder how many new drugs they are coming up with lately.

Posted by: muirgeo | Mar 28, 2008 11:36:37 PM

Everything in this statement is exactly reversed, and/or wrong.

Posted by: Mesa Econoguy

No it's no wrong. But I'm willing to also recognize the great inovation of private enterprise here in America as well. The truth lies in between. To deny this truth is to deny the reality of the world.

Just read this Keynes quote, "I believe that in many cases the ideal size for the unit of control and organisation lies somewhere between the individual and the modern State."

And all the evidence in front and behind us says he's right. The idea Mesa that you have that makes you think you'd be better off with a minimalist government is pretty much an article of faith on your part.

Posted by: muirgeo | Mar 28, 2008 11:45:47 PM

"Just read this Keynes quote, "I believe that in many cases the ideal size for the unit of control and organisation lies somewhere between the individual and the modern State."

Ow, wow! Killer quote! I'll just have to go back to the drawing board.

So where is that somewhere...and how do you keep it there?
Questions he apparently never asked and certainly can't answer.

Society and government are not static. Inbtween states, even if 'ideal' are not stable. The incentives prohibit such stability. Good grief man, can't you comprehend that this mess is the result of over a hundred years of a progressive vision of government?

To understand why, you must first comprehend the moral nature of political power, the nature of those who seek it, and it's corrupting effects on those who wield it and those who are subject to it.

Posted by: Sam Grove | Mar 29, 2008 1:04:28 AM

"To understand why, you must first comprehend the moral nature of political power, the nature of those who seek it..."

Says the guy who thrice ran for office...yes yes maybe you CAN explain it to us.

Sam what do you think the world will look like in 100 years?

Does it matter one bit any way? All us individuals will be gone by then so from the individualist perspective it seems it shouldn't matter. But I suspect you are no different then me and I bet you do worry quite a bit about the world in 100 years.

Posted by: muirgeo | Mar 29, 2008 1:55:42 AM

Yeah it seems clear a lot of what the Wall Street Gang does is skim off of the productive economy.

From Thomas Palley;

http://www.thomaspalley.com/?p=102

"The Federal Reserve’s recent decision to grant Wall Street access to special borrowing facilities smells of special dealing for special interests. The decision subsidizes the biggest most powerful investment banks, thereby distorting financial markets in their favor. Behind the decision lies the problem of excessive representation of Wall Street interests within the Fed.

...

The Fed’s new Primary Dealer Credit Facility (PDCF) effectively gives Wall Street’s primary government securities dealers, which includes all the large investment banks, access to discount window borrowing. That means access to funding at the bargain basement interest rate of 2.5 percent, and all that is asked is borrowers post some form of investment grade collateral.

...

Wall Street has been quick to embrace the facility, and within four days borrowing reached $29 billion. Erin Callan, Chief Financial Officer of Lehman Brothers, enthusiastically declared the facility to be “incredibly attractive… Our ability to access that form of financing to do more business for clients is incredibly interesting.”

Morgan Stanley Chief Financial Officer Colm Kelleher described the facility as being “there for normal business. It’s not meant to be there as a last-recourse thing.” A Goldman Sachs spokesman declared “we think the Fed window provides a good alternative to the secured funding markets and we welcome the initiative.”

These subsidies are a travesty. Goldman Sachs, Lehman Brothers, and Morgan Stanley are extraordinarily profitable companies. They have also been the drivers of the worst trends in the American economy over the past generation, pushing excessive CEO pay that has spread like a cancer throughout corporate America, even reaching into universities and non-profits. Additionally, they have pedaled the shareholder value paradigm, that has pushed companies to emphasize short-term gain over long-term investment, and contributed to ripping up America’s social contract. Meanwhile, their business model has promoted speculation that is behind repeated asset and commodity price bubbles."

Yep, it's true some of the most pathetic worthless scavengers reside on Wall Street....we need to put these folks to work doing something useful. As John McCains new economic advisor Phil Gramm used to say, These people need to get out of the cart and start pulling the wagon". Too big to fail my arse. Time for some good old fashioned trust-busting!

Posted by: muirgeo | Mar 29, 2008 9:11:24 AM

I don't know why you insist on showcasing your immense stupidity at every opportunity and go so far as to create those opportunities, but you do, Muirdiot.

I still don't understand how a person deemed too stupid to get into vet school was allowed to graduate med school and practice on children. Seems to me, we need to re-examine the medical establishment before more children die at the hands of incompetents.

Posted by: Methinks | Mar 29, 2008 9:52:04 AM

I continually amazed that supposedly educated and intelligent people that write for "respected" publicatons and post of message boards think that the banking system, the Federal Reserve, the financial markets, the mortgage markets,etc. are in any way, shape or form "free markets" governed by Laissez-Faire. That is entirely mistaken and I'm shocked that there is anybody who doesn't understand this.

Listen to a big-mouth like Jim Cramer who doesn't have the horse sense not to say the things that aren't supposed to be said. He has said all throuhout this "crisis" that it is the Fed's job to prop up the markets and has continually derided people advocating a return to the "Laissez-Faire" way of doing things. What he has been saying is that this is the way the system was designed to work - something that most people on Wall Street know but never say in public. He's just too much of a blabber-mouth to keep the secret. Listen to him not for stock picks (many people have shown how bad he is at that) listen to him as an insider who can't keep a secret.

The Federal Reserve system was founded as a government sponsored, if officially "independent" cartel. The Fed member banks are on it's board, are PART of (not clients of) the system, they are not controlled and regulated by the Fed, they ARE the Fed.

Bailouts of the banking and financial system are not unusual events, they are the day to day operation of the Fed. They are the reason that it was created in the first place, as were all the other central banks around the globe.

Don't be at all surprised when the supposedly "un-regulated" parts of the financial markets like Investment banks, hedge funds and private equity mysteriously go along with or even welcome more regulation. That's because what they get in return is membership in the club, which gives them guaranteed profits and all their risks backstopped by the American taxpayer.

Anybody trying to understand how the financial system works through the false lens of Laissez-Faire and free markets will continually misunderstand and be surprised by events. The financial markets are anything but "free".

Posted by: DS | Mar 29, 2008 11:30:48 AM

OK methinks I'm pretty convinced you have absolutely nothing of substance to rebut with. You've almost universally countered everything I write with no arguments but childish name calling. What amazes me is that some one so childish can succeed on Wall Street.... oh wait that's right you're bringing the hole system down .... again.

"Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone."

- John Maynard Keynes

Posted by: muirgeo | Mar 29, 2008 1:51:17 PM

Jim Cramer .. what a piece of crap cry baby hypocrite. If he typifies Wall Street then its clear that it is made up of some of the filthiest wretches the human race has ever devolved.

These people are so taken over by their greed they actually think they are contributing to society rather then sucking out it's marrow.

"Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone."

- John Maynard Keynes

Posted by: muirgeo | Mar 29, 2008 1:57:10 PM

Says the guy who thrice ran for office...yes yes maybe you CAN explain it to us.

You must consider most carefully those who are most successful at it.

Posted by: Sam Grove | Mar 29, 2008 2:50:07 PM

I never run for any office I have a chance of winning. My primary job now is more important than winning political office.

Posted by: Sam Grove | Mar 29, 2008 3:05:21 PM

"Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone."

Let me rewrite that for Mr. Keynes

"Progressivism is the astounding belief that the most wickedest of men will wield political power for the greatest good of everyone."

Posted by: Sam Grove | Mar 29, 2008 3:10:53 PM

You've almost universally countered everything I write with no arguments but childish name calling. - Muirpid

The irony of writing that and following it with...

Jim Cramer .. what a piece of crap cry baby hypocrite

and...

...its clear that it is made up of some of the filthiest wretches the human race...

...just eludes you, doesn't it, Muirdiot? Truly, your mind is a steel sieve.

signed,

paper pushing Wall Street asshole jerk who is working hard to bring down the "hole" system.

Posted by: Methinks | Mar 29, 2008 3:17:47 PM

Winston Churchill was quoted as saying: "If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions."

wikipedia on Keynes

Posted by: Sam Grove | Mar 29, 2008 3:18:50 PM

Muirpid,

I'm still waiting for an explanation for how a person who was rejected by vet schools was allowed to practice medicine on innocent infants.

I'm waiting

waiting

Posted by: Methinks | Mar 29, 2008 3:21:34 PM

Well, you know, veterinary medicine is more difficult than human medicine.

Foe one thing, you have to study different species. Human medicine deals with only one.

Posted by: Sam Grove | Mar 29, 2008 3:35:07 PM

Muirgeo got one right!

Jim Cramer is a criminal: he regularly traded ahead of his clients, and still front-runs his own “recommendations” on television. People are in jail for doing this.

He’s also good buddies with Eliot Spitzer, which is why he got a pass.

Posted by: Mesa Econoguy | Mar 29, 2008 3:39:28 PM

I was never rejected from Vet school. I never applied. But it is much harder to get into because there are so few vet schools compared to med schools. So yeah, on that basis your dogs doctor is probably smarter then your doctor.

Posted by: muirgeo | Mar 29, 2008 4:54:29 PM

Muirpid,

I'm still waiting for an explanation for how a person who was rejected by vet schools was allowed to practice medicine on innocent infants.

Posted by: Methinks

Hey we saved a baby last night that would have certainly died in the old days if born at home.

How bout you methinks did you push some overvalued pieces of paper around your desk top and out your computer? Were you on the floor like a lab monkey screaming for more cocaine and pushing the lever over and over. Wow.. good job!! .... what would we do with out you?

Posted by: muirgeo | Mar 29, 2008 5:00:06 PM

Thanks for clearing that up, Muirpid. I thought by this post: "...that's what I wanted to do but it's really hard to get into one of the few Vet schools in the country. Pediatrics is pretty close to veterinarian medicine." You meant that you didn't get into vet school. But apparently you were at least smart enough to know not to apply because you would never get in. My opinion of your intelligence has just risen tremendously. I now think you're ever so slightly more intelligent than a possum.

Hey we saved a baby last night that would have certainly died in the old days if born at home.

Awesome. I drove a car today, which in the old days of horse-drawn carriages would have been impossible.

Were you on the floor like a lab monkey screaming for more cocaine and pushing the lever over and over.

Of course. Isn't that what all paper pushing Wall Street Asshole Jerks bringing down the "hole" system do in Muirpidville?

Your knowledge of things you don't understand is stupefying.

Posted by: Methinks | Mar 29, 2008 5:54:18 PM

Jim Cramer is a criminal: he regularly traded ahead of his clients, and still front-runs his own “recommendations” on television. People are in jail for doing this.

I booyah do not booyah like him booyah because I think he's a fool. I did not know he front-ran his clients.

Speaking of Spitzer, did you hear that our brave and virtuous moral crusader bought hoochies from more than one store? The latest one to be discovered is a real doozy, complete with day-glow hair and surgically enhanced triple-ZZZ boobs. The story has disappeared from the headlines what with the Spitzter being the shining light of the democrat party and all. The media doesn't want attract attention to how much shinier his 'hos are.

Posted by: Methinks | Mar 29, 2008 6:13:47 PM

I’m convinced he used public funds to do it, too. I doubt if they’ll catch him on it, tho.

He has ample anti-money laundering knowledge to pull that off….

Posted by: Mesa Econoguy | Mar 29, 2008 7:38:44 PM