You again hide! You're dismissed until you can answer the little question: what is neo-liberalism? The answer will of course help you understand my argument.
If anyone who has debated this topic with this clown has the time, could you link me to his posts? I do not feel like searching, nor do I have the time. Thanks.
Out-sourcing generates numerous economic gains that further increase the gains from trade. There are aspects, however, that are problematic. The short term profit motive, for example, can lead to the destruction of organisational knowledge as firm integrity suffers
exactly, like anything, done in moderation is fine, but we have taken it to the extreme, less jobs, means less people with money and less people paying taxes, and of course that just leads to less buying, less paying of bills, and on and on it goes repeating the cycle over and over, then business try to do more outsourcing as they are making less profits and literately it's like Pandora's box, we put are hand in and now are unwilling to take it out
But you haven't, nor will you be able to, refer to empirical evidence to suggest otherwise. Your stance is essentially the modern day version of mercantilism. It looks valid, but (except in very specific circumstances) it lacks economic sense
Its the hegemony of the financial class that's important. The profit motive goes hand in hand with instability (e.g. Problematic housing market characterised by boom and eventual bust, further manipulated by the fears created by poverty risk)
How does hegemony of the financial class and profit motive explain the 2008 crash though ? I get that these things are part of it, but these factors have been in place for many decades. Neither really explains the specific factors that led to the 2008 crash. To be specific .. the housing market for example. This was not a "boom and bust" senario under normal market conditions and there was no manipulation on the basis of fear created by poverty risk. There were a number of specific acts of deregulation starting primarily with the 1999 Financial Modernization Act which eliminated Depression-era firewalls between commercial banks, investment banks, insurance companies, and securities firms. The second came on December 15th, 2000 in the form of the Commodity Futures Modernization Act. sponsored by Gramm and cosponsored by Senator Lugar (R). This act ensured that neither the SEC or the Commodities Futures and Trading Commission could regulated financial swaps. A few years later retail banks and mortgage institutions were able to directly sell mortgages into leveraged securities (something that was made illegal in the 1920's for exactly the same reason - such gambling causes rapid bubbles which burst). The banks and mortgage brokers no longer had to assume any risk for the mortgages they wrote so they no longer cared about the credit-worthyness of the borrower. I suppose we could attribut this to "neoliberalism" - open markets, deregulation and so forth but like everything .. extremes are bad. There is a big difference between free trade and open markets and not having high levels of regulation and what caused the 2008 Crash. I guess what I am saying here is that there is a difference between responsible capitalism and completely irresponsible crazy stuff. It is humorous that the Republicans were acting as "neo liberals"
Naming a couple of instances of deregulation and thinking that it somehow demonstrates that deregulation was responsible for the crisis is silly. The Financial Services Modernization Act allowed financial institutions to diversify their activities. As it happens, the institutions who were most diversified made it through the crisis relatively unscaved, while the insitutions who were not (Bear Stearns, Lehman) did not. This Act did not contribute to the crisis at all. Regarding credit default swaps, these instruments were borne out of a need to bypass absurd regulations which forced institutions to keep regulatory capital on their balance sheet (which is expensive.) It was fueled by government regulation. It was later developed and used for credit risk management, and other institutions/individuals (who were ill-equipped with the technology and human capital to understand these instruments) participated in trading/speculating. But their existence was directly related to capital adequacy requirements. To think that regulating swaps - ie further intervention - is what was needed is asinine. For the deregulation bills you mentioned, I could name hunderds upon hundreds (possibly thousands) of financial regulations that were still in existence (CRA first and foremost.) You also forgot to mention the goal of the government to increase homeownership, which began in the 80s and continued into the Bush years. This was implemented through legislation such as the CRA, and through government sponsored enterprises like Freddie Mac and Fannie Mae.
But they haven't. Neo-liberalism is a relatively recent phenomenon. We've always had the likes of house price bubbles. And those bubbles will have significant effects on the economy. We haven't, however, had the dominance of the financial sector and the ability of the profit motive in this sector to so significantly change the nature of the economy The point is whether financial sector hegemony is necessarily destabilising. There doesn't have to be manipulation of fear, just utilisation of the consequences on economic rationality. Was it rational, for example, to overstretch in the pursuit of the housing tenure dream? Yes! And the financial sector hegemony enabled it as part of their own bonus-boom bliss. Which is an advert for the neo-liberalism and economic power of the financial class, which you also essentially refer to here... There is a big difference between free trade and open markets and not having high levels of regulation and what caused the 2008 Crash. Agreed!
This is nothing more than a display of ignorance. The financial sector enabled it as part of the government's goal to increase homeownership and their interference to ensure their goal was achieved. Financial institutions wouldn't engage in such risky behavior in the absence of legislation. In fact, commercial real estate (which is significantly less regulated than residential real estate) remained stable through the crisis, leading up to it, and afterwards. In other situations - credit card loans, automobile loans, etc - where the government plays little role, financial institutions rigorously test for creditworthiness by assessing the probability of default and loss from default.
It's an accurate statement, as evidenced by the examples I've given you. You are uneducated/uninformed. This explains why you enjoy being told what to believe.
Accurate? No, just amusing. The idea that the financial sector could somehow be forcrd into risk taking by deregulation is a terribly entertaining idea. Take behavioural economics to the extreme!
By deregulation? Are you that unintelligent that you could not understand what I was saying? They were forced into it by the regulations that existed at the time - some of them had been in place since the 80s.
You do not seem to understand the purpose of the Glass Steagall act. The purpose was to keep banks from taking too much risk with depositors money. The financial services modernization act repealed Glass Steagall. The Commodity futures modernization act deregulated over the counter derivatives which included Credit Default swaps. The combined effect was to allow banks to engage in highly speculative activities with leveraged money. The third factor I mentioned, which you neglected to comment on was allowing retail banks to sell their mortgages into mortgage backed securities or collateralized debt obligations CDO's. This was a critical factor to the crash. What I did not mention was the lack of oversight that would have stopped banks and lending institutions from taking bad loans and selling them into CDO's. It was the third factor, the one you neglected to comment on, that was the major cause of the housing bubble. I will comment on the financial crash later. You seem to have some understanding of what swaps are but you do not seem to understand how these swaps were related to the financial crash. CDS's are insurance policies (this you mentioned - credit risk management). The difference between a CDS and fire insurance on your home is that you do not have to actually own the underlying asset. The idea of a CDS's was that if you invested 100,000 in a MBS and were to receive 8% annual interest you could hedge this risk by buying insurance (CDS) against default. The cost of these CDS's was so low that you could insure 100,000 for as little as 1000 or less in some cases. This was a way to guarantee a 7 % return risk free. The problem was that you did not have to actually own any MBS's to buy the swaps. AIG sold way more swaps than it could possibly pay out. If the mortgage backed securities would have been allowed to go under the swaps and all the leverage instruments related to the swaps would have come due. Considering the banks were allowed to leverage as high as 40 to 1 .. and the swaps were leveraged instruments and the derivatives on swaps incured more leverage .. you ended up with Leverage x Leverage x Leverage = too big to fail. This was a simplified explanation however some of the key points leading to the crash were given. This has zero to do with anything ? What do hunderds of regulations that were on the books have to do with deregulation that caused the crash? It is a good thing that the government seeks to increase home ownership. They did this by lowering interest rates and giving tax breaks. This does not mean that you encourage folks with no job or credit to go out and buy a 400,000 dollar house. If you want a good read on the crash of 2008 I recommend "The Crash of 2008" George Soros.
I have a very deep understanding of the Glass Steagall Act. Probably because I've actually read the thing. You might wanna try it sometime, instead of spouting nonsense. To enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, insurance companies, and other financial service providers, and for other purposes. http://www.gpo.gov/fdsys/pkg/PLAW-106publ102/pdf/PLAW-106publ102.pdf Start with section 101 to 103. Also, read sections 211 to 217. The purpose of this Act was clearly to allow depository institutions to engage in other financial activities, such as investment banking, securities operations, etc. In fact, many financial institutions lobbied for this for many years leading up to the Act. The funny thing about your pedestrian understanding of CDOs and CDS and you fumbling your way around trying to "explain" them, is that I've written hundreds of thousands of lines of code based off of algorithms I've developed to price such instruments. I wrote my thesis on numerical analysis of stochastic partial differential equations in computational fluid dynamics before transitioning to finance, and I've utilized some of the same methods. I'll refer back to the complexity of these assets later. Regarding CDOs - what I said about the use of CDS in bypassing regulations applies more directly to CDO, because CDS is in effect insurance on CDOs or other asset backed securities. In a perfect market, the the money that goes into its construction and the amount of time to construct a CDO would negate any benefits derived from it. The most common types of CDOs are balance sheet CDO and arbitrage CDO. Given market imperfections, most notably capital adequacy requirements, balance sheet CDOs allow institutions to reduce the [expensive] regulatory capital [which on the balance sheet is a liability] they have to hold on their balance sheet, so that they can achieve capital relief and an increase in valuation of assets through an increase in liquidity. The creation of such instruments are one example of the unintended consequences of government regulation (in this example, capital adequacy requirements.) Similarly, the creation of CDS was tied to the use of synthetic balance sheet CDO, in which rather than transferring owenership to a special purpose vehicle, they use a CDS to transfer default risk. It's true that these instruments amplified the crisis, but at the end of the day they are pieces of paper. It's true that they are complicated - they are usually 500 pages long wit nothing but legal jargon and stochastic calculus - and the majority of people who purchased them probably did not udnerstand them. But the problem was with the fundamentals - near zero interest rates for years leading up to the crisis, government intervention to increase homeownership through reckless legislation, borrowers wanting to purchase homes they could not afford with no money down who signed risky mortgage contracts (adjustable rate) they could not understand, etc. There never would have been a crisis in the absence of a housing collapse - which had nothing to do with asset backed securities or credit derivatives.
Also, why do you think that firms were leveraging so excessively? Why do you think it was so profitable for them to do so? Why is debt so cheap? Do you have any idea about the tax incentives for debt in the US Federal tax code?
You have my condolenses for having to read the entire act. Understanding the act however does not change the fact that it was designed to limit the ability of retail banks to expose themselves to excessive risk. Understanding the complexity a CDO and CDS instruments is cool. Then you must understand well the inherent risks associated with the assumptions of these models when applied to a highly leveraged trades. There are many different kinds of swaps .. swaps on currency, CDO's and so forth. Insurance against risk is only as good as the ability of the insurer to pay. I did not mean to imply that arbitrage trading had much if anything to do with the financial collapse. Any insurance product involves a calculation of risk. Clearly the risk assumptions in many of these products ( "housing prices will never do down") were flawed. The risk assessments of the mortgage backed securities was also flawed. These instruments became so intwined into the financial system that the commercial paper markets froze. We can not have the commercial paper markets freezing. I agree with your assessment of the housing bubble. The main role of mortgage backed securities was to give the ability to retail banks, and lending institutions, to assume no risk on the mortgages they were writing. It is obvious that this would create a bubble when combined with low interest rates, shady adjustable rate contracts, and so forth. This is not to say that you can not have asset backed securities but there should be a separation between these intruments and retail banking as there was for many years. When you have banks using deposits on a 40-1 leverage basis looking for high interest rates .. and MBS's offering these high interest rates are rated AAA but really contain junk .. there is a problem. No worries .. we can protect our investment though hedging by buying a CDS which pays us back our principle should the MBS defult .. problem solved. The bank collects the spread between the CDS and the MBS risk free. Well .. risk free so long as the CDS is valid. Unfortunately... the CDS was not valid. If Freddie and Fannie would have been allowed to go under the house of cards would have collapsed.
