The following quotes are from a book describing a real set of events:
[The incident] is an extraordinary example of what happens when you get… a dozen people with an average IQ of 160… working in a field in which they collectively have 250 years of experience… employing a ton of leverage.
It’s hard to overstate the significance of a [government-led] rescues of a private [corporation]. If a [company], however large was too big to fail, then what large [company] would ever be allowed to collapse? The government risked becoming the margin of safety. No serious consequences had come about in the end from the… near-meltdown.
Was the incident:
a) The savings and loan scandal
b) The collapse of Enron
c) The sub-prime mortgage meltdown
d) none of the above
First correct answer gets to invest in an exciting new bridge project I’m involved with in New York!…
I’m giving my “2009 Q1 award for most concise, lucid comment” to Paul Phillips for this gem:
Viewed from a thousand miles, the financial system has a incalculably large incentive to fail catastrophically as frequently as it can do so without killing the goose that lays the golden eggs.
As long as there is such a thing as “too big to fail” and trillions of dollars are available for siphoning, according to what logic can this cycle be dampened? Nobody has to explicitly pursue this outcome (although there are many who will) for it to be inevitable; the system obeys its own logic above all else.
[ commenting on Alfred Hubler on Stabilizing CAS ]
With his permission, I am posting an email thread between myself and Alfred Hubler. I had contacted him on the recommendation of John Miller when Kevin and I were posting on the possibility of dampening boom-bust cycles in the financial markets through policy or other mechanisms. Here’s what Hubler had to say:…
The import of this talk goes way beyond the specific and stunning work that Bassler and her team have done on quorum sensing. In my mind, this is the prototype for good biological science:…
Steven Gjerstad and Vernon Smith have published a really nice article that starts out with bubbles in general and goes on to explain why the bursting of this particular bubble hurt the economy so much. It echoes a lot of themes that I’ve covered before, but is obviously much more soundly though out.
The short version is that the effect of a bubble on the economy is determined by its effect on consumer spending. The Dot Com Bubble didn’t have much of an effect because it primarily affected institutions and already relatively wealthy consumers. However, the Fed’s attempt to shorten the resulting recession created a loose monetary policy which forced dollars into the most attractive asset class: homes. This attractiveness stemmed from relaxed lending standards and tax-free capital gains on homes, which created more buyers. But asset appreciation in this class is fundamentally limited by the ability of consumers to repay loans from income, which was not growing fast enough. As the institutions insuring mortgages …
I asked this question on twitter/facebook and got a lot of variants of “I agree” and only one person who stated disagreement (but provided inadequate reason, IMO). Jay Greenspan put it this way:
Interesting question this morning, and something I’ve been wondering about. I’ve yet to see anyone really argue that state of non-regulation we’ve been in for the last years has been a good idea. I’ve heard some thoughtful conservatives talk about how their views have changed radically — coming to understand that forceful regulation is absolutely necessary.
The super-conservatives I’ve seen are talking more about taxes, avoiding the subject. I’d be very interested to see a credible argument for a hands-off approach.
So how about it, anyone game to take up a considered argument for not mandating that companies who get big enough to affect the global economy should be broken up or otherwise handicapped?…