Yesterday, I posted about the rabid, pro-free-market rhetoric present in Washington, DC over the past decade. When Congress had the opportunity to consider privacy laws that would limit marketing of financial products, it chose to side with bank lobbyists, who invoked the idea of the "miracle of instant credit." Basically, they argued that any incursion on the free market would harm credit markets. They promised that this miracle would lower credit prices, make credit more convenient, and manage the risk involved in lending. Congress sided with the banks. As a result, many financial products were marketed to people who didn't deserve mortgages. And now you're paying for it. You'll soon be paying their auto loans and credit card bills too.
To get a flavor for the atmosphere, check out this Congressional testimony by John Dugan. It was delivered on behalf of the Financial Services Coordinating Council, American Bankers Association, and the American Insurance Association. Dugan was listing the various benefits of having a federal standard for information sharing, unfettered by state privacy laws:
Better risk management. Risk management is a crucial factor in every decision that a financial institution makes, including determining what types of products and services to offer. Undercutting this decision-making process has important implications. For example, if a lender cannot depend on credit files that are truly complete, loans may not be extended or may become more expensive in order to account for the higher level of risk. Moreover, Cate and Staten find that robust, national credit reporting has made it possible for more people to have access to more credit without significant increases in defaults.
Oops. That risk management apparently wasn't good enough. So, you didn't get privacy protections or good risk management. And who's John Dugan, you ask? Well, he's now one of the principal regulators of banks--he is the Comptroller of the Currency and a director of the FDIC.
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I'm all for a free market and all, but it has to come with some limits and safeguards. Unfortunately, these safeguards are put into place by people who benefit from the failures of said safeguards. That's their idea of risk management... They make it all a win-win situation for them.
$85 billion to bail out ING this morning... I won't get a raise at the end of this fiscal year because the State is $400 million in the hole.
It boggles the mind.
Quick nitpick... It is AIG all Americans now own indirectly, not ING.
That said, a bailout is a bailout.
I've begun the next section of my rant three times and discarded it. My cynicism was off the charts and that wouldn't add anything to a discussion so here is my toned down version.
The leaders of the financial markets are hypocrites like the leaders of so many other endeavors. When governmental interference in the markets would lower their profits from incomprehensible to simply obscene they fought tooth and nail to stop it. When lack of interference would increase their losses from obscene to incomprehensible they did everything they could to initiate that interference. In the end they are still left with an interesting equation...
Incomprehensible Profits - Obscene Losses = Millions in their pockets.
When it is all said and done it will be the people who have to live off of their investments who will be truely hurt. I can't feel too sorry about whether the ex-SVP of Lehmanns can only afford one new Jag this year rather than two.
All this talk of free market, but when pressed, the buyouts and bailouts are all agreed to be good things, necessary things.
I don't think it's so great. I want to buy a house. I want housing prices to plummet. Why is government interfering in my business? Don't I have an Objectivist right to lets everyone else get screwed so I can make a fast buck?[/sardonic]
Risk management is unfortunately not something that the free market guarantees, because if you're lucky, you can become very successful (in the short term) with poor risk management (or a poor appreciation of long-term versus short-term risks), and the market tends to reward based on short-term performance, not long-term performance. Experience has shown that many companies, even large ones, will suck at risk management. The ones who do a good job of risk management will succeed long term -- but the majority of companies will not be so good at it, and will eventually fail. A corollary to that is that companies are not static, and a company that had really good risk management ten years ago may suck today because it got new management, or got suckered into some new management style, or whatever.
We can't trust food manufacturers not to try to cheat and put melamine in our food to save a buck and increase their profit margin, and we can't trust even the noble-hearted to really understand the importance of avoiding cross-contamination; that's why we have agencies to regulate food safety. I don't see why banks should be trusted any more than food manufacturers. Why should banks be nobler or more sensible than people who make our food?
Mind you, a balance is needed. Total state regulation is not good either, since the government is no more immune to foolishness. But if we have a mostly free market plus a representative government, then we have some checks and balances to keep everybody honest.
As of this morning we have socialized the vast majority of debt and risk. Just imagine if Social Security had been privatized as the Libertarians and Republicans pushed so hard to do. Bush's speech this morning was pathetic.
Bob Chapman has identified the source of the current market problems:
wow. That's bringing some serious crazy. Maybe we can send bob some tin foil.
Bob is afraid because the Illuminati have sent the Masons to assasinate him and the 911 Trufers can no longer can protect him from the incoming flying pig.
These clowns wanted growth without control.
Well! In medicine, uncontrolled growth is called cancer; in finance, it's called bubble. Neither can be considered a desirable outcome.
Ergo, the need for regulation is blindingly obvious in both cases.
Magister Dixit! :-D
To the True Objectivist, letting everyone else get screwed so you can make a fast buck is not a right. It is a vital civic duty.