The Understated Effects of "Cash For Clunkers" and Other Government Idiocy

Ultimately that is what speculation is: informed gambling. You should, however, look up the law of large numbers and then apply that to the pricing mechanism of securities.

I will try to make this as simple as possible. The bankers took insured savings deposit and loaned it to anyone who would pay them a fee. That was our money that was loaned out not theirs. They would never give their personal money for such junk. That is the whole point.

They took their profits up front. They put those profits in Swiss Bank accounts (the Obama administration is not after these illegal accounts). The loans went sour (trillions of dollars worth), and the taxpayer was left to bail out other taxpayers in order to save the financial system, while the bankers gave themselves additional bonuses on top of their initial fees. The bankers were not speculating. They god all of their money upfront. It was a no brainer for them, as long as the government did not step in to stop those crazy loans being made with our money.

The free market system rewards first and foremost scam artists who can get away with it. This is something that free market people forget. People do not play fair. They play to win in any manner they can. They have to be watched when it is our money they are playing with.

You are shifting the goalposts like crazy here.

What does this have to do with what we are talking about earlier?

How does a bank take its profit up front, yet loose the money they loaned out?

They not only get the upfront fees, but they get a TON of interest from late loan payments.

That is why college loans, credit cards, and subprime mortgages are such a cash cow -- because you're banking on high risk people making late payments at 10% or 15% interest.

The S&P 500 only gives around an 8% return in its good years, bonds and savings accounts give 1 or 2%. It's in the banks' interest to make risky loans because the return is so good. People who charge near their credit limit are a goldmine for credit card companies. College students generally take a long time to earn enough to pay back their loans, so the rate of return is high. Etc.

I will be convinced by a sound rational argument... The central question is whether the way in which the government manages the economy improves things.

There is also no point arguing that this is just "how the free market works". I can continuously point to all of the ways in which every economy in the world is fundamentally skewed away from free market processes.

It's not hard to look at unregulated economies, by the way, and see how they functioned. They just did a couple segments on economics in the Middle Ages on NPR's Planet Money, if you're interested in seeing what an unregulated economy looks like.

Rich, I was speaking more to Mr FTP's bias towards deregulatory policy. The majority of human economic history took place in unregulated economies, and it's no coincidence that economic growth happened at a snail's pace under such systems. I mean you can't have fast growth without credit -- and you can't have credit if you don't have safe lending institutions; and you can't have safe lending institutions without regulation.

Well, you're asking a couple questions here -- the question of 1) does OUR central goverment regulate well or poorly or both is manifestly different than the generic question of 2) is regulation "good" or "bad" in a large economy.

For the first question, all we've got is hindsight and historical controls. And the second question is too generic to be useful.

The reason that economics has skewed away from the free market, is precisely because what has been learned over history concerning the free market. Lack of regulation and watch dogs, allows bankers and financiers to literally steal our money. Laws, regulation, and oversight are essential in order to preserve the savings of people.

Regulations is a direct result of what happens when the markets are free to do whatever they want including absconding with people's life savings.

Rich

It's not hard to look at unregulated economies, by the way, and see how they functioned. They just did a couple segments on economics in the Middle Ages on NPR's Planet Money, if you're interested in seeing what an unregulated economy looks like.

Hi Paul,

The reason is simple enough. Financial institutions are based upon accepting money and lending money. It is extremely risky to give money to an unregulated institution. But ever with some regulation, there were run on banks all the time because of poor lending practices, which culminated in the banking reforms after the Great Depression.

Rich
Rich

Rich, I was speaking more to Mr FTP's bias towards deregulatory policy. The majority of human economic history took place in unregulated economies, and it's no coincidence that economic growth happened at a snail's pace under such systems. I mean you can't have fast growth without credit -- and you can't have credit if you don't have safe lending institutions; and you can't have safe lending institutions without regulation.

Not at all, there are rational economic laws that can be used to at least estimate what effects regulation, in general, has on the economy.

you completely ignore that economics is a system of a priori knowledge.

I would be interested in hearing it if you could link me to it.

Why can you not have safe lending institutions without regulation

No one cares about estimates and rationality once the rubber hits the road. It's the results and not the general principles that matter.

I altogether reject the proposition of a priori knowledge, especially as pertains to an applied science like economics. So there :cool:

Economics is a data-based science. It would never exist as a system of thought without market and monetary systems first having come into being. And it is therefore in no way, shape, or form a "system of a priori knowledge" (and neither is anything else except perhaps primordial human instincts).

A bank needs to borrow money (i.e. when you put money into an account) and lend money. Banks make their money by making loans at an interest rate higher than what they pay for people who have accounts with them. In order for banks to be able to ensure the safety of your money, they are forced to keep capital on hand (so that their balance sheet is even at the end of each day). When they don't do that, or if they cannot do that, then they cannot pay their creditors (the account holders) and you are at risk of losing your money when you put it in an account. All it takes is a few loan defaults and a bank without capital will give you nothing when you try and get cash from the ATM.

How does it keep it safe? It keeps financial institutions from putting the savings of account holders at risk. And by doing so, it prevents banks from collapsing as they did in the 1930s. By preventing banks from collapsing, you can have credit. By providing credit, you can have economic expansion and growth, which are impossible without credit.

The entire global economy is dependent on the flow of credit now. After Lehman collapsed, the commercial paper market (i.e. short term capital loans) completely froze, so companies all of a sudden couldn't get money to buy a truck or to make a shipment or whatever. It's that quick, that big, and that dangerous.

Expectations of future lending revenue is regulation enough to keep lenders in check.

So then we engage in blind trial and error, praying that we improve the situation?

Do you not agree that we are forced to understand ourselves as reasonable actors? Do you not agree that our choices are a manifestation of our values?

Economics could not exist without certain fundamental assumptions that no amount of economic data can supply us with.

Expectations of future lending revenue is regulation enough to keep lenders in check.

This is subordinate to the fact that no system of human knowledge has ever come into being without there first being empirical experience. EVER. We sense and experience before we're even born. We count on our fingers to learn numbers. We imitate sounds to learn language. There is no such thing as a priori knowledge -- it is idealistic and unsupportable, and it is a good example why Kant might have been well served to get out of his house and actually meet someone in his life.

Nor could it exist without economies.

Right, so how did that end up working out for Fanny Mae and Freddy Mac?

The mental functions that provide us with reason preexist yours and my existence by tens of thousands, if not hundreds of thousands of years.

So?

At what point did Fanny and Freddy ever need to fear for their future earnings? They were subsidized at every point for taking on horrible lending policies. The worst their lending standards were, the more the government guaranteed their income.

This gives us capacity. It does not give us understanding.

Economics is the study of economies. To credit it as being some evolutionarily derived program in the human mind makes no sense.

Is that also true of Bear Sterns?