Concerning the Articles of the Federation

[TerraUnam]

Hehehe. Keynes is back in fashion, you know.

 

[David cgc]

You all, I think, agree that it is in the economic self-interest of employers to have the best work force possible.

No. It's not. It's in the economic self-interest of employers to have the greatest margins possible. This can certainly be achieved by reducing expenses, such as wages, benefits, safe working conditions, so on, and et cetera.

And if you reduce expenses enough, you can reduce your prices while still bringing in a tidy profit, thus increasing business and boosting revenues. It also reduces competition, increasing the business's bargaining power with suppliers, allowing them to demand lower wholesale prices, increasing their revenues even more. And there's no chance in hell this money would be reinvested in the little people.

So they'll just all quit and get better jobs elsewhere, right? Except, of course, this company has undercut it's competitors, driving them out of business. Or the economy is in a lull, so there's no other job to be had.

I eagerly await for your explanation for how all this is wrong, and that Wal-Mart does not, in fact, exist. If you can tie it in with how Uncle Sam can shoot anyone who gets out of line, guaranteeing the despotism of the American Government(!), that'd be swell.

 

[Rush Limborg]

I don't think that really was a conservative idea until the Reagan era. The modern definition of "conservative" is far more radical and reactionary than it used to be. Conservatism means wanting to place limits on government power. Wanting to eliminate government from the equation altogether -- well, that's just anarchism. It's oddly parallel to Marxism, really, except that Marxists naively believe that the workers can be counted on to make the system run fairly without oversight while the modern far right naively believes that management can be counted on to make the system run fairly without oversight.

Chris, even Reagan said, "It is NOT my intention to do away with government, but rather to make it work."

In both cases, it's the "without oversight" part that makes it infeasible. The thing that's enabled the United States to endure as a generally fair and just society is its system of checks and balances. Any single institution given complete free rein will run out of control and commit its own excesses and injustices, no matter how good its intentions. What's needed is for every seat of power to have other seats of power to balance it out, to keep it from taking things too far.

And I do not disagree. The government has every right to punish fraudulent companies and abusive employers.

My problem is the imposition of regulations which punish the innocent along with the guilty. Far better, I.M.A.N.S.H.O., to insitute criminal laws, which punish crime. Trying to institute regulations that basically tell businessmen how to do their job is not the way to go.

 

[Rush Limborg]

You all, I think, agree that it is in the economic self-interest of employers to have the best work force possible.

No. It's not. It's in the economic self-interest of employers to have the greatest margins possible. This can certainly be achieved by reducing expenses, such as wages, benefits, safe working conditions, so on, and et cetera.

And if you reduce expenses enough, you can reduce your prices while still bringing in a tidy profit, thus increasing business and boosting revenues. It also reduces competition, increasing the business's bargaining power with suppliers, allowing them to demand lower wholesale prices, increasing their revenues even more.

And there's no chance in hell this money would be reinvested in the little people.

So they'll just all quit and get better jobs elsewhere, right? Except, of course, this company has undercut it's competitors, driving them out of business.

...I eagerly await for your explanation for how all this is wrong, and that Wal-Mart does not, in fact, exist. If you can tie it in with how Uncle Sam can shoot anyone who gets out of line, guaranteeing the despotism of the American Government(!), that'd be swell.

Sir, with all due respect, even if the company were to "Price gouge" and thus drive opponents out of business, it is economically impossible for said monopoly to retain control of the market.

If this monopoly were to rack up prices, that would serve as an insentive for investors to enter the market, offering their products as lower prices. There is no way for the former monopoly to retain control of the market, because the constant fear of competition would therefore keep said company in fear--and therefore, in check.

This is, in part, why Wal-Mart has..."Always Low Prices."

Or the economy is in a lull, so there's no other job to be had.

Which is hardly the fault of the businesses, is it?

Quite frankly, sir, an economic lull hurts the businesses, too, as you are aware.

 

[sfroth]

Sir, with all due respect, even if the company were to "Price gouge" and thus drive opponents out of business, it is economically impossible for said monopoly to retain control of the market.

Did you seriously just say that it's impossible for a monopoly to exist? Despite mounds of evidence, both past and present, that prove otherwise? And when companies do get a monopoly, they do everything that they can to maintain it. Once they've got the monopoly, they can raise and lower prices to directly fight competition, buy out the little guy to ensure their continued monopoly (helping the owner, but not any of the employees you were saying would have a chance at a different job), or, in an unregulated environment, resort to dirty tricks to undermine the little guy - all of which is why we've got anti-trust laws.

Or the economy is in a lull, so there's no other job to be had.

Which is hardly the fault of the businesses, is it?

Last time I checked, that's exactly whose fault this current crisis is.

Quite frankly, sir, an economic lull hurts the businesses, too, as you are aware.

Next time I see a business do something that hurts itself, I'll be sure to be properly shocked.

 

[Sci]

Let me address the flaws within the arguments of many here:

You all, I think, agree that it is in the economic self-interest of employers to have the best work force possible. The building of this force is conducted by the best proposed treatment of employees enonomically possible--which included high wages, vacations, benefits, etc.

I think it's in the long-term best interests of employers to have those sorts of benefits for their employees, yes. I also think that a great many businesses are incapable or unwilling to think in terms of what is in their long-term best interests, willing to think only in the short term. The present economic crisis is stark evidence of this fact -- huge swaths of Wall Street businesses were simply unable to put their long-term interests ahead of short-term profits, and their short-sightedness nearly led to the collapse of the entire economy.

As a result, businesses cannot automatically be trusted to never violate something they should never violate, such as their employees' right to time off.

That some employers do not realze this is due to stupididty on their part--and this results in their going out of business, as this stupidity is not tolerated by the market.

Sometimes. Other times the market encourages stupidity before they go out of business -- and then drag down numerous other industries and businesses, too. It is a myth of modern American Corporatism that the costs of bad business decisions are only borne by those who make the bad decisions; externalities exist. (A prime example being the family whose home loses so much value as a result of the housing market crash that their house is no longer worth more than their mortgage, even when that family has always paid their mortgages and never made irresponsible decisions.)

And besides the point, it doesn't matter if the free market would automatically punish businesses that abuse their employees, because they shouldn't be allowed to abuse their employees in the first place. The abuses should be prevented in advance, not punished in retrospect.

But, as Sci pointed out, this only would happen if the employees could quit. That they could not...would only be a direct result of there being a lack of competition--i.e., a lack of profit in business starting up for the purpose of competing with the employer.

No, it can also happen when there is such a large pool of potential employees desperate to work for low wages and no benefits, or for even lower wages, that current employees have no bargaining power with their employers. Competition doesn't just drive down prices amongst businesses -- it can drive down wages when it occurs between workers. And when that happens, desperation essentially forces workers to relinquish their own economic rights just in order to convince employers to let them survive.

Here's another talking point: Regarding Sci's point that some employers would simply not be economically minded enough--or just too power hungry--to care about the employees.

Yet...it is assumed that somehow the government can be trusted to solve these problems.

No, it is trusted that the government can act as a check on the power of businesses while businesses act as a check on the power of government.

No one's saying the government should take complete control of the economy. We're not arguing for pure Socialism here. We're arguing for private enterprise having a check and balance in the form of legal regulations protecting the rights of workers -- including the right to time off.

Here is the problem: the government has more power than the employer, as it has a legal monopoly on force.

The complete inability of the United States government to get its act together to rein in Wall Street should have demonstrated how false that premise is. Large corporations, in particular, can be as powerful as, or even more powerful than, the government.

It therefore has less of an economic incentive--indeed, no economic incentive--to be fair.

Don't be ridiculous. It has a powerful incentive to be fair: Democracy. The government regularly answers to the people and depends on them to stay in office -- far more so than corporate leaders, I'd point out. To say nothing of the power that, in real life (rather than an idealized situation) businesses have over elected officials by funding their campaigns.

The idea that the free market can be counted on to protect the rights of workers is bizarrely naive.

To the contrary: the idea that government knows best how to run the business is more naive, still.

Again: No one is saying the government should control all businesses and run them.

Why on Earth would you equate a rule saying, "Workers have a right to have time off" with "government knows best how to run a business?"

And you did not produce a compelling argument for why Christopher's claim that the free market cannot be counted upon to protect the rights of workers is erroneous, especially in light of historical examples of governments having to stop in to stop corporate abuses.

Now, as ronny noted, there is a purpose for government oversight--the protection of rights. But this should be limited solely to the protection of individual rights--right which apply to all.

And the right to leisure is a right, and employers have that right as much as employees.

But the idea that workers should have the "right" to be provided things at the expense of the employers, is, frankly, an extention of the idea that rights are created by society, and that they are therefore not inalienable.

Dude, the right to time off is not being provided something at the expense of employers. "The right to leisure" doesn't mean the right to paid vacations -- it means the right to have time off without being fired.

 

[David cgc]

Sir, with all due respect, even if the company were to "Price gouge" and thus drive opponents out of business, it is economically impossible for said monopoly to retain control of the market.

What I described was the exact opposite of price gouging. Price gouging is when there's an acute excess of demand over supply, and the suppliers take advantage of the fact that Adam Smith's invisible hand is moving their salable prices towards infinity. Price gouging does not drive out competition. Price gouging is only possible when there already is no competition for external reasons (or collusion amongst various parties that are ostensibly competing, as in the ADM price-fixing scandal some years ago).

If this monopoly were to rack up prices,

Or "price gouge."

...that would serve as an insentive for investors to enter the market, offering their products as lower prices. There is no way for the former monopoly to retain control of the market, because the constant fear of competition would therefore keep said company in fear--and therefore, in check.

Or, they could not raise their prices, and remain a monopoly in perpetuity, and be free to exploit their workers to whatever degree they saw fit.

This is, in part, why Wal-Mart has..."Always Low Prices."

So, you understand the point I just made. Wal-Mart, by maintaining low prices and accepting lower revenues can still reap profits by reducing expenses, and can do so indefinitely. Unless you're suggesting an inevitable law of nature that, at some point, they'll go mad with power and begin raising the prices of their crap for no logical reason.

Or the economy is in a lull, so there's no other job to be had.

Which is hardly the fault of the businesses, is it?

Quite frankly, sir, an economic lull hurts the businesses, too, as you are aware.

It's not the damn weather. When things go wrong, it's because someone done wrong.

 

[Rush Limborg]

I think it's in the long-term best interests of employers to have those sorts of benefits for their employees, yes. I also think that a great many businesses are incapable or unwilling to think in terms of what is in their long-term best interests, willing to think only in the short term. The present economic crisis is stark evidence of this fact -- huge swaths of Wall Street businesses were simply unable to put their long-term interests ahead of short-term profits, and their short-sightedness nearly led to the collapse of the entire economy.

The collapse was due to a new market of sub-prime loans being created by government directives, which forced banks to make loans to borrowers who could not afford them (part of a compassionate "affordable housing" plan). The banks, trying to find a way out of that mess (WHO would offer a loan to someone who couldn't meet the deadlines?), became desperate to find buyers for those loans. Fannie Mae and Freddie Mac, which were, and are, run by the government, became the eventual buyers of the loans.

Thus, with government promises of stability, the sub-prime lending kicked off even more--and Wall Street investors saw potential profits out of funding the "investments".

But A is A--and eventually, the borrowers' inability to repay loans resulted in massive amounts of foreclosures, which resulted in a sudden overload of supply in the housing market. Also, Fannie Mae and Freddie Mac collapsed, unable to withstand the fact that the borrowers could not repay.

Do not blame on the market, or Wall Street, what the government is at fault for.

As a result, businesses cannot automatically be trusted to never violate something they should never violate, such as their employees' right to time off.

And I never said they should be. But the government cannot automatically be trusted to decide what is best for workers, either.

Sometimes. Other times the market encourages stupidity before they go out of business -- and then drag down numerous other industries and businesses, too. It is a myth of modern American Corporatism that the costs of bad business decisions are only borne by those who make the bad decisions; externalities exist. (A prime example being the family whose home loses so much value as a result of the housing market crash that their house is no longer worth more than their mortgage, even when that family has always paid their mortgages and never made irresponsible decisions.)

How, precisely, does the market "encourage" stupidity?

And besides the point, it doesn't matter if the free market would automatically punish businesses that abuse their employees, because they shouldn't be allowed to abuse their employees in the first place. The abuses should be prevented in advance, not punished in retrospect.

I agree. But it must be done in a way that would not put regulatory burdens on the honest businesses, as well.

As a general rule, the fear of punisment is the greatest discouragement to the commiting of a crime. The harsher the punishment, the greater the detriment.

Thus, in addition to the market forces effectively having their revenge, the government should be allowed to punish the abuse, to the fullest extent of criminal law. It is, after all, criminal to encourage slavery.

No, it can also happen when there is such a large pool of potential employees desperate to work for low wages and no benefits, or for even lower wages, that current employees have no bargaining power with their employers. Competition doesn't just drive down prices amongst businesses -- it can drive down wages when it occurs between workers. And when that happens, desperation essentially forces workers to relinquish their own economic rights just in order to convince employers to let them survive.

Which means a solution would be for a government policy that involves the encouragement of economic growth--such as tax cuts across the board, which would result in more money in the hands of the consumer, and our investors, who would use that money to start new business, and thus create new job opportunities. These new businesses would thus compete with the more "abusive" ones, resulting in the employees being able to leave those old businesses, for the better ones.

No, it is trusted that the government can act as a check on the power of businesses while businesses act as a check on the power of government.

And...just trying to understand your reasoning...how does business act as a check on the power of government, would you say?

No one's saying the government should take complete control of the economy. We're not arguing for pure Socialism here. We're arguing for private enterprise having a check and balance in the form of legal regulations protecting the rights of workers -- including the right to time off.

I see.

Understand, I am a strong advocate for a powerful criminal justice system, for the protection of individual rights. If employee abuse can objectively be proven, it is the right of the justice system to crack down on this abuse. This is a proper "check and balance" on the busisness world.

The complete inability of the United States government to get its act together to rein in Wall Street should have demonstrated how false that premise is. Large corporations, in particular, can be as powerful as, or even more powerful than, the government.

If you are referring to the inability to crack down on the frauds of Madoff, Enron, etc., that was a direct result of the inefficiencies of bureaucracy. An effective solution to that would be to streamline the red tape of the SEC, the FBI, etc.

...[Government] has a powerful incentive to be fair: Democracy. The government regularly answers to the people and depends on them to stay in office -- far more so than corporate leaders, I'd point out. To say nothing of the power that, in real life (rather than an idealized situation) businesses have over elected officials by funding their campaigns.

Yet, that does not seem to stop many of them from going over the people's heads when they are in office....

Again: No one is saying the government should control all businesses and run them.

Good.

Why on Earth would you equate a rule saying, "Workers have a right to have time off" with "government knows best how to run a business?"

It is a simple matter of "Where do you draw the line?"

And you did not produce a compelling argument for why Christopher's claim that the free market cannot be counted upon to protect the rights of workers is erroneous, especially in light of historical examples of governments having to stop in to stop corporate abuses.

I was satirizing his implication that government is somehow more inherently trustworthy than business.

And the right to leisure is a right, and employers have that right as much as employees.

If it is not coerced, I agree. If you will apply it to all citizens equally and objectively, than yes, we can discuss a possible right to the pursuit of leisure.

(BTW, the reason I say pursuit, is to provide a distinction between the employee being free to use his unpaid time off to spend as he/she pleased, and the idea of employees having to pay for said lesiure.)

But the idea that workers should have the "right" to be provided things at the expense of the employers, is, frankly, an extention of the idea that rights are created by society, and that they are therefore not inalienable.

Dude, the right to time off is not being provided something at the expense of employers. "The right to leisure" doesn't mean the right to paid vacations -- it means the right to have time off without being fired.

Good. My fear is simply that that is how it would be interpreted.

That is why I say pursuit of leasure. It's the same reason the Declaration of Independence says Pursuit of Happiness.

(Fun Fact: Originally, Jefferson had written "Life, Liberty, and Property"--but he soon realized that slaveowners could use that line to justify slavery. Jefferson, and many other Founding Fathers, wanted to eventually have slavery die out, so to prevent this excuse, he re-wrote it into "Life, Liberty, and the Pursuit of Happiness.")

 

[Rush Limborg]

Sir, with all due respect, even if the company were to "Price gouge" and thus drive opponents out of business, it is economically impossible for said monopoly to retain control of the market.

Did you seriously just say that it's impossible for a monopoly to exist? Despite mounds of evidence, both past and present, that prove otherwise?

That's absurd, sfroth. Monopolies can and do exist. I simply deny that they can posses that kind of power without help.

And when companies do get a monopoly, they do everything that they can to maintain it. Once they've got the monopoly, they can raise and lower prices to directly fight competition, buy out the little guy to ensure their continued monopoly (helping the owner, but not any of the employees you were saying would have a chance at a different job), or, in an unregulated environment, resort to dirty tricks to undermine the little guy - all of which is why we've got anti-trust laws.

And what economic incentive would the little guy have to sell his/her company to the big guy, rather than compete, attract customers with a better deal, and thus expand business, and thereby become another big guy?

Quite frankly, sir, an economic lull hurts the businesses, too, as you are aware.

Next time I see a business do something that hurts itself, I'll be sure to be properly shocked.

Here's an example: Enron.

The dang thing crashed because of its fraud.

Same for Madoff. He's rotting in prison.

Crime doesn't pay. At least, it shouldn't.

 

[Rush Limborg]

Or, they could not raise their prices, and remain a monopoly in perpetuity, and be free to exploit their workers to whatever degree they saw fit.

But the competition would still arise, offering the same low price, with the express intention of attracting those workers away from the company, with the atrraction of better benefits.

So, you understand the point I just made. Wal-Mart, by maintaining low prices and accepting lower revenues can still reap profits by reducing expenses, and can do so indefinitely.

And yet...there IS competition out there. I refer you to K-Mart, BestBuy, and Target.

And...you assume Wal-Mart's workers are treated badly?

It's not the damn weather. When things go wrong, it's because someone done wrong.

Yes...indeed it is.

 

[Sci]

The collapse was due to a new market of sub-prime loans being created by government directives,

No, sub-primes were only a part of it. The other part was the credit default swaps market.

From my notes from my Political Economy course in Sept. 2008:

HOW DID THE HOUSING BUBBLE GROW AND THEN BURST?

Keep in mind: Government provides money to various programs (med labs, etc) by directly billing Medicare and Medicaide; farmers, agricultural businesses get money from Farm Aid-Slash-Subsidy Programs

Sometimes this entails government backing loans in case they fail: This was the intent behind Freddie and Fannie; so long as they could attract business loans, money from taxpayers were not needed. But if loans were on verge of being defaulted, taxpayer money was guaranteed to take care of it.

Freddie and Fannie loans were guaranteed by the full faith and credit of the US government.

In present case, there is no possibility of having gov’t pay off debts and then letting F&F go on their merry way; we’ve taken them over. Those that own stock in F&F lost their money.

Bailout: A one-time gov’t step-in to provide money to a failing company

So we have gov’t intervention in many different forms: Can lend a failing business cash with expectation of payback with interest; in some interests, gov’t can also insist on options for equity share in the bailed out company (Congress currently asking for this); in some instances, gov’t provides a gift in the form of a grant and may or may not receive benefits – eg if gov’t interested in research it might give a grant to a researcher looking into that issue; gov’t might give a contract to a failing business, eg Bath & Ironworks, in order to prevent a failure

One of the most interesting bailouts in history was Chrysler Corporation bailout in 1979:

Chrysler in 1979 petition US gov’t for $1.5 billion in loan guarantees to avoid bankruptcy; at same time, former Ford exec Lee Iacoca was brought in as CEO, appeared in ads saying, “If you find a better car, buy it” – attempt to tout Chrysler as a top car and instill pride in American products; ergo, US gov’t reluctantly passed the Chrysler Corporation Loan Guarantee Act of 1979, signed by Pres Carter in 1980: Chrysler employees/ers in every district frightened of losing jobs, military bought many Chrysler products (jeeps, etc).

In early 1980s, the loans were being repaid and new models of cars were selling well. A significant aspect of its recovery was the revitalization of its manufacturing facilities: Became more efficient. Improvements in vehicle quality. In 1990s, Chrysler made first steps into Europe, set up factory in Austria.

In other words, they borrowed money to build cars and paid the loans back with revenue generated.

Bottom line: Bailouts are not common in US history; in Chrysler case, gov’t persuaded that too many people would be thrown out of work. Chrysler lived up to its loan, paid it all back. It also improved efficiency, reduced executive pay, laid off many management and execs and employees, reduced its fixed costs. Basically, the gov’t cosigned its loans and Chrysler lived up to it.

In past two weeks, the gov’t has become more responsible for major parts of the housing market through its seizure of F&F. It has entered the insurance business after taking control of AIG. In AIG’s case, Treasury is making a loan to them and the Treasury has announced plans for another intervention to allow financial institutions to be able to sell their bad assets (i.e., their subprime mortgages).

Last week: Leyman filed for bankrupty
Tuesday: Gov’t takes control of AIG, world’s largest insurance company
Note: Re the assets being sold: Many of those assets don’t have a market value; how those assets will be valued is one of the crucial questions being debated this week. “Who is being bailed out?”

We’ve had a problem with many investors who buy bonds because those who buy short term obligations of companies and financial institutions – that market provides the immediate needs for working capital to borrowers. IE, what companies do is, they borrow on a short-term basis to meet their payroll and other expenses. What has happened is, the market for those short-term loans has begun to dry up. One of the things that happened is, the regulatory agencies (SEC, Fed Reserve, etc) were becoming concerned, talking about what needed to be done, but initially the problem did not look like 1930s Depression-style big bad.

During Depression, what happened was Fed Reserve tightened monetary policy, which added to the depth of the economic problems of the Great Depression. The Stock Market Crash was in 1929, but Federal Reserve did not act until 1930s. Today, Fed Res and Treasury and SEC have been making changes so that we can avoid Depression-era tightened monetary policy. Nonetheless, investors still very concerned, and certain markets where people had investments in derivitives with Leyman Brothers for example wondered how gov’t’s actions were going to help them. People who sold credit default swaps – an insurance policy type that insures certain types of financial instruments….. The market was showing that the investment banking model was not working. Investment banks, unlike commercial banks, borrow money and then make investments that are high-risk but high-return, as compared to a commercial bank, and did not come under the same kind of regulatory system that commercial banks did, so they were really outside of the typical regulatory system for financial institutions.

Money market funds started experiencing problems, they were selling what they could, because people wanted to hoard cash, so they were either selling their money market funds or were instructing their finance handlers to sell their funds on their behalf.

So the Fed Reserve was discussing the plan to bail out AIG and what they could do for the broader systemic problems, but interest rate changes would not help. They met but left interest rate as it was because it wasn’t going to help the current crisis to change it. TreasSec, FedRes Chair, NY Fed Reserve Pres got together to try to fix it.

NY Fed Reserve Bank probably the most powerful in the Fed Reserve system, b/c it is where the action is.

Three discussed a systemic approach of buying distressed assets such as residential and commercial mortgages and mortgage-backed securities. At the same time, the Fed Res put billions of additional cash into the system but it did not calm the market, and short term interest rates were gyrating. What was happening was, banks were holding reserves b/c they were afraid they were going to have to meet many diff kinds of obligations, and banks didn’t trust each other to lend to each other. SO, we had this major crisis where we had 144.5 billion dollars pulled out of money market funds, and without those funds, the commercial paper which finances auto lending, money cards, etc – they were facing outrageously high costs, means factories shut down, people lose their jobs, etc., major consequences for Main Street and not just Wall Street – the problem has a cascading effect

Last week, the market for mortgage backed securities disappeared; the yield on mortgage backed bonds were rising and the trading on those went away even though gov’t nationalized F&F.

TresSec Paulson wants US Congress to approve a plan to allow Tres to create a new facility to hold auctions and buy up distressed assets. Without Congressional approval, Tres could expand programs to buy mortgage backed securities through F&F, but that wouldn’t be enough to address underlying problem of subprime mortgage meltdown and mortgage backed securities. Fed Res not equipted to handle the problem; part of problem in banking system, part in economy, part in the mortgage-backed securities outside of responsibility of the Fed Res.

Bernanke asked Congress for the authority to buy billions of dollars in assets. This will actually be a reserve auction where these various financial institutions will go to the Fed with their financial instruments, and there will be a bid where they will say, “ My mortgage backed securities are worth X,” leading to a back and forth – the question is how those assets will be valued, b/c how they will be valued speaks to who will be the “winner”

If you step back and think about it, if there was a market for those assets, then the banks and the investment houses would have sold them. There is no market for them, because housing prices have declined, many people took out mortgages that couldn’t afford them, etc. So what’s the value of those assets? Many had become illiquid, ie untradeable. If they lack value and cannot be traded, there will now be an auction. How much will the Tres’s new agency going to pay for those assets?

The Federal Reserve as an independent regulatory agency:

The FedRes is stepping into a very different role, a much more “political” role, than it has in some time. Some people are questioning the FedRes’s independence at this point b/c one of the things we need to keep in mind – remember we talked last week about the fact that Independent Regulatory Agencies are independent, with Pres appointing chair with advise and consent of Senate, meaning that they operate independently and apolitically; this independence is supposed to keep those agencies from being politically maneuvered, b/c there can be problems with, say, Congress setting interest rates; we had such problems in 1970s, eg Nixon persuaded Paul Vulger to keep interest rates low for political reasons and this created larger problems in the financial system. So some are questioning whether elected officials should be able to decide without Congressional vote which companies should and should not get assistance.

Fed Res Chair Ben Bernanke: Meeting with Congressional committees this week.

The Federal Reserve is independent, has a Board of Governors, and most of the time it stays out of political debates so that it can be independent. Politicians often want lower interest rates in order to give the perception that they’re working for the people, but in most cases they defer to the Reserve. (Not now, though – much anger about financial probs)

In past year, Federal Reserve has extended its lending programs and its purview: It has lent money (Bear Sterns), gotten involved in Treasury decisions, etc.

The government has now gotten involved in industry outcomes.

We are in a storm, and though we can hypothesize how things will turn out, we do not know for sure until it is over.

Most favor intervention by gov’t because of the magnitude of the problem. But some people are saying that the problem and the way it’s being presented – they’re making the analogy between what’s going on now and the Bush Administration’s presenting to Congress and US public what happened just before Iraq War. They say it’s the equivalent because it’s saying, “We have no choice, this is what we have to do, and we’re gonna do it.” If you can convince people that there is an immediate problem and you have the answer, then you can usually coalesce certain groups – eg when they met with Congressional leaders on Saturday, they presented a very dire picture. Often only way to get people on left and right to come together: Idea of not having too much choice.

AIG

American International Group does business with just about every financial institution in the world. It is a central player in the unregulated credit default swap market, which is about $60 Trillion. There is no central clearing house or regulator for credit default swaps.

Credit Default Swaps (CDSs): One company pays another company to protect it from the risk of default on a debt instrument (loan, etc): The insurer compensates the insuree for the lost. The insurer is usually an investment bank or a hedge fund. The insurer is required to post collatoral to support its payment obligation, but the collatoral deposit in most cases was too small. This was one of the real problems AIG faced; ergo AIG was undercapitalized.

AIG was given a loan because it had hundreds of billions of dollars of mortgage related assets. Those would be added to those being sold by other financial institutions, further depressing housing values. The counterparties to CDSes would not be able to collect their trades. Regulators knew that if Leyman went down, world would not be impacted in large way, but world not prepared for AIG to go down. There is no precedent for fed gov’t lending to an insurer, but they had little choice.

Enter the SEC.

One of the things going on is, SEC looking at potential market manipulation. SEC will require hedge fund managers to submit under oath their trading activities in financial company shares and related instruments such as CDSes. What happened with CDSes is, there are some people who are ethical, but others who were unethical. What happens with a CDS is, you bet that a company’s stock is going to go down so you want to sell before it goes down: Enter the CDS, which is an insurance bond that guarantees a certain amount. What can happen is, certain people because CDSes are not regulated would spread rumors that a company’s value was going down and then they would be able to manipulate the market. Sellers charge buyers’ fees to insure the bonds and loans from default. Buyers can benefit if the cost of protection rises. We’ve had large price declines in stocks accompanied by moves in CDses – that’s what led to people being concerned about market manipulation. CDSes became a gamble on what was going on.

CDS-related manipulations are the main problem. Added on to the CDSes has been what’s called “short selling.” Short selling is where certain investors believe that a stock price is going down so they will sell short – sell before the price goes down. There were rumors by those who wanted to manipulate the market and sell short. Short selling has been banned.

CDSses trade off the Exchange and are outside the scope of regulation. There’s a great increase and prices have swung sharply before news of major company news. SEC has not brought any cases because there is debate about whether CDSes are securities, thus within SEC jurisdiction, or another instrument outside their purview.

New York State Insurance Department is now looking at CDSes as insurance, will require them to register. This is a new development. State, not federal.

The SEC has taken the position that swaps that reference to securities such as bonds are subject to oversight, but right now the SEC is issuing subpeonas to gather info, want to look at hedge funds to see if there were any rumors that led to the downfall of Bear Sterns or Leyman Brothers. SEC is halting short sellers of financial companies, requiring hedge funds and other asset managers to submit their decisions/records.

Sunday night: SEC modified that order. They have a list of companies where traders are not allowed to sell short. They are saying that there is an exception to the requirement for something that is already in the pipeline as part of a futures contract. They clarify that the exception applies to all market makers including over the counter market makers and applies to all market making and hedging activity. They want to enable market makers to be able to continue to supply liquidity.

Goldman Sachs, Morgan-Stanely:

As mentioned last week, investment banks get their money from taking on debt and then investing and then paying that debt with high rates of return because they have a high level of risk in the types of instruments they are involved in.

The independent investment banks were not regulated by the Federal Reserve as commercial banks were. GS and MS transformed themselves into bank holding companies. That will reshape the way that we see finance take place in the US, around the world. Their model of investment banking where they don’t have the cushion of bank deposits like commercial banks was a problem.. By becoming Bank Holding Companies, they will have tigheter regulation from several gov’t agencies rather than just the SEC (which only looked at certain aspects of what they were doing). These holding companies will now have access to Fed Res lending facilties, will be able to borrow from other banks, will be fully regulated banks in much the same way commercial banks are.

We are seeing much movement to more regulation, to be expected given the enormity of the problem, and much more government involvement in the market.

Subprime Mortgage Market: A market where people who don’t have good credit could access to get a mortgage when they wouldn’t otherwise qualify. That basically came from our philosophy stemming from the 1990s saying we wanted to open home ownership up to a greater number of people. Many were qualified who really couldn’t afford to take out the mortgage.

By contrast, a prime mortgage is for someone who has good credit. A subprime mortgage had higher interest.

The Dr. argues that under an administration more bent towards regulation, we wouldn’t have the same problems we have now. However, the prob wasn’t only in the exec branch: Congress often had constitutions complaining about tighter regs on mortgages etc. Lack of enforcement, a regulatory framework with many reg agencies were both problems. Also: If a financial institution did not fall very cleanly under a regulatory body, they could shop around and choose the reg agency that gave them oversight. Leyman eg had office of Thift Supervision as their oversight body, even though there was no real relationship between their activities and TS’s purview.

As you can see from these notes, in a lot of ways, the economic crisis that began in 2008 was a sort of "perfect storm" of bad economic decisions, most of them being made in the private sector. Particularly, the market for credit-default swaps proved disastrous. You're right to note that the government had its role to play, but it's inaccurate to lay all blame at the government's feet.

 

[Sci]

How, precisely, does the market "encourage" stupidity?

Every time there's a stock market bubble, we see a prime example of the free market encouraging stupidity. This was particularly notable in the Dot Com bubble of the late 90s/early 00s. "Shiny.Com is the newest and coolest company ever! I should buy stocks!" "Well, heck, if he's buying stocks, I want some too!" "Me too!" "Me too!" Suddenly, you'd have Shiny.com's stocks being driven sky-high as investors all jump on it, heedless of its lack of a functional business model -- and that happened all the time during the Dot Com bubble. And it happens when there are other bubbles, too.

The free market is not rational.

Which means a solution would be for a government policy that involves the encouragement of economic growth--such as tax cuts across the board, which would result in more money in the hands of the consumer,

No, tax cuts to the middle class result in money in the hands of the consumer. Tax cuts to multinational corporations and to the richest 1% only ends up with the money leaving the country as a result of the age of globalization.

And...just trying to understand your reasoning...how does business act as a check on the power of government, would you say?

Because, at the end of the day, the economy can't function without businesses doing well, and if the economy goes crap, people vote the government out of office and new people in. It's basic politics. I've interned in the state and federal governments -- and even if a legislator is not in businesses' pockets, I can assure you that businesses are seen as important political actors whose favor political leaders want for themselves. I've seen it with my own eyes. Businesses have power over government.

If you are referring to the inability to crack down on the frauds of Madoff, Enron, etc.,

I am not. I'm referring to the inability to bring about meaningful regulatory reform in areas like credit default swaps and breaking up banks that are "too big to fail."

Or, for that matter, to the Congress's complete inability to enact serious health care insurance reform because of the insurance industry's influence.

Yet, that does not seem to stop many of them from going over the people's heads when they are in office....

Everyone's always convinced that politicians they don't like are going over "the people's" heads; no one ever seems willing to accept that we get the government we pick or that the people bear some responsibility for the consequences of policies they favored during election time.

I was satirizing his implication that government is somehow more inherently trustworthy than business.

He had no such implication. This is not a zero-sum game where if business is untrusthworthy, government must therefore be trustworthy. It's entirely possible for both to be untrustworthy.

And the right to leisure is a right, and employers have that right as much as employees.

If it is not coerced, I agree.

No. This is not negotiable. If you want to run a business, you should offer your employees days off as a condition of being allowed to run that business. No one's saying you must offer paid vacations, but you must offer them time off. If it is a condition of their employment that they not have time off, you are abusing your employees by definition.

There are some things in life you just shouldn't be able to do, and that's one of them.

If you will apply it to all citizens equally and objectively, than yes, we can discuss a possible right to the pursuit of leisure.

Dude, it's not a discussion. It's not a negotiation. It's already a right. It's been a right for 60 years. We agreed to it as a universal human right. It's a done deal.

(Fun Fact: Originally, Jefferson had written "Life, Liberty, and Property"--but he soon realized that slaveowners could use that line to justify slavery. Jefferson, and many other Founding Fathers, wanted to eventually have slavery die out, so to prevent this excuse, he re-wrote it into "Life, Liberty, and the Pursuit of Happiness.")

Fascinating how he didn't take a substantive step towards encouraging the abolition of slavery by emancipating his own slaves, but instead continued to live lavishly on the backs of his fellow man for his entire life after the writing of the Declaration.

 

[Rush Limborg]

Every time there's a stock market bubble, we see a prime example of the free market encouraging stupidity. This was particularly notable in the Dot Com bubble of the late 90s/early 00s. "Shiny.Com is the newest and coolest company ever! I should buy stocks!" "Well, heck, if he's buying stocks, I want some too!" "Me too!" "Me too!" Suddenly, you'd have Shiny.com's stocks being driven sky-high as investors all jump on it, heedless of its lack of a functional business model -- and that happened all the time during the Dot Com bubble. And it happens when there are other bubbles, too.

The free market is not rational.

Bubbles are caused by cheap-money policies of the Federal Reserve--i.e., by the Fed keeping interest rates at an arbitrary low to "encourage" growth. There need to be "down cycles", but in normal market conditions, they goes nowhere near a "recession" stage. Supply and demand keep the market in check.

However, the inflation of currency results in the inflation of the market. In a word, bubbles.

No, tax cuts to the middle class result in money in the hands of the consumer. Tax cuts to multinational corporations and to the richest 1% only ends up with the money leaving the country as a result of the age of globalization.

And tax cuts to both...?

And about "multinational corporations": Yes, some money leaves the country, but money also comes into the contry because of those corporations selling products overseas.

And...what about those coorperations that produce and sell here?

I'm referring to the inability to bring about meaningful regulatory reform in areas like credit default swaps and breaking up banks that are "too big to fail."

No one is "too big to fail". Congress has no authority to take over banks in order to "break them up". A simpler alternative would simply be to let them fail, and let the economy rebuild, instead of prolonging the problem by propping up the crumbling buildings.

Or, for that matter, to the Congress's complete inability to enact serious health care insurance reform because of the insurance industry's influence.

Again, the reason for a lack of competition in this area is because of government restrictions forbidding citizens to keep their insurance programs when they move into another state. Lifting those restrictions would result in allowing the good-quality companies to enter the national market--and the low-quality companies to be weeded out, due to lack of demand.

Everyone's always convinced that politicians they don't like are going over "the people's" heads; no one ever seems willing to accept that we get the government we pick or that the people bear some responsibility for the consequences of policies they favored during election time.

Yes, elections have consequences. That is an incentive for people to be informed before they go to the ballot box.

This is not a zero-sum game where if business is untrusthworthy, government must therefore be trustworthy. It's entirely possible for both to be untrustworthy.

Which, of course, was my point. But the mindset he stated, indeed, often leads to confusion of this kind.

If you want to run a business, you should offer your employees days off as a condition of being allowed to run that business. No one's saying you must offer paid vacations, but you must offer them time off. If it is a condition of their employment that they not have time off, you are abusing your employees by definition.

There are some things in life you just shouldn't be able to do, and that's one of them.

Again, if the employers are rational, they will realize that.

If they are irrational enough not to realze that, they will therefore make mistakes in other areas, too.

Dude, it's not a discussion. It's not a negotiation. It's already a right. It's been a right for 60 years. We agreed to it as a universal human right. It's a done deal.

Truth, Sci, is not determined by majority vote. If it were, rights can change and be repealed with the times, or be altered when they seem to cause trouble, or "get in the way...."

Fascinating how he didn't take a substantive step towards encouraging the abolition of slavery by emancipating his own slaves, but instead continued to live lavishly on the backs of his fellow man for his entire life after the writing of the Declaration.

My guess? He didn't want to cause any panics among the slaveowners. Goes to show, that even the best of men, are men at best.

It is worth noting, however, that he opposed the slave trade.

 

[Sci]

Dude, it's not a discussion. It's not a negotiation. It's already a right. It's been a right for 60 years. We agreed to it as a universal human right. It's a done deal.

Truth, Sci, is not determined by majority vote.

And neither is it decided by someone complaining that something ought not to be a right when it already is.

 

[Rush Limborg]

Dude, it's not a discussion. It's not a negotiation. It's already a right. It's been a right for 60 years. We agreed to it as a universal human right. It's a done deal.

Truth, Sci, is not determined by majority vote.

And neither is it decided by someone complaining that something ought not to be a right when it already is.

But what constitutes a right, and what does not?

The sum total of what we are discussing here, is what is it that makes a right a right?

 

[Sci]

Truth, Sci, is not determined by majority vote.

And neither is it decided by someone complaining that something ought not to be a right when it already is.

But what constitutes a right, and what does not?

The sum total of what we are discussing here, is what is it that makes a right a right?

Theoretically, one could argue that rights exist because they come from God or because we create them.

Practically, the distinction is irrelevant, because there are always going to be disagreements about what rights God grants us if we accept the premise that they come only from God.

Speaking practically -- if we agree that it's a right and enumerate it as a right, then it's a right. And we agreed that leisure is a right and enumerated it as a right 60 years ago. It's a done deal.

 

[sfroth]

Did you seriously just say that it's impossible for a monopoly to exist? Despite mounds of evidence, both past and present, that prove otherwise?

That's absurd, sfroth. Monopolies can and do exist. I simply deny that they can posses that kind of power without help.

And yet, you said:

it is economically impossible for said monopoly to retain control of the market.

So which is it? Maybe I'm misunderstanding you? And besides, even if the monopoly can't exist indefinitely, most still infringe on the rights of both workers and competitors while they do.

And what economic incentive would the little guy have to sell his/her company to the big guy, rather than compete, attract customers with a better deal, and thus expand business, and thereby become another big guy?

Short term vs. long term incentive. People can think in the short term, just like companies.

Crime doesn't pay. At least, it shouldn't.

Something I think most people can agree on. Yet that doesn't stop people, government, or business from skirting the law, or attempting to get the laws rewritten to better suit themselves.

 

[Rush Limborg]

Did you seriously just say that it's impossible for a monopoly to exist? Despite mounds of evidence, both past and present, that prove otherwise?

That's absurd, sfroth. Monopolies can and do exist. I simply deny that they can posses that kind of power without help.

And yet, you said:

it is economically impossible for said monopoly to retain control of the market.

So which is it? Maybe I'm misunderstanding you? And besides, even if the monopoly can't exist indefinitely, most still infringe on the rights of both workers and competitors while they do.

This is what I mean:

Monopolies cannot retain control of a free market. Only subsidies, or regulations, or other intervention by government could create a situation where a coercive monopoly could exist--i.e., one who posseses the kind of power to control its side of the economy.

And what economic incentive would the little guy have to sell his/her company to the big guy, rather than compete, attract customers with a better deal, and thus expand business, and thereby become another big guy?

Short term vs. long term incentive. People can think in the short term, just like companies.

But the entire reason they saw fit to compete in that market in the first place is that the monopoly created a situation which would make any competition quite successsful. To suddenly sell off and leave in that manner would effectively contradict that plan.

Crime doesn't pay. At least, it shouldn't.

Something I think most people can agree on. Yet that doesn't stop people, government, or business from skirting the law, or attempting to get the laws rewritten to better suit themselves.

So, in the end, who can be relied upon to oversee all this, and regulate such corruption?

 

[seigezunt]

Again, this is just the sort of stuff that makes me think it's best not to get into the particulars of politics of 23rd and 24th century Earth and the federation. If they had to live in said utopia, dittoheads would suffer a Glenn Beck-style aneurysm, sputtering "communist! communist!"

 

[Sci]

So, in the end, who can be relied upon to oversee all this, and regulate such corruption?

No one person can be relied upon to oversee all this. Nor even any one agency. That's why governments are often designed with checks and balances. That's why we elect Presidents rather than Kings.

That's the great thing about liberal democracy -- really, there isn't a government. There's a collection of governmental agencies, but the overall government is so divided that it can't reasonably be described as a single entity. The government is actually a collection of agencies, not an institution in its own right.