More on the Goldman Sachs debate.
Simon Johnson writes,
``When you deliberately withhold adverse material information from customers, that is fraud. When you do this on a grand scale, the full weight of the law will come down on you and the people who supposedly supervised you. And if the weight of that law is no longer sufficient to deal with – and to prevent going forward – the latest forms of very old and reprehensible crimes, then it is again time to change the law."
While this is ideal in theory, in the real world, it won't work.
Why?
Because it does not deal with the source of the problem: incentives.
Once again Hyman Minsky ``It should be noted that this stabilizing effect of big government has destabilizing implications in that once borrowers and lenders recognize that the downside instability of profits has decreased there will be an increase in the willingness and ability of business and bankers to debt-finance. If the cash flows to validate debt are virtually guaranteed by the profit implications of big government then debt-financing of positions in capital assets is encouraged. An inflationary consequence follows from the way the downside variability of aggregate profits is constrained by deficits.”
In short, there are two factors involved which fundamentally erodes idealist solutions as proposed by Mr. Johnson, one as shown by Mr. Minsky is the moral hazard problem provided for by government.
This means that aside from bailouts, government implicit and explicit backing has provided the Wall Street with the incentive to commit "fraud". When you know the law is behind ya, the motivations shifts from risk averse to aggressive "ponzi dynamics" which may involve indiscretions.
Yet fundamentally what Goldman Sachs had done is a product of the bubble cycle (ponzi dynamics)...
Again Mr. Minsky, “Ponzi financing units cannot carry on too long. Feedbacks from revealed financial weakness of some units affect the willingness of bankers and businessmen to debt finance a wide variety of organizations.” "Inflation, Recession and Economic Policy", 1982 (page 67)
Another factor, the Government is doing it themselves. It's basically MBO-Management By Example, or follow the leader.
Proof?
Here is Bloomberg,
``Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.
``The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn't seek money damages.
``The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry,'' said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.
The next important reason why grand idealist one size fits all solutions aren't likely to work is due to the incentives provided for by the cartelization of the banking industry by the Federal Reserve.
Again Murray N. Rothbard, ``the real reason for the adoption of the Federal Reserve, and its promotion by the large banks, was the exact opposite of their loudly trumpeted motivations.
``Rather than create an institution to curb their own profits on behalf of the public interest, the banks sought a Central Bank to enhance their profits by permitting them to inflate far beyond the bounds set by free-market competition."
It's called regulatory capture- collusion between the regulator and the regulated.
How this came about?
Again Mr. Rothbard, "The answer was the same in both cases: the big businessmen and financiers had to form an alliance with the opinionmolding classes in society, in order to engineer the consent of the public by means of crafty and persuasive propaganda."
So yes, in the aftermath of the bubble there will always be finger pointing.
But no, taking out Goldman Sachs is insufficient, it'll just be a merry go around.
We need to take away the source of the problem, the provider of the misdirected incentives-the US Federal Reserve.
Here is Ron Paul, ``A point we learn from this event and every other banking panic in U.S. history is that a crisis has always led to greater centralization. A system that is mixed between freedom and the state is a shaky system, and its internal contradictions have been resolved not by tending toward a free market but rather through a trend toward statism. It is not surprising, then, that academic opinion swung in favor of central banking too, with most important economists — having long forgotten their classical roots — seeing new magic powers associated with elastic money."
Simon Johnson writes,
``When you deliberately withhold adverse material information from customers, that is fraud. When you do this on a grand scale, the full weight of the law will come down on you and the people who supposedly supervised you. And if the weight of that law is no longer sufficient to deal with – and to prevent going forward – the latest forms of very old and reprehensible crimes, then it is again time to change the law."
While this is ideal in theory, in the real world, it won't work.
Why?
Because it does not deal with the source of the problem: incentives.
Once again Hyman Minsky ``It should be noted that this stabilizing effect of big government has destabilizing implications in that once borrowers and lenders recognize that the downside instability of profits has decreased there will be an increase in the willingness and ability of business and bankers to debt-finance. If the cash flows to validate debt are virtually guaranteed by the profit implications of big government then debt-financing of positions in capital assets is encouraged. An inflationary consequence follows from the way the downside variability of aggregate profits is constrained by deficits.”
In short, there are two factors involved which fundamentally erodes idealist solutions as proposed by Mr. Johnson, one as shown by Mr. Minsky is the moral hazard problem provided for by government.
This means that aside from bailouts, government implicit and explicit backing has provided the Wall Street with the incentive to commit "fraud". When you know the law is behind ya, the motivations shifts from risk averse to aggressive "ponzi dynamics" which may involve indiscretions.
Yet fundamentally what Goldman Sachs had done is a product of the bubble cycle (ponzi dynamics)...
Again Mr. Minsky, “Ponzi financing units cannot carry on too long. Feedbacks from revealed financial weakness of some units affect the willingness of bankers and businessmen to debt finance a wide variety of organizations.” "Inflation, Recession and Economic Policy", 1982 (page 67)
Another factor, the Government is doing it themselves. It's basically MBO-Management By Example, or follow the leader.
Proof?
Here is Bloomberg,
``Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.
``The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn't seek money damages.
``The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry,'' said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.
The next important reason why grand idealist one size fits all solutions aren't likely to work is due to the incentives provided for by the cartelization of the banking industry by the Federal Reserve.
Again Murray N. Rothbard, ``the real reason for the adoption of the Federal Reserve, and its promotion by the large banks, was the exact opposite of their loudly trumpeted motivations.
``Rather than create an institution to curb their own profits on behalf of the public interest, the banks sought a Central Bank to enhance their profits by permitting them to inflate far beyond the bounds set by free-market competition."
It's called regulatory capture- collusion between the regulator and the regulated.
How this came about?
Again Mr. Rothbard, "The answer was the same in both cases: the big businessmen and financiers had to form an alliance with the opinionmolding classes in society, in order to engineer the consent of the public by means of crafty and persuasive propaganda."
So yes, in the aftermath of the bubble there will always be finger pointing.
But no, taking out Goldman Sachs is insufficient, it'll just be a merry go around.
We need to take away the source of the problem, the provider of the misdirected incentives-the US Federal Reserve.
Here is Ron Paul, ``A point we learn from this event and every other banking panic in U.S. history is that a crisis has always led to greater centralization. A system that is mixed between freedom and the state is a shaky system, and its internal contradictions have been resolved not by tending toward a free market but rather through a trend toward statism. It is not surprising, then, that academic opinion swung in favor of central banking too, with most important economists — having long forgotten their classical roots — seeing new magic powers associated with elastic money."
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