“What the Government should do is place all securities under the sweeping powers of the same kind of agency that regulates drugs. And, just as drugs are tested for their real effects and approved with regulatory strings, securities too should be subject to testing (which would be in the nature of simulations) and approved, if found not to have malign side effects and found to be useful, only with their own regulatory strings. The ‘shadow’ financial system, as Roubini calls it, has become a giant ectoplasm of iffy puts and options, in a system that really has already developed the vehicles it needs for investment, thank you very much. And, as we have seen, Alien turns to the nanny state as soon as the downside whacks it. Thrust the fuckers into the light. Regulation now, regulation forever.”
And notice this, in today’s WSJ:
“Joseph Stiglitz, a professor of economics at Columbia University who won the Nobel in 2001, suggested misguided innovation itself caused the current turmoil. Noting that homeowners’ most important risk assessment is the likelihood that they can retain their home amid market volatility, Stiglitz said, “these are the problems [financial markets] should have created products to match. But they created risks, and now we’re bearing the consequences of this so-called innovation.”
There were some areas of agreement. The standards that gauge how much capital banks should hold — called Basel II for the Swiss city in which they were developed — focus too tightly on managing daily risk and not enough on handling crises. “What happens most of the time is not important,” said Scholes, noting the current financial turmoil comes on the heels of the dot-com bubble’s bursting and the Asian financial crisis of the early 1990s. “We have to learn how to handle the shocks when they occur.”
One idea that might prevent a repeat of the turmoil: a commission that would vet financial products before their release, akin the Food and Drug Administration’s evaluation of drugs before they’re released to the market. McFadden suggested, “we may need a financial-instrument administration that tests the robustness of financial instruments and approves only the uses where they can do no harm.”
I came across this quote at Marginal Revolution, the libertarian blog run out of George Mason university's economics department, which is a wholly owned subsidiary of Koch Industries. The bloggers denounced it as a terrible idea. If the crank libertarians are opposed to it, it must be good!
5 comments:
LI, I hope you are scribbling your Nobel Prize winning acceptance speech. You should post it here first of course for ye who have followed you through the valley of death etc, before one gets to Stockholm, the promised land. May I humbly suggest, that you include a quote or two from Villon's Frères Humains. Come to think of it, every Nobel laureate should quote that poem.
Amie
Well, I have the Nobel acceptance speech down on my list, right after paying the electric bill. Ho ho.
Although I like the Villon suggestion, I'd also be partial (if this is the Nobel Prize in Economics) to CB's Le jeu:
Dans des fauteuils fanés des courtisanes vieilles,
Pâles, le sourcil peint, l'oeil câlin et fatal,
Minaudant, et faisant de leurs maigres oreilles
Tomber un cliquetis de pierre et de métal;
Autour des verts tapis des visages sans lèvre,
Des lèvres sans couleur, des mâchoires sans dent,
Et des doigts convulsés d'une infernale fièvre,
Fouillant la poche vide ou le sein palpitant;
Sous de sales plafonds un rang de pâles lustres
Et d'énormes quinquets projetant leurs lueurs
Sur des fronts ténébreux de poètes illustres
Qui viennent gaspiller leurs sanglantes sueurs;
Voilà le noir tableau qu'en un rêve nocturne
Je vis se dérouler sous mon oeil clairvoyant.
Moi-même, dans un coin de l'antre taciturne,
Je me vis accoudé, froid, muet, enviant,
Enviant de ces gens la passion tenace,
De ces vieilles putains la funèbre gaieté,
Et tous gaillardement trafiquant à ma face,
L'un de son vieil honneur, l'autre de sa beauté!
Et mon coeur s'effraya d'envier maint pauvre homme
Courant avec ferveur à l'abîme béant,
Et qui, soûl de son sang, préférerait en somme
La douleur à la mort et l'enfer au néant!
Seems appropriate.
Terrible logic, there, about the Libertarians. It is entirely possible for both them and the WSJites to be wrong. Recall the modernised form of the three laws of thermodynamics:-
- You can't win.
- You can't even break even.
- You can't get out out of the game.
Mr. Lawrence, I was engaging in a little humorous exaggeration there. The objection on the Marginal Revolution site is that securities are inherently risky, and - I don't think I'm exaggerating the bogusness of the argument - thus, any attempt to regulate that risk is counterproductive. And if the speedometer on your car shows that you can drive at 120 miles per hour, you should do it all the time.
It is, of course, insane to pretend, after the rather amazing and continuing bailout of the financial sector we've witnessed this spring, that we just have to put up with risky securities issued by hot to trot but oh so brilliant entrepreneurs. Instead, we have to deal with the result of so skewing the relations of the moneyed to the indebted class in the U.S. that the moneyed can not only prey on the indebted at their ease during good times, but are insured tax money from the indebted during bad times. Libertarianism, applied in the rote, George Mason fashion, leads, by way of sabotaging democracy, to a rule by plutocrats that is, if anything, worse than the rule of ancien regime nobility.
As I pointed out in a post a while back, economists never consider that the wealthy will, quite rationally, spend money on other than productive ventures to remain wealthy. And since the wealth we are talking about was accumulated under the paradox of its not really being useful per se to the wealthy - once you have five hundred million dollars, it is unlikely your lifestyle is going to get better with another 100 million dollars - the amounts involved can be seen as pure instruments of prestige. In other words, the plutocrats operate as aristocrats have operated for the last six thousand years or so of human civilization. Non-productive expenditure involves such things as raising the barriers to entry to wealth - that is, slowing down social mobility by freezing or pushing back wages - and buying off threats to prestige wealth - that is, producing a political system in which the politicians operate as bribed factotums of the plutocrats - and creating a universe of plutocratic spinners - as per the endowment of, say, libertarian think tanks, which exist in gross disproportion to the number of libertarians that live in this country, where libertarianism has never been politically popular.
Why don't economists consider these rent seeking activities? Because that would force the kind of self examination they are very loathe to do.
Awesome post, roger-the last comment in particular. I am cutting and pasting it over on an other site I spend too much time on!
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