

An Economy of Liars - watchandwait
http://online.wsj.com/article/SB10001424052748704508904575192430373566758.html

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RyanMcGreal
>Classical liberals, whose modern counterparts are libertarians and small-
government conservatives, believed that the state's duties should be limited
(1) to provide for the national defense; (2) to protect persons and property
against force and fraud; and (3) to provide public goods that markets cannot.

I happen to agree with this definition of the state's duties, but I have a
more expansive notion of (3) than most libertarians. For example, universal
health care and education are public goods that generate more market wealth in
higher productivity than they cost in taxes collected to pay for them, but
markets intrinsically cannot produce universal education or health care by
themselves.

As for the article, crony capitalism is precisely what happens when
capitalists control the levers of government.

~~~
kevinpet
You don't understand the definition of a public good. The key to a public good
is that it is non-exclusionary, or at least partially non-exclusionary, and
would suffer from the free rider problem if provided by the market, and so
would be inefficiently under-produced.

You say that health care and education generate more wealth than they cost.
That doesn't make them public goods. Education primarily produces the extra
wealth for the person who gets the education. This doesn't make it a public
good, it just makes it something worth investing for each individual.

Also, look to rural India if you think the market has trouble providing
education.

There are bits of health care that fall into public good, like vaccinations,
but public health and health care are mostly entirely separate things.

~~~
RyanMcGreal
I understand the definition of a public good. Take education: a significant
part of the benefit that flows from education is externalized, that is society
as a whole benefits as well as the individual. As a result, in a pure market
people tend to under-invest in education.

~~~
solutionyogi
Ryan, I completely disagree. I am surprised that you would think that the
society benefits more from the education than the individual. According to me,
if I have higher education, I get a better job, better salary, more respect in
social circle. Compared to this, what does society get if I am educated?

And looking at how tuition fees are at all time high and people are still
paying them, I would not say that people are under investing in education.

 __EDIT 1: __

For some reason, I am not able to reply to some of the replies to my comment,
so let me clarify.

What is society made of? Individuals. Obviously, if individuals are better off
then society will automatically be better off. Isn't it?

So if you think by providing education to an individual, society becomes
better, why don't we provide good healthy food for all the individuals and we
will solve the obesity problem and end up with a really healthy society? How
about providing free access to a high quality gym and personal instructor? I
see that you are disagreeing and you would say, one has to draw line
somewhere. And in my opinion, if you think that Government should be not be
responsible for good healthy food (the most important thing for an individual,
even more than education), I don't understand how you can say that Government
should provide public education.

 __EDIT 2: __

And here's why I am not in favor of government programs. A bureaucrat has no
incentive what so ever to please their customers (i.e. taxpayers). [Quick,
tell me, how many government agencies do a good job in your opinion?] By
nature, government will try to find a one-size-fits-all solution to education,
which does not work. As someone else said, I am all in favor of voucher system
which gives control back to people who care about education and let market
place offer variety of solutions for people's education needs.

~~~
papercrane
You're misrepresenting Ryan's statement. His argument is not that public
education benefits society more than the individual. His argument is that
public education is a net benefit for society.

~~~
solutionyogi
And my point is, anything which benefits an individual (as long as it's not
illegal) automatically benefits the society, as society itself is made of
individuals. Is there any case where individual is better off but society is
not?

~~~
mcantelon
Not necessarily. If the government were to, say, buy big screen TVs for its
citizens that wouldn't necessarily create a social benefit as it may promote
TV watching and negatively impact health. Education, however, it likely to
give people perspective and options that will lessen their chance of looking
to the criminal sphere for income and becoming a social cost via the prison
system.

~~~
solutionyogi
Now you are mixing two things. I am stricly opposed to Government forcing
anything on individuals as it doesn't lead to any good. So if Government
forces everyone to buy TV (or for that matter anything else), obviously it's
no good for society.

I was talking about any __voluntary __, legal action by an individual which
benefits himself. Such an action always leads to improvement in society as
society is made of individuals.

------
stretchwithme
When something is regulated by the government, the nature of that regulation
is subject to being influenced by the regulated.

If the regulator itself had competition and participation in the regulatory
scheme was voluntary, there would be real pressure to honestly regulate.

The government could, instead of regulating companies itself, manage a system
of competing regulatory regimes and let people decide which one they trust.

There could be a "Good Housekeeping Seal of Approval" for accounting competing
with FASB, companies could pick one and then publish to investors which one
they adhere to.

If investors find that they are consistently burned by companies governed by
FASB, they would start to favor companies governed by the alternative.

There would be real pressure to perform honestly over the longterm that a
monopoly is not subjected to.

In technology, we have all sorts of competing standards that live and die by
how good the results are.

Competition is a good thing and we need more of it, especially in government.

~~~
eru
Yes. That's also a good argument for pushing for power from the federal to the
state level. (And for having a federal system, or really small countries in
the first place.)

~~~
stretchwithme
Amen.

Actual, the competitive situation I described is already in place to a degree.
Companies can go public in a different country, which many are doing since the
oppressive sarbanes oxley regulations went into effect.

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jamesbressi
I know there has to be some great accountants, CFO's, finance people, etc on
HN that can offer more detail about a Repo 105 and what the benefit is for an
organization (maybe an individual?) to do this, not just in Lehman's case. WSJ
explanation is straight forward, but I would like to hear a little more about
this practice--hopefully I'm not the only one.

From the article: "We have now learned of the creative way Lehman Brothers hid
its leverage (how much money it was borrowing) by the use of a Repo 105. The
Repo 105 meant Lehman temporarily swapped assets (such as bonds) for cash. A
Repo, or repurchasing agreement, is a way to borrow money. But an accounting
rule allowed Lehman to book the transaction as a sale and reduce its reported
borrowings, according to a report by the court-appointed Lehman bankruptcy
examiner, a former federal prosecutor, last month."

~~~
chasingsparks
Repo's are essential to banking. At the end of the day, a bank must be in a
certain financial state. Fluctuations in withdrawls and deposits can lead to a
need or surplus of cash. Financial institutions balance their books daily with
repos. (The market is HUGE.)

IB's have a need for repo's also, but they often push the limits of sanity.
LTCM used repos for large leverage also. ( _When Genius Failed_ is an
interesting book to read; essentially the crisis of 2007 was LTCM on a larger
scale.)

The financial crisis of 2007 was actually a run on banks through the repo
market. IB's used repos on a rolling basis with very little margin for error.
Suddenly, the haircuts got large and blew them up.

For an excelent paper on the crisis and the repo markets huge (dominant) roll
in the crisis, see Gary Gorton's paper:
<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882>

~~~
mbateman
Though this is tangential to the story, I would like to second the
recommendation of this paper. On the way to arguing for his thesis, the author
explains the function of the modern banking system and the "shadow" banking
system in clear and cogent terms. He relates contemporary banking practices to
older ones and explains shows how they are similar in the event of a banking
panic. Very good (but long) article.

------
Maascamp
This article attacks the current attempt to create new regulations without
actually providing any alternatives to fixing the problems in the financial
system. The author states:

"If we want to restore our economic freedom and recover the wonderfully
productive free market, we must restore truth-telling on markets."

Yet the author provides no ideas or suggestions on how this is to be achieved.
Even Alan Greenspan, former champion of the free market said this about the
greediness of Wall St, "Those of us who have looked to the self-interest of
lending institutions to protect shareholders’ equity, myself included, are in
a state of shocked disbelief." The author wants to restore something that was
never there.

Since people (especially bankers) have proven time and time again that they
will act in their own, immediate, self interest, this simply comes off as a
rant by someone who's quite satisfied with the current state of affairs
(cronyism included) and doesn't want anyone messing up his (or his cronies')
cash flow.

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diego_moita
Oscar Wilde said "a cynic is a man who knows the price of everything but the
value of nothing". In the same spirit I say "a classical liberal or an
economist is a man that believes that societies are nothing more than
markets". And libertarians think societies are just an individual multiplied
by n, where n > 1; they ignore that people interact and depend on each other.

Besides the list provided, I'd add 4) the state must protect the values of a
society, also. Universal health care, avoiding abortions, protecting the
environment, controlling proliferation of drugs are ethical values. The state
must do it because it is just wrong not to do it.

Think of it as a "social infrastructure" akin to strengthening the social
fabric or the human ties, of a society. It makes it more resilient to crisis.

~~~
orangecat
_In the same spirit I say "a classical liberal or an economist is a man that
believes that societies are nothing more than markets"._

Ridiculous strawman. If anything, it's the left that acts as though society is
a simple system that can be effectively steered by central planning. And of
course, selfless regulators will only steer in the right direction...

 _I'd add 4) the state must protect the values of a society, also_

Which values? Christianity? Defending the sanctity of marriage? Preventing
mixing of the races?

 _Universal health care, avoiding abortions, protecting the environment,
controlling proliferation of drugs are ethical values. The state must do it
because it is just wrong not to do it._

Ah, the values that you personally like. And it's wrong to _not_ ruin the
lives of recreational pot smokers?

------
DrSprout
>Modern liberals have greatly expanded the list of government functions, but,
aside from totalitarian regimes, I know of no modern political movement that
has shortened it.

We hear conservative and libertarian voices constantly decrying the expansion
of government power, but what about the expansion of corporate power?
Government deregulation is totally meaningless when virtually all industries
are controlled by a handful of super-corporations with more capital and
internal legal structure than most countries. The only way deregulation can
have a whisper of a chance of ushering in a better market is if we also insist
on the abolition of the multinational corporation, and break up the behemoths
into competing regional conglomerates.

Of course, without any regulation, a single victor will soon emerge to impose
its own will.

------
bluedanieru
This article is schizophrenic trash. In one breath the author complains that
the failure of the market is due to lax regulation and corrupt officials,
while in the next he calls for further deregulation and less government
oversight. He completely ignores the actual issue brought to light by the
financial crisis which is exactly that this same spirit of "deregulation" has
squeezed regulatory agencies like the SEC of funding and allowed them to be
infiltrated by industry insiders, to all our detriment. The SEC ignored Madoff
because they didn't want to rock the boat and even if they did, investigations
cost money they don't have.

The Wall Street Journal has been a real Newspaper of Liars since it was
acquired by News Corp. Get this garbage off HN please.

~~~
hexis
"In one breath the author complains that the failure of the market is due to
lax regulation and corrupt officials, while in the next he calls for further
deregulation and less government oversight."

I think the point was that regulation and officials provide false comfort, as
they will be captured by the interests they regulate. Removing those
regulations and officials will at least remove the false security the "lax
regulation and corrupt officials" provided.

~~~
dean
The author isn't only talking about the regulators being corrupt or
incompetent. He's also talking about market participants like Madoff and
Lehman Brothers.

Removing regulation will not suddenly turn the bankers into honest people, as
the author seems to think.

"Better than multiplying rules, financial accounting should be governed by the
traditional principle that one has an affirmative duty to present the true
condition fairly and accurately—not withstanding what any rule might otherwise
allow."

He's suggesting that we take away the regulations and just ask the bankers to
be honest. Maybe I'm just cynical, but I don't think that's going to work.

------
tlholaday
Anyone who cites the U.S. constitution and limited government, who does not in
the same paragraph acknowledge that the reason government was limited was to
protect the power of slaveholders, perpetuates the crime.

~~~
astine
If you're going to make a claim like that, you ought to cite your sources.

~~~
tlholaday
The 3/5ths clause? The two-senators-each rule to assure that the slaveholding
states would have disproportionate power, and the subsequent battles to
prevent new slave-prohibitionist states upsetting the balance? Article 1,
section 9 (The migration or importation of such persons as any of the states
now existing shall think proper to admit, shall not be prohibited by the
Congress prior to the year one thousand eight hundred and eight, but a tax or
duty may be imposed on such importation, not exceeding ten dollars for each
person)? The necessity of the 13th Amendment? Sanford vs Scott (4. A free
negro of the African race, whose ancestors were brought to this country and
sold as slaves, is not a "citizen" within the meaning of the Constitution of
the United States.

5\. When the Constitution was adopted, they were not regarded in any of the
States as members of the community which constituted the State, and were not
numbered among its "people or citizens." Consequently, the special rights and
immunities guarantied to citizens do not apply to them. And not being
"citizens" within the meaning of the Constitution, they are not entitled to
sue in that character in a court of the United States, and the Circuit Court
has not jurisdiction in such a suit.

6\. The only two clauses in the Constitution which point to this race treat
them as persons whom it was morally lawfully to deal in as articles of
property and to hold as slaves.) ?

~~~
astine
How does any of this suggest that the purpose of limited government was to
protect slaveholders? No one is going to say that allowances weren't made to
protect them but the 3/5ths clause has nothing to do with the enumeration of
powers or the scope of government. Limited government and slaverights are
orthogonal issues and should be treated as such.

