

David Brooks: Good summarization of all the literature on financial collapse. - anirudh
http://www.nytimes.com/2009/04/03/opinion/03brooks.html

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cia_plant
It is odd to me that so many people are looking for some kind of abnormality
which "caused" the crisis. Capitalism has had cyclical crises since its
inception 300 years ago, so I would say that the crisis was not "caused" by
either greed or stupidity, but is a naturally emergent behavior of the
capitalist system.

Actually it is even more general than that. The pattern of exponential growth
followed by die-off is common throughout nature - algal blooms, for example.

It seems that the whole discussion over the financial crisis has been warped
and twisted by this absurd belief, in the face of all evidence, that the
economy is in some sense "rational," that it has some kind of steady-state
equilibrium, and that its problems are therefore caused by too little or too
much regulation, too little or too much greed, etc.

~~~
mighty
> so I would say that the crisis was not "caused" by either greed or
> stupidity, but is a naturally emergent behavior of the capitalist system.

But greed and stupidity are "natural" forces at work within the capitalist
system. Asserting that crises are cyclical and "naturally emergent" doesn't
rule out greed and stupidity as causes. It actually doesn't say anything about
causes at all.

I'd also be wary of concluding that because certain phenomena appear to be
cyclical, any similar phenomena must necessarily be an expression of that
cycle.

~~~
cia_plant
Yeah, I don't think it's exactly wrong to say that greed and stupidity caused
the crisis, but it seems like a category error. If a farmer kept planting
crops in September, and they died during the winter, and he said that they
died because it got cold, then he'd be perfectly correct. But that way of
phrasing it almost suggests that he expects it not to get cold again next
year.

I think it's very hard for people to see bubbles as forces of nature, because
in retrospect you can always see how dumb they were. So it always seems as
though, if we just rationalize the system a bit, then we'll no longer have
bubbles. However, no system has yet been invented which is capable of
preserving rationality within a modern economic system. Hundreds of years of
evidence suggest that whatever reforms are attempted as a result of this
crisis will eventually run into the same mishaps and errors as ever before,
unless someone comes up with a truly systematic account of bubbles.

You're right that I shouldn't assume that this crisis is an expression of
cyclical booms and busts. I'm very puzzled by this crisis, and the information
that's available is maddeningly vague and handwaving.

------
adamc
I read it and wondered why stupidity vs. greed were presented as exclusive
alternatives. They could both be true -- there was a lot of clubby legislation
to benefit the financial community, _and_ the models were wrong.

~~~
apinstein
I read the article and wondered that exact thing the whole time, but this type
of rhetoric is quite typical of David Brooks. He tends to paint things in a
way where such that in the end he can point to the article as a conservative
pundit and say "conservatism is _the_ way". He is kind of a wanker in that
regard.

I have studied markets empirically for a long time. They fascinate me. But
ultimately they're very simple. Markets are just games with certain rules.
It's human nature to exploit knowledge for gain. And we're very good at it,
which is why you see _home sapiens_ running things and not dogs or chimps. The
emergent properties of nearly all markets are pretty obvious from the outset
if you know the rules and just extrapolate.

Brooks is analyzing psychological motives, but he half misses the point (for
the above reason; he wanted to come to a conclusion that supported a
"conservative" viewpoint). I get really annoyed when people make the argument
"but if only people hadn't mis-behaved we wouldn't be in this mess." Umm, any
exploitable situation will be exploited by someone. Quit expecting morality to
protect humanity. Don't you grok the Tragedy of the Commons?

In the case of the financial crisis the market failure was one of
externalities. If you look at the value chain of how loans were originated,
sold, and re-sold, the current crisis was inevitable. It's always been obvious
that several of the layers of the industry simply had no risk, because
intermediaries were able to make profit regardless of risk and the risk was
concentrated in an external entity. This is my favorite (and funny!)
explanation of the situation:

[http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&...](http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1)

So ultimately _stupidity vs greed_ is a red herring. In reality, a few _evil
geniuses_ knew that they could make a ton of money with no risk, and they
unleashed their massive resources to turn this money train into a years-long
profit engine. The people that caused this have already punched out for more
money than they could ever imagine.

IMHO the real solution here is:

1) prosecute _thousands_ of people for fraud.

2) Let the current banks rot with the pile of assets they've amassed. 3)
capitalize new banks to re-start the credit markets.

3) _Vastly_ increase regulation.

It is not in the taxpayers' interest to have a system in which a misbehaving
company can destabilize the economy.

~~~
cwan
Arbitrage is not evil - ie making money without risk. The problem is not
behaviour - particularly since it is regulation that warped incentives.
Everywhere you look is regulation - regulation encouraged home buying over
rentals, taxes encouraged borrowing over equity, government sponsored
enterprises underpriced/didnt evaluate risk, regulation increases the time it
takes to fund and create new banks, and I've yet to see a convincing
explanation of how the repeal of Glass-Steagall caused this mess in the first
place. I also don't get why government doesn't allow for some form of rapid
bankruptcy to restructure balance sheets and wipe out shareholders and to some
degree, bondholders. I'm not sure why taxpayers and "good" innovative
industries should be subsidizing bond holders and shareholders of businesses
that didn't adequately plan for risk. If they're worried about runs on banks,
the bulk of the capital in these firms _are not_ depositors.

The irony is that we're looking to regulation to solve this crisis? This while
we're looking to bail out dying industries?

~~~
apinstein
You say a lot of things... let me take them a few at a time:

On arbitrage - I don't consider this financial crisis to have much to do with
arbitrage. I am not sure you understand what arbitrage is; it isn't ANY money-
making activity. It's when a middleman exploits transient differences in
prices in markets. In any case, I never said arbitrage was evil. However, if
the arbiter makes his money by exploiting an externality, then someone is
losing. This is simply a notable side-effect.

On incentives - I don't buy the line that regulation caused that many warped
incentives. Maybe some, but not all. And this would have happened WITHOUT the
regs that might have caused some of the incentive anyway. None of the tax
policies shifted behavior that significantly. Being able to deduct mortgage
interest does differentially favor homeowners, but it doesn't affect the risks
involved in becoming a homeowner. At worst it artificially inflates home
prices.

On Glass-Steagall - I don't know it well, but one very useful effect of it was
to compartmentalize risk. As anyone on HN should know; isolating risks in
independent buckets drastically reduces the chance of major bad things
happening. It's the sheer scale of the crisis that makes it bad; most of this
stuff was ultimately pushed by a small handful of banks at the top. It also
separated different types of investing which prevented oligopoly situations
and group-think from having as big of an effect on the market. It put
different companies on opposites sides of investments rather than the same
side and probably had the effect of improving real-world due diligence. But I
am just WAG'ing here on this one.

On bailout - I don't think taxpayers should be subsidizing bond or equity
holders in any of these financial companies. Not sure where you got that idea,
not from me.

On regulation - it's not ironic at all. You are presenting logical fallacy.
Just because reg A is stupid doesn't mean regs B-Z are. They are unrelated. I
am all for regs that help prevent massive market failures or allow massive
externalities to persist over time. In the end, the citizens pay for it in
taxes and instability. It is true that more regs would probably dampen some of
the GDP upside, but IMHO that's a fine tradeoff compared to the economic havoc
of massive recessions.

------
cwan
Any explanation that ignores the central role that Fannie Mae and Freddie Mac
played in the crisis leaves a lot to be desired - and can hardly be considered
a "good summary" of the financial collapse essentially since they were taken
over quite early on in the crisis.

Can we also blame traders and financiers for mispricing risk? Definitely - but
let's also be clear that government influence through GSE's like Fannie Mae
and Freddie Mac, and poor government regulation played a central role in this.
Further, as for leverage, high corporate taxes give companies large incentives
to borrow to fund growth. What about the role the Fed played in keeping
interest rates low and the credit bubble going? Sorry, I really can't see how
this summary can be considered even remotely "good".

~~~
jhancock
The leverage is a magnitude or two greater than possible defaults covered by
Fannie and Freddie. At least when you talk about home mortgages, you still
have a tangible asset behind it. The many layer of leverage on top of this
provided phantom value and is where most of the horror is in the big numbers.

------
tsally
David Brooks is one of my favourite columnists and I still wont sign up for an
account to read his writing. Call me stubborn if you'd like :-p.

~~~
mkelly
<http://www.bugmenot.com/>

~~~
tsally
I'm aware of bugmenot, but for me it's an issue of principle not convenience.
If everyone took this stance, Bugmenot wouldn't even be necessary.

