To sum it up, despite there being regulations on CDOs the real problem still exists. That problem is that loans are easy to get the gov stamp. Thos makes it easy for new home owners to get loans. And this makes it easy for sales people to sell the loans.
Much of this opinion article is based on an other article [0] which seems less doom and gloom and more about the shift to a majority of state sponsored loans. This in itself its own issue in that capitalism isnt doing what it should be when everything is subsidized by the gov.
Ultimately these two articles seem to be about responsibility. Banks are not responsible for homeowners making poor decisions. Banks are not responsible for investors trusting a market that is not self sufficient. And Banks are not responsible for the government to enable them with tax payer money. Meanwhile everyone can point the finger back to the banks and the bank depends on the fact that too many economies rely on them to fall
This in itself its own issue in that capitalism isn't doing what it should be when everything is subsidized by the gov.
Thus $500k 800 sq ft bungalows. You show me a chronic bubble and I'll show you a 'market' riven with subsidies, tax incentives, government secured debt and pencil whipping regulators. Healthcare, education, housing.... Yet when the bubble pops and the too-big-to-fails have to be 'recapitalized' all we get from the ruling class is more hating on markets.
Your last sentence is interesting:
the fact that too many economies rely on them to fall
I believe you meant that banks can't be permitted to fail. But it could also be read to mean that what we've self inflicted is a system whereby the greater fools are those found holding worthless CDOs (and all of their various derivatives) when the bubble pops; the market is ultimately expressing itself through the failure of financial institutions.
This may sound cynical but that is one of the fair markets that likely will not fall. These are luxery that are likely only to be bought and sold to people looking for vacation spots or a crashpad. Much more likely to be paid off than a 4 bedroom in the midwest bought by a hardworking train engineer and his wife working part time in a restaurant.
"We've self influcted a system wherevy the greater fools are those found holding worthless CDOs"
I really appreciate the hot potato analogy! Exactly what I was thinking.
>Yet when the bubble pops and the too-big-to-fails have to be 'recapitalized' all we get from the ruling class is more hating on markets.
The reason this happens is that during the boom phase, the conservatives and libertarians, the defenders of the market, tell everyone things are going just fine. And then when it all blows up, they suddenly change their line and say it was all due to government subsidies and regulations. That is what happened last time, remember?
Why does the government need to be involved in mortgage lending at all? Is there a specific market failure inherent in it people can point to that calls for government intervention to overcome (akin to the public good failure for e.g. roads)?
People who have nothing to lose tend to make poor economic decisions and poor social decisions.
That's why home ownership matters. It's a poor investment vehicle only if you assume people would invest savings from renting into appreciating assets, rather than burn it on consumables. They won't.
So, yeah, government is involved because it's a collective action problem. Individuals and the market left to their own devices will reach a suboptimal equilibrium.
Is home ownership the _only_ answer? No. The problem is fundamentally cultural. But in the U.S. especially, subsidizing home ownership seems to be the most viable mechanism we can, as a society, agree upon. Probably because of our emphasis on individualism. In a society that highly values individualism, people will be more incentivized to strive toward home ownership than other alternatives. We went them (us) to delay other, less economically efficient forms of gratification.
In some Asian societies, for example, different cultural preferences make alternatives more viable. For example, they're more likely to emphasize investment in education. I'm pretty sure the phrase "book learning" isn't derogatory in most Asian societies, even for low-skilled laborers who feel disenfranchised and lack any intellectual ambition. (Not that those things are necessarily related--I strung them together for emphasis.)
In any event, the point is to keep people invested in the economy in such as way that their individual choices tend toward more productive activities. It's a channeling function.
The government, acting as the collective will of the people, believes, due to recent experience, that a housing crash, and the concomitant cascade of mortgage defaults, is something worth making an effort to avoid?
I think that's how the story is supposed to go.
I guess the flip side is that quote by that fellow I read somewhere that went something like: democracy cannot last as a permanent form of government, it can last only until people realise they can vote themselves largess from the public purse.
Cringed while reading. We've got to stop transcribing intuitions into universal laws if we want to claim the sapiens in homo sapiens.
Regardless of political stance, for any animal to require half its lifetime in effort to acquire a shelter, well that is retarded. And for some reason we consider ourselves more enlightened than our ancestors building functionally useless monoliths. At least the pyramids united the tribe or whatever.
I feel like I can relate to your position however I believe there is much more to this than simply "unevolved"
- a hive mind (similar to that of bees or ants) likely considers death to be a reasonable loss to the point of canabalism being deemed reasonable. This is probably the closest to full centralization there is.
- in gorillas there tends to be one male per multiple females and per area. There also tends to be a female pecking order where one stands dominant and weaker ones get scars. This is probably the closest to fully independent since each individual only gets what they take.
We live in a world where money can be anywhere and we want to allow anyone to have the opportunity to get what they want (so long as it doesnt harm the collective good). What tends to happen is the money becomes centralized to trade centers or with rare resources like peaceful community or opportunity in entertainment. However, space is a scarce commodity in these locations because it attracts so many people. So isnt it fair to increase the prices? The people who are making the most money for the area should have the most convinient location.
"unevolved" implies that there isnt rhyme or reason to this.
When these institutions were first created no one imagined the harm they would inevitably cause. Now that they exist they can't be killed, because they help some people. Like a lot of things, really.
Thats not entirely true. England has had a number of economic scandals before the US recieved their independence. There is also certainly a president of "too big to fail" to the point that the king was invested [0].
That problem is that loans are easy to get the gov stamp.
It's more that the fee the government charges for its stamp is too low, such that if the loans sour, the taxpayer ends up paying back the loan.
Partly because the state charges too little for the guarantees it offers, taxpayers are subsidising housing borrowers to the tune of up to $150 billion a year, or 1% of GDP. Since the government mortgage machine need not make a profit or have safety buffers, well-run private firms cannot compete, so many banks have withdrawn from making mortgages. If there is another crisis the taxpayer will still have to foot the bill, which could be 2-4% of GDP, not far off the cost of the 2008-09 bank bail-out.
Much of this opinion article is based on an other article [0] which seems less doom and gloom and more about the shift to a majority of state sponsored loans. This in itself its own issue in that capitalism isnt doing what it should be when everything is subsidized by the gov.
Ultimately these two articles seem to be about responsibility. Banks are not responsible for homeowners making poor decisions. Banks are not responsible for investors trusting a market that is not self sufficient. And Banks are not responsible for the government to enable them with tax payer money. Meanwhile everyone can point the finger back to the banks and the bank depends on the fact that too many economies rely on them to fall
[0] http://www.economist.com/news/briefing/21705316-how-america-...