I just made a really loooooong comment on an article that one of my friends posted to facebook. I figured, what the heck, I might as well go ahead and turn it into a blog post. Why not? No one reads the blog, anyway and I went to the trouble of typing. So, here goes.
This is the original article that triggered my response: http://newledger.com/2009/04/do-free-markets-actually-work/
Here is my response:
I don't know why this is considered positively. Whoever that writer is seems to overstate several points and not really grasp the others. e.g., the statistical risk models were simply an attempt to give a better, more accurate way of generating that "domain-specific knowledge" to "form an opinion" - fancy ways of saying that you look at the opportunity and use what you can to guess at the relative risk vs long-term returns. It has been noted that the math models were misapplied and, my own view, were overly relied upon. E.g., No one truly belives that your house *always* goes up in value, just like the stock market doesn't always go up in value. With a long enough horizon it always has, but some of those downturns that have to be recovered from last a long, long time. A big part of the problem is that people believed that their hourses would always keep appreciating in the short term.
The other issue is the idea of the "government-directed" economy - it's the government and it's system of incentives that helped to create the housing bubble in the first place! Incentives for "non-traditional" buyers to get "creative" financing to become homeowners, government guarantees of various loan types that shouldn't have been made, "artifically" low interest rates, and previous industry bailouts from the past creating an "implicit" government guarantee of insurance in the face of moral hazard (for both financial institutions and auto manufacturers). Had the banks and other financial institutions been in a purely free market, there is good reason to bet they wouldn't have gotten into the mess in the first place because there'd be no one to bail them out when, you know, the fan got hit.
I also find declarative, postive statements of "this is going to happen" or "this won't ever happen" or "fundamental shift in x direction" to be very unconvincing. I think there is always going to be capital pursuing risk - if people have excess money around, they're going to throw it at risk from time to time. There are always going to be big players with more money than sense or money to risk. Look at those that financed the American Colonies. Look at Leland Stanford and the railroad. Look at those that financed the Panama canal. I think it's exceptionally silly to say that's not going to happen anymore. Yes, people and businesses are retrenching right now and unloading debt. It's a good thing. There's a minimum amount of debt that one can achieve - zero. When they hit that point, they're going to feel confident in trying to expand to new opportunities and ways to grow, etc...
One of the biggest problems, IMHO, is that most people, including those in the industry, understand neither modeling nor research in general, especially in regards to what can or can't be done or said with both of those things. It's the lack of understanding of those limitations that lead people to do stupid things like assume that mortgage risk in a large pool of securitized mortgages are statistically indpedendent, or that the only way they can go is "up." The ignorant citation of certain strains of "research" as authoritative is a scourge amongst commentators, news outlets, and advocates. Likely also true amongst policy makers. It's this misunderstanding of the limitations of modeling and research that makes me doubtful about many aspects of the current climate debates - but that's a different story than the one that I have already gone on too long about.
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3 comments:
I do read your blog and I think you're a hottie, but you lost me at "statistical risk models", sorry.
xoxox
Ren,
Thanks for stopping by and leaving a comment on my blog (www.wdihtnmb.blogspot.com) the other day. That, (along with the fact that your wife suggested that I should come and check yours out ;)) brought me over here today.
We agree at least on a couple of things. I think the use of words like "always" and "never" should rarely be used in conversation, and probably never in a financial context! And while I used to be a proponent of the free market system, one only needs to look around to see where it has led us.
I read the reference article, along with the one referenced by it, and while there is some that I disagree with (deglobalization, for instance) I do believe that we may be seeing a sea change in the global financial system. The problem with something global is that it is so big that many, if not most, fail to see the scope of it.
One other thing before I go. I also disagree with the idea that debt can only go to zero. Nagative debt is called savings (but you knew that) and while people may reduce debt to zero, they may choose to not only start saving, but to continue saving (rather than spending). And for many of those that are not financially savvy, just putting money in the bank will suffice. The banks in turn, will invest eventually, but all of this could be a very long time in the making. Many individuals that have been, continue to be, or will be burned by the current financial collapse I fear will be very reluctant to take any risk of reoccurence - perhaps in their lifetime. One need only look at the mentality of the depression era generation. Perhaps an extreme example, but I think one worth remembering.
I want to let you know that I think I understood a little. So knowing me that is a big statement. What gets me boiling is that many people are making money on the demise of our country. People and institutions were set up to bet on failure. That in itself is such a poor attitude. My overall opinion is that the way for us to resolve our problems is simple. Produce goods that people need at a decent price. Profit at a decent rate. Be honest in what you make. Mean what you say and say what you mean. Tell the govt what you want by ways of law and let the people govern themselves. We as a Nation caused this problem by greed and not wanting to know what was going on since we were gaining from it. We need to stand up and be counted and be accountable. The American dream is not to own a home. The American Dream is to be able to afford a home. So since I dont make as much as the Jones's I do not need a home like them. Plain and simple. Correct me in my thinking so I can understand what the real deal is. Thanks for the info.
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