PSA: The market isn't always perfect. Economic actors are not always rational.

[Phokus]

Originally posted by: BoberFett

Originally posted by: Phokus

Originally posted by: CycloWizard
The question remains: is government policy necessarily more rational than any individual's? I have no reason to expect that this is the case. It's simply another case of an oligarchy deciding what is best for everyone.

Here's a case where government policy was more rational than the free market's

http://www.nytimes.com/2009/02...opinion/28tedesco.html

And here's a case where government policy was less rational than the free market.

http://en.wikipedia.org/wiki/Soviet_Union

What's your point?

Oh yes, lets take one end of the extreme to disprove my point. My point is that a balanced approach won out in Canada whereas the extreme approach (free market) almost destroyed the world economy.

 

[Gonad the Barbarian]

We need to stop looking at rationality and start looking at incentives. IMO you can't asses rationality because it is unique to each person. You can however asses the incentives people face and follow when attempting to act rationally. And I don't think people can not act rationally, we always follow our greatest incentives. How we prioritize them just varies too much from person to person for an observer to decide rationality. If the action was taken it was rational, the observer just needs to figure out why.

 

[Phokus]

Originally posted by: bamacre

Originally posted by: Phokus
So you would rather deal with wall street hucksters who almost destroyed the world economy (but thankfully gov't stepped in and saved us) vs. for example, canada's banks that are well regulated and don't have to really deal with this subprime mess?

http://www.nytimes.com/2009/02...opinion/28tedesco.html

You, my friend, are irrational. That is why your extreme ideology is dangerous and thankfully you are considered the lunatic fringe and you nutjobs will never have a say in government.

You calling me a nut is nothing less than a total compliment.

You are a nut. You LOLbertarians will never have a seat at the table because we all know your free market fundamentalism would destroy our economy.

 

[Fern]

The examples he offers are questionable:

* It was not rational for Bear-Stearns CEO James Cayne, with his own $1 billion fortune on the line, to allow his firm to become hostage to the excessive risks taken by his subordinates in the mortgage markets.

^ I believe this is better explained by ignorance, not irrationality, I think it unlikely Cayne was aware just how much risk there was. Many in these markets thought excessive losses on these type securities was impossible. They simply misjudged the true risk.

* It was not rational for Citigroup CEO Charles Prince to keep dancing to the music, without thinking which seat Citi would claim when the round of musical chairs came abruptly to a halt.

^ I don't know what he means?

* It was not rational for shareholders of newly incorporated investment banks to offer traders large annual bonuses for performance assessed by a year-to-year mark-to-market yardstick?rather than rewarding them with long-run restricted stock that would hold its value only if the traders' portfolio strategies proved durable.

^ Nope, nope nope. He fails to underestand much. As a specific trader I am awarded based on my performance, giving me stock will award me based on the collective performance of all traders etc. So even if I do remarkably well, I may end up with nothing because other traders lost tons of money - not acceptable. You are asking each individual trader to assume the risks of other traders; that's not rational IMO.

By taking stock instead of cash performance bonus, the trader is subjecting his/her payment to the whims of management - what if the CEO, CFO, president etc have contracts that award them based on the value of stock? That means they are sucking money from my profits out of the company thus reducing the stock price and my stock bonus. I.e., stock plans are subject to some degree of manipulation, and that increases dramatically in smaller companies with concentrated ownership.

This author also fails to understand some basics of restricted stock plans - specifically if you leave, or are terminated, you forfeit your stock that hasn't yet vested. How long is "long-run", well easily three years (that is common) so you could work two years and eleven months and get zippo.

From the companies point of view, once the trader gets that stock, he/she continues to participate in the future profits even if no longer woking there (as all shareholders do). Why use a reward system that rewards people who no longer work there? Why would current traders want their profit diluted by having it 'paid' to these others?

Also from the companies perspective 9as well as the other shareholders), by giving huge stock awards to these people, how do retain control of 'your' company? I suppose you must issue more stock, who is getting diluted? Regular shareholders? Management? If it's the traders you have just have just invalidated this model as suitable.

Waaay too many things wrong with his suggestion.

* It was not rational for the shareholders and executives of General Motors and Chrysler to ignore the need for a Plan B in the event Americans fell out of love with SUVs.

Plan B? What would that be? If it's the ability to manufacture higher miliage vehicles, well they had that but not many were buying. Also note that Toyota etc have all lost huge amounts of sales/money.

What Plan B does he speak of?

IMO, it's not that the markets or people in them are irrational, rather they are not omnicient. And certainly combining individually rational acts does not always constitute rational or benefical acts in the aggregate.

IMO, the unintended results of the government's response to Enron (enacting mark-to-market rules) was a primary factor in this, and that is not the result of these peoples' alledged irrational acts.

And a big problem here in my estimation is that those who decry the market mechanism are the very ones who are preventing it from working as it should. I mean the Dems and the Obama admin specifically, you must let the market itself punish those business that have made bad decisions or you undercutting the market and preventing it from working as it should. In that regard their critism is unfair, and they are impeding it and then claiming it doesn't work. It ain't working because they're not letting it. Their interference is hardly fair to blame on some inherent market failure.

Fern

 

[JS80]

* It was not rational for Bear-Stearns CEO James Cayne, with his own $1 billion fortune on the line, to allow his firm to become hostage to the excessive risks taken by his subordinates in the mortgage markets.

Lack of info and lack of fortune telling, not acting irrational

* It was not rational for shareholders of newly incorporated investment banks to offer traders large annual bonuses for performance assessed by a year-to-year mark-to-market yardstick?rather than rewarding them with long-run restricted stock that would hold its value only if the traders' portfolio strategies proved durable.

Much of wall st comp is restricted stock that vests over 5 years. This guy just doesn't know what he's talking about.

Plus he's lumping traders who make cash profits vs the private equity scammers who invest in mark to market illiquid securities.

 

[ElFenix]

^ I believe this is better explained by ignorance, not irrationality, I think it unlikely Cayne was aware just how much risk there was. Many in these markets thought excessive losses on these type securities was impossible. They simply misjudged the true risk.

the fact that they didn't understand and didn't want to understand the model and its pitfalls is a little more than 'misjudged.'

 

[HardcoreRobot]

to me, if you are out to profit in an economy, you are acting rationally. you may make MISTAKES, you may be ill-informed, ill-advised, but you are still behaving rationally if the desire is to make money. the opinion is all in retrospect also, a truly irrational actor would be clearly irrational at the time of acting. if you have to look back to say, wow that was stupid, that is just evidence of ignorance. none of the examples show people intentionally sabotaging the market in order to LOSE money.

im really cringing at his every use of rational. no, it was not smart for GM to ride the SUV gravy train to their death. the RATIONAL thing as a shareholder, customer tax payer, would be to encourage GM and other companies that make stupid mistakes OUT of the market, not try to come up with excuses save them.

 

[LumbergTech]

Originally posted by: HardcoreRobot
to me, if you are out to profit in an economy, you are acting rationally. you may make MISTAKES, you may be ill-informed, ill-advised, but you are still behaving rationally if the desire is to make money. the opinion is all in retrospect also, a truly irrational actor would be clearly irrational at the time of acting. if you have to look back to say, wow that was stupid, that is just evidence of ignorance. none of the examples show people intentionally sabotaging the market in order to LOSE money.

im really cringing at his every use of rational. no, it was not smart for GM to ride the SUV gravy train to their death. the RATIONAL thing as a shareholder, customer tax payer, would be to encourage GM and other companies that make stupid mistakes OUT of the market, not try to come up with excuses save them.

This is a perfect example of irrationality. By your logic, it would be rational to horde every dollar and try to control everything.

 

[Munky]

Originally posted by: Phokus

Originally posted by: CycloWizard
The question remains: is government policy necessarily more rational than any individual's? I have no reason to expect that this is the case. It's simply another case of an oligarchy deciding what is best for everyone.

Here's a case where government policy was more rational than the free market's

http://www.nytimes.com/2009/02...opinion/28tedesco.html

Sounds more like a government run by a few wealthy bankers. We need better regulation of banks, but I don't approve of consolidating all baking to a few major ones. Too bad the world seems to be headed that way in any case.

 

[ebaycj]

Originally posted by: JS80

* It was not rational for Bear-Stearns CEO James Cayne, with his own $1 billion fortune on the line, to allow his firm to become hostage to the excessive risks taken by his subordinates in the mortgage markets.

Lack of info and lack of fortune telling, not acting irrational

I believe the lack of information is obvious. I believe what he is saying, is that letting your own $1B of wealth ride on the back of said lack of information, is what is irrational. If this is the case, he would be correct.

 

[First]

$6T in distressed assets from private banks, out of a $10T industry, can be blamed squarely on the managers of these banks, hedge funds, etc. that threw out well-established risk management practices betting on ever-expanding asset prices. Most of that had nothing to do with interest rates because they were literally making decisions that had nothing to do with the Fed's benchmark rates and everything to do with exotic financial instruments with little to no oversight and therefore no sensible method for valuing their risk. Overly low interest rates doesn't explain any of that, which just shows exactly why populists, libertarians, etc. still can't come up with models that explain and/or predict business cycles. And it's why their lackeys continue to wimp out on threads that ask them for specifics. Instead we get vague analogies about "giving up" liberty for a perfect cage or maybe a Jefferson quote or two.

 

[Phokus]

Originally posted by: munky

Originally posted by: Phokus

Originally posted by: CycloWizard
The question remains: is government policy necessarily more rational than any individual's? I have no reason to expect that this is the case. It's simply another case of an oligarchy deciding what is best for everyone.

Here's a case where government policy was more rational than the free market's

http://www.nytimes.com/2009/02...opinion/28tedesco.html

Sounds more like a government run by a few wealthy bankers. We need better regulation of banks, but I don't approve of consolidating all baking to a few major ones. Too bad the world seems to be headed that way in any case.

Well, it worked pretty well for canada so far. Which banks would you rather have, theirs or ours?

 

[BoberFett]

Originally posted by: Evan
$6T in distressed assets from private banks, out of a $10T industry, can be blamed squarely on the managers of these banks, hedge funds, etc. that threw out well-established risk management practices betting on ever-expanding asset prices. Most of that had nothing to do with interest rates because they were literally making decisions that had nothing to do with the Fed's benchmark rates and everything to do with exotic financial instruments with little to no oversight and therefore no sensible method for valuing their risk. Overly low interest rates doesn't explain any of that, which just shows exactly why populists, libertarians, etc. still can't come up with models that explain and/or predict business cycles. And it's why their lackeys continue to wimp out on threads that ask them for specifics. Instead we get vague analogies about "giving up" liberty for a perfect cage or maybe a Jefferson quote or two.

So what you're saying is that the federal rate has absolutely nothing to do with market mortgage rates? And that therefore has nothing to do with the secondary mortgage market?

 

[First]

Originally posted by: BoberFett

Originally posted by: Evan
$6T in distressed assets from private banks, out of a $10T industry, can be blamed squarely on the managers of these banks, hedge funds, etc. that threw out well-established risk management practices betting on ever-expanding asset prices. Most of that had nothing to do with interest rates because they were literally making decisions that had nothing to do with the Fed's benchmark rates and everything to do with exotic financial instruments with little to no oversight and therefore no sensible method for valuing their risk. Overly low interest rates doesn't explain any of that, which just shows exactly why populists, libertarians, etc. still can't come up with models that explain and/or predict business cycles. And it's why their lackeys continue to wimp out on threads that ask them for specifics. Instead we get vague analogies about "giving up" liberty for a perfect cage or maybe a Jefferson quote or two.

So what you're saying is that the federal rate has absolutely nothing to do with market mortgage rates? And that therefore has nothing to do with the secondary mortgage market?

Greenspan lowering certain benchmark rates early in the decade did not cause, for example, Lehman to transfer $400B in risk to a 3rd party in the form of CDS now did it? Secondary mortgage markets absolutely are affected by the Fed's actions, but had those securities not been parlayed and fractured off into a thousand pieces (in innumerable ways might I add) with no way to assess their risk, we would have had a less far-reaching global catastrophe. What unregulated CDS (arguably not even the biggest cause for collapse) did was simply add fuel to the fire by spreading a few billion in "net" dollars risk across industries and continents. And that had nothing to do with overinflating a bubble via interest rate cuts and everything to do with no controls, no regulation (CDS is not OTC anymore and stats are now available via the DTCC), and just plain greed.

 

[sandorski]

The Financial Industry had the Rationality of Trailer Trash spending their Pay Cheque on Lotto Tickets. If they Won, the Payoff would be fantastic, unfortunately the Probability of Winning was exceedingly remote.

 

[Hacp]

The markets are far from perfect. If they were, we'd be rid of those pesky unions by now. Crime fostered by greed is always something we need to worry about in a free market. When you have hedge fund managers making billions in a year, you need to be asking a few questions.

 

[rchiu]

Originally posted by: yllus
I've seen this debate be brought up once in a while on these forums, and browsing The Week a couple of days ago I read an editorial by Brad DeLong that touched on the topic. With a new book entitled A Failure of Capitalism: The Crisis of '08 and the Descent into Depression by Judge Richard A. Posner, it seems like this topic can begin to be addressed in depth.

Hypothesis: Markets are perfect. Actors in that market will act rationally to maximize their profits and avoid losses.

Below, Mr. DeLong lists a number of examples of actor irrationality, and quotes an extremely prominent member of the Chicago School of Economics implying that strong government intervention is sometimes needed to correct irrational actions.

The Chicago School is eclipsed

Richard Posner, leader of the Chicago School of Economics and Fourth Circuit Court of Appeals judge, uses his new book, ?A Failure of Capitalism,? to try to rescue the Chicago School?s foundational assumption that the economy behaves as if all economic agents and actors are rational, far-sighted calculators.

In some sense, Posner must try. For without this underlying assumption, the clock strikes midnight, the stately brougham of Chicago economic theory turns into a pumpkin, and the analytical horses that have pulled it so far over the past half- century turn back into little white mice.

Thus he writes: "At no stage need irrationality" on the part of markets or their participants "be posited to explain? the collapse of financial markets last year and the current deep recession.

We see many things in the financial crisis and the recession that are not what we would see in an economy populated by smoothly rational utilitarian calculators:

* It was not rational for Bear-Stearns CEO James Cayne, with his own $1 billion fortune on the line, to allow his firm to become hostage to the excessive risks taken by his subordinates in the mortgage markets.

* It was not rational for Citigroup CEO Charles Prince to keep dancing to the music, without thinking which seat Citi would claim when the round of musical chairs came abruptly to a halt.

* It was not rational for shareholders of newly incorporated investment banks to offer traders large annual bonuses for performance assessed by a year-to-year mark-to-market yardstick?rather than rewarding them with long-run restricted stock that would hold its value only if the traders' portfolio strategies proved durable.

* It was not rational for the shareholders and executives of General Motors and Chrysler to ignore the need for a Plan B in the event Americans fell out of love with SUVs.

Yet while Posner insists on saving the appearance of individual rationality, he is willing to jettison the Chicago School's conclusion that markets are everywhere and always perfect. As Robert Solow observed: "If I had written that, it would not be news. From Richard Posner, it is."

Abandoning the conclusion of market perfection opens the door to the idea that government needs to properly check, balance, and regulate markets in order to help them function as well as possible. But clinging to the assumption of individual rationality forces Posner?s view of what regulation is appropriate into a very awkward straightjacket.

"The mistakes were systemic,? he writes, ?the product of the nature of the banking business in an environment shaped by low interest rates and deregulation rather than the antics of crooks and fools." What we needed, Posner implies, was a Daddy State in the early 2000s that would have kept interest rates high, kept the recovery from the 2001 recession much weaker, and kept unemployment much higher.

The Daddy State should have restricted financial innovation because a "depression is too remote an event to influence business behavior. "The profit-maximizing businessman rationally ignores small probabilities that his conduct in conjunction with that of his competitors may bring down the entire economy."

Posner's claim that the Princes of Wall Street were rationally ignoring small probabilities is simply not true. The venture capitalists of Silicon Valley in the 1990s raised money for their funds overwhelmingly through equity rather than debt tranches.

They did so because they wanted themselves and their clients to retain some considerable fraction of their fortunes in an event that they regarded as small probability?but actually happened?that the overwhelming bulk of the value from the internet revolution flowed to customers rather than to businesses.

Explanation: Book reviewer Jonathan Rauch of the New York Times summarizes:

Populists and libertarians will hate this book, though I wouldn?t want to predict which group will hate it more. A perfect storm of irresponsibility? Hardly. The crisis came about precisely because intelligent businesses and consumers followed market signals. ?The mistakes were systemic ? the product of the nature of the banking business in an environment shaped by low interest rates and deregulation rather than the antics of crooks and fools.?

Were a lot of people reckless and stupid? Of course! But that cannot explain why the whole system crashed, since a lot of people are always reckless and stupid. The problem, fundamentally, is that markets cannot, and rationally should not, anticipate their own collapse. ?A depression is too remote an event to influence business behavior.?

Any single business can rationally guard against its own bankruptcy, but not the simultaneous bankruptcy of everybody else. ?The ­profit-maximizing businessman rationally ignores small probabilities that his conduct in conjunction with that of his competitors may bring down the entire economy.?

And so ? here is the part libertarians will hate ? markets, entirely of their own accord, will sometimes capsize and be unable to right themselves completely for years at a stretch. (See: Japan, ?lost decade? of.) Nor can monetary policy be counted on to counteract markets? tippy tendencies, as so many economists had come to believe.

Alas, economists and policy makers got cocksure. They thought they had consigned depressions to history. As a result, they missed warning signs and failed to prepare for the worst. ?We are learning,? Posner writes, ?that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails.?

So what say ye? I can see substance in the opinion that a businessman will guard against his own losses but care little for taking actions that spare others - even though enough losses by others will lead to his own. Logically following that line of thought, an actor with significant market heft may be needed to take the longview and be afforded more tools than what the Federal Reserve currently has.

There is a reason that perfect market is only a "hypothesis" and whenever you hear efficient/rational market you always see the word "assumption" in front.

That's what academic use to build their models and describe their theories. Who the hell really thinks the real market is perfect and perfectly efficient or rational?

The market is not perfectly efficient and not every single actors is rational. Do we really need to debate that point? If market is perfectly efficient, we wouldn't have all the investment professionals or brokerages. Everyone would know all info and everyone will get the same return. And dah, there are dumb CEO making irrational and dumb decisions all the time, that's why we see all the bankrupt companies all over, recession or not.

Market efficiency/rationality is always relative. US market is more efficient than China, and people in US market is probably more rational than some third world country. There is no such thing as absolute efficiency/rationality or inefficiency/irrationality. The good thing about having the market to determine price/behavior is that you have all the market participant decide. If you have government/Fed/some committee decide, you have much fewer people involved and much higher chance of those people being inefficient and irrational. After all, human are irrational, and it's the open discussion and as much involvement from different people as possible that makes decisions less irrational and more logical.

 

[Phokus]

Originally posted by: rchiu

Originally posted by: yllus
I've seen this debate be brought up once in a while on these forums, and browsing The Week a couple of days ago I read an editorial by Brad DeLong that touched on the topic. With a new book entitled A Failure of Capitalism: The Crisis of '08 and the Descent into Depression by Judge Richard A. Posner, it seems like this topic can begin to be addressed in depth.

Hypothesis: Markets are perfect. Actors in that market will act rationally to maximize their profits and avoid losses.

Below, Mr. DeLong lists a number of examples of actor irrationality, and quotes an extremely prominent member of the Chicago School of Economics implying that strong government intervention is sometimes needed to correct irrational actions.

The Chicago School is eclipsed

Richard Posner, leader of the Chicago School of Economics and Fourth Circuit Court of Appeals judge, uses his new book, ?A Failure of Capitalism,? to try to rescue the Chicago School?s foundational assumption that the economy behaves as if all economic agents and actors are rational, far-sighted calculators.

In some sense, Posner must try. For without this underlying assumption, the clock strikes midnight, the stately brougham of Chicago economic theory turns into a pumpkin, and the analytical horses that have pulled it so far over the past half- century turn back into little white mice.

Thus he writes: "At no stage need irrationality" on the part of markets or their participants "be posited to explain? the collapse of financial markets last year and the current deep recession.

We see many things in the financial crisis and the recession that are not what we would see in an economy populated by smoothly rational utilitarian calculators:

* It was not rational for Bear-Stearns CEO James Cayne, with his own $1 billion fortune on the line, to allow his firm to become hostage to the excessive risks taken by his subordinates in the mortgage markets.

* It was not rational for Citigroup CEO Charles Prince to keep dancing to the music, without thinking which seat Citi would claim when the round of musical chairs came abruptly to a halt.

* It was not rational for shareholders of newly incorporated investment banks to offer traders large annual bonuses for performance assessed by a year-to-year mark-to-market yardstick?rather than rewarding them with long-run restricted stock that would hold its value only if the traders' portfolio strategies proved durable.

* It was not rational for the shareholders and executives of General Motors and Chrysler to ignore the need for a Plan B in the event Americans fell out of love with SUVs.

Yet while Posner insists on saving the appearance of individual rationality, he is willing to jettison the Chicago School's conclusion that markets are everywhere and always perfect. As Robert Solow observed: "If I had written that, it would not be news. From Richard Posner, it is."

Abandoning the conclusion of market perfection opens the door to the idea that government needs to properly check, balance, and regulate markets in order to help them function as well as possible. But clinging to the assumption of individual rationality forces Posner?s view of what regulation is appropriate into a very awkward straightjacket.

"The mistakes were systemic,? he writes, ?the product of the nature of the banking business in an environment shaped by low interest rates and deregulation rather than the antics of crooks and fools." What we needed, Posner implies, was a Daddy State in the early 2000s that would have kept interest rates high, kept the recovery from the 2001 recession much weaker, and kept unemployment much higher.

The Daddy State should have restricted financial innovation because a "depression is too remote an event to influence business behavior. "The profit-maximizing businessman rationally ignores small probabilities that his conduct in conjunction with that of his competitors may bring down the entire economy."

Posner's claim that the Princes of Wall Street were rationally ignoring small probabilities is simply not true. The venture capitalists of Silicon Valley in the 1990s raised money for their funds overwhelmingly through equity rather than debt tranches.

They did so because they wanted themselves and their clients to retain some considerable fraction of their fortunes in an event that they regarded as small probability?but actually happened?that the overwhelming bulk of the value from the internet revolution flowed to customers rather than to businesses.

Explanation: Book reviewer Jonathan Rauch of the New York Times summarizes:

Populists and libertarians will hate this book, though I wouldn?t want to predict which group will hate it more. A perfect storm of irresponsibility? Hardly. The crisis came about precisely because intelligent businesses and consumers followed market signals. ?The mistakes were systemic ? the product of the nature of the banking business in an environment shaped by low interest rates and deregulation rather than the antics of crooks and fools.?

Were a lot of people reckless and stupid? Of course! But that cannot explain why the whole system crashed, since a lot of people are always reckless and stupid. The problem, fundamentally, is that markets cannot, and rationally should not, anticipate their own collapse. ?A depression is too remote an event to influence business behavior.?

Any single business can rationally guard against its own bankruptcy, but not the simultaneous bankruptcy of everybody else. ?The ­profit-maximizing businessman rationally ignores small probabilities that his conduct in conjunction with that of his competitors may bring down the entire economy.?

And so ? here is the part libertarians will hate ? markets, entirely of their own accord, will sometimes capsize and be unable to right themselves completely for years at a stretch. (See: Japan, ?lost decade? of.) Nor can monetary policy be counted on to counteract markets? tippy tendencies, as so many economists had come to believe.

Alas, economists and policy makers got cocksure. They thought they had consigned depressions to history. As a result, they missed warning signs and failed to prepare for the worst. ?We are learning,? Posner writes, ?that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails.?

So what say ye? I can see substance in the opinion that a businessman will guard against his own losses but care little for taking actions that spare others - even though enough losses by others will lead to his own. Logically following that line of thought, an actor with significant market heft may be needed to take the longview and be afforded more tools than what the Federal Reserve currently has.

There is a reason that perfect market is only a "hypothesis" and whenever you hear efficient/rational market you always see the word "assumption" in front.

That's what academic use to build their models and describe their theories. Who the hell really thinks the real market is perfect and perfectly efficient or rational?

The market is not perfectly efficient and not every single actors is rational. Do we really need to debate that point? If market is perfectly efficient, we wouldn't have all the investment professionals or brokerages. Everyone would know all info and everyone will get the same return. And dah, there are dumb CEO making irrational and dumb decisions all the time, that's why we see all the bankrupt companies all over, recession or not.

Market efficiency/rationality is always relative. US market is more efficient than China, and people in US market is probably more rational than some third world country. There is no such thing as absolute efficiency/rationality or inefficiency/irrationality. The good thing about having the market to determine price/behavior is that you have all the market participant decide. If you have government/Fed/some committee decide, you have much fewer people involved and much higher chance of those people being inefficient and irrational. After all, human are irrational, and it's the open discussion and as much involvement from different people as possible that makes decisions less irrational and more logical.

We pay twice as much in healthcare as 'socialist' countries and we still have 50 million uninsured. That's efficient and rational.

 

[bamacre]

Originally posted by: Phokus
We pay twice as much in healthcare as 'socialist' countries and we still have 50 million uninsured. That's efficient and rational.

:laugh: Yeah, that fucked up free market health care system we have really sucks.

 

[Munky]

Originally posted by: Phokus

Originally posted by: munky

Originally posted by: Phokus

Originally posted by: CycloWizard
The question remains: is government policy necessarily more rational than any individual's? I have no reason to expect that this is the case. It's simply another case of an oligarchy deciding what is best for everyone.

Here's a case where government policy was more rational than the free market's

http://www.nytimes.com/2009/02...opinion/28tedesco.html

Sounds more like a government run by a few wealthy bankers. We need better regulation of banks, but I don't approve of consolidating all baking to a few major ones. Too bad the world seems to be headed that way in any case.

Well, it worked pretty well for canada so far. Which banks would you rather have, theirs or ours?

There's not enough info to tell what exactly "worked" for them. They might be better off not because of big banks but better regulation, different economic trends, less government intervention... The danger of their system lies in the power it affords to such a banking cartel, and how it might influence and exploit the free market and small investors.

 

[rchiu]

Originally posted by: Phokus

We pay twice as much in healthcare as 'socialist' countries and we still have 50 million uninsured. That's efficient and rational.

Heh yeah, put a Mexico next to those socialist countries and see how well they do with illegal immigrants using their facilities. Plus adjust their doctor salaries to US cost of living and see what's gonna happen.

To simpletons, gov intervention vs. free market is the only difference. But people knows something about the real world know better than that.

 

[yllus]

Originally posted by: JS80

* It was not rational for Bear-Stearns CEO James Cayne, with his own $1 billion fortune on the line, to allow his firm to become hostage to the excessive risks taken by his subordinates in the mortgage markets.

Lack of info and lack of fortune telling, not acting irrational

A lack of perfect information is a given. It was his "I don't care how just keep making us loads of money" policy that was the mark of irrationality. I don't know about you, but I tend to stay well informed about how my subordinates are bringing in cash. Trust but verify, you know? And in my case it's only my job that I have to lose - I'll find another. This guy had a billion dollars riding on something he didn't bother finding out very much about.

Originally posted by: Hacp
The markets are far from perfect. If they were, we'd be rid of those pesky unions by now. Crime fostered by greed is always something we need to worry about in a free market. When you have hedge fund managers making billions in a year, you need to be asking a few questions.

Originally posted by: rchiu
There is a reason that perfect market is only a "hypothesis" and whenever you hear efficient/rational market you always see the word "assumption" in front.

That's what academic use to build their models and describe their theories. Who the hell really thinks the real market is perfect and perfectly efficient or rational?

You both misunderstand. I nor anybody else is claiming that the market is perfect. That it's not is obvious. What we are doing is debating whether some level of government intervention is necessary even in the hypothetical perfect market - because if it's necessary in a perfect market, it's sure as hell going to be needed in ours.

 

[BoberFett]

Originally posted by: Evan
Greenspan lowering certain benchmark rates early in the decade did not cause, for example, Lehman to transfer $400B in risk to a 3rd party in the form of CDS now did it? Secondary mortgage markets absolutely are affected by the Fed's actions, but had those securities not been parlayed and fractured off into a thousand pieces (in innumerable ways might I add) with no way to assess their risk, we would have had a less far-reaching global catastrophe. What unregulated CDS (arguably not even the biggest cause for collapse) did was simply add fuel to the fire by spreading a few billion in "net" dollars risk across industries and continents. And that had nothing to do with overinflating a bubble via interest rate cuts and everything to do with no controls, no regulation (CDS is not OTC anymore and stats are now available via the DTCC), and just plain greed.

So you feel that hundreds of billions of NEW, CHEAP dollars being pumped into mortgages due to skyrocketing real estate values didn't affect Lehman's decision to move a massive portion of their portfolio into CDS at all? And then you must also think that massive investment shifts such as Lehman's had no affect on the CDS market by creating demand for more CDS?

 

[BoberFett]

Originally posted by: yllus
You both misunderstand. I nor anybody else is claiming that the market is perfect. That it's not is obvious. What we are doing is debating whether some level of government intervention is necessary even in the hypothetical perfect market - because if it's necessary in a perfect market, it's sure as hell going to be needed in ours.

You're framing the argument to end the debate before it begins. I think most free marketers would agree that government is necessary. You seem to be making the same mistake many people do though, and that is equating a free market with anarchy.

The government has a very important part to play in a free market, and that part is education and preventing coercion. What free marketers are against is direct market intervention by specifically listing what is allowed and what is disallowed, or worse direct competition with private enterprise. That isn't a market at all, it's a command economy which is what we seem to be moving to. The concept of "too big to fail" is another way of saying "big enough that government must control it." I have even less faith in our elected leaders than corporate executives, which is why I support free markets.

 

[Fern]

Originally posted by: ElFenix

^ I believe this is better explained by ignorance, not irrationality, I think it unlikely Cayne was aware just how much risk there was. Many in these markets thought excessive losses on these type securities was impossible. They simply misjudged the true risk.

the fact that they didn't understand and didn't want to understand the model and its pitfalls is a little more than 'misjudged.'

As regards the above bolded portion of your remarks - we agree. However, what you wrote afterwards is silly; people with substantial personal investment in markets definately WANT to know what's going on. In fact, only because of their confidence will they do so. Only in hindsight can we be so judgemental, otherwise we'd all be bazillionaires.

You don't invest a billion $'s and not "want to understand", that't absurd. To risk a $ billion indicates they felt, wrongly, quite sure of what they were doing (they were so confident they bet a billion on it). Such things are NOT undertaken lightly, no matter what many on the 'outside' may think.

Fern