Why Do You Think That the US "Market Economy" Is a Superior Economic System?

[host]

The banking regulations promulgated in the 1930s in reaction to the massive failures in the banking system precipitated by the stock market crash of 1929 and the economic downturn that, had they been left fully in place in this era by congress and the last two presidential administrations, and enforced by federal regulators, would have prevented most of what the "system" is experiencing now. Instead, legislation and regulation erred on the side of loosest lending policy and avoidance of regulation.

This isn't that complicated if one can focus on a few details. MBS, "mortgage backed securities" are assets made up of a bunch of home mortgages "lumped together" in "tranches" of a specific number of individual mortgages. Because no one knows for sure what the details related to the probability that each indvidual mortgage is secured by a home property actually worth more than the amount still owed on the mortgage, and the intent and ability of the mortgagee to make timely and continuous mortgage payments, most of these MBS were "insured" by bond insurers. The insurance coverage and the act of inserting what were thought to be only a "small number" of lower credit and collateral quality mortgages in each tranche, persuaded the credit rating agencies (S&P, Moodys, Fitch...) to rate these MBS at "AAA" credit quality.

Since the spring of 2007, there has been a growing awareness and concern that no one knows what the quality of the mortgages in these tranches will actually turn out to be in a residential realty market declining in price, the value of the MBS dropped below the actual price that they were purchased for. This drop triggered claims against the bond insurer's policy coverage. Now the bond insurers are running through their claims payment reserves, and the credit rating agencies delayed lowering the ratings on the MBS. The "primary dealers" refused to mark the MBS they owned or held as collateral from borrowers on loans like the Carlyle group took from banks ($670million collateral from Carlyle in exchange for bank loans used by Carlyle to buy $21 billion of "undervalued" MBS that turned out to be worth much less than Carlyle paid for them.) down to their actual current market price....the price they could be sold for now.

The "primary dealers", last summer began to refuse to lend each other money "over night", because they feared that the other dealers might suddenly announce bankruptcy, even with the Fed coddling, knowing themselves, how precarious their own balance sheets are.....and the Fed stepped in to intensify the manipulation we see them so dramatically practicing this week. They are accepting MBS from the primary dealers at "face value", instead of at market value, in exchange for T-Bills created out of thin air that can be short sold by the dealers in exchange for cash. The intent of the Fed was to help the dealers raise cash. The dealers instead are going out and "raiding" hedge funds like Carlyle to obtain their MBS and exchange them at face value at the "Fed" window, for T-Bills.

All other "players" with cash and rising fear, buy T-Bills as a place to safely "park" uninvested funds. This raises the price of T-Bills higher than the price of the soon to be $1 trillion of T-Bills that the primary dealers borrowed from the Fed and sold into the market. These dealers owe the Fed T-Bills, not dollars. They are also responsible for the difference in face value and actual market price of the MBS they have passed to the Fed in exchange for the T-Bills they've borrowed from the Fed and sold. On monday, three days ago, T-Bills were rising in price as MBS were falling further, and Fannie Mae's stock price dropped 19 percent in just that one day.

This isn't "capitalism at work", and it isn't "free markets". What do you call it, then? It looks like it's imploding, so how does that square with your belief system about what the system is?

The financial editor at BBC News explains how the Fed's decision to accept near worthless MBS at face value from primary dealers as collateral in exchange for T-Bills which are sold for cash, without requiring the primary dealers to pay back the T-Bills loaned to them by a fixed date, has triggered the foreclosure of Carlyle's MBS hedge fund:

http://www.bbc.co.uk/blogs/thereporters/robertpeston/
The Fed and Carlyle
Robert Peston 13 Mar 08, 07:13 AM

<a href="http://www.carlylecapitalcorp.com/">Carlyle Capital Corporation</a>, the leveraged-mortgage vehicle of the famous, eponymous private-equity firm, said over night that it has been unable to stabilise its financing and that its “lenders will promptly take possession of substantially all of the company’s remaining assets”.

So almost within the blink of an eye, a business that had borrowed $21bn from the world’s biggest banks to invest in high-quality mortgage-backed securities will be gone, liquidated, kaput.

Such is the whirlwind blowing through global financial markets.

What’s the damage? Well the equity in the business, about $670m, looks as though it will be wiped out.

In the scale of credit-crunch losses, that’s an “ouch” rather than a “yikes”. The suppliers of that equity include Carlyle’s own partners. They’re a bit poorer than they were.

More worrying is the explanation for why lenders are seizing the assets, which are US government agency AAA-rated residential mortgage-backed securities (RMBS).

Carlyle says: “negotiations deteriorated late on March 12 when, among other things, the pricing service utilized by certain lenders reported a drop in the value of RMBS collateral that is expected to result in additional margin calls”.

That statement will reverberate through global markets today.

Why?

Well, the point of Tuesday’s dramatic $200bn intervention by the Federal Reserve in mortgage-backed markets was to stabilise the price of US government agency AAA-rated residential mortgage-backed securities and – by implication – to encourage the big banks NOT to seize assets in the way they’ve been doing at Carlyle.

Right now, it’s not clear that the Fed’s medicine has worked.

In fact, it’s arguable that the banks’ seizure of Carlyle’s $20bn-odd in assets has actually been encouraged by the Fed's mortgages-for-Treasuries offer. Because the Fed’s new lending emergency lending facility allows the banks to swap mortgage-backed debt for Treasury Bills in a way that Carlyle could not do.

So it would be rational for the banks to take Carlyle’s assets and exchange them for top-quality, liquid US government bonds, rather than leave loans in place to a business, Carlyle, whose assets remained highly illiquid.

If that’s the case, there will be some very scared people in hedge-fund land today. Hedge funds that have borrowed from banks against the security of mortgage-backed debt could be about to see their assets sucked into the banking system and their businesses vanish.

It’s a process known as de-leveraging the global financial economy, yet another manifestation of the puncturing of the debt bubble.

Many will see it as a healthy cleaning of the Augean stables. But if it is, it certainly won’t be completed in a day – and, as I’ve said many times, it won’t be painless for the rest of us, because de-leveraging also means they'll be less credit for all of us.

So what kind of a system is it where there are a group of banks, "primary dealers", considered by the federal regulator to be "too big to fail". A system where these "primary dealers" in T-Bills have borrowed and sold nearly $1 trillion in T-Bills from the Fed as a method to fend off their bankruptcies?

What kind of a system allows liberal lending that pushed up valuations of homes and stock shares in an uncapped manner...."sky high", yet refuses to allow them to decline to a "floor" level in the same manner that they rose in value in....without a government agency "buying" them to fake a higher valuation than the market bids for them? Or a system that changes the terms and conditions of loans to "help" borrowers caught with mortgage debt on property with valuation that has declined to less than the amount owed on it?

How does changing mortgage loan terms or "refinancing" a mortgage loan to permit a "home owner" to borrow more than the home is currently worth, in a market of continuing home valuation decline, help anyone other than the lenders? How can it be claimed that it "bails out" the mortgage holder, when he ends up with the risk that the home valuation will decline further, from a starting point where he already owes more than "his" home is worth?

Isn't this just another manipulation to benefit the "too big to fail" lender vs. a mortgage holder who could just walk away from the home and the mortgage and rent a home for less for a few years until prices and his credit rating stabalize again?

[Willravel]

With the dollar plummeting, jobs being sent overseas, massive debt increasing both on a federal level and also even on an individual level, corporate interests winning out over citizens' interests, misinformed citizens who cant afford homes getting free passes from lenders causing collapses, and the developing corporatocracy? Yeah, our economy needs an overhaul starting with an enema into the West Wing to clean out the shit and continuing onto the Senate. We need feet actually held to the fire for once. We need education, we need activity from people who are mad and want justice, and we need it yesterday.

[loquitur]

Compared to what?

[host]

Originally Posted by loquitur

Compared to what?

Compared to the "indoctrinated adults" in the US waking the fuck up:

http://www.google.com/search?hl=en&q...=Google+Search

Read the articles at the link above, then take a stroll over to our own "Spitzer" thread....compare the interests and priorities of the participants there, with REALITY.....

Many of the lenders on this list were OCC regulated:

http://online.wsj.com/article/SB119698145380316368.html
Top Subprime Lenders 2005 - 2007
February 20, 2008 12:14 p.m.

Top 20 Subprime Mortgage Lenders in 2007...

Primary Dealers:

http://www.newyorkfed.org/markets/pr...s_current.html
List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York

BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Bear, Stearns & Co., Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Countrywide Securities Corporation
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Wasserstein Securities LLC.
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Lehman Brothers Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.

[robot_parade]

Unregulated capitalism is an insanity. The only people who think it's a good idea are Neo-cons and Neo-libertarians. Both groups are demonstrably insane, and not worth arguing with. You can't change their minds because the fact that "Unregulated capitalism == good" is one of their axioms, and is not open to debate.

[loquitur]

Host, you asked whether the US system is superior or not. "Superior" is a comparative term. That's why I asked "compared to what?" Your last post was nonresponsive.

To a degree, I think part of your nonresponsiveness is due to your viewing economics as largely a morality play. I won't discount the moral component of economic systems, or of economics in general, but there's a lot more going on in an economic system than just morality. "Wake the fuck up" implies that, in your view, failure to comply with your particular views of economic morality is a sign of some moral or cognitive deficit. You really mean that? "Disagreeing with Host is immoral or stupid" doesn't strike me as a great guide for behavior........

robot parade, "unregulated capitalism" doesn't exist, and shouldn't. We'll always need police and courts, and we'll always need to enforce laws against fraud and violence. The issue is how much more than that we should assign the government to do. In this country, answers range from "a bit more" to "a whole lot." That particular debate has engrossed a fair number of high-candlepower thinkers for many years, and I don't think we're going to solve it here.

[Willravel]

liq, I would say superior to what people aspire to economically would be a good start. Sort of turn it into a "Are we really headed in the right direction?" kinda thing.

It's tough to compare the US economy to China or Europe because there are too many variables.

[aceventura3]

Your introductory question assumes any one actually believes our current economic system is working the way it should. And by "should", I mean the way Adam Smith envisioned, others may have a different view. Also, other economic systems implemented in the real world have not been implemented the way their visionaries envisioned either. A centralized controlled economic system, such as a communist system, has never been implemented in its pure sense. I would argue that neither system is superior, only different because they serve different end goals.

[host]

loquitur, at every turn, you and I have disagreed about whether the condition in the US of 70 percent of the entire private wealth in the country in control of just the top ten percent wealthiest is symptomatic of a grave problem that can only be mitigated by political power directed by the majority of "have less" and "have nots".

To you, everything related to wealth inequity seems to be a "coincidence", either not to even be recognized as symptomatic of a grave problem, or if it turns out to be a problem, not to be forced in a more equitable direction by mass political will.

Do I have all that right? Is that your position? Isn't the reaction to Spitzer, posted over on the other thread, compared to the non-reaction, by the very same posters, to everything I've posted on this thread, anything to prompt my WTF, "call"? Where are our priorities and our attention, on the "potty"?

I do have a great "fart joke" to tell....would a PM be the way to deliver it, or should I just post it?

I'm sorry to permit my disgust on so many levels to manifest itself in this post, but you and I are certainly far apart, aren't we....and I do think you are the most reasonable of the posters I regularly mostly disagree with....

[Jinn]

Host, you asked whether the US system is superior or not. "Superior" is a comparative term. That's why I asked "compared to what?" Your last post was nonresponsive.

To a degree, I think part of your nonresponsiveness is due to your viewing economics as largely a morality play. I won't discount the moral component of economic systems, or of economics in general, but there's a lot more going on in an economic system than just morality. "Wake the fuck up" implies that, in your view, failure to comply with your particular views of economic morality is a sign of some moral or cognitive deficit. You really mean that? "Disagreeing with Host is immoral or stupid" doesn't strike me as a great guide for behavior........

I agree with everything you just said.

[loquitur]

host, I don't think inequality is a coincidence. The difference in our views is that I think some degree of income and wealth inequality, particularly when it is based on work and not merely passive investment, is a feature of the system, not a bug. You think inequality of means is a bad thing in and of itself, or at least that's what I understand you to be saying.

If the inequality in the US was of the Czarist or Bourbon variety I might agree with you. But we have no substantial idle aristocracy in this country, and the masses aren't starving (to the contrary, they're obese).

That's why I don't get agitated about the things you do. We disagree on the premises. That's why I started that inequality thread - I genuinely don't understand why some people think it's a terrible thing that someone else has more than they do, so long as they are clothed and housed and getting enough to eat. I can understand resenting those who got their money fraudulently, but I can't understand resenting those who have more simply because they have more. And even after all the posts in that thread I still don't understand why some people think envy is moral.

[Willravel]

Don't confuse a want for equality with envy. I want equality. It's a big part of why I'm attracted to socialism and communism. I believe that after one has equality, one will have freedom. Most others seem to disagree, but I've never seen a case for equality made for capitalism that isn't either full of holes or is a grand generalization resting on theory instead of practice for support.

[loquitur]

will, that's because the criteria by which you're evaluating the practice have, at a deeper level, disapproval built into them.

[Willravel]

Can you elaborate?

[robot_parade]

Originally Posted by loquitur

robot parade, "unregulated capitalism" doesn't exist, and shouldn't. We'll always need police and courts, and we'll always need to enforce laws against fraud and violence. The issue is how much more than that we should assign the government to do. In this country, answers range from "a bit more" to "a whole lot." That particular debate has engrossed a fair number of high-candlepower thinkers for many years, and I don't think we're going to solve it here.

My little rant was mostly informed by and directed at the over-simplistic logic that seems to dominate neocon thinking these days - that all regulation is bad, than any regulations that exist are bad for business and should be removed. There's a not-insignificant group of people who actually believe this (or at least, act as if they do).

My view is that a person or organization should be regulated and monitored (as opposed to punished after the fact) according to factors such as how harmful a given behavior is likely to be, how motivated or predisposed they are to perform a given action - with the understanding that people have more inherent rights than corporations, such as those outlined in the bill of rights.

So, the mortgage industry, like any industry, is motivated by profits - but, since they can cause fairly extensive harm to individuals, other companies, and society as a whole by engaging in unethical business practices, they should be monitored and regulated accordingly. In this case, the mortgage industry (or rather, players in the industry) engaged in various unethical practices which boil down to securing loans for individuals with terms that they should have known those individuals could not reasonably meet, and then passing those loans on to other entities (ie, The Big Banks) while misrepresenting the risks involved. I feel a lot less sympathy for The Big Banks, because I think they were more part of the problem than not, and have more resources to ensure that they were getting a fair deal.

The individuals who took out these loans of course bear some responsibility, but, the relative complexity of mortgage agreements, couple with deceptive practices on the part of mortgage brokers and companies resulted in many, many people taking loans that they were not realistically going to be able to pay. Most people would not take on a mortgage they knew they could pay. A combination of poor judgment and lack of financial sophistication on their part, poor guidance from the person providing the mortgage, who the buyer probably thought was acting in their best interest, and a softening economy led to the buyer being unable to pay the loan. Better transparency, regulation, and consumer education might help us avoid this in the future.

A word of advice - if a bank is offering you a mortgage that is going to adjust based on inflation in a few years, they are betting that interest rates will go up. It's almost never wise to bet against the banks.

[sprocket]

Originally Posted by robot_parade

My little rant was mostly informed by and directed at the over-simplistic logic that seems to dominate neocon thinking these days - that all regulation is bad, than any regulations that exist are bad for business and should be removed. There's a not-insignificant group of people who actually believe this (or at least, act as if they do).

Thats not really neocon thinking, as I see it... neo-con thinking seems to me to be more about big business protectionism, rather than free markets and all out deregulation. They love regulation, just as long as it's designed to create artificial and insurmountable barriers to entry in markets where their buddies are already established. Monopolies and Oligopolies propped up and enforced by government are the neo-cons bread and butter.

[Sun Tzu]

Saying the US has a superior system now and saying the same thing in seven to ten years may be inaccurate.

I think we have the potential of having a great system, but there is no political party addressing the issue of the FRB.


The Act of February 12, 1873 (Sec. 14), establishes "25.8 grains of gold" 900/1000 fine (or 23.22 grains of fine gold), which bears the required stamp and impress. The statute says that this is a dollar---not that it resembles a dollar, or that, for the purposes of discussion, it may be considered a dollar, but that it is a dollar. Furthermore, the statute again cuts off all controversy regarding the worth of a dollar; for it says that the dollar (the printed piece of gold containing 25.8 grains of gold 900/1000 fine) 'shall be the unit of value' in our money system."







The US is a far cry from that. Why? Is the government really allowing a private entity handle the production of “accepted” representation of currency for the sake of being convenient?

I think it is hard to really judge the American system until it stops passing currency with debt automatically attached to it vs. currency of wealth.

We will have to see in the years to come as the dollar continues to plummet, China continues to keep us afloat, where the standard currency for oil will be in 5 years, and if indeed the Amero truly is an urban legend.

[girldetective]

>>I genuinely don't understand why some people think it's a terrible thing that someone else has more than they do, so long as they are clothed and housed and getting enough to eat. I can understand resenting those who got their money fraudulently, but I can't understand resenting those who have more simply because they have more. And even after all the posts in that thread I still don't understand why some people think envy is moral. - Loquiter


There will always be someone else with more. Im not sure that one resents others having more so much as they might resent the frivolous ways in which they see the wealthy spending their money. It is one thing to see someone doing something that seems to better another as compared to seeing them carrying a $10K bag made in a sweat shop or owning 20 Hummers. Of course it is always one's freedom to do as they like with money they earn but I think there is some validity to it. We will never all be equal, but that doesn't mean one can't work toward it. I would rather see that $10K put towards some kid's education. And you know there is a difference between creme brulee and "getting enough to eat".

[Baraka_Guru]

The problems with a pure free market economy are exploitation and loss through corruption. It is an inherently inefficient system, though on paper it is sold as entirely efficient. Add human elements and that goes to shit.

I don't think there is such thing as a working free market economy in a pure form. I think it would be an inhuman nightmare.

This is where governance comes in. This is where a balanced system of government encourages the implementation of practices demanded by the people, most of whom are made up by the workers who are the engine that generate the wealth to begin with.

Without being tempered with social programs for the benefit of the people, a free market economy isn't just impossible, it is an abomination.

To put this in context, the US free market economy has much wrong with it. Union-busting, wage erosion, and predatory credit practices are serious problems that have ramifications that hurt the system as a whole. It's only a matter of time before it goes beyond repair. How far will it go?

[Ustwo]

Originally Posted by namako

There will always be someone else with more. Im not sure that one resents others having more so much as they might resent the frivolous ways in which they see the wealthy spending their money. It is one thing to see someone doing something that seems to better another as compared to seeing them carrying a $10K bag made in a sweat shop or owning 20 Hummers. Of course it is always one's freedom to do as they like with money they earn but I think there is some validity to it. We will never all be equal, but that doesn't mean one can't work toward it. I would rather see that $10K put towards some kid's education. And you know there is a difference between creme brulee and "getting enough to eat".

So when you make a few million do just that, put it towards other peoples educations.

Interestingly if that guy is buying 20 hummers, he is putting money to some kids education, the kids of the guys making the hummers.

A tax on luxury yachts doesn't hurt the rich nearly as much as it hurts the people making the yachts.

[girldetective]

I knew when I was writing it that I would get nailed on it. I should have known it would be you Ustwo. Yes, I understand. But really, until 6 months ago I was a philanthropist; now I'm more of the okay I'm comfortable but I'll never be able to do that again type girl. I was resting on my laurels. Thanks for opening the window and letting the realistic stink in.

[roachboy]

there was a time when i would have actually typed a long response to this kind of thread. i have learned since.

is the american economic system superior to what? in the endless circle-jerk of conservative ideology, the superlative is not relational. the most excellent ne plus ultra....and in that tiny and shrinking little world, the question is a tautology. and that is why it is of no interest to engage the dwindling population of that tiny tiny intellectual world.

there are a number of structural features of american captialism which are HUGE problems:

1. the entire war economy model that was a significant element of the american economy under fordism and which became the center of it under the uncoherence that was the reagan period--ideological expression: neoliberalism.

2. the inability to face the fact that the fordist period is over and that another possibility exists within "globalization" than america-uber-alles: neoliberalism in its domestic variant resulted in a jingoist denial of reality for a very long time--no planning, no foresight, no action, no nothing.

3. firms are not rational economic actors. hell, even hayek and von mises knew this--everyone knows this except apparently neoliberals.
well, look at the banking crises and now you know.
look at the evanporation of the american manufacturing sector and maybe you'll being thinking "firms may act rationally in the pursuit of profits, but they kinda fuck over everyone else in the process"..but hey, the SERVICE SECTOR takes care of the excess human beings produced by this particular transformation--and in typical reagan-period slight of hand, that percentage not taken care of by macdonalds or retail or by adventures in iraq, you dont count.

4. the appalling neglect of public education. already a weapon of class warfare because its funding is tied to local property taxes, so never great to begin with, public education has been subjected to 30 years of politically motivated attack from the jingo right because of the fact that teachers are unionized on the one hand--and because for conservatives, it is ok that the futures of the childen of the affluent are structurally different from the futures of the lives of the less affluent. this is obscene.

5. the barbaric health care system.

6. what the american system has made itself into outside the united states.

7. the fact that 1 in 10 african-american males is in prison. this is self-evidently an index of class warfare conservative-style: act like it doesn't exist, do nothing to change anything about it, neglect infrastructre, choke off opportunity, criminalize informal economies, blame the victims of this reactionary mode of class warfare, round em up, put em in camps. go usa.

thing is that we could make this a different kind of system.
but neoliberalism has to go--contemporary jingoist conservatism has to finish its collapse. the period they defend is over. the politics of retro-denial in significant measure explain why we're in this fiasco. the politics of the right are responsible for this: this is the world the right has made.

given how conservatives like to talk about "personal responsibility" you'd think they'd suck it up and acknowledge---well, this didnt work out so well and we're all in this together so maybe try something else....