On Thu, Oct 21, 2010 at 4:15 PM, Dan Minette <danmine...@att.net> wrote:
> Nick wrote: > > > >I see that as a market failure that should have been prevented via > >regulation (or, more correctly, enabled via deregulation). > > First, I'm sorry you are stuck in a bad situation. That's sucks. > Thanks for saying so. I do keep the perspective that it is only material stuff and not as important as many other things. > But, I'm curious as to how the deregulation caused the real estate bubble. > Now one could argue that it made it worse, since banks packaged sub-prime > mortgages, did smoke and mirrors, and sold it as solid investments. But, > the problem with the Risk Assessment model was not a regulation problem, > the > banks just wouldn't believe that national housing prices could fall more > than 10% because the odds were, historically, <2%...which the Risk > Assessment Model rounded to zero. Richard Posner's "A Failure of Capitalism" explains it far better than I ever could. http://en.wikipedia.org/wiki/A_Failure_of_Capitalism "Some of the causes of the depression that Posner cites are the lack of enforceable usury <http://en.wikipedia.org/wiki/Usury> laws, which would discourage risky loans,[10]<http://en.wikipedia.org/wiki/A_Failure_of_Capitalism#cite_note-Posner.2C_p._291-9> the FDIC <http://en.wikipedia.org/wiki/FDIC> and central banks taking risks,[11]<http://en.wikipedia.org/wiki/A_Failure_of_Capitalism#cite_note-Posner.2C_pp._45-46.2C_130-10>securitization of mortgages <http://en.wikipedia.org/wiki/Mortgage_loan>,[12]<http://en.wikipedia.org/wiki/A_Failure_of_Capitalism#cite_note-11> illiquidity and insolvency of the banking system,[13]<http://en.wikipedia.org/wiki/A_Failure_of_Capitalism#cite_note-12> the housing bubble,[14]<http://en.wikipedia.org/wiki/A_Failure_of_Capitalism#cite_note-Posner.2C_pp._77-78-13> blindness to warning signs of a crisis,[15]<http://en.wikipedia.org/wiki/A_Failure_of_Capitalism#cite_note-Posner.2C_pp._118-138-14> and the preconceptions of ideology.[<http://en.wikipedia.org/wiki/A_Failure_of_Capitalism#cite_note-Posner.2C_pp._134-136.2C_310-316-15> 16<http://en.wikipedia.org/wiki/A_Failure_of_Capitalism#cite_note-Posner.2C_pp._134-136.2C_310-316-15> ]<http://en.wikipedia.org/wiki/A_Failure_of_Capitalism#cite_note-Posner.2C_pp._134-136.2C_310-316-15> " And I must quote this section, which includes comments from Brad: The *New York Review of Books<http://en.wikipedia.org/wiki/New_York_Review_of_Books> * said that "it is at best a partial success; it gets some things right and some things wrong, and the items on both sides of the ledger are important." [8] <http://en.wikipedia.org/wiki/A_Failure_of_Capitalism#cite_note-Solow-7> In the *Review*, Nobel-prize-winning economist Robert Solow<http://en.wikipedia.org/wiki/Robert_Solow> praises the author quite faintly: I have to say that the prose in this book often reads as if it were written, or maybe dictated, in a great hurry. There is some unnecessary repetition, and many paragraphs spend more time than they should on digressions that seem to have occurred to the author in mid-thought. If not exactly chiseled, the prose is nevertheless lively, readable, and plainspoken. The haste may have been justified by the pace of the events he aims to describe and explain. Posner has an extraordinarily sharp mind, and what I take to be a lawyerly skill in argument. But I also have to say that, in some respects, his grasp of economic ideas is precarious. —Robert M. Solow[8]<http://en.wikipedia.org/wiki/A_Failure_of_Capitalism#cite_note-Solow-7> Solow's review itself was notable to some degree, according to Brad DeLong<http://en.wikipedia.org/wiki/Brad_DeLong>, who critiqued Posner's logic along the way: Yet while Posner insists on saving the appearance of individual rationality, he is willing to jettison the Chicago School<http://en.wikipedia.org/wiki/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.[<http://en.wikipedia.org/wiki/A_Failure_of_Capitalism#cite_note-DeLong-51> 52<http://en.wikipedia.org/wiki/A_Failure_of_Capitalism#cite_note-DeLong-51> ] <http://en.wikipedia.org/wiki/A_Failure_of_Capitalism#cite_note-DeLong-51> Sounds dead on to me. Summary from the publisher: http://www.hup.harvard.edu/catalog.php?isbn=9780674035140 And from a review on Amazon.com: "Posner recognizes that competition carries the seeds of capitalism's destruction - bankers, etc. realize that if they don't participate in whatever current fad is popular, they risk becoming unemployed and their firm bought out by others who ride the fad to higher P/E multiples. That's why government regulation is essential." Nick
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