Why We Regulate. The theory of social costs: Why markets cannot discipline financial institutions. In-depth analysis on Credit Writedowns Pro. You are here: Financial Institutions » The theory of social costs: Why markets cannot discipline financial institutions By L. Randall Wray I recently came across a video of one of my talks on the Global Financial Crisis, or, Global Economic Crisis, that provides a clear antitdote to orthodox thinking. You can view it here: “The Financial Crisis Viewed from the Perspective of the Social Cost Theory”, Social Cost Workshop, Wright State University, Ohio, April 27, 2012; video here here (begins approximately at the 23 minute mark) : Here is a summary of the argument, and a link to a relevant paper is at the bottom.
Mainstream economists have developed theories in which financial markets are “efficient,” pricing financial assets according to fundamental values. This led to Chairman Greenspan’s famous excuse for not intervening into the serial bubbles that preceded the global financial crisis that began in 2007. L. Forcing frequent failures. I’m sympathetic to the view that financial regulation ought to strive not to prevent failures but to ensure that failures are frequent and tolerable.
Rather than make that case, I’ll refer you to the oeuvre of the remarkable Ashwin Parameswaran, or macroresilience. Really, take a day and read every post. Learn why “micro-fragility leads to macro-resilience”. Note that “micro-fragility” means that stuff really breaks. It’s not enough for the legal system to “permit” infrequent, hypothetical failures. Economic behavior is conditioned by people’s experience and expectations of actual events, not by notional legal regimes.
As a matter of law, no bank has ever been “too big to fail” in the United States. So we need a regime where banks of every stripe actually fail, even during periods when the economy is humming. Squirrels don’t lobby Congress, when the ranger decides to burn down the bit of the forest where their acorns are buried. Failure isn’t supposed to be fun. Acknowledgments: Notes: Pluto Press - Decent Capitalism. Product Description The recent crisis, created by finance capitalism, has brought us to the economic abyss. The excessive freedom of international markets has rapidly transformed into international panic, with states struggling to rescue and bail out a globalised financial sector. Reform is promised by our leaders, but in governments dominated by financial interests there is little hope of meaningful change. Decent Capitalism argues for a response that addresses capitalism’s systemic tendency towards crisis, a tendency which is completely absent from the mainstream debate.
The authors develop a concept of a moderated capitalism that keeps its core strengths intact while reducing its inherent destructive political force in our societies. This book argues that reforming the capitalist system will have to be far more radical than the current political discourse suggests. About The Author Hansjörg Herr is a Professor at the Berlin School of Economics. Click to browse contents. The evils of unregulated capitalism. Just a few years ago, a powerful ideology - the belief in free and unfettered markets - brought the world to the brink of ruin. Even in its hey-day, from the early 1980s until 2007, US-style deregulated capitalism brought greater material well-being only to the very richest in the richest country of the world. Indeed, over the course of this ideology's 30-year ascendance, most Americans saw their incomes decline or stagnate year after year. Moreover, output growth in the United States was not economically sustainable.
With so much of US national income going to so few, growth could continue only through consumption financed by a mounting pile of debt. I was among those who hoped that, somehow, the financial crisis would teach Americans (and others) a lesson about the need for greater equality, stronger regulation, and a better balance between the market and government. Alas, that has not been the case. So what happened? But matters are little better in Europe. The Jungle, Revisited. The meat would be shoveled into carts, and the man who did the shoveling would not trouble to lift out a rat even when he saw one—there were things that went into the sausage in comparison with which a poisoned rat was a tidbit. There was no place for the men to wash their hands before they ate their dinner, and so they made a practice of washing them in the water that was to be ladled into the sausage.
There were the butt-ends of smoked meat, and the scraps of corned beef, and all the odds and ends of the waste of the plants, that would be dumped into old barrels in the cellar and left there. Under the system of rigid economy which the packers enforced, there were some jobs that it only paid to do once in a long time, and among these was the cleaning out of the waste barrels. The Obama Administration has approved the expansion of a pilot program that allows poultry producers to hire their own regulators. Isn’t the next step to get rid of the Food and Drug Administration entirely. Opening the Fraud Gates: New JOBS Bill 'A Colossal Mistake of Historic Proportions' "The premise is that the economy and startups are being held back by regulation, a favorite theme of House Republicans for the past 3 ½ years – ignoring completely the banking crisis that caused the recession...The bill’s proponents point out that Initial Public Offerings (IPOs) of stock are way down.
That is true – but that is also exactly what you should expect when the economy teeters on the brink of an economic depression and then struggles to recover because households’ still have a great deal of debt. " I think this is just what America needs: many more IPO's from the financial sector with much less disclosure and transparency, and the weakening of Sarbanes-Oxley and what few investor protections still remain. So the solution to unemployment, debt, and fraud is -- wait for it -- more debt and more fraud. And even though it won't gain many new jobs outside of the boiler rooms and penny stock hustlers let's call it JOBS. We have learned nothing. And it will happen again.
The Magazine - Financial Regulation. January/ February 2012Financial Regulation Back to the good ol’ days of 2008. By Michael Konczal Immediately after the GOP took the House last year, Alabama Republican and chairman of the House banking committee Spencer Bachus made the mistake of saying what he actually believes about financial regulation. “In Washington, the view is that the banks are to be regulated,” he told the Birmingham News, “and my view is that Washington and the regulators are there to serve the banks.”
This view is consistent with thirty years of Republican-backed financial deregulation as well as with the conservative explanation of what went wrong in the financial crisis. On July 21, 2010, President Obama signed the Dodd- Frank Wall Street Reform and Consumer Protection Act into law. Why does the GOP view Dodd-Frank as an unnecessary overreach? It has long been the case that, in the conservative imagination, the best market is one with the least amount of rules. Take the issue of consumer protection. Revolving Door Makes Lobbying Cheaper and More Effective. Revolving Door Makes Lobbying Cheaper and More Effective June 14, 2011 - by Donny Shaw The conclusions will probably come as a surprise exactly none of you, but a new study from the International Monetary Fund on the influence of campaign donations and lobbying politics is worth a mention because of the completeness of the research and the authority of its source.
Two IMF economists, Deniz Igan and Prachi Mishra, have been examining how the targeted political activities of financial corporations between 1999 and 2006 affected how Congress voted on bills that strengthened or loosened regulation of Wall Street leading up to the 2008 crisis. They found — surprise! — that the more the corporations spent on campaign donations and lobbying, the more likely Congress was to vote in favor of deregulation. A preliminary version of the economists’ research paper, replete with detailed methodology information, can be found here (happy to see OpenCongress mentioned as a data source). The Good Bankers: Battling the Financial Lobby in Brussels - SPIEGEL ONLINE - News - International. The financial crisis is complicated, but so is a fully automated coffee machine, at least according to Thierry Philipponnat, who is standing in the hallway of his office with a frown on his face.
"Just a minute, I can only do this in French," he says. He changes the language in the machine's menu, but what eventually emerges bears only a vague resemblance to a café au lait. "Everything is a little new here," he says, "but we'll figure it out. " Dieser Artikel ist aus dem SPIEGEL Hier geht es zum digitalen Heft Neu:Lesen Sie den vollständigen SPIEGEL auf Tablets, Smartphones oder am PC/MACMit vielen zusätzlichen Videos, interaktiven Grafiken und BildernLesbar über Apps oder Browser Indeed, some things will take getting used to in the offices Finance Watch has just leased near the building housing the European Parliament in Brussels.
Philipponnat runs the organization, which will soon have a team of a dozen people. Unrelenting Hordes of Lobbyists Finding a Cause and a Leader. Volcker Rule May Be Extended to Overseas Banks With Operations in the U.S. A rule limiting proprietary trading by U.S. banks may be extended to overseas firms with operations in the country, according to four people familiar with the matter.
Regulators next month will issue a proposal to carry out provisions of the so-called Volcker Rule, part of the Dodd-Frank financial-regulation law, that will clarify the types of offshore trading allowed under the rule, the people said. The Volcker Rule, designed to reduce the types of risky investments blamed for triggering the financial crisis, has prompted U.S. banks such as Goldman Sachs Group Inc.
(GS) to close proprietary-trading operations. Overseas banks say that a strict interpretation of the rule may also force them to fire or relocate U.S. employees who are involved in proprietary trading, even if no American money is at risk. “There is no question that we would lose jobs,” said Wayne Abernathy, vice president of the American Bankers Association in Washington. Subject to Interpretation Five Agencies.
Where Is the Volcker Rule? Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.” Three years ago, a financial crisis threatened to bring down the United States economy and to spread economic disaster around the world. How far have we come in preventing any kind of recurrence? And will the much-discussed Volcker Rule – attempting to limit the risks that big banks can take – play a positive role as we move forward? Bad loans were the primary cause of the 2007-8 financial debacle. The damage to the economy became huge because these losses were not dispersed throughout the economy or around the world.
And what a downside that proved to be. The additional government debt as a direct result of this finance-induced deep recession is estimated by the Congressional Budget Office at around 50 percent of gross domestic product, roughly $7 trillion. These are staggering numbers. But we also need to make the megabanks less likely to fail. There is some good news. Mr. Do Regulations Really Kill Jobs Overall? Not So Much.
Rep. Darrell Issa, R-Calif., who's the chairman of the House Oversight and Government Reform Committee, solicited opinions from businesses, trade groups, and experts on which regulations kill jobs. (TIM SLOAN/AFP/Getty Images) It’s become a mantra on Capitol Hill and a rallying cry for industry groups: Get rid of the job-killing regulations. In recent days, with nearly every one of the GOP presidential candidates repeating that refrain, the political echo chamber has grown even louder. Earlier this month, President Obama also asked the Environmental Protection Agency to back off more stringent ozone regulations, citing the "importance of reducing regulatory burdens" during trying economic times.
But is the claim that regulation kills jobs true? We asked experts, and most told us that while there is relatively little scholarship on the issue, the evidence so far is that the overall effect on jobs is minimal. “The effects on jobs are negligible. “Mortgage Fraud is a Top Priority for This Administration” By Matt Stoller, the former Senior Policy Advisor to Rep. Alan Grayson and a fellow at the Roosevelt Institute. You can reach him at stoller (at) gmail.com or follow him on Twitter at @matthewstoller. Since the President is now establishing yet another committee to look into the mortgage fraud crisis, I figured it would be useful to look into the history of the Obama and Bush administrations’ approaches to the problem of vast financial fraud. As with most Obama government activities, it’s largely a story of policy continuity with the last administration, though the boom-bust cycle meant that there was not a huge amount of public pressure on the Bush administration to act, so their PR apparatus was less visible.
In 2009, President Obama established the Financial Fraud Enforcement Network, whose purpose was “to hold accountable those who helped bring about the last financial crisis, and to prevent another crisis from happening.” Here’s what I mean. US Attorney Lawrence Brown, Oct, 2009 U.S.