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- Thread starter MUSKYMAN
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Mike_Rupp said:
The ethical justification of free markets takes two forms. One appeals to the intrinsic moral superiority of autonomy and freedom (in the market), see deontology. The other is a form of consequentialism—a belief that decentralised planning by a multitude of individuals making free economic decisions produces better results in regard to a more organized, efficient, and productive economy, than does a centrally-planned economy where a central agency decides what is produced, and allocates goods by non-price mechanisms. An older version of this argument is the metaphor of the Invisible Hand, familiar from the work of Adam Smith.
Mike_Rupp said:
Not true. Look at the housing bubble. Every step of the way, the transactions were in the best interests of the parties involved: home buyer/broker (someone got a house someone got a commission), broker/bank (got the commission/got interest), bank/financial markets (got short-term cash for a long term instrument/got a long term source of income).
Unfortunately, some of those were built on a lack of understanding of the risk involved in those transactions. It eventually caught up.
We're not in a free market. Had we truly been in a free market where there is a risk / reward balance, those loans wouldn't have been made in the first place. When the government is involved with companies to reduce risk in the marketplace, the banks don't act in their own best interests.
Here's a free market: the bank makes a loan to someone based on their credit worthiness in order to safeguard the potential for foreclosure. When a government entity steps into the process and guarantees mortgages, things get messed up. The entire risk / reward balance get completely screwed up and the the market is no longer free. An outcome of a free market is that capital will be placed into investments that make logical sense in terms of risk vs. reward. The risk of loaning money to people that can't pay it back is extremely high and accordingly the interest rates should have been screaming high, but that would hurt the liberals attempts to help the little guy.
Here's a free market: the bank makes a loan to someone based on their credit worthiness in order to safeguard the potential for foreclosure. When a government entity steps into the process and guarantees mortgages, things get messed up. The entire risk / reward balance get completely screwed up and the the market is no longer free. An outcome of a free market is that capital will be placed into investments that make logical sense in terms of risk vs. reward. The risk of loaning money to people that can't pay it back is extremely high and accordingly the interest rates should have been screaming high, but that would hurt the liberals attempts to help the little guy.
Hmmm..
I'm not sure that the housing bubble would not have occurred without Fannie/Freddie. I think that a lot of banks and Wall street firms would have bought up the mortgages and bundled them in to financials anyway. The brokers didn't care about the worthiness of the applicant because they weren't on the hook for the mortgage if it didn't get paid.
If what you said was true, than only Fannie/Freddie would be going under, right? However, we have a lot of institutions going under because they hold or insure that paper which is now worthless (actually, not worthless, just not able to put a value on it).
To me, it was a case of pass the buck (or hot potato). As long as I don't get stuck with the potato, it's all good. That and a belief that the value of the homes/paper would always go up. When it didn't, then the house of cards came down.
I'm not sure that the housing bubble would not have occurred without Fannie/Freddie. I think that a lot of banks and Wall street firms would have bought up the mortgages and bundled them in to financials anyway. The brokers didn't care about the worthiness of the applicant because they weren't on the hook for the mortgage if it didn't get paid.
If what you said was true, than only Fannie/Freddie would be going under, right? However, we have a lot of institutions going under because they hold or insure that paper which is now worthless (actually, not worthless, just not able to put a value on it).
To me, it was a case of pass the buck (or hot potato). As long as I don't get stuck with the potato, it's all good. That and a belief that the value of the homes/paper would always go up. When it didn't, then the house of cards came down.
Scott, in a free market, there will be ups and downs. But when you tinker with risk / reward of an investment class, things aren't going to be pretty.
Yes, there will be ups and downs. I guess my point is that our current situation would have occurred with or without federal involvement.
Back to the federal reserve: I see the financial panic of 1907 and the great depression as examples of where a central bank can be necessary. The 1907 panic, doom was averted by the injection of liquidity by JP Morgan (his own $, and other bankers that he brought on board). The GD was exacerbated by the lack of liquidity and inaction of the Fed (we can debate this, but I agree).
Those who think the Fed is useless, really haven't looked back in history. Bank runs/panics and severe rescessions were pretty common in the 19th/early 20th century. Since the formation of the Fed, we've had one (maybe 2 now turns into one). I think that says alot.
Back to the federal reserve: I see the financial panic of 1907 and the great depression as examples of where a central bank can be necessary. The 1907 panic, doom was averted by the injection of liquidity by JP Morgan (his own $, and other bankers that he brought on board). The GD was exacerbated by the lack of liquidity and inaction of the Fed (we can debate this, but I agree).
Those who think the Fed is useless, really haven't looked back in history. Bank runs/panics and severe rescessions were pretty common in the 19th/early 20th century. Since the formation of the Fed, we've had one (maybe 2 now turns into one). I think that says alot.
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eric w siepmann
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Mike_Rupp said:
EDIT. Misread Mike's posts. I would agree with the above quote and have deleted my old post as it was baseless based on the current direction of the thread.
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housing bubble was never in the best interest of everyone involved.
an 80-15-5 or 80-20 helps not a single person but a third party short term investor. the home owner is assuming way more risk than return in this area, thus resulting in a bubble bursting.
an 80-15-5 or 80-20 helps not a single person but a third party short term investor. the home owner is assuming way more risk than return in this area, thus resulting in a bubble bursting.
eric w siepmann said:
Eric, I think you almost answered your own question about investing in capital markets. In order for companies to raise money, they would have to present information to people so that they could evaluate the company's financial position and determine whether it makes sense to invest in the company. Reporting a company's financial statements are crucial to a company's ability to raise capital and thus its profitability. All that GAAP does is standardize financial statements. You should know that. Aren't you an accountant?
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eric w siepmann
Guest
Mike_Rupp said:
Mike, Yes I am an accountant and yes I know exactly what Generally Accepted Accounting Principles are! GAAP is much more inclusive than just financial statement presentation as mentioned above. GAAP has more to do with standardized US of A accounting methodology (mandated for public companies subject to the SEC) as opposed to financial statement presentation. The statements are the result of a company using the principles. The need for standardized information established the principles, though, as the Depression was due in part to disjunct information available at the time.
The example I originally posted, before I edited out (as I missed about three or four posts), was to point out that in a pure free market stance that GAAP and standardized information for investment does serve the interests of a purely free market. They are meddling by an outside agency, the SEC. It wasn't really a question just an example of why you'd want a base line of some social responsibility in the market system. Again, not the argument being made by yourself. Hence the EDIT! But good bust though. You had to have had only a short window to pull that since I edited it so quickly after posting. Oh course I haven't actually checked the post to make sure it was edited though!
The moral of the story as far as accounting goes is that there continue to be major unresolved issues facing it. Sarbanes was supposed to bolster healthy internal control and GAAP is supposed to clearly present information to investors, institutional and public. The information to predict this mess was there, but how many people saw it and acted on it? Not many. Proof that the utility of GAAP once again comes into question. And what healthy internal control environment allows entire portfolios to be based on bullshit risk? Again calling into question of the utility of SOX. There are so many loopholes available to financial statement auditors it's a joke. The chairman of our company always half jokingly asks accountants why we would so stupid as to allow a certain business practice. He blames insurance industry woes squarely on accountants, lawyers and actuaries. Lots of truth to that.
The only solace to be taken is that hopefully smarter people than I will now have to revisit GAAP and solve many of it's current shortcomings. The market is amazing in the breadth of its corrective actions....
eric w siepmann said:
That was the most important sentence in your post. Not to get bogged down into accounting minutiae, the intent of my post was to show that it is profitable for companies to provide factual accounting information to the public.
MUSKYMAN said:I sure hope your right leg is anchored on firm ground because your left foot just stepped onto the slippery slope of communism
LOL...guess I wasent alone in my comment:smilelol:
http://wordpress.com/tag/were-all-communists/
Rusty Shackelford said:
So how does setting up a federal bank to loan out money vs loaning it out from private institutions, make JP Morgan money? Seems like a bad deal for him. And like I said, bank runs were occuring throughout the 19th century (long before the robber barons), yet we've only had 1 (2?) since 1913?
Sorry, I don't buy into conspiracy theories....
Rusty Shackelford said:
Boy you really do have a bunker calling you! Watch out for the aliens, too!
Just kidding...:bigok:
Quite simple, really. They make money because they're shareholders of the Fed, who loans money to the US Gov't (we, the people), who, in turn, pays them interest. Every single transaction that occurs with a Federal Reserve Note (the only currency we all use) creates revenue for the Federal Reserve Bank and it's shareholders.
