Save Yourself!
Well I’m sure that most have already heard about the new regulations over the financial system the Obama administration is proposing. Increased programs for consumer protection, more power delegated to the Federal Reserve when they’re faced with institutions deemed “too big to fail”, and increased federal oversight on certain types of products within the financial system are some of the hallmarks. Don’t mind me if I get a little philosophical here but, what is the purpose of government? Is it to protect people from themselves? To protect them from ignorance? Do we need the government to tell us what the risks are when buying stock, or how much we can truly afford when we’re considering a home mortgage?
At what point did people stop thinking for themselves, and start relying on the government for protection from their own mistakes? I can understand a government that provides services and functions to the taxpayer like interstate highways, and civic education, and even a standing military, but do we really need our government in the business of determining financial risk? I’m sure that this whole idea of government as its brother’s keeper got its start with FDR in the Great Depression (talk about seizing a great opportunity).
Think about social security and the federal deficit at the exact same time: Do you really think the US government is better at managing your money than you are? I, for one, do not, and now we see that more of the money promised to the government by the taxpayer is being spent on further public and private oversight. Still, every working American is forced to contribute a portion of their earned money to a program that protects them from an ill-prepared retirement when in its essence social security defeats the forward-thinking mind by rewarding the poor financial planning of the non-saver. The more power we vest in the government, the weaker we become.
I believe this weakness is what drove us to where our economy and understanding of governmental purpose is now. Did we expect the person selling us a house to say, “Maybe you can’t afford this…”? Did the buyer expect a federal agency to verify that each of the loans delved out to first-time buyers were appropriate for their level of income? Maybe some people were expecting that kind of protection. Either way the “security” that some seek may soon become a reality. What we’re seeing proposed is a patchwork of reactionary oversight aimed at strengthening the federal government’s role as the central network through which business transactions are processed. The role of government is shifting further away from its purest purpose as a servant of the people, and becoming more like a savior. I hope I’m not the only one that doesn’t want to be saved.
June 18th, 2009 at 22:47
Its hard for me to read things like this and not wonder if we are over-simplifying the problem.
The collapse was not caused simply by people going out and getting mortgages they couldn’t afford. The problems ran very deep, and many people, at many different points in the financial chain, made stupid and reckless decisions.
You also seem to make the assumption that the only people who have been hurt through all this were the ones making the poor decisions. The fact is, many people’s ability to take out loans, the value of their homes, their costs of living, and their *ability to have a job* have been dramatically adversely affected by the choices of a relatively small group of people.
We’ve been fortunate that the economy hasn’t taken OUR jobs away, but there are MANY who did nothing wrong, but are still suffering the consequences.
Is it the governments job to try to protect these innocent bystanders? To avoid greater economic collapse (keeping in mind when you consider this that our national security is certainly tied to our national security)? The answer may or may not be “more regulation”, but I’m not sure black and white “Government=Bad” arguments are not going to move us closer to a solution.
June 19th, 2009 at 00:09
In some ways the government’s job IS to protect us from ourselves. A perfect example is the FDA. Which is exactly why I’m not allowed to sell “Uncle JJ’s Miracle EliXXer - the extra X is for extreme!”
[metaphor on]
If you equate financial risk and health risk, then this legislation is attempting to protect Americans from making uninformed and often dangerous financial decisions by acting as a filter to keep the riff-raff products out.
[metaphor off]
The other thing, Andrew, is that you and your peers are not the average American. Only 27% of Americans finish college and the average American would rather watch American Idol than the news. My point is that most Americans are no where near as informed as you and your peers are about such issues as global and domestic economic markets and their impact on both micro and macro US financial security. You understand basic financial models and accrued interest which makes it much more difficult to take advantage of you.
That being said, do I want responsibility for other people’s economic security? No. Is it a good thing that I help to pick up the slack for the others that can’t/won’t? Yes. Sadly, yes.
My sister, who spent the better part of a decade practicing financial regulatory law on wall street, is excited for the new regulations. They’re a “long overdue necessary overhaul of tangled regulations and regulators of the financial sector.” This is not because the new laws are all together that much stricter but rather because they’re more cohesive. There will still be a million ways to get around them, but at least it makes things that much easier to understand and enforce.
Book recommendation: Nudge by Richard Thaler
http://www.amazon.com/Nudge-Improving-Decisions-Health-Happiness/dp/014311526X/ref=sr_1_1?ie=UTF8&s=books&qid=1245362449&sr=8-1
June 19th, 2009 at 14:35
In general, the kind of pure free-market economics being professed here requires that people have full-information about the kinds of risks and rewards they are taking on when they purchase a good or capital and that capital markets themselves are functioning efficiently.
Imagine putting your money in a simple savings account. Most people don’t and can’t know what the bank does with their money, especially because banks today have much more leeway with the types of investments they make than in the past. This is largely due to the tearing down of the wall between investment and commercial banks. If a bank buys a mortgage backed security is it really an efficient use of the individual saver’s time to figure out if the banks decision is sound and their savings are safe? Would anyone save if they were facing that kind of effort barrier and uncertainty? Would capital markets function if individual savers faced this uncertainty?
How do we get around this in practice (even aside from new regulation)? Individual savers don’t have to worry, because they know the government will back their savings up to a point. Thus, the government clears the potential inefficiency caused by a lack of information (or huge barriers to acquiring information) by providing insurance. This is how I view the role of government, to bridge the gap between the perfect economy people imagine and the real world economy, which is often hard to see through.
June 19th, 2009 at 16:26
To address some of the comments:
It’s not that government is inherently bad. As I wrote, government is charged with performing specific functions like road building or defending the country. The problems arise when government steps outside of its bounds and begins to meddle in the affairs of individuals. In a situation like this, the government will often do more harm than good, even it’s intentions seem right. This leads to my point concerning the weakening of the populace. When we rely on government to interfere for its people, we take the risk off of ourselves and place it within the central authority; making us believe that all fraudulent organizations are kept at bay. This is nothing new…this meddling has been happening for a long time (sometimes even triggered at the behest of the people) which is why we’re in the state we’re in. I believe that this reliance on government to intervene is one of the root causes of today’s economic crisis because we often rely on others’ judgement when making financial decisions.
Concerning the FDA, there is a difference between this government bureau and the new market regulations (some may find it trivial, but I think it’s important). The FDA is charged with protecting the consumer from goods that could potentially do physical harm to or even kill the user. I don’t think any bad loans or tricky credit card stipulations have the power to do physical harm. Even so, I also do not fully support the power the FDA has over the marketplace. I don’t think we need to rely on the government to tell us what is bad or good for us. There’s obviously a citizen-driven market for consumer reporting and protection services…wouldn’t this need be best served by the market itself? I know that there are already private groups that participate in this business, and act as respectable stewards reporting on consumer products. Some would argue that privatizing the consumer protection industry would open consumer protection companies to influence by other corporations, but one could simply point them in the direction of the lobbying offices of Capitol Hill and ask, “What about them?”
Regarding the savings account scenario: I actually think it is an efficient use of the consumers time to research what kind of investments your bank makes. It’s your money, right? Everyone knows there is some risk in performing any financial transaction. That said, you don’t have to save your money in a bank; distrust of those institutions may lead people to only save in cash (which is their choice). You’ll argue that this might lead to the meltdown of the banking system as we know it, but the consumer drives the product, not the other way around. If people are skeptical of savings accounts, banks will have to find another way to make money. That’s the beauty of capitalism…the market is ever-changing based upon what consumers value at any given time. Regulation of such a system will only lead to its demise, as capitalism moves farther and farther away from what was initially intended.
June 19th, 2009 at 18:31
I think saying that the government is responsible for protecting us from ourselves is a fallacy and a belief that creates the slippery slope to oligarghy/dictatorship. Senators and Presidents do not know more than its citizens…they are supposed to represent us, not protect us. Just beacuse you don’t have a college education doesn’t mean you can’t understand investments, another fallacy is thinking an organized public education is in some way better than self-education. Some of our greatest minds and leaders were self educated. Giving the federal government more and more power to regulate any industry it pleases from investments to farming to the news is a bad bad bad idea, and common sense should tell us why ( just look at histroy). This is why our country was not set up this way to begin with. When I read the constitution, no where does it say that congress or the president has the power to regulate and direct the private financial markets where they see fit at the expense of the tax payer- powers not delegated to the federal govenrment by the constitution are then reserved to the states and the PEOPLE.
June 19th, 2009 at 21:22
To be clear though, my argument is unrelated to the government’s need to protect people. It is simply that in some cases the economy might function more efficiently, literally better (more stuff), if the government is involved. I think the FDIC is a good example of this. To me questions about “should the government protect people” or “is the government acting unconstitutionally in regulating the economy” are separate from questions about economic efficiency.
June 19th, 2009 at 21:48
I don’t think these are separate questions at all. I understand the fact that you were discussing efficiency in your first comment, but there are profound links between government intervention in business and the efficiency of the economy. Often the burdens that the government puts on industry end up making companies incredibly inefficient by adding layers of red tape. Anytime one considers government intervention in the economy for purposes of protecting the people, the effects of that intervention on the efficiency of business should be taken into consideration.
June 19th, 2009 at 22:02
buracracy was never known for its effiency. The fact that commercial and investments banks were merged are at fault of the government to begin with, right?
June 19th, 2009 at 23:19
I agree with your comment Drew. My point is in some cases efficiency may be helped by the government while in some cases it may certainly be hurt. I don’t believe the government is helpful in all its endeavors into the economy. I also don’t believe it is hurtful in all its endeavors into the economy. I think in the case I am speaking of, it is helpful.
The argument that you would have to make to say it is hurt (in the FDIC example) is to say that the cost of the structure of the FDIC, when imposed on businesses and consumers through taxes, exceeds the gains to output in terms of lower interest rates and more liquid capital markets that results from consumers increased confidence in bank saving. You would also have to convince me that the damage done to long-term confidence from things like bank-runs is very small. In this case I would imagine the benefits exceed the cost.
June 19th, 2009 at 23:42
I was doing a little reading on the FDIC and found this quote from 2007 in a speech by its VP.
“When the FDIC was created, there was no national system of deposit insurance in the world. President Roosevelt actually opposed its creation, even threatened to veto the legislation that was to create the FDIC. He was concerned about the moral hazard that can occur when protection extended to depositors makes them less diligent in the selection and monitoring of their banks, and makes banks less careful in their lending practices.”
http://www.fdic.gov/news/news/speeches/archives/2007/chairman/spnov1407.html
June 20th, 2009 at 00:00
One paragraph later…
Without a doubt, the FDIC helped restore public confidence in the U.S. financial system. In 1934, the year after the FDIC was created, only nine banks failed compared to 4,000 bank closures during the nine months prior to its creation. Deposit insurance effectively ended bank runs in the U.S. The FDIC is widely viewed as one of the most successful legacies of that era, and remains highly relevant to the challenges facing the U.S. financial system today.
June 20th, 2009 at 00:14
I think the last two posts illustrate my point. There are costs to government intervention in the economy. Drew’s quote mentions moral hazard, which is a good example, but there are also setup costs that must be born by firms and consumers.
My quote, from the same document, illustrates the benefits. I think you would be hard pressed to find legitimate research that would label the FDIC a program that is more costly than it is beneficial. I have found some research that suggests its design does encourage some moral hazard.
June 22nd, 2009 at 17:17
I’m not saying that having a college education makes you a better American. I raise the point to say that the vast majority of Americans do not seem to make a commitment to continued education and curiosity.
1) It is important to recognize that one’s peer group is not necessarily an accurate cross-section of the population, especially regarding the understanding of complex economic principles.
2) You can’t expect people to fully assess intricate financial models when they’re presented with 100 pages worth of mortgage paperwork that was written by people with advanced legal and financial degrees. It is easy to take advantage of them.
Should everyone be doing their homework before examining credit opportunities? Yes. But it’s not realistic to expect everyone to. In fact, we know that most don’t.
June 22nd, 2009 at 23:39
I agree that it is unrealistic to think that all people will do their homework…but, that doesn’t mean they are incapable, and with that said yes, I do fully expect people to understand a mortgage agreement if they are choosing to sign such papers. Borrowing that much money should not be taken lightly, and just because one doesnt do their homework does not excuse them. And there are not that many banks that are “douping” its clients to be realistic. Anyone can gauge that 0% down has a catch, if you can’t, then you deserve what you get. Not expecting people to be responsible for the outcome of their decisions is justifying a lack of personal responsibility on their part, its not incapability, its laziness, which I have little tolerance for. Sure, there are cases where capable and responsible people were tricked into something they didn’t expect, but I would think that is not the majority
June 23rd, 2009 at 17:15
The issue isn’t difficulty in assigning blame. I’m with you 100% that people that don’t do their homework deserve the deal they signed on for.
But that doesn’t remove the problems that these investments cause for everyone else. I don’t care if someone wraps his car around a tree because he was drunk driving. I do care when it hurts others and causes traffic delays. Individual stupidity shouldn’t be allowed to spoil things for the rest of us. If we can’t isolate the damage caused by the individuals, then we have to decide whether it is appropriate to provide them with some sort of safety net so that we don’t have to clean up the mess they make.
June 23rd, 2009 at 17:52
Well then thats a decison Americans are making now. Are we willing to sacrifice our liberties and freedoms for secutiry from the government- much like the Patriot Act- but this is “financial” security. Wall Street can’t take the risks they used to, won’t make the money they used to because they can’t take such risks, and now they will have another hoop to jump through. Is sacrificing those liberties worth the security in return? That is an individual preference. Sometimes bone head people make bonehead decisions which affect us all, but what are we willing to sacrifice to keep catering to the lowest common denominator?
Its at the point now where we can BUY an air conditioner, but we have to set it at certain speeds. We can BUY a car, but it has to be a specific emissions standard car, we can smoke cigarettes but you will be told when,where, and how to smoke them. Are we maintaining freedom? obviously no, not with these regulations, its slipping away. But it seems that the good of the collective is more important the freedoms and rights of the individual. you say that individual stupidity shouldn’t be allowed to spoil things for the rest of us, but I think allowing the government to set hundreds of regulations on our lives is allowing that stupidity to spoil it for the rest of us.
June 23rd, 2009 at 19:28
That’s a fair argument. My point is that there are multiple ways to look at this.
No decisions are happening in a vacuum and unintended consequences are everywhere. Deregulating the market will solve some of these issues as well as create new ones. Tightening the regulations will solve some and cause others.
I wonder how much of these financial issues can be solved by fixing the inflation index due to crazy spending (foreign and domestic) caused by obscene social programs and crappy ROI on our insane DOD budget.
June 24th, 2009 at 03:11
I agree so much! These folks who think that the government is capable of taking care of us have no idea that the well-intended programs that we have set up with bankrupt this country. We are really going the wrong way and it will lead to the financial ruin of this country. This is why I hate the politicians on Capital Hill. They are so heartless and they do not care about the little guy. All they care about is votes.
June 24th, 2009 at 06:37
What great posts! I am really impressed with the depth of thought, insight, knowledge, and logical thinking exhibited by every one of you. And truly, there are, at the very least, two sides to every story. There are no easy answers, especially when dealing with these complex issues and the variety of positions and philosophies that people can legitimately hold on them. My two cents to the issue of the role of government is this:
I like to believe that the role of the federal government is, and should be, kept very limited. I believe that the founding fathers had a lot of these very same arguments/discussions/differences of opinion that you are having, and I believe that they got it right the first time. Through the years the federal government has expanded its reach and breadth of control way too much, and should be retracted. In terms of the good that the government has done, is doing, or could do by way of enacting more regulation over the free market, the argument can only be made when comparing the scenario of an expanded role and control of government with the alternate, null scenario where the government does not get involved. When the government does not enact the regulation, then the invisible hand of capitalism takes over and controls it in its own way. What the current argument fails to recognize is that there are other controlling mechanisms that take over when the government does not interfere/intervene/regulate. In the early history of capitalism in this country, when business was conducted on a more local or regional scale, these other control mechanisms flourished, and were more community based. Flim flam men and con artists were able to fleece unwitting and innocent victims on occasion, but were typically discovered eventually and then tarred and feathered and run out of town on a rail after being relieved of their booty. By the way, the ones who got taken advantage off were almost universally the ones who refused to believe that something that was too good to be true wasn’t. Con artists, then as now, prey on another person’s greed. Even up until your grandparents days, most everyone knew who you could trust when it came to buying a car or a house, hiring a reputable contractor, or investing in securities. And the ones who didn’t know who to trust usually tested the waters cautiously before turning over their life savings. Those that dove headfirst into unsafe waters had to learn the hard way. But, as the market expanded and things became at first more national, and then more global, it was incredibly more difficult to do the necessary homework, and as Geoff points out, very inefficient, to check out the investments and financial stability of the institutions with which one might do business. But, despite the promises of the nanny state to protect us, many private enterprises have arisen to do the homework for us, and they are far more trustworthy and efficiently run than the federal government. The publishers of Consumer Reports is a good example, as are the various organizations that rate the performance of financial institutions. But the difference between these organizations and the government is that they are there to provide information to assist in decision making for those who want to learn more, and they have no ability to enforce their control through coercive force they way that government can. They leave the decision making up to the individual, and the control comes through the collective action of large groups of individuals making their own choices, which ultimately forces those that perform poorly or dishonestly out of business.
June 25th, 2009 at 02:33
It was much more the fault of the low interest rates that the government instated to help us ‘recover’ from the tech bubble and 9/11 than the individuals who bought beyond their means. But if we intend to blame the people who failed to question the prices of their mortgages (like this guy http://marinalee.wordpress.com/2008/10/10/dont-bailout-the-homeowners/), what about the people who trusted the risk assessments of the mortgage backed securities they bought? Now THAT is where I believe that is where the government should step in. People should be smart enough to know their budgets, but not necessarily to question an *independent* risk assessment. When the ‘independent’ risk assessor has a vested interest in giving a good report (companies have to pay the risk assessor, and they can take their business elsewhere if they don’t like it) then the government should let people know.
However, in principle I agree with you. I do not want to be saved, no one is too big too fail, and when you don’t have serious consequences for screwing up you’re going to keep screwing up. The government is not there to protect us from ourselves, JJ, it’s there to protect us from each other.
I love this quote “The issue isn’t difficulty in assigning blame. I’m with you 100% that people that don’t do their homework deserve the deal they signed on for.
But that doesn’t remove the problems that these investments cause for everyone else.” Everyone else, on some level, that was affected, was part of the stupidity, whether through an investment or a poorly chosen bank. Now as I said the government should let people know about shady risk assessor, but they shouldn’t bail them out.
A final note on the practicality of the philosophical side of this: Even if you do want the government to bail us out, how do you want them to do that? Who are you hurting if you do? The people who messed up or the people doing everything right? Just doesn’t seem fair.
PS Nice add on facebook, webmaster
(And it took me forever to figure out what you wanted with the math)