Would Glass-Steagal Have Prevented the Mortgage Crisis?

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399 Responses

  1. Avatar BlaiseP says:

    Is it possible you have anything to say on this subject, yourself, without trying to insulate yourself behind the opinions of others? The fact remains, the Crash of 2008 was caused by unregulated speculation on mortgage-backed assets, speculation which would have been illegal under Glass-Steagall.

    The danger of larding one’s own essays with quotations from others is to be accused of wearing another man’s treasure. I can do the same. This, from Ludwig von Mises Institute:

    But an insidious form of “market-based policy” is also a real culprit in the current mess. In 1999 a bill was passed by a Republican Congress and signed by Democratic President Bill Clinton that rescinded the Depression era’s divorce of commercial banking activities from investment banking, called the Glass-Stegall Act of 1933. That opened a floodgate of “creative” financial instruments backed by notes and other commercial paper. Much of the banking regulation of the Roosevelt administration — including abandonment of the gold standard — made absolutely no sense, but markets can fail with dire short-run consequences under a fiat monetary system. With Glass-Steagall, Congress put its finger on and mitigated the tendency and temptations of banks to create massive costly externalities to society, in this case, by holding bundled mortgage-backed securities which were deemed safe by rating agencies but which ultimately failed the market test.

    The Financial Services Modernization Act of 1999 would make perfect sense in a world regulated by a gold standard, 100% reserve banking, and no FDIC deposit insurance; but in the world as it is, this “deregulation” amounts to corporate welfare for financial institutions and a moral hazard that will make taxpayers pay dearly. Such government privileges are nothing new to Republicans — consider the effective subsidies to the pharmaceutical, sugar, and steel industries — but this particular gift to financial institutions is what allowed the credit bubble to expand to such absurd proportions, because it allowed banks of all types to engage in increasingly risky transactions and to greatly expand the leverage of their balance sheets. As the crisis unfolds, credit continues to contract, the risk of bank failures increases, and the possibility of far more serious economic consequences become more apparent. The S&L crisis cost the taxpayers a few hundred billion, but this crisis has the potential of saddling the taxpayer with several trillion in bailouts.

    Feel free to counter their arguments, for you have none of your own.Report

    • Avatar James Hanley says:

      Is it possible you have anything to say on this subject, yourself, without trying to insulate yourself behind the opinions of others?

      Is that really your A game? An argument that people should ignore the joint opinions of experts and just make it up on your own?

      The fact remains, the Crash of 2008 was caused by unregulated speculation on mortgage-backed assets, speculation which would have been illegal under Glass-Steagall.

      Except the weight of evidence seems to be that it would not have been illegal under Glass-Steagall. If you want to make a case that it would have been, you’ll need more than just your bare assertion devoid of anything remotely resembling evidence.Report

      • Avatar BlaiseP says:

        No. Just you confine yourself to answering the arguments presented by the Folks at Mises. Explain how they’re wrong. You can start here: …but this particular gift to financial institutions is what allowed the credit bubble to expand to such absurd proportions, because it allowed banks of all types to engage in increasingly risky transactions and to greatly expand the leverage of their balance sheets. Report

      • Avatar Kim says:

        You’re missing Stiglitz’s point, about derivatives… Risk assessment got fouled up, we can agree on that? Well, derivatives (which would have been better regulated under Glass-Steagall) were a large part in that.Report

        • Avatar James Hanley says:

          Nobody’s arguing that risk assessment didn’t get fouled up. Back to my original post, re: opacity of MBS; I covered that.

          As to whether derivatives would have been better regulated under G-S, that’s again mere assertion without any backing evidence. It’s the popular claim, but it’s not the claim being made by most economists, including such pro-regulatory guys as Krugman and DeLong. Gramm-Leach-Bliley (GLB) primarily relaxed the restrictions on joining different types of financial firms together–restrictions which to a large extent had already been effectively relaxed previously, as a de facto matter.

          Just about all the sources I’m finding are asserting that GLB made no substantive changes in the legality/regulation of particular types of investments.

          What it may have done is spur the creation of “too big to fail” financial firms, by eliminating some of the restrictions on mergers. That’s a serious issue itself, of course, but a very different one.Report

    • Avatar Dave says:


      The danger of larding one’s own essays with quotations from others is to be accused of wearing another man’s treasure. I can do the same.

      I didn’t find that quote particularly convincing.

      In 1999 a bill was passed by a Republican Congress and signed by Democratic President Bill Clinton that rescinded the Depression era’s divorce of commercial banking activities from investment banking, called the Glass-Stegall Act of 1933. That opened a floodgate of “creative” financial instruments backed by notes and other commercial paper.

      What floodgate? The two financial instruments that became the most problemmatic during the crisis, the mortgage-backed security and the credit derivatives were already in existence by the time Glass Steagall was repealed. Mortgage-backed securities backed by subprime mortgages were being sold by investment banks like Lehman and Bear in the 1990’s (in smaller quantities). The 1998 crisis knocked out a lot of securitized lenders (at least temporarily) because of the volatility in the fixed income markets that was a result of a bond default by Russia. Glass Steagall didn’t prevent this nor was it meant to. It wasn’t the commercial banks that were the biggest originators of this kind of paper. It was the Lehmans, Bears and Merrils of the world.

      Having Glass Steagall in effect may have prevented certain institutions from getting into the game (BofA and Citi), but the game was already underway. There was nothing anyone was going to do to stop it. By the time shit hit the fan, the investment banks were leveraging themselves almost up to 40:1. Furthermore, the investment banks were not funded the way traditional banks get funded via deposits. The investment banks were capitalized through the “shadow banking” sector, which effectively comprised of short-term (overnight) repurchase agreements that constituted collateralized loans. Unfortunately, the “loans” were being collaterlized with much of the same toxic shit being sold to investors.

      Bear and Lehman failed because, among other reasons, they lost access to this funding. What they experienced was the same sort of run on its capital (when its “lenders” demanded repayment and chose not to fund them) as depository institutions did prior to the Depression. The Wall Street banks were playing a dangerous game by using a very short term and potentially volatile source of funding to fund potentially highly illiquid investments. By the fall of 2008, they were all circling the drain because they lost access to this capital (the repo markets were completely shut down). It was a duration mismatch of the worst sort.

      Again, Glass Steagall had nothing to do with this. There’s much more I can write about this, and I think James excludes some very important factors. However, he makes the case that Glass-Steagall was a small player at best, and the experts he quotes are by and large correct.Report

      • Avatar James Hanley says:

        The danger of larding one’s own essays with quotations from others is to be accused of wearing another man’s treasure. I can do the same.

        I didn’t find that quote particularly convincing.”

        Exactly. My approach was standard academic style, and there’s not a serious academic alive who doesn’t “lard” his essays with cites to other’s writings. The desire to substitute a single person’s opinion–one’s own–in place of a larger set of (educated) opinions is fundamentally flawed. It assumes a single data point trumps multiple data points, and it reflects a fear of learning what others have to say on the subject.

        Blaise continues to claim he’s proven his case, but he’s not provided anything but assertions (and a link to a CRS report that he asserts has evidence; it may, but I can’t find it in the linked article, and he refuses to show where the evidence is). In the world of the well-trained thinker, assertions absent evidence prove nothing.Report

        • Avatar Dave says:


          There are parts of your original posts that I don’t agree with, but the case was still made. The short version of the story is that when bond yields moved in lockstep with Greenspan’s interest rate cuts, yield-seeking investors were priced out of quality, investment-grade rated fixed income securities and there was a demand for a product that had both the AAA designation and higher yields than Treasuries or corporates. Wall Street’s answer was the mortgage-backed security and they were pooling subprime/Alt A/second mortgages/home equity lines of credit and anything and everything else they could in every way imaginable to meet the strong demand in the capital markets. The Wall Street firms were funding the non-bank finance companies that were originating the bulk of the mortgage loans that were being pooled. They were also financing purchases of tranches of these securities to the extent that investors were buying them on margin. It had its hand in every pie.

          Given that the demand for this kind of paper was insatiable and Wall Street stood to make enormous amounts of money in that business, the orignate-to-securitize model that dominated mortgage lending during the housing bubble era became a game of hot potato. The mortgage brokers didn’t care about repayment risk since they were paid for the loans they originated. The non-bank finance companies originated the loans didn’t care about the risk because they were selling their pools of loans to the Wall Street firms (the biggest players being Merrill, Lehman and Bear – none subject to G-S). The Wall Street firms didn’t necessarily care because they stood to make a shitload of money and they were turning a blind eye to the risks that were involved largely due to cultures that stress short-term profit over everything else. The people that had to worry about bearing the risk, the institutional investors, relied on the credit ratings agencies without realizing how badly the ratings agencies were getting strong-armed by the investment banks. The banks are the clients of the ratings agencies not the investors and the ratings agencies are just as sensitive to market share as any other profit-maximizing firm. Their interests were not aligned with those that were relying on them.

          It was a clusterfuck in the making. If G-S was still in force, it would have still been a clusterfuck in the making because nothing could have been done to stop firms like Goldman, Morgan, Lehman, Bear and Merrill from going all-in. Without firms like Citi, Wachovia, JP or BofA in the mix, it would have meant more opportunity for the other street firms. While the statement I just made was speculation, I am confident making it given the three years I spent at one of the i-banks and the profit-maximizing culture I was exposed to. The i-banks would have chased that on their own and still caused a systemic crisis.

          Where this version of events departs from your thesis is where you mention that a mix of policies was the cause of the crisis. This was not policy-driven at all. People all the way up and down the originate-to-securitize chain stood to make a ton of money. There were no government policies pushing people to make loans they couldn’t afford. The opportunity for people to make themselves rich was all it took. This wasn’t policy. This was profit.Report

          • Avatar Roger says:


            Hope you don’t mind me jumping in…

            “Where this version of events departs from your thesis is where you mention that a mix of policies was the cause of the crisis. This was not policy-driven at all. People all the way up and down the originate-to-securitize chain stood to make a ton of money. There were no government policies pushing people to make loans they couldn’t afford. The opportunity for people to make themselves rich was all it took. This wasn’t policy. This was profit.”

            Your paragraph seems to imply that the desire for profit is inherently bad. I would offer that the desire for profit can be good or bad depending upon how it is directed. Desire for profit by harming others or exporting significant negative externalities such as risk is indeed undesirable. It leads to a win lose dynamic which makes society poorer and at each others throats.

            However, there is a form of constructive profit. This is a situation where everyone involved in the interaction benefits from it. In this case, a long as interactions are voluntary and face the competition of alternative choices, then the pursuit of profit is win win. The more profit is pursued in the prescribed win win fashion, then th more net value is created. Everyone involved gains and thus profit can be used for good.

            Sorry for the long lead-in which I assume you agree with. The point I want to make is that what failed were our institutional parameters which funnel profit seeking into positive sum, win win activities. Profit seeking was allowed to jump outside the proper boundaries into the destructive realm which led to bankers pocketing bonuses while taxpayers paid the tab. To paraphrase Mike, we privatized gains and socialized losses. The question then is what rules, regs, insurance products and incentives changed which distorted the system and allowed profit seeking to become so destructive?Report

            • Avatar Kim says:

              1) Culture change. When people stopped being self made men (like George Romney) and started being the sons of self-made men… well, these aren’t people who got rich by being smart and taking risks.
              2) Cabalism. When Boards of directors turned into “good boys networks” for getting the “good boys” cushy jobs…
              3) The real divorce of long term corporate perspective from CEO’s personal profits. (This is what sunk westinghouse — the corporate focus on “keeping stocks high” rather than actually running a damn fine company).
              4) The misclassification as “growth stocks” of a lot of things that ought to have never been considered growth investments. (This is mostly Greenspan’s fault, but it deserves to be brought up)
              5) the SEC refusing to protect small time investors, leading to illegality being tolerated, and “insider trading” being defacto allowed (the big fish using knowledge of one contract you have with them to squeeze profit out of you…)
              6) The culture of “the only thing I can boast about is how much money I make” — this leads to destructive investing instead of positive investing, because destruction is a lot easy to create profit in the short term.
              7) Automation, and the general divorce of “who earns the money” from “who collects the money.” When the rich stop earning money… and instead select investments based on “where do I get the most return per year”, without any moral backing…Report

            • Avatar Dave says:

              Your paragraph seems to imply that the desire for profit is inherently bad.

              If you read my paragraph that way, then I apologize for any confusion and wish to clarify that by saying that I do not believe that the desire for profit is inherently bad. In fact, I think it’s inherently good as it drives just about all forms of commerce. I work in commercial real estate on the capital markets side and it would be absurd for me to try to get capital sources to do deals with our clients and not expect them to earn a return that is commensurate with the level of risk they are undertaking. The same goes for any business.

              If I run a consulting business, I’m going to want to be compensated for my time and the risks I take. If you wish to employ my services, and you pay me for those services and I render them to your satisfaction, it’s very constructive for both of us. Look, I’m not very good at discussing abstract theory, but it seems to me that from the businessman’s perspective, this is a good thing.

              Yes, I do agree with your lead in.

              Let’s get to the meat of it.

              Sorry for the long lead-in which I assume you agree with. The point I want to make is that what failed were our institutional parameters which funnel profit seeking into positive sum, win win activities. Profit seeking was allowed to jump outside the proper boundaries into the destructive realm which led to bankers pocketing bonuses while taxpayers paid the tab. To paraphrase Mike, we privatized gains and socialized losses. The question then is what rules, regs, insurance products and incentives changed which distorted the system and allowed profit seeking to become so destructive?

              I could write a very lengthy post on this subject, but I’ll try to keep it short and within the comments section here.

              There were institutional failures all over the place, some within the scope of the existing rules and regulations and others that took place in lightly regulated/deregulated environments.

              The Fed. James puts part of the blame on his interest rate policy. He’s right to do that. In fact, I’ll go farther and say he was a central banker of the worst sort seeing that he was the “statist interventionist” that libertarians say he is when they mention his interest policy as well as the Randian liberals say he is because he refused to step in and use his authority to regulate the mortgage markets, especially those dominated by the non-bank finance companies (companies outside of the standard banking regulations). Mortgage fraud complaints soared during the early years of the boom. It was a fertile ground for predatory lending (and some would say “predatory borrowing” when no-doc loans became popular). I’ll get into this in a bit, but as I mentioned above, because the people making the loans were so far removed from assuming the risk and because the safeguards that should have prevented the people taking the risk from taking on toxic crap failed, things got bad. This brings me to…

              – The ratings agencies. First, to dispense with the regulatory arguments, I’m aware that there are regulations governing the ratings agencies and that securities have to be rated. Would deregulating this function have helped? I don’t think so unless the buyers of bonds were going to start paying to have securities rated. Given that the ratings agencies are very good at what they do in evaluating fixed income investments of all stripes (the recent past notwithstanding), they had gained the trust of institutional investors. Also, in a deregulated environment, in the event the ratings agencies would be paid by the banks, it would amount to having multiple competitors trying to gain market share by the “pay for AAA” game that went on as opposed to only Moody’s, S&P and Fitch.

              I have a hard time being fair to the ratings agencies with respect to this crisis. They had poor models. They should have known the activity in the housing market was so far beyond what the historical data showed that they should have made adjustments. They did very little due diligence if any. They were rating securities that they did not understand and had to rely on the banks to explain (which they would do in most favorable light – understandably so).

              Yeah, the banks had their feet to the fire. If the banks didn’t like the ratings they got on the mortgage backed securities or the CDOs, not only would they have taken that business elsewhere but all the other ratings business as well (corporates, munis, etc).

              I’ve never liked the idea of having the banks pay the ratings agencies. The ratings agencies are a for-profit business. I’m completely fine with that. While I think the crisis was an outlier situation with the ratings agencies, it really brought to light what happens when the people paying the fees aren’t aligned with the interests of the people that have built up the most trust in those institutions.

              I can think of more things, but since you do like to engage in discussions, we can work with this and move from there.Report

              • Avatar James Hanley says:

                I’m going to sit back and hope Roger responds. This was a great comment, with lots to chew on. The only substantive comment I’ll make is my agreement about the problems with the rating agencies (I think Blaise also made that point somewhere), and how much it reminds me of the earlier problem when the accounting firms like Arthur Andersen started fudging their audits to please firms that were also paying for their consulting services. I think the evidence is clear that for-profit rating/auditing models can work, but only if they are designed so they don’t benefit from cooking the books. Perhaps they have to be purely stand-alone companies that don’t have any side-business?Report

              • Avatar Kim says:

                Anything can be bought.
                Anyone can be bought.

                Sorry, you’re catching me in a remarkably cynical mood.

                Perhaps a better choice would be to burn down the ratings agencies every year or few, and choose new ones?

                Switch back and forth between government and corporate?Report

              • Avatar Dave says:

                I say we put you in charge of the ratings agencies and let your cynicism ruin the day of a great many investment bankers.

                I’ll grab a seat and a bag of popcorn.Report

              • Avatar Kim says:

                Do I look like JFK?
                Cause If I was that dumb, I’d be shot too!
                There’s a reason folks stay bought.
                It’s cause they’re scared shitless of what happens if they don’t.

                Most of the movers and shakers in Washington are blackmailed by someone… (and Obama has those two daughters of his, makes him an easy mark if you know what I mean…)Report

              • Avatar Dave says:


                The ratings agencies had solid criteria for the underwriting of mortgage-backed securities prior to the crisis and based on my experiences with the securitized lenders, they are mostly sticking to that. Where they used to be the go-to lenders because they were more aggressive than everyone else, the playing field has become a lot more level.

                My leanings are libertarian, but my views on regulation in the financial markets will differ from what I see from other libertarians largely because I have my own views on the role information plays in financial markets and why that is different than most other markets. That said, I don’t know if any more regulation is needed here for two reasons. The first reason is that the chief cause for all the problems is gone and is likely not to come back anytime soon. The second is that I think investors have started to pay attention and if the underlying collateral doesn’t meet their internal investment committee requirements (no matter what the ratings agencies say), they will either elect not to make the purchase or you’ll see the paper sold at a discount because investors will want to be compensated for what they perceive is additional risk.Report

              • Avatar James Hanley says:

                views on the role information plays in financial markets and why that is different than most other markets.

                I’m pretty open to that view.Report

              • Avatar Dave says:

                I’ve been meaning to write a guest post, but I never get around to it. Perhaps it’s something to discuss via a conversation offline.

                The last time I pressed the issue was in a discussion about predatory lending. I can’t remember when that was other than it was this past summer.Report

              • Avatar Kim says:

                “The first reason is that the chief cause for all the problems is gone and is likely not to come back anytime soon.”

                … bullshit. the same people are still in charge, and the systemic problems are still out there.Report

              • Avatar Kim says:

                plus, we just gave them a very graphic example that we can be blackmailed.
                “Heads I win, Tails we all Die.” And we let them win.

              • Avatar Dave says:

                … bullshit. the same people are still in charge, and the systemic problems are still out there.

                No bullshit.

                I was talking about the chief cause of the conflict between the ratings agencies and the investment banks. I am not claiming that we are not vulnerable to another crisis (we are). I should have made that clarification.

                Investors have wised up. I know my evidence is anecdotal, but we see it when we try to place debt for our clients. The mortgage lending groups (commercial in my case) that wish to compete for our business are very sensitive to the ratings agencies. We’re back in the pre-bubble mentality.Report

              • Avatar Kim says:

                -some- investors have wised up.
                75% of the money out there is still dumb money.
                (and people are still depressed about real estate, even though McBride called bottom a while back)Report

              • Avatar Dave says:

                I can’t get my reply in the spot I want it so I’m posting here:

                75% of the money out there is still dumb money

                I see two kinds of dumb money. The first kind is the kind that overpays for everything and leverages to the hilt. That dumb money is by and large either wiped out, recovering or on the sidelines as it tries to address their legacy issues.

                The second kind of dumb money, the kind is more predominant, is the “check the box” kind of money where the investments all have to fit a specific pre-determined criteria. Being someone that works in a niche asset class, I find this frustrating. This kind of dumb money relies on “the box” and not on its good sense to make their investments (I’m being a bit simplistic but I think you get the point).

                I see more of the second kind than the first. That kind of dumb money won’t chase the toxic stuff.Report

              • Avatar Kim says:

                that 75% is just pensions and stuff (the second type).

                California’s pension fund was in deep in all this mortgage mess.Report

              • Avatar Dave says:

                California’s pension fund was in deep in all this mortgage mess.

                It wasn’t just the mortgage mess. It was real estate in general. Both CalPERS and CalSTRS were also making sizable investments at the height of the bubble. They had accumulated significant positions in residential land via joint ventures (one of them may have been with Lehman – I don’t recall though) and were stuck with that land after the bottom fell out of the market.

                Their most high profile flameout was the investment it made in 2006 when it was amongst a consortium of equity investors led by Tishman Speyer that took part in the largest single-asset transaction in history – the acquisition of Stuyvesant Town and Peter Cooper Village for a total of $5.4 billion.

                By the time it was said and done, after the crisis, litigation, battles with tenants rights groups, the bubble bursting and all other sorts of problems, the property got foreclosed on. CalPERS and CalSTRS lost a combined $600 million on a single investment.Report

              • Avatar Kim says:

                *nods* someone decided to set the world on FIRE. It took us eight years to notice the smoke. ;-PReport

          • Avatar James Hanley says:


            Thank you for that comment. To paraphrase Buzz Lightyear, that’s disagreeing with style. 😉

            There’s not much I disagree with you in your analysis. I think you fill in some important details I skipped over. I remain unpersuaded that low interest rates and the capital gains tax cut didn’t shape behavioral incentives in a way that helped produce this (there’s always the “why not, not before” question). But the policy argument is about what helped feed the system, and as far as what was happening within the system, I don’t think we have any fundamental disagreements.Report

            • Avatar Dave says:


              I’m definitely with you on the interest rates. I couldn’t persaude you otherwise if I tried. That said, I’m less persuaded on capital gains taxes for two reasons.

              1. Like-kind exchanges, i.e. selling a home and buying for equal or greater value are exempt from capital gains taxes so if I sell a home for $100,000 and make a $50,000 profit on that, if I buy another home for $100,000, that $50,000 gain is not subject to taxes.

              The only situations where I think this would apply is with empty nesters selling homes they no longer need or want, but even with those, I think there are one-time capital gains exemption that would eliminate most or all of the taxable gain (unless we’re talking about very expensive homes).

              I very much agree that capital gains rate cuts did spur more selling than we would have seen otherwise (I saw this in the commercial real estate space – as sellers decided to engage in outright sales as opposed to tax-deferred transactions), but I think there were other factors that played a stronger role.

              There may be statistics that show otherwise and I could be completely wrong, but I’ve spent a lot of time reading on the crisis, and this is not an explanation I have come across before. It’s intriguing and it’s backed by solid theory, but I’m not sure how much it applied here.Report

            • Avatar Dave says:

              To paraphrase Buzz Lightyear, that’s disagreeing with style. 😉

              Damn it Hanley!!! You just don’t get it. Buzz off now. 😛

              Sorry, I can’t help myself.Report

  2. Avatar Michael Cain says:

    Texas is an interesting data point in any discussion like this. Texas got burned badly in the S&L debacle of the late 1980s, and in response, regulated the snot out of the mortgage business in the state. Many of the most egregious underwriting practices that contributed to the recent boom and bust didn’t happen in Texas because they are illegal. Not just slap-on-the-wrist sort of illegal, but go-to-jail illegal. Doesn’t matter that national headquarters says to write lots of no-doc nothing-down negative-amortization loans; it didn’t happen in Texas.Report

    • Avatar Mike Schilling says:

      My (wholly amateur) opinion about CDOs more or less matches what you’ve said here: that they’re extremely opaque investments, which were valued based mostly on historical levels of mortgage default. As you might recall, the major “risk” acknowledged by their sellers was that mortgages paid of early would reduce their cash flow. Three points:

      1. This opaqueness was a natural opportunity for fraud, as mortgages were mischaracterized and put into tranches that didn’t reflect their actual (known) risk. If anyone’s been prosecuted for this, I’m unaware of it. It’s a hell of a lot worse than what Aaron Swartz did.

      2. The whole debacle is a perfect example of privatizing profit and socializing loss. Yes, some people got to live in nicer houses than they could afford for a short period, as the McCardles of the world love to point out, but the vast majority of benefits went to the mortgage industry, while all of us have had to live with the consequences of the crash.

      3. Humans are notoriously poor at evaluating risk, which is one reason that brand-new investment vehicles are treacherous. The data and methodology required to understand them doesn’t exist. That was true in spades with CDOs. Screw gun control and the war on drugs. I want a war on CDOs, CDSs, fourth-level derivatives with no relationship to any real commerce, and anything else those stupid greedy bastards are going to use to fuck the rest of us. (Note that the first sentence of this paragraph is a truism, almost a tautology, but the aforementioned stupid greedy bastards never remember it in time.)Report

      • Avatar BlaiseP says:

        As I’ve said a zillion times before, as varies risk, so must vary regulation. There are markets for these arcane instruments such as ICE.

        Here’s the rule of thumb: the trick to managing risk, any sort of risk, is to enable a mechanism to forcibly separate winners from losers. Saddest bunch of losers you’ll ever see are the jamokes lined up at the out trade window at MERC and CBOT. A buy has to match a sell. Trading accounts have to settle.

        When you say The data and methodology required to understand them doesn’t exist., there is a counter-argument: it’s not the data we lack, but transparency of that data.Report

        • Avatar James Hanley says:

          separate winners from losers.

          As many times as you’ve said this, I’ve never understood what you mean. Would you be willing to explain it?Report

          • Avatar BlaiseP says:

            This is not going to turn into another Cleaner Fish debate. The answer you seek is as obvious as a Las Vegas game of chance. As Steely Dan wryly observed: “In the land of milk and honey, you must put them on the table.”Report

            • Avatar James Hanley says:


              OK, perhaps it’s that obvious, but one way or another I’m too dull to get it. And if it’s so simple, then you should be able to explain it clearly. I’m truly curious here; I get it in relation to Vegas, but I just don’t get what it means in the financial trading sector. In what way are winners and losers not separated absent regulation?Report

              • Avatar BlaiseP says:

                Don’t play little games with me, Hanley. When you make a bet, you put your chips on the table and the croupier says “The chips are down” and when you lose, he rakes your chips off the table. And when you win, he rakes them in your direction. And they’re nice, tangible chips. You can take them to the cashier’s window and convert them into cash.

                It’s really quite simple. Simple, everywhere except Cleaner Fish World. Markets in risk are fundamentally bets. And bets must be paid. Now do not ask that question again. Ere you make any reference to the Financial Trading Sector again, you tell me what happens to risk markets when bets aren’t paid and there’s no mechanism to ensure they do get paid. That’s called Regulation and we used to have it with Glass-Steagall.Report

              • Avatar James Hanley says:

                Great, Blaise, you explained it in the case I already said I understand, and skipped explaining it in the case I said I didn’t understand.

                I understand the problem of bets not being paid and there being no mechanism to ensure they do get paid, but how is that “separating” the winners and losers? You offer me an MBS and I buy. The mortgages go sour, the money doesn’t come through, and you lack cash to run through to me. I’m clearly a loser, but how are we not separated? That’s what’s not clear to me. And when the money stops coming through, aren’t you a loser, too? After all, it wasn’t just the investment banks that went under, the mortgage aggregators like Countrywide and Golden west went down, too.

                I don’t think the essential problems there are what I’m having a difficult time understanding; it’s your phrase and how it applies that I’m not grasping.

                Enough bluster from you, Blaise. It’s time for more than slogans and poetry.Report

              • Avatar BlaiseP says:

                Oh spare me the crap. Separating winners from losers means one guy is labelled Winner and the other guy is labelled Loser. When you don’t separate them, as in croupiers and dealers colluding with gamblers, there is no separation of winners and losers.Report

              • Avatar James Hanley says:

                Twasn’t crap, Blaise. Only your never-ending effort to bluster and bully blinds you to that.

                But I think maybe I’m starting to get you now, but it does stimulate a further question. If both parties lose–the mortgage aggregator who’s offering MBS on mortgage pools, and the investor buying the MBS–that requires regulation to do what? Make one of them a winner?

                If I loan John Doe money to start a business, and the business fails and he can’t repay me, we’re both losers and so we’re not separated. How do we regulate that outcome away?Report

              • Avatar BlaiseP says:

                The question you’re asking reveals how little you understand about the problem. There’s an asset, to wit, a house and land. In the fractional-reserve banking world, some of that money, if not most of it, is simply notional. Many Libertarians have serious reservations about fractional-reserve banking because it’s a serious fiction. But fractional-reserve banking system really does work, if it’s regulated.

                Money really does grow on trees. They’re called banks. People will go into debt and translate years of work into paying three times the retail price for a house and land, depending on how the mortgage is structured. But it’s not real money which backs the totality of that mortgage, that’s why banks have reserve requirements, to keep the system from collapsing.

                But after the repeal of G-S, the system went crazy. The retail banks could dump risk immediately. All that funny money which should have been carried on the retail banks’ books was turned into a simple bet. Because Wall Street could hide the amount of risk it was carrying by over the counter trading in mortgage-based risk, winners couldn’t be separated from losers: nobody knew where all the bets were. Furthermore, it kinda got like the ending of Animal Farm, where you couldn’t tell the pigs from the men: everyone in that market, dealers, investors, was gambling and there was no way to tell what true exposure was, see first paragraph for why this is so.

                More accounting for you. JH has cash. JD borrows that money. Credit cash, debit Accounts Receivable. JD starts repaying the loan, plus interest. JH debits Cash, credits AR. JH’s receivables go +90. JH takes JD to court. JH obtains a lien. Accounting transaction, create loss reserve account or attempts to factor the receivable. Let’s say JH can’t factor. JD goes bankrupt. JH is forced to write off the loan. Credit AR for the balance of the loan, general journal entry, debit loss reserve. Only one loser, JH.Report

              • Avatar James Hanley says:


                There’s a lot of repetition of stuff I know quite well, but you avoid answering the question. It might come as some surprise to you, but in fact I’ve heard of fractional reserve banking a time or two. And as to nobody knowing their actual exposure, I addressed that very plainly in the second section of my post. (At this point I doubt you actually read it; you probably just saw I’d written something about G-S, took an extremely cursory glance, and launched into an attack without having any understanding of what I’d written.)

                So here’s the question, again. In the end, you say “only one loser, JH.” But what about JD, who went bankrupt? His bankruptcy (the underlying fact, not the legal process) is the reason he couldn’t pay JH. Isn’t his bankruptcy prima facie evidence that he’s also a loser?

                Now if the real point is that the folks running Countrywide, Bear Stearns, etc., etc., weren’t pinned as losers when they should have been, there’s no actual disagreement between us, and the point’s been made a lot more clearly and succinctly by others on this very page.Report

              • Avatar BlaiseP says:

                For crissakes, Hanley, you’re only digging yourself deeper. JD didn’t lose anything but JH’s money. He spent it. It’s gone. Ya se fue. It ran away.

                Bear Stearns got caught out in a game of Musical Chairs. You really don’t get this, even now. They weren’t playing with their own money. They were playing with funny money, revenue streams and fictional valuations of assets and insurance policies which couldn’t possibly be paid out upon claims. When demand for their funny money product dried up, everyone went screaming for the exit doors, trying to turn that funny money into Real Money.

                That’s how we sized up the bailout, working backward, putting enough fictional cash into the balance sheets, money they wouldn’t dare to spend, so the bowels of the markets could start moving again. Only this time, the investment banks were all hiding under the umbrella of the regulated banking system so the Feds could manage this stunt, by putting those losses onto the deficit.Report

              • Avatar James Hanley says:

                Sure, JD put nothing into his operation that went bankrupt. Got you. If he was simply committing fraud, sure. But if he was actually trying to succeed, no.

                Yes, Bear Sterns was playing with other people’s money. But they were also trying to succeed as a business. They failed, but according to you a failing business hasn’t lost anything. Got it.

                With all your talk about fractional reserve banking, you do realize that as long as we have it this problem is unavoidable, right? It’s different than Vegas–in Vegas the money I’m laying on the table isn’t purely hypothetical; if I lose I actually lose real available funds. If investing was that way, nobody would ever actually be leveraged, and investments would be very safe, but wouldn’t return much. But as long as there’s money purely on paper, there’s always the possibility that you might not be able to separate the winners and the losers.

                If everyone stopped repaying their loans to my bank and a bunch of them pulled their money out, the bank would fail and wouldn’t be able to repay me what I’d put into them. That’s why we have the FDIC, of course, but that’s still a socialized loss, not the bank covering the money of mine that they lost.

                So the only way to fully separate the winners from the losers, as you seem to define it, is to eliminate fractional reserve banking?

                Oh, and as for the “digging myself deeper”? More of that bluster I talked about down below. It makes me laugh, so please do keep it up.Report

              • Avatar BlaiseP says:

                Are you joking? When JH loaned JD the money, he wrote a check which was deposited in a bank. A real bank. Real money was moved from one bank to another. When JD wrote checks, he wrote them to real people and they cashed those checks, If JD can’t make money, that’s JH’s problem. Nobody else’s. JH’s money has already departed and he’s left with a piece of paper.

                Bear Stearns wasn’t even playing with real money. And it’s possible to leverage in a world of gold-backed currency. The lender holds title to an asset. Finance 101 again.

                Once again, FDIC is backed by real money, insurance premiums, paid by the banks.

                Pay attention, closely, Hanley. I’m about to tell you a big truth here: I’m saying the repeal of Glass-Steagall led to a collapse of the credit markets, precisely because in a fractional reserve system, mortgages and insurance and bank deposits ought to be regulated. When they’re regulated, when banks are subject to stress tests, the system works. When those risks are obscured, when they’re not on the books, shit goes sideways.

                The only way we could possibly make a repeal of Glass-Steagall work would be to make everyone pay cash and that’s unrealistic. But maybe that’s what you want? Is that what you want? You ask a lot of dumb questions but you’ve yet to answer any of mine.Report

              • Avatar James Hanley says:

                a big truth

                This perfectly encapsulates your argumentative failure. You like to focus on big truths, which are very seductive, but you don’t have the patience for the little truths that test the validity of the alleged big truths. Evolution is a big truth, but how do we know it really is true? By looking at the little truths, the fossil record of whales, or the evolution of amoeba in a laboratory.

                As long as you refuse to deal with the little truths, you hold the big truth on faith only, not knowledge.

                So what are the little truths? Saying that regulation is necessary isn’t sufficient–you have to show exactly what regulation changed, and how that specific change affected investors’ behavior. If you can’t get that detailed, you’re just making assertions, not giving explanations.

                Here’s the specific claim you made on the other thread: The public policy we’re concerned about here is the elimination of the bright line between Wall Street investment banks and the FDIC controlled, retail banking institutions.

                But as Sorkin notes, it was primarily investment banks that failed, not commercial banks or combined commercial/investment banks. Brad DeLong agrees that, “merging investment and commercial banks gave investment banks more stability in their liabilities that allowed them to ride out the storm more easily.” And so does Blinder, who says “the pure investment banks, like Lehman Brothers, have been the greatest source of instability, while the banks with combined commercial and investment arms have fared the best.”

                So let’s get down to brass tacks here. Give the details. Explain exactly where these three guys went wrong. Because it’s not me you’re really arguing against, right? As you pointed out, I’m hiding behind these guys’ arguments. So rebut their arguments. I’m still waiting.Report

              • Avatar BlaiseP says:

                What?! Don’t you understand the implications of G-L-B? There was no practical distinguishing between commercial banks, investment banks and insurance firms once G-L-B had been passed.Report

              • Avatar James Hanley says:

                And yet the investment banks were the ones most likely to fail, not the commercial banks or the mixed ones.

                And still you’re unable to provide anything that looks like evidence to support your claim that G-S repeal caused the crisis.

                I’m pretty sure at this point that it’s because you don’t have any.Report

              • Avatar BlaiseP says:

                James, in case it escaped your attention, everything failed at once. IBM and McDonald’s were lined up at the were lined up for emergency loans.

                This shit got so bad. You really do not get this, I swear you don’t. Everything crashed, within a few minutes, the entire fucking credit system in this country seized up. And why, you may ask? That’s because G-L-B had so thoroughly screwed up any semblance of order in the system nobody knew whether to shit or go blind.Report

              • Avatar Mike Schilling says:

                But as Sorkin notes, it was primarily investment banks that failed, not commercial banks or combined commercial/investment banks.

                The banks are failing.

                It’s a problem.

                You don’t have to tell me it’s a problem.

                OK, I won’t. But you know what?


                It’s a problem.Report

      • Avatar James Hanley says:


        I agree with a lot of what you say, but I d0 have one question. Are CDOs that much worse than the basic MBS? If it’s the MBS itself that’s opaque, are the derivatives of it really more of a problem, or just another way of packaging the problem, not really different in substance, but only in form?

        That’s a sincere question, not a challenge. I just don’t know that yet (and contra the recommendation from certain quarters, I don’t believe in just pulling arguments out of my ass).Report

        • Avatar BlaiseP says:

          There are several types of risk involved. There’s liquidity risk, IOW you can’t exit a position fast enough to save your position from a damaging transit. Then there’s system risk, everyone holding that position starts losing and there’s a rush for the exit doors. And of course default risk.

          CDO and MBS risk depend on the specific instrument involved. These are reflected in the coupon pricing: riskier instruments and tranches get higher coupon pricing.Report

        • Avatar Mike Schilling says:

          I did say “amateur”. 🙂 My intuition is that each level of obfuscation compounds the problem, but I don’t have anything like the expertise to say “this far and no further.” (Is tranching at the MBS or CDO level? Without absolute rules for assessing risk, it’s a red-carpet invitation to fraud.)

          But I think I wind up pretty close to Blaise. These things need to be regulated, if not in detail (since we don’t know enough to do that), then

          * via disclosure: 16-point-type on the annual report: “We have 57% of our stuff where we don’t knew our assets from our elbow”
          * via regulation of how much you can have invested in out-there crap and still be licensed to issue mortgages, trade stocks, etc.
          * via an absolute Chinese wall between federal deposit insurance and investments of unknown risk

          And I honestly don’t care about their “freedom”. You and I wind up paying for their fun, via TARPs or crashes or both, so let’s treat them like the XXX teenagers they are. (I won’t use the actual word out of deference to Rose.) Mow the lawn and clean your room, and I’ll think about letting you use the car, but home by midnight, and if there’s one sign you’ve been drinking, you’re grounded for a month.Report

          • Avatar clawback says:

            Tranching is done at the CDO level, adding one more level of opaqueness. Then you get into synthetic CDOs, constructed of credit default swaps, which is just one step further on the way to insanity.Report

          • Avatar James Hanley says:

            Well, I won’t pretend I’m not an amateur in this, as well.

            I support your first and third recommendations wholeheartedly. I don’t object to the second in principle, but I think we will always struggle with drawing the line of what’s too “out there.” Doesn’t mean we shouldn’t try; just means there’s probably no true line so we’ll we’ll always be drawing problematic lines.Report

        • Avatar Kim says:

          Circle jerks, where people don’t know who is insuring what, are the real problem. When Lehmann went bankrupt, everyone suddenly started asking “so who is getting hurt?” . They Didn’t Know who the creditors were.Report

          • Avatar Ken says:

            Ah, yes, the “Emperor’s New Clothes” moment, when it turned out that all these firms that were supposedly such financial experts couldn’t even figure out their exposure to AIG and Lehman. Kind of ruined my faith in the Masters of the Universe approach to finance.Report

    • Avatar Mike Schilling says:

      Not just slap-on-the-wrist sort of illegal, but go-to-jail illegal.

      How about capital-punishment-with-a-sleepy-senile-PD illegal?Report

    • Avatar Lyle says:

      To boot in Texas the rule is you can not refinance and take money out unless the new loan stays below 80% loan to value. This simple rule would have stopped a lot of the folks who used houses as ATMs early in the game. Further there is a 3% limit on closing costs not counting pre-paid interest.Report

  3. Avatar clawback says:

    So not only did the CRA not affect enough mortgages to be a factor in the crisis, but those mortgages affected by it were less likely to be in foreclosure than others. So why even mention it? Because it “create[d] a new precedent.” Please. The banks are run by grown-ups. Their job is to invest responsibly, not to follow every fad.Report

    • Avatar Ken says:

      When banks kept mortgages on their own books, “investing responsibly” meant checking the borrower’s background and income, verifying the value of the property used to secure the mortgage, and a bunch of other things; since the only way the bank could profit from the investment in that mortgage was if the borrower paid it back.

      Once it became possible for a bank to immediately turn around and sell the mortgage at a profit, “investing responsibly” meant making as many mortgages as possible as quickly as possible; since the bank had a guaranteed immediate profit on every mortgage, regardless of its quality.Report

      • Avatar James Hanley says:

        This is a good point, Ken. It’s an issue I’ve struggled with. On the one hand I agree that having the banks keep the mortgages on their own books encourages responsibility. On the other hand I think it’s useful to keep money flowing back to them so they can make more mortgages.

        But it sure does seem as though there was more than a little too much flowing back to them, right? But was the fundamental problem really the re-selling of mortgages, or was it the Fed’s loose money supply? Or did it require both of those variables to be present for the bad shit to go down?Report

        • Avatar Ken says:

          Money was flowing back to the banks under the old discipline, in the payments made by the borrowers on the mortgages. That was the bank’s income from the mortgage.

          Part of the mortgage blowup was because a few clever people thought you could get more income than that total. You could turn a bundle of mortgages all at 5% interest into something that paid 12% or 18%, as if you could get more milk out of a cow by pouring it from bucket to bucket.

          But perhaps I’m being too harsh – after all, the people who invented that idea were very clever, and were the ones that got the 18% payouts. It was all the people and pension funds that ended up holding the instruments when the music stopped who lost.Report

      • Avatar clawback says:

        Except they still got stuck with a ton of bad mortgages when the music suddenly stopped. So no, wrapping trash mortgages into instruments and playing hot potato isn’t investing responsibly, even if it worked for a while.Report

  4. Avatar zic says:

    It is virtually impossible to understand the economic collapse, and irresponsible to try to explain it, without going back to Brooksley Born. She explains why the collapsed happened, in this quote, ‘the market’ is the synthetic derivatives market:

    there was no oversight of a very, very big, dynamic, growing market. Market participants don’t look out for the public interest. Traditionally, government has had to protect the public interest by overseeing the marketplace and keeping the extreme behavior under some check.

    We had no regulation. No federal or state public official had any idea what was going on in those markets, so enormous leverage was permitted, enormous borrowing. There was also little or no capital being put up as collateral for the transactions. All the players in the marketplace were participants and counterparties to one another’s contracts. This market had gotten to be over $680 trillion in notional value as of June 2008 when it topped up. I think that was the peak. And that is an enormous market. That’s more than 10 times the gross national product of all the countries in the world.

    $680 trillion dollars. That’s vs. the $16 trillion national debt, for instance. According to Nate Silver, that was $50 of bets for every $1 lent to a homeowner.

    So thank you very much for backing away from the CRA argument, because I would have been spitting bricks otherwise.

    I think the real culprit here is that we allowed a dark, unregulated market. I view this as a libertarian experiment in free markets, and the result something every person who thinks regulation strangles free markets should seriously take to heart, for it resulted in $680 trillion of money gambled on the mortgage industry; with a $50 bet that each $1 of mortgage would or would not be paid, and nothing but magic to make those bets get paid off.

    And it was likely your pension money in on the bet. Regulation protects shareholders and investors from uncertainty of unregulated markets and the temptations of boards and management to go for the get-rich-quick schemes on which their bonuses are based.Report

    • Avatar zic says:

      Can an editor fix my blockquote? Ends at ‘countries of the world.’
      thank you.Report

    • Avatar Michael Cain says:

      $680 trillion dollars.

      Let’s hold on for a moment before we just accept that number as particularly meaningful. The only way you get to a “market” of that size is to include interest-rate swaps, which are the vast majority of the dollar amount. It’s also a notional number; that is, if I write an interest-rate swap on someone’s $100M loan, the notional value is $100M. But the actual amount at risk is the difference between two interest rates, typically one variable and one fixed, not the principal. If I’m smart enough to be in that business, the risk is perhaps a half-percent over the course of a year: $500K, not the reported $100M. Perhaps at some point I decide that I’ve bet the wrong way on variable interest rates, so I cover myself by buying fixed-rate swaps on a portion my portfolio of variable-rate swaps. When someone sells me such a swap on the first swap (notionally valued at $100M), the $100M gets counted again, even though my risk may now have declined to only $250K. $100M in principal can easily sit at the bottom of interest-rate swaps totaling many billions in notional value. But the actual amounts at risk through the derivatives are much smaller than the principal, let along the notional value of the derivatives.

      FWIW, at one point in 2012, the notional value of the global derivatives market was $1,200 trillion — almost all of it due to counting the not-at-risk principal for interest-rate swaps many, many times.Report

      • Avatar zic says:


        But: you know the number $1,200T. Why?

        Nobody knew the CDO market had swelled to $680T; that was invisible and unknowable at the time, we learned it after the fact.

        But it wasn’t the actual values lent to borrowers at the bottom that were the problem. The the notational value was insured. I’ve read something like 92% by AIG. It did not have access to the capital to pay a small fraction of those policies, and was on the verge of collapsing. That’s why TARP was used to bail AIG out, too; if AIG had gone under, it would have collapsed the world economy because the company has its fingers in everything.Report

        • Avatar Michael Cain says:

          But: you know the number $1,200T. Why?
          Because the Bank for International Settlements publishes figures for global derivatives at the end of June and December, with about a five month lag. For the end of June, 2012: notional value, $639T; gross value, $25T; and gross exposure, $3.7T. Exposure compared to notional value just under 0.6%, reflecting the fact that the vast majority of the derivatives are interest-rate swaps. Any reported derivatives number that is in the hundreds of trillions is, for practical purposes, a measure of interest-rate swaps. The totals are all reported, although not in a “timely” fashion. Of course, it’s not broken down by individual parties; if you want to know Bank of America’s exposure to an Italian default, you’ll just have to take their word for it.

          Nobody knew the CDO market had swelled to $680T; that was invisible and unknowable at the time, we learned it after the fact.
          Again, the derivatives market swelled to $680T; it’s still on that order of magnitude. The CDO market has never been more than a tiny fraction of that. Global CDO issuance, including the synthetic stuff, from the first one in 1987 to present day amounts to less than a couple trillion dollars.

          But it wasn’t the actual values lent to borrowers at the bottom that were the problem. The notational value was insured. I’ve read something like 92% by AIG. It did not have access to the capital to pay a small fraction of those policies, and was on the verge of collapsing. That’s why TARP was used to bail AIG out, too; if AIG had gone under, it would have collapsed the world economy because the company has its fingers in everything.
          And for CDOs, which make up a tiny share of the derivatives market, the notional value makes sense. When a CDO is insured, the insurance guarantees that the collateral behind the CDO is worth what the CDO says it is (eg, that the assets behind a $100M CDO issue can be converted to $100M). As you say, AIG insured a huge portion of the issues. And covering all of AIG’s losses took less than a trillion dollars.Report

          • Avatar zic says:

            And for CDOs, which make up a tiny share of the derivatives market, the notional value makes sense. When a CDO is insured, the insurance guarantees that the collateral behind the CDO is worth what the CDO says it is (eg, that the assets behind a $100M CDO issue can be converted to $100M). As you say, AIG insured a huge portion of the issues. And covering all of AIG’s losses took less than a trillion dollars.

            I’m sorry, but aren’t you’re comparing the synthetic derivatives market to options markets? One has actual commodities that will get traded in the future, the other has bets based on mortgage payments that may or may not get made, but nothing else to do with the mortgage. There was no requirement that the mortgage at the base of a CDO have anything to do with the CDO; that mortgage was not in a portfolio or in any way tied to the CDO. The owners of the mortgage did not necessarily have any involvement with issuing the CDO. This was more like betting on coin tosses.

            And AIG’s bailout was as small as it was because the bailout itself helped stem the losses, rather like stopping a run on a bank.

            These things are not the same.Report

            • Avatar Michael Cain says:

              There was no requirement that the mortgage at the base of a CDO have anything to do with the CDO; that mortgage was not in a portfolio or in any way tied to the CDO.

              I’m wrong, you’re right — because you’re talking about synthetic CDOs, and there’s considerable debate about whether they should be called a CDO at all — they’re a private-contract CDS based on complex combinations of multiple securities that doesn’t have to be reported the way other derivatives are. Technically, the net gross exposure from synthetic CDOs, across all parties, is zero. A default happens: someone wins the bet, someone loses the corresponding amount, fees were paid up front. AIG got in trouble because as a single party they had taken too many bets in one direction where they had to pay out first when defaults happened and the market froze up — a mistake that even your neighborhood bookie doesn’t make. And you’re right, the bailout effectively allowed things to unwind gracefully. As that happened, AIG has been able to repay the US government the liquidity that had been provided — suggesting that their net exposure wasn’t all that bad.

              As a technical question, how do we avoid that kind of problem? Finance company X says, “Our net exposure in the synthetic CDO market is a billion dollars, and we have plenty of reserves to cover that.” What they don’t have is the reserves to pay off all of their bets in one direction before they get paid for their bets in the other. A market of some sort, I suppose, where someone is doing the accounting and no one has to pay more than their net position. Given that, it appears AIG wouldn’t have had a problem.Report

              • Avatar Michael Cain says:

                Damn! I hate when I don’t get a tag closed :^(Report

              • Avatar BlaiseP says:

                Problem sol-vayed.Report

              • Avatar zic says:


                Derivatives didn’t sink our economy, synthetic derivatives did.

                there’s considerable debate about whether they should be called a CDO at all — they’re a private-contract CDS based on complex combinations of multiple securities that doesn’t have to be reported the way other derivatives are.

                Those securities didn’t have to be reported because the market was unregulated. It was a totally free market. I suspect, if lender’s had upheld mortgage underwriting standards, it would have just taken a lot longer. Or they’d have found something else to bet on; because that’s all it was, betting.

                It’s like if there was a league rule: every time you cuss, you’ve got to put a dime in the jar. And so someone then we start betting on if the offender’s actually going to pay; people are polite, and mostly do. So we start betting a half dollar on each cuss, some for, some against. And a clever Gentleman decides to offer insurance on the bets, since people mostly pay; a % of each bet went into the insurance. Then the bets got bigger and bigger, more folks came to play, and the foul-mouthed cussers all decided not to pay after one day. The insurer, who had been turning a healthy profit on the occasional foul word, would go broke. Notice, now, the cussers money in the pie is just a few pennies on the dollar; almost a negligible amount.

                In the case of AIG, they had their fingers in too many pies; they were also on the hook for Katrina and the tsunami in the Indian Ocean. When Lehman and Bear went down, they couldn’t cover the bets. The insurer went broke.Report

          • Avatar zic says:

            And I forgot: You know that number because we’re discussing regulated markets, the numbers are published.

            Such information was not available on synthetic derivatives.Report

  5. Avatar greginak says:

    Well it isn’t really fair to say there was no regulation now is it. Regulation was occurring by private companies like S and P. Of course that crashed and burned but its not like anybody suggests private profit making business can really effectively regulate a market they themselves are involved in .

    Or less snarkily; James how do you think the failure of the ratings agencies play into this and does that show anything about the ability of markets to regulate themselves.Report

    • Avatar BlaiseP says:

      There was no regulation of the Over The Counter markets. None. Zip. Zilch.Report

      • Avatar zic says:

        Greginak’s trying to suggest it was ‘regulated’ by the ratings agency (which was rubber-stamping everything AAA) and the insurers like AIG, which insured everything so that nobody was supposed to actually loose any money.

        But you are correct, those market forces are not regulation.Report

        • Avatar BlaiseP says:

          It’s not quite that simple, though there’s a great deal of truth to what you’re saying about the ratings scheme. Thing is, the ratings people were being paid by the same firms they were supposed to be rating, which rather defeats the purpose, don’t you think?

          So no, the ratings agencies weren’t really regulating. The gambler might tip the dealer from time to time, but I don’t think the casinos would long tolerate the gamblers paying the dealers’ salaries, if you get my drift here.Report

          • Avatar zic says:

            I agree; I was just trying to clarify greginak’s point because so many folk who preach the gospel of free markets that self regulate think ratings and insurance work in lieu of regulation.Report

            • Avatar BlaiseP says:

              Heh. It’s been my observation, here and elsewhere, that the people who yell loudest about the Free Market know the least about how markets operate in the real world.

              May I interest you in the purchase of some lunar real estate? Or the services of a Cleaner Fish?Report

              • Avatar James Hanley says:

                Wow, Blaise, you’re really stuck on the cleaner fish, aren’t you? Maybe you should check this out.

                But, hey, per your first response who needs to look at what experts say, right?Report

              • Avatar BlaiseP says:

                Just you get around to answering Ekelund and Thornton, James. Quit wriggling around and answering the issues I’ve raised. The very idea, that you’ll take me to task for calling you uninformed, while the thinkers in the Mises Camp have made the same points I’m making.

                I’m going to continue to use Cleaner Fish, because you clearly don’t understand how money-based markets work. The Mises Folks have made this clear enough, and I quoted them. Now either answer the objections they made or don’t. I don’t care. But you have hardly distinguished yourself in this round.Report

              • Avatar James Hanley says:

                Who ever said cleaner fish were in a money-based market? Are you really that egregiously willfully dense? When I was writing that post about markets, I was starting at the fundamental level of barter markets, and you would know that if you weren’t intent on being the League’s biggest tool.

                As to “the Mises folk,” I have no idea what in the world you’re talking about. I’m not talking about the Mises folk, and your effort to imply that I am is only further evidence of your dishonesty.

                You like to challenge, but you’re too cowardly to accept a challenge. Krugman and DeLong, two liberal economists who want more regulation of the financial industry say you’re wrong that Glass-Steagall would have prevented the mortgage crisis. But in the true fashion of the cowardly hack you’ll ignore that challenge to your position and just pivot to some irrelevant point.

                Go read your poetry books; I’m pretty convinced at this point that you’re intellectually incapable of a sustained logical argument.Report

              • Avatar BlaiseP says:

                Mises Folks, referenced in Comment 1.Report

              • Avatar James Hanley says:

                You’re seriously comparing a cite from the Mises Institute as the equivalent of citing Krugman, DeLong, Kling and V. Smith?

                And you’re thinking I should believe what you think about the effect of Glass-Steagall instead of Krugman and DeLong?

                Leave the jokes to Schilling; he’s much better.Report

              • Avatar BlaiseP says:

                Yes, I am seriously comparing them to anyone else. Now stop your wriggling and address their complaints. Or don’t. In a perfect world where reserve banking wasn’t the order of business, repealing G-S would make perfect sense. That’s an entirely realistic assessment of the problem.Report

              • Avatar James Hanley says:


                Given your own refusal to seriously address serious economists like Krugman and DeLong, I surely owe you no effort at addressing a couple of guys who are probably goldbugs. It’s like someone quoting R.A. Fisher on kin selection, and instead of dealing with the Fisher quote, their interlocuter responds by demanding that they address something written by a creationist.

                It’s not a serious approach to intellectual discussion. As you said on the other thread, this issue isn’t a joke. But what you’re doing here is.Report

              • Avatar BlaiseP says:

                Given that you clearly do not understand what you’re talking about, asking me dumb questions that anyone who’d survived two semesters of accounting wouldn’t ask, I am in no mood to discuss this further. I have put forward an argument from the Libertarian side of the fence, one which you refuse to address. I chose it specially and I’ve had that bear trap set since you got snotty with me on the other post. I knew this post was coming.Report

              • Avatar BlaiseP says:

                As for the Gold Bug jibe, I’ve outlined the fractional reserve banking system below. For the fractional reserve banking system to work, there must be reserve requirements and an FDIC system acting as a backstop.

                The argument of the Gold Bugs cannot be so easily dismissed. Retail banking was separated from investment banking for good reasons. Retail banks are subject to stress tests so we can go on perpetuating the illusion required for fractional-reserve banking to work. The Feds can shut down a bank and pay off the depositors once it can’t pass a stress test.

                But nobody could shut down Wall Street so easily. In point of fact, it’s impossible, unless we impose Too Big to Fail rules on it. There is a way to regulate markets in risk, as I’ve put forward any number of times: we forbid over the counter trading in mortgage-backed securities and oblige such risk takers to enter regulated markets, where reserve requirements are imposed upon them, as in any other market in risk. Trading accounts. Margin calls. Surely you’ve heard of such things.Report

              • Avatar James Hanley says:


                The whole post was an elaborate set up to challenge you on two points. First, you claimed I don’t understand how the mortgage security markets work. But you haven’t been able to point to anything I said and demonstrate how it was wrong.

                Second, you claimed that an unmodified Glass-Steagall would have prevented the crisis. But I show that highly respected liberal economists who think Wall Street needs more regulation–not simply anti-regulation free market libertarians–say Glass-Steagall wouldn’t have prevented the crisis. And you’ve entirely avoided trying to answer that challenge.

                All your misdirection about fractional reserve banking, gold bugs and OTC trading (which was perfectly legal prior to the modification of Glass-Steagall) is irrelevant to the question of whether you can demonstrate–not assert, demonstrate–that I don’t understand, and whether you can rebut Krugman and DeLong.

                It’s one thing to say, “I think X is the case,” but when you assert without equivocation that “X is the case and anyone who disagrees just doesn’t understand,” then you bear a burden of proof that you haven’t even begun to bear; that I increasingly am persuaded you are incapable of even comprehending.

                You’re good at bluster and bullying, but is there any bite behind the bark?Report

              • Avatar BlaiseP says:

                James, this isn’t a question of mortgages. It’s a question of derivative instruments traded on unregulated risk markets, completely fucking unrelated to the underlying instrument.

                I laid out the case, from a Libertarian perspective, how a repeal of Glass-Steagall could have actually succeeded. You’ve run around and screamed like a stuck hog but you haven’t addressed that issue. You then ask if I want to take the country off the fractional-reserve system. Ask me a dozen more dumbass questions, don’t answer any of mine. What are you, the Little Prince or something? He didn’t answer questions, either.

                I’m not here to discuss what Krugman and DeLong have to say about G-S. They’re both making simplistic arguments and I’m not here to address them. I’m here to point out, you, James Hanley, don’t know what you’re talking about when it comes to risk markets. We could have replaced G-S with a regulated market system, exactly as government bonds are traded, on open exchanges. Best of both worlds: we have money moving in and out of mortgages, just like any other risk market, with trading accounts settled through the Fed just like MERC or NYMEX or ICE or anyone else’s market. But since you’ve never actually been involved in a futures market, this is all lost on you.

                Quit hiding behind Krugman and DeLong. They’re not going to save your argument. As for bluster and bullying, stop whining and step up to the plate and defend your position. Absolutely everything you’ve said about Glass-Steagall is wrong. Glass-Steagall was set up to interactions between regulated banks and investment houses, the very conflation which had led everyone in the 1920s to secure their crazy stock market trading against their mortgages.Report

              • Avatar James Hanley says:

                As I said, this whole post was an elaborate setup. My intention was to expose your inability to defend your claim in any detail. You don’t get to say that’s not the issue–it’s my post, not yours, and your G-S claim is the issue of my post.

                Defend it if you can, but I haven’t seen any evidence that you can.Report

              • Avatar BlaiseP says:

                You and Inspector Clouseau. A cunning ploy. G’wan ‘long now, Hanley. You don’t answer questions. Go run off and send an email to Brad DeLong. Maybe he’ll answer my questions about the fundamentals of risk markets. He’s already made an ass of himself with Larry Summers. Neither of them foresaw the crash of 2008. I did, because I was writing the rulesets for Citigroup.Report

              • Avatar James Hanley says:

                Yet another comment in which you try the ol’ misdirection play. “Hanley’s not answering my questions! Please don’t notice that I’m not answering the questions he posed first! Please don’t notice that I’m unable to defend my claim about Glass-Steagall!”

                Ah, but I do notice, and I’m happy to call you out each time you fail to support your own claim.Report

              • Avatar BlaiseP says:

                Just answer the question asked in Comment 1 on this thread. You know you’re cornered, reduced to whining about Bullying. I will not be hectored by a know-nothing who quotes economists who completely failed the most elementary test of economics: risk and its consequences.Report

              • Avatar James Hanley says:

                Still not defending your claim, and still trying to divert attention away from that failure.

                I don’t think you can do it.Report

              • Avatar James Hanley says:

                Here’s a more reliable source.Report

        • Avatar Mike Schilling says:

          When referring to AIG, you need scare quotes around “insurer”. They pretended to be one but weren’t, and that was a major source of the rot.Report

    • Avatar Will H. says:

      The more I think about it, the more it seems like this would have made things more of the go-to-jail- type of illegal for a lot more people than what I’ve heard about.Report

    • Avatar James Hanley says:


      Fair question. I haven’t look at that issue closely, so I offer this just as some very tentative thoughts.

      First, from what I’ve read a lot of the firms wouldn’t touch the lowest rated MBS, so the credit ratings weren’t wholly meaningless.

      Second, as long as home prices were going up, those MBS were sound. They became unsound precisely because home prices stopped going up. So if the rating agencies failed, it was because they–like everybody else–were surprised by a new development.

      The problem I have with the assumptions people have about regulation is that it’s not clear just how we prevent these types of problems. No government agency would have better information, so it’s not like they could play a more effective role as a rating agency. We can ban specific types of financial instruments, but clever people will always be doing their best to innovate new ones. We can’t preemptively ban specific instruments that haven’t been invented yet, because the regulators aren’t likely to have thought of it, and we can’t write overly broad bans that we hope will catch every bad thing that might be innovated.

      It’s like doping in sports; the doping regulators are always a step behind the dopers, as the dopers innovate and the regulators play catch up after they learn about the new method. In the same way, the regulators are kind of inevitably constrained to being reactive, responding to each new innovation only after its proved problematic.

      That’s not an argument against regulation, understand. If the best we can do regulatorily is to be reactive to specific innovations, then that’s what we should continue doing. But that won’t stop the next unhappy innovation, so the common assumption that “we should regulate, that will prevent bad things” just isn’t an accurate understanding of the world.

      Really, my primary argument over and over here at the League is not that we should eliminate regulation, but that almost everyone–here and everywhere, left, right and center–has unrealistically simplistic notions of regulation. It is always a bit mind-boggling to me, because in certain respects everyone understands these ideas are overly simplistic, but nobody follows through on their own logic. Conservatives believe economic regulation is bound to fail, but are sure regulation of social behavior will work. Liberals understand how unpromising the regulation of social behavior is, but are sure that we can come up with effective economic regulations.Report

      • Avatar BlaiseP says:

        Second, as long as home prices were going up, those MBS were sound. They became unsound precisely because home prices stopped going up.

        Wrong. The MBS market became hyper-extended as these firms extended themselves into untenable risk-to-equity ratios. Some of them were at 30:1. As for the MBS market tanking, that only happened when Bear Stearns couldn’t sell its last offering. Then everyone scrambled for the exits. System risk.Report

        • Avatar Dave says:

          Now I can catch up on everything else.

          Wrong. The MBS market became hyper-extended as these firms extended themselves into untenable risk-to-equity ratios.

          The Wall Street banks became hyper-extended post 2004 when the leverage ratios went up to hedge fund type proportions. The MBS market became hyper-extended because investors were buyings the bonds as fast as they could be issued.

          As for the MBS market tanking, that only happened when Bear Stearns couldn’t sell its last offering. Then everyone scrambled for the exits. System risk.

          My version of events is different. The housing bubble burst in 2006. Default rates were starting to rise. It was only a matter of time before the increasing defaults and declining home values were going to hit the underlying securities. They started to do so in early 2007 but then it really started to hit by the summer. The most notable casualties were two hedge funds run by Bear Stearns, both of which were long subprime mortgages (through various instruments including the lower tranches of the CDOs, which were the first ones to get completely wiped off the map).

          I was working in the real estate group at one of the investment banks, and I sat in a cubicle group surrounded by commercial mortgage originators. As it was explained to me, when the losses started to hit the securities and the values started to tank (especially the CDO tranches), the investors that held these positions on margin got margin calls. Many of them were not going to put up the cash to cover them given the losses so they tried to sell. Unfortunately, all sellers and no buyers helps no one’s cause so to cover the losses, investors were forced to sell assets that had more value (i.e. higher-rated tranches and other forms of paper). This pushed down values on the higher-quality paper.

          On the commercial mortgage backed securities side, we saw this jolt the markets in the Summer of 2007 (roughly August), a year before the crisis hit. There was too much volatility in the markets so it was very hard to originate loans. CMBS originators were either pulling their term sheets entirely or altering deals at the very last second because of the difficult market conditions.

          You did have securitizations hit the market at the end of 2007 but there weren’t that many of them. By my lights, the MBS markets were tanking long before the crisis, and it was made worse by the massive downgrades from the ratings agencies. Institutions that could only invest in AAA-rated paper were forced to sell the stuff after the downgrades. The entire universe of buyers either became sellers or moved to the sidelines long before the real crisis hit.

          In hindsight, it was a very interesting time and having a front row seat to that was one of the few positive takeaways from my three years working for one of the i-banks.Report

      • Avatar zic says:

        First, from what I’ve read a lot of the firms wouldn’t touch the lowest rated MBS, so the credit ratings weren’t wholly meaningless.

        Which is also likely why so many were rated AAA; couldn’t sell ’em otherwise.

        Second, as long as home prices were going up, those MBS were sound.

        That’s an assumption that the unqualified buyers could continue to pay and that they would be able to refinance due to appreciation; it also includes the assumption that all foreclosed properties could be sold quickly and at minimal expense without deflating real estate in the surrounding community. That’s a whole lot of assuming.

        This was a betting market, and one regulator was asking to regulate it in the 1980’s. Greenspan, Rubin and Summers said no.

        Really, my primary argument over and over here at the League is not that we should eliminate regulation, but that almost everyone–here and everywhere, left, right and center–has unrealistically simplistic notions of regulation.

        This had me guffawing all over my keyboard. Because you’ve just taken the best example of how unregulated markets can explode under the weight of the greed they create and used it to suggest people who think good regulation matters are ‘simplistic.’

        That’s the funniest thing I’ve read all day. Thank you for the laugh. But I expect better from you, James.Report

        • Avatar James Hanley says:


          That’s perhaps the most uncharitable reading I’ve ever seen you do. If you’ll do me the kindness of re-reading, you’ll see that I wasn’t arguing against regulation. And truthfully, the severity of the problem does not necessarily correlate with the easiness of writing good regulations.Report

          • Avatar zic says:

            The point is that existing regulation did not apply.

            There were no rules.

            So S&Pand Moody’s could rate AAA, AIG could insure, GS sell to your TIA CREF, yet nobody knew what was actually being sold. Because there were no rules. And what rules there had been that might have at least contained or constrained were repealed.

            To hold this up as an example of regulatory oversimplification boggles the mind. Because there was no regulatory in this game. At all.

            I gave a link up thread, if you haven’t, go read/listen/watch. Because that unregulated market grew to “10 times the gross national product of all the countries in the world.” quoting Born.Report

      • Avatar Mike Schilling says:

        Second, as long as home prices were going up, those MBS were sound. They became unsound precisely because home prices stopped going up.

        “Are these investments sound?”

        “Good news and bad news.”

        “Good first.”

        “Given the current projections of single-family home appreciation, these investments are perfectly sound.”

        “And bad?”

        “Given those same projections, by 2035 99% of the world’s wealth will consist of single-family American homes.”Report

        • Avatar James Hanley says:

          Heh. Like all bubbles, the housing bubble was destined to pop. As in all cases, the best strategy is to be the last one out before it pops.

          What I’m curious about is how many people involved in this understood that and were trying to be the last ones out before the pop and how many really believed it never would pop. Far too many of the latter type, I’m afraid.Report

          • Avatar clawback says:

            Why would they care? The decision makers had little personal stake in avoiding a crash, and much to gain as long as the music kept playing.Report

            • Avatar Mike Schilling says:

              Exactly. Management’s money came from salaries, bonuses, and commissions. Assets are the shareholder’s problem.

              In other words, management has figured out how corporations really work.Report

            • Avatar James Hanley says:


              Whether they care is an important question, of course, but I assume nobody ever cares unless it affects them personally,* as was the case for too many folks here. I was more interested in the question of whether they actually even understood the situation.

              *When either libertarians or liberals say libertarians don’t believe in regulation, they’re wrong. Libertarians generally belie that things should be structured so that a person’s decisions do affect them personally. Often this is the main difference between a liberal’s approach to regulation and a libertarian’s–the liberal wants to forbid something or set up close rules on how that something is done, while the libertarian just wants the person doing it to have to suffer the negative consequences of their actions. I’m not making an argument for either approach here; just noting what I think is the common difference.Report

              • Avatar clawback says:

                James, did you read the piece I linked? Chuck Prince of Citibank clearly did understand what was happening; and he was by no account particularly brilliant, so I’m sure many of the others did as well. They were “trapped” by the money they were making and the knowledge that either they kept the bubble floating or someone else would be found to do it.

                Regarding your footnote, count me among liberals who would be delighted to see regulations that ensured personal responsibility. If you’re going to make such a sweeping generalization, you might pick some area other than the financial sector, for which liberals have been nearly unanimous in demanding the incentives and disincentives be set up right.Report

              • Avatar James Hanley says:


                Correct me if I’m wrong, but what I seem to be seeing from liberals is calls to disallow these types of financial instruments, not simply to make those investing in them responsible for the losses.

                I’m not saying liberals don’t care about incentives and disincentives; just that they generally want to go well beyond just an incentive-based approach to a more command-and-control approach.Report

              • Avatar clawback says:

                Many of the complex derivatives are beyond our ability to analyze and price correctly. This isn’t a matter of political view, but a simple empirical fact shown by what happened to them five years ago. Yes, anything that can blow up and leave no one but the taxpayers to pay the tab should be regulated. You can call that command-and-control if you wish, but I think that’s just part of ensuring the incentives are right.Report

              • Avatar James Hanley says:

                Many of the complex derivatives are beyond our ability to analyze and price correctly.

                Seriously, clawback, read my post. I was explicit about the opacity of mortgage backed securities, so you’re not saying anything I didn’t already point out.

                Yes, anything that can blow up and leave no one but the taxpayers to pay the tab should be regulated.

                I’m not sure who you think you’re arguing with, but it’s not me. Go back and read my footnote. We’re not arguing about whether there should be regulation, but about what form that regulation should take. I’m open to arguments about that, but I’m not open to arguments that aren’t directed at any position I’ve actually taken.Report

              • Avatar clawback says:

                Then why don’t you just tell me your position rather than making me guess? How can trading inherently unanalyzable securities be made safe without “command-and-control” regulations?Report

              • Avatar Mike Schilling says:

                You’re not seriously suggesting trying to make individuals responsible for trillion-dollar losses.Report

              • Avatar James Hanley says:


                I’m not seriously suggesting they could repay trillion dollar losses. I’m seriously suggesting that not everybody on Wall St. should be walking away with big bonuses and/or whatever’s in their own investment accounts. I don’t think any, or at least many, of my liberal friends disagree with that.Report

              • Avatar Mike Schilling says:

                Fishing libertarians, never any respect for the workers!Report

              • Avatar James Hanley says:

                Never any respect for anyone, eh?Report

              • Avatar Stillwater says:

                I’m seriously suggesting that not everybody on Wall St. should be walking away with big bonuses and/or whatever’s in their own investment accounts.

                Why not? I mean, everyone voluntarily entered into those transactions because they rationally believed their subjectively determined expected utility would be increased as a result, right? So, why shouldn’t people be allowed to keep the fruits of their positive sum transactions?Report

              • Avatar James Hanley says:


                Because the incentives are perverse. How many times do we have to say, as Roger does below, that we believe in internalizing the risks and rewards before you’ll stop pretending we’ve never talked about that?Report

              • Avatar Stillwater says:

                So, people should have to surrender their non-coerced property not because their individual behavior is perverse but because the institutional incentives they’re acting under are perverse?

                You sure about that?Report

              • Avatar James Hanley says:

                You liberals are the ones who keep saying their was fraud. Are you sure there wasn’t any coercion (fraud is a form of coercion, right?)? Were the folks whose employers had their defined benefit pensions invested in these investment banks really voluntary participants?

                And how many of those bonuses were made possible through the socialization of the losses? You really think a libertarian is supposed to support that?

                Once upon a time I thought you had an interest in asking sincere questions about libertarians. Now I think you have an interest in asking gotcha questions. Your big goal seems to be catching a libertarian in claims that aren’t perfectly consistent with each other, and somehow that will mean something…even though you insist that liberals don’t need to be very consistent at all. But as I’ve said many times in the past, I don’t buy your insistence that libertarianism has to be wholly driven by a priori principles, and I don’t think you have any standing to insist on such a position.

                I’ve answered out of courtesy, but I won’t continue to do so if I remain unpersuaded about the integrity of your purpose.Report

              • Avatar Jaybird says:

                Had the statute of limitations passed by the time Obama took office?

                It must have, right?Report

              • Avatar Stillwater says:

                You liberals are the ones who keep saying their was fraud. Are you sure there wasn’t any coercion (fraud is a form of coercion, right?)?

                So you think fraud was a factor? And maybe coercion? Fair enough. I do to.

                If you want to argue that we have/had an institutional structure that incentives fraud, then you won’t get an argument from a liberal.Report

              • Avatar Stillwater says:

                Jaybird, you’re becoming a parody of yourownself.Report

              • Avatar Mike Schilling says:

                I’m not going to argue Obama has much in the way of guts. He didn’t prosecute either the torturers or the thieves. (Remember how the GOP threatened to shut the government down if torture was even investigated? Good times.)Report

              • Avatar Stillwater says:

                Eh, I’m not gonna play the game, Mike. Jaybird wants to reduce all the arguments on this issue to partisan loyalties. That’s his standard schtick. Let him have it. We all know he’s the only clear eyed partisan amongst us.Report

              • Avatar Jaybird says:

                Actually, it’s not a “partisan” game I’m playing as much as a “the government is IN BED WITH THESE GUYS” game.

                Because the government is in bed with these guys.Report

              • Avatar Jesse Ewiak says:

                Hey, when us liberals try to regulate things to limit that, libertarians start screaming about Goldman Sach’s first amendment rights to buy however many representatives they can afford.Report

              • Avatar Jaybird says:

                Really? They don’t yell about “regulatory capture” and selective prosecution?

                I’m thinking you’re mixing up your oppositions again and figuring out that since they’re not on your side, they must be on each other’s.Report

              • Avatar Jesse Ewiak says:

                If you care about massive corporations involvement in politics, but you still believe that money is speech and as a result, we can’t limit their spending in the political arena, then you’re the equivalent of a smoker who has to carry around an oxygen tank, but continues to light up, but bitches about second hand smoke.Report

              • Avatar Jaybird says:

                Jesse, did you know that the last time the government tried to pass laws keeping corporate money out of politics, it ended up censoring PPV movies *WITHOUT* particularly inconveniencing Wall Street?

                Let me guess: you think that Washington would be able to do it right this time.Report

              • Avatar James Hanley says:

                Jesse, may I recommend the book That’s Not What We Mean to Do: Reform and Its Unintended Consequences in the Twentieth Century? It has an excellent chapter on campaign finance reform.

                I get your position, and I don’t think there’s an easy answer to the challenge you pose about the incongruity of wanting to eliminate corporate bedding of politicians without controlling corporate contributions. But our whole history of campaign finance legislation never shows an ability to actually stop the problem. Because corporations really really want influence, all any of our successive iterations of campaign finance reform has accomplished is to shift their spending into different paths all heading toward the same end.

                Is there really a way that we could actually eliminate corporate spending for influence–not just in its present forms, but in whatever forms they devise when the present ones are restricted–without ultimately putting the First Amendment at risk? If 20th Century Fox made a political movie that had as its real message an argument about the need to renew Ethanol subsidies for Archer-Daniels-Midland (which just happened to be an investor in the movie), do we need to ban that?

                And what would constraining corporate spending on politics do to solve the problem of Treasury Secretaries regularly coming from, and knowing that they’ll probably be going back to, Wall St?

                And in general, if giving government more regulatory power constrains businesses more, and that constraint just gives businesses ever greater incentive to try to influence that regulation, is it logically possible to give government enough regulatory power to resist corporate influence?

                I honestly do think those are the real questions that have to be pondered.Report

              • Avatar Jesse Ewiak says:

                Honestly, at this point, I’d say the same thing I said to people about health care in about 2007 when I was tired on nit-picking. “Throw every Western Europe country’s policy in a hat. Pick one at random. Use it. It’ll be better than ours. Without a doubt.”

                Same thing with campaign finance reform. Unless you think political speech has been unduly destroyed in any number of countries that have more viable political parties and wider variety of political opinion present in their legislatures than we do.Report

              • Avatar Jesse Ewiak says:

                Oh and btw, even with all it’s problems, McCain-Feingold was still better than our current mess of campaign finance. Just like the ACA isn’t great, but it’s still better than the system before hand. Small, incremental change. I’m no radical, except in my end game.Report

              • Avatar Stillwater says:

                Unless you think political speech has been unduly destroyed in any number of countries that have more viable political parties and wider variety of political opinion present in their legislatures than we do.


              • Avatar James Hanley says:


                Are you claiming businesses in those countries don’t have plenty of political clout? Because my claim is that they do, and that’s tied up with the fact that political speech hasn’t been decimated.

                As to McCain-Feingold, it’s only significant problem was that it assumed legislative power not granted by the Constitution. I get that you’d like Congress to have that power, but what we’d like Congress to be able to do does not determine what it has constitutional authority to do.Report

              • Avatar Jesse Ewiak says:

                Did I say any of those European countries had a perfect system? No. But, much like health care, I’d bet a decent chunk of money that all of their campaign finance laws are better than ours.

                Also, it’s a good thing I have a differing opinion of the Constitution. 🙂Report

              • Avatar Jaybird says:

                I don’t know. The government argued that it did nothing wrong by banning people from seeing that movie and even argued that it could ban books.

                That’s a bit too far for me.

                Indeed, I look at such things as Britain’s libel laws, France’s public health code (newspapers have been fined for arguing against the War on Drugs over there), and Germany is, of course, Germany (not a Nazi joke, very much a German joke).

                I’ve gotta say: what you seem to like so much about Europe’s Political Speech all seems very much tied into how they don’t have Free Speech over there.

                Since I rather suspect that I am much more likely to be fined/jailed or otherwise silenced under such a system than in charge of figuring out who should be fined/jailed or otherwise silenced, I’m opposed pretty much on principle.Report

              • Avatar James Hanley says:


                But how deeply have you studied constitutional law? It’s one of those areas where I have no respect for the beliefs of the uninitiated, and most of the liberal legal scholars I’ve read or talked to agreed, albeit with enthusiasm, that McCain-Feingold was very dubious at best.

                Policy-preference driven constitutional interpretation is pedestrian.Report

              • Avatar Michael Drew says:


                If you have a link or two or three to liberal con law scholars having serious problems with McCain-Feingold (i.e., saying it was unconstitutional), I’d like to read them.

                (That’s a real request, not a challenge. [It sort of bums me out that I’m fairly sure I actually do have to put that clarification in for it to be understood, but I’m fairly sure I do.])Report

              • Avatar Michael Drew says:

                …Or just names – who you have in mind. I can find the papers/posts.Report

              • Avatar Mike Schilling says:

                Corporations can have free speech the day I can transfer all my debts to a subsidiary and let it go bankrupt.Report

              • Avatar Jaybird says:

                The pundit that comes first to mind is Michael Kinsley but you asked for a legal scholar. Would Joel Gora count? He’s argued on behalf of the ACLU (like, as a lawyer) which is, alternately, “liberal” or “libertarian”.

                If he’d count, he’s in the middle of the column here (and you can check out his pre-game here).

                Part of the problem is that a lot of this seems to be defined after-the-fact. Did this guy like Citizens United? Oh, then he’s a Conservative. Did this guy hate it? Oh, then he’s a Liberal. It’s not a discussion of principles and then figuring out whatever really weird places the principles take you. (“To what extent should corporations be prevented from criticizing the government?”)Report

              • Avatar BlaiseP says:

                When it comes to Things We Didn’t Mean to Do by way of Reforms, the first reforms to the Constitution were the first ten amendments. Most countries have no equivalent to the First Amendment. If Citizen’s United means anything, it’s that money never stinks. Anyone can form a SuperPAC, even Steven Colbert.

                This Liberal never much liked McCain-Feingold. I understand the good it tried to accomplish but it was a sieve, not a stopper. The problem goes far beyond Washington: it goes right down to every two-bit election in this country. Money doesn’t stink. If we want electoral reforms which meant anything, the worst approach is to pass ineffective legislation: McCain-Feingold only drove the problem farther into the weeds: it didn’t stop anything at a fundamental level.

                Louis Brandeis said sunlight is the best disinfectant. There’s only one way to clean up this mess, expose it for what it truly is, advertising — and regulate it as such.Report

              • Avatar Michael Drew says:


                Obviously when I ask for legal scholars, yes, I’m looking for legal scholars. Judges or other prominent lawyers would be fine, too. Someone whose job is to produce legal analyses to be accepted by other lawyers, not prose that will sell ads. I’ll be the first to tell you that who’s liberal is muddy, but Prof. Hanley’s description of his experience/research was straightforward. He surely has some particular academics or jurists in mind; I was honestly just asking so I could read their views. I’m not surprised or disappointed that he might not see my comment, though; it’s buried pretty deep in the thread.Report

              • Avatar James Hanley says:

                Michael Drew,

                It’s a fair question, but it kind of cathes me off guard. To tell the truth most of what I heard was either in panel sessions or around the lunch table at academic conferences, or in articles I just skimmed, and since I don’t really specialize in Con Law anymore (just keep half an eye on it), the names haven’t stuck with me. I need to backtrack a bit and say that 1) my impression is from merely casual observation, and 2) I didn’t mean to imply that all liberal legal scholars think McCain-Feingold was unconstitutional, and if I did give that impression I apologize for being misleading. Anyone researching the topic will not struggle to find articles claiming campaign-finance restrictions are constitutionally allowable.

                But having made the claim I do owe the sources. I don’t have time right now (two classes to prep for today), but I will try to find some and get back to you at some point.

                For my own part, here’s my brief argument. First, on the policy level. I share liberals’ concern about unfettered corporate spending in politics. As a libertarian I despise government favoring businesses rather than favoring free(er) markets. Contra some (not all) liberals, I think the evidence shows that such spending does not lead to Republican dominance; but I do think it leads to corporate dominance–a pro-business outlook–in both the major parties (e.g., we all know that from a Euro perspective, Bronco Bama is center-right, not left). But I also think that liberals tend to over-state the effects of more money. Anyone in the ad industry knows that spending is necessary, but the gains don’t come in a straight-line effect; there’s declining marginal value to more and more spending. And a study I heard reported (I might still have the report somewhere, if I can find it) at a political consultants conference demonstrated that self-funded candidates who’d outspent their opponents lost more often than they won. And other research shows that unknown challengers facing a known incumbent almost certainly lose if they can’t spend as much as the incumbent (because they have to first spend to get name recognition, which the incumbents do not), but when they reach parity, they have about a 50-50 chance of winning–the need for spending sets a threshold, but perhaps no more.

                I think there’s more reason for concern with state and local ballot initiatives, but even there it’s not a certain thing. Here in Michigan, the owner of the bridge between Detroit and Canada–a monopoly business–spent millions on a ballot measure that would have prevented the state from building a second, publicly operated, bridge without a public vote on it. The ads were not only very well done (“Politicians in Lansing are putting billions of Michigan tax dollars at risk!”), but went almost completely unchallenged by counter-advertising. And still it lost badly, 60 some percent to 30 s0me percent. Unfortunately I haven’t look for any thorough research on that topic–I really should.

                Finally, and this one’s just off the top of my head, so perhaps it’s easily rebutted, there’s a problem with the for-profit/non-profit distinction in law. Currently we don’t allow non-profits to engage in advocacy; that’s the price they pay for non-profit tax status. If they engage in political advocacy they can lose their non-profit status and get treated as for-profits. So it’s a bit bizarre, then, to say now that we’ve redefined you as for-profit due to your political advocacy, we’re still not going to let you engage in political advocacy.

                Second the constitutional aspect. I understand the claim that money != speech, but I find myself logically forced to disagree. The free speech clause doesn’t only mean Congress can’t prevent you from making political claims, but they can’t deny you the means to do so. A bullhorn isn’t itself free speech, nor is the money used to buy the bullhorn, but to say a speaker at a rally can’t use a bullhorn to be heard would surely be a limitation on speech rights. And while the Supreme Court does allow time-place-and-manner restrictions, those are to protect the public’s right to be left alone, not to limit who says what.

                Liberals also argue that corporations aren’t people. Of course the Court has declared that they are, at least for purposes of taxation, and being sued. But are they corporations for the purpose of the First Amendment? That’s tougher, to be sure. But the Lochner decision that created corporate personhood was about constitutionally permissible regulation, so it’s really hard to say they have personhood in regard to one type of constitutional regulation, but not another.

                But even if they aren’t persons, it seems to me the language of the Constitution is clear, that Congress does not have authority to regulate speech. In other amendments of the Bill of Rights, and even in a distinct clause in the First Amendment, the terms “individual” and “person” are used, but not in the free speech clause. There’s an old legal principle that says if some restriction is mentioned in one part of a law but not in another, then it’s exclusion in that other should be considered deliberate. Corporate speech is clearly speech, even if we don’t like the source, hence Congress can’t regulate it.

                Do I worry about the effect of unlimited speech on democratic debate? I do, and although I don’t worry as much as many liberals, I don’t think the concerns can just be pooh-poohed as meaningless. But does the Constitution give Congress authority to act on everything that we are concerned about? Obviously not–it is a legislature of limited authority defined by explicitly delegated powers (article 1, section 8). Our political preferences do not create constitutional authority.

                I wonder if we could get Burt Likko to write a post on the issue?Report

              • Avatar BlaiseP says:

                Stop it. Now. Nobody says a credit default swap isn’t a viable instrument. We want those responsible for the creation and trading of such risk instruments to be responsible for those losses by pushing those instruments into regulated markets.

                As for Clawback’s conclusions about our ability to analyse and price such derivatives correctly, when gains and losses are denominated in Actual Cash Money moved from one trading account to another via a settlement process, analysis is irrelevant. Risk markets are affected by many factors. Anyone who thinks risk markets are amenable to analysis is cordially invited to have me send them a prospectus for BlaiseP’s Lunar Real Estate.Report

              • Avatar James Hanley says:

                Stop it. Now.

                Heh, there’s more of that bullying behavior, which is always good for a laugh. I’m pretty sure you’ve read Sun Tzu, right? Never give an order you’re not willing–or in this case, unable–to enforce.

                But as to nobody thinking credit-defaults swaps aren’t viable, nobody wanting to ban them, try this on for size. Such people actually are out there.

                Fantastic job making yet another easily invalidated claim.Report

              • Avatar BlaiseP says:

                A whole post dedicated to nothing but squealing about me calling you out for saying dumb things you can’t support, dude, I’ve already pointed out that ICE has a CDS market, just what I propose. ICE CDSes didn’t go up in smoke.

                Now why didn’t ICE go bust and Bear Stearns did go bust? Because ICE CDSes were traded on a regulated exchange.Report

              • Avatar James Hanley says:

                OTC trading was legal before Glass-Steagall was modified. This means two things. Now pay close attention, I’m going to tell you a small truth, two of them in fact.

                1. If OTC trading was legal before G-S was modified, and OTC trading was the cause of the collapse, the a non-modified G-S couldn’t have prevented the collapse, as you have asserted.

                2. If OTC trading was legal long before the collapse–and we both know it was going on even in the ’80s–then it can’t be the real cause of the collapse, because it doesn’t explain why it happened now and not in the ’80s or ’80s. (Note: I’m not arguing for unregulated OTC trading; I’m just pointing out that your argument about it doesn’t pass muster as a causal explanation.)Report

              • Avatar BlaiseP says:

                On your say-so? You and the Underpants Gnomes. Last step … Profit!

                OTC trading in mortgage-backed securities was completely illegal before the repeal of G-S.Report

              • Avatar James Hanley says:

                On your say so? Hah! Cite, please. I’m finding sources stating the OTC derivatives grew in frequency during the ’80s and ’90s. Granted those sources aren’t talking specifically about MBS, so I’m not sure if it includes them. But the Gramm-Biley-Leach Act only repealed sections 20 (disallowing relations between commercial and investment banks) and 32, preventing and Fed member bank from sharing officers/directors with firms engaged primarily in the securities business.

                With a few minutes internet search I can’t find any source to support your claim, but of course if you can provide one I’ll accept it.

                But at this point, if you want to be taken seriously, you’re going to have to start sourcing your claims. Your word alone is not sufficient.Report

              • Avatar BlaiseP says:

                Allow me to be a clue to the clueless here.Report

              • Avatar James Hanley says:

                That’s a great source, Blaise. Thanks.

                But having skimmed it, I don’t see anything about Gramm-Leach-Bliley turning OTC trading of MBS from illegal to legal. Please bear with the clueless here and cite me chapter and verse.Report

              • Avatar BlaiseP says:

                That, James, is because you don’t understand what you’re reading. Now let me make this very simple. Origination of mortgages was regulated under G-S. Though it had been progressively weakened over time, I was involved with Citicorp at the very point when it merged with Travellers Insurance, which would set in motion the G-L-B legislation.

                Sorta put me in a unique position, I did a lot of integration work there. Went back there in 2005 when they redid their underwriting rules, after G-L-B. Their underwriters were aghast at what they were being asked to support and what I would have to implement.

                When I say something was illegal under G-S, I speak from personal experience and the informed opinions of dozens of Citibank -> Citicorp -> Citigroup underwriters. And you have the document I’ve so thoughtfully provided as further evidence.Report

              • Avatar James Hanley says:

                So you can’t actually cite anything from your source, and you’re one again falling back on “you’ll have to take my word for it?”

                Didn’t I already say that I don’t trust your word?Report

  6. Avatar zic says:

    The CDO market existed before Glass Steigall was partially repealed; so in the sense that Glass Steigall didn’t prevent the market from existing, eliminating some of its teeth didn’t prevent the markets collapse.

    But the modifications to Glass Steigall made a lot more ‘money’ available for betting in the unregulated play ground of synthetic derivatives, aided and abetted by the justification that all those new mortgages were meeting the demands of congress to end redlining minority neighborhoods.

    Please notice the difference between redlining a neighborhood, which discriminates against qualified borrowers within that neighborhood, and failing to properly due diligence in underwriting a loan due to the high demand for additional mortgages on which to place bets. Remember that the market worked the way free-marketers say it should; it was rated by a ratings agency and insured by insurance companies, but otherwise completely unregulated.

    The free market in action.Report

  7. Avatar Major Zed says:

    Thank you, James, for bringing more light to the subject. I would draw your attention to two Atlantic articles.

    William D. Cohan explains why none of us here at LoOG (or pretty much anywhere) are likely to yet understand WTF really happened (causal-wise).

    And Simon Johnson gives my favorite (and IMHO libertarian-friendly) prescription as to what should have been done in the aftermath. The cure for externalized risk is to internalize it.Report

      • Avatar Mike Schilling says:

        During Wall Street’s heyday, when these firms were private partnerships and each partner’s entire net worth was on the line every day, shared risk ensured a modicum of prudence even though leverage was often higher than 30-to-1. Not surprisingly, that prudence gave way to pure greed when, starting in 1970 and continuing through 2006, one Wall Street partnership after another became a public corporation—and the partnership culture gave way to a bonus culture, in which employees felt free to take huge risks with other people’s money in order to generate revenue and big bonuses.

        Pretty much what Clawback and I were saying above.Report

      • Avatar James Hanley says:

        Thanks for the link. Most interesting thing in there (to me) was this:

        Both Stiglitz and Blinder were right to point out that Wall Street was highly leveraged before the crash, on the order of 33-to-1 or more. But the truth is that in recent decades, Wall Street firms have almost always been highly leveraged. For instance, according to a 1992 study by the U.S. General Accounting Office (now the Government Accountability Office), the average leverage ratio for the top 13 investment banks was 27-to-1 midway through 1991 (up from 18-to-1 in 1990). A subsequent GAO report, in 2009, noted that the big Wall Street investment banks had higher leverage in 1998 than in 2006. According to SEC filings, in 1998, the year before it went public, Goldman Sachs was leveraged at nearly 32-to-1, while in 2006 it was leveraged at 22-to-1. In 1998, Bear Stearns’s leverage was 35-to-1; in 2006, its leverage was 28-to-1. Similar patterns applied at Merrill Lynch and Lehman Brothers. To be sure, leverage has fluctuated over time: In the early 1970s, for instance, it was generally below 8-to-1. But in the 1950s, it sometimes exceeded 35-to-1.

        That’s fascinating. I had no idea.Report

      • Avatar Stillwater says:

        To prevent another crisis, Wall Street’s top executives, bankers, and traders should once again have something close to their full net worth on the line every day—not just the portion represented by company stock or options—so that they will collectively take risk management more seriously. That’s a solution that has nothing to do with the amount of leverage on Wall Street’s balance sheets.

        Maybe. But even if it would work, how is this supposed to be accomplished?Report

        • Avatar Mike Schilling says:

          The problem isn’t just corporations vs. partnerships. There’s also the huge percentage of retirement savings that are in securities rather than cash, and the vast amount of money to be made by playing games with it. (Privatized social security would make this even worse, of course.)Report

          • Avatar Stillwater says:

            Mike, I agree with this. It seems like the proposed solution misses the biggest part of the problem (which leaves aside sticky issues about implementing such a proposal even if it were desirable). It seems an instance of a standard type of argument that’s supposed to have bite: if the world were only different than it is, we wouldn’t have all these problems.

            I also really like your earlier comments. I want to second them. All of them. You’ve said what I’d say much more clearly and concisely.Report

        • Avatar Roger says:

          Stillwater and Mike,

          I believe we are often talking past each other. Zed and James and the Simon Johnson link are all stressing an important point (as does Taleb elsewhere)

          Finance is one of the most regulated industries in the world. We ( or at least I) am not recommending no regulation. What we are saying is that activist, revolving door, crony capitalist regulation is not the solution. That is what we have now, and we all agree it is fished up, right? We’ve created a Rube Goldberg device which as even Mike mentions privatizes gains and socialized risks.

          When we hear you demand more regulation, we just roll our eyes knowing this will just lead to more crony capitalism with bigger revolving doors and larger exemptions for insiders. Every additional page of regulation is just one more sweetheart deal for the well connected CEO, one more vote for the slimy politician, and one more instance of rent seeking on the public’s dime.

          When you hear us cry out against regulation, you just roll your eyes and assume we want the corporations to do whatever the hell they want regardless of who they harm.

          That is not what we (or I ) want. We want a set of clear and consistent rules which are minimally intrusive, non activist in nature, non command and control, which, as James, Zed and the link all stress, ensures that risks and rewards are properly internalized.

          I am all for a consistent set of rules that say financial firms need to not lie, cheat, steal, harm, discriminate based upon race, and that they must be adequately capitalized or reserved to pay their debts. I also realize that complex industries require more than a simple set of Queensbury rules.

          In summary, I would say we believe that the problem is that these industries are regulated wrong. And more wrong isn’t gonna make it any better, indeed it will eventually make it worse. We hear you guys pleading for more wrong, and you hear us as pleading for none at all.

          “People are pretty simple: they do what they are rewarded for doing. If they get multimillion-dollar bonuses by taking huge risks with other people’s money—as they still do—then they will continue to take those huge risks, and not give it another thought.”Report

          • Avatar Mike Schilling says:

            It’s all so simple! Just create a simple, straightforwardness, transparent set of rules that create all the proper incentives and can’t possibly be gamed, and the entire problem goes away!Report

            • Avatar Jaybird says:

              I’d rather we have regulatory laws that were written by the corporations that are going to be regulated and then have these laws fail to be enforced unless there is some really big catastrophe or something. (But if the catastrophe is big enough, maybe we could just bail the companies out? Or something?)Report

              • Avatar BlaiseP says:

                Exactly. This phenomenon crops up in entities such as NYSE, CBOT, ICE and other such bourses. They’re mostly regulated from within. All that is necessary for such markets to succeed is to ensure trading accounts clear through some clearing house, with absolutely minimal oversight.

                My first contact with Libertarians was through Rand Financial, an excellent firm. Enter their lobby and you will find quotes from Ayn Rand on the walls. It’s entirely possible to be a dyed-in-the-wool Free Market Libertarian and believe in regulated markets.Report

            • Avatar Roger says:


              No, it is not simple. That is one reason nobody in power is actually discussing it. The other reason, of course, is that they don’t really want to solve the problem, because for those in power it isn’t a problem, it is the source of their power.

              Your recommendation was what again? What additional complex regulatory power do you want to give the ex CEos and CFOs that run the regulatory agencies?
              Because that is what more regulation does.Report

          • Avatar clawback says:

            We want a set of clear and consistent rules which are minimally intrusive, non activist in nature, non command and control, which … ensures that risks and rewards are properly internalized.

            I don’t think anyone disagrees with these vague principles. We’d be looking for specifics.Report

          • Avatar BlaiseP says:

            When we hear you guys cry out against regulation, we’d be more inclined to listen to your complaints if you understood risk markets. If you did understand, you’d make more intelligent noises about the consequences of removing the regulations.Report

            • Avatar Roger says:


              Back off, please. Your attitude is not conducive to a decent dialogue.Report

              • Avatar BlaiseP says:

                Make an intelligent noise, then.Report

              • Avatar Roger says:

                Case in point.

                You are worse than Tom. I have absolutely no idea why the League allows you and MA to continue to poison this site. We need to find a collective way to encourage more professional means of disagreement.Report

              • Avatar BlaiseP says:

                I did ask you to make an intelligent noise. Thus far, I haven’t heard one. I contend James doesn’t know what he’s talking about. It’s clear he doesn’t. I’ve made my case, not only from my own perspective, but from the Libertarian perspective, pointing out how Glass-Steagall could have been repealed by going back to the gold standard and eliminating the fractional reserve banking system. It’s a curious argument and absolutely true in its own way.

                But this argument was completely ignored. Instead, it’s all about me. I have done banking integration for many years now. I’m doing it now. I deal with underwriters and securities analysts all the live-long day. When I say James doesn’t understand what he’s talking about, I’ve made my case as well as it can be made.

                As for Tom, I knew how to deal with him, if you did not. I varied between elaborate courtesy and a rhetorical tomahawk. James can’t make his own arguments and clearly you can’t save those arguments either. The facts of the matter are not on your side. Neither of you have any practical experience in risk markets. If you did, your arguments would reflect it. If you want to make this about me, it’s just so much disingenuous wrist-flapping. I repeat myself in saying James’ arguments are all borrowed from others. Do not make the same mistake, borrowing his arguments.Report

              • Avatar Roger says:

                I think Tom was an important asset to the League. He was often the lone but loud conservative voice.

                Every conversation I have ever had with you progresses the same way (which is also reflected in how your discussion with James went here).

                1) You Claim alpha status and beat your chest.
                2) You then demean your opponent and accuse them of being a naive idiot.
                3) You then start the name calling.
                4) Finally you end it by arguing not with the other person, but by arguing phantom issues with an imaginary opponent who says what you want them to say so you can kick their imaginary ass and feel better about yourself.

                Maybe we can have some fun and turn it into a drinking game. “he just hit stage 3!”Report

              • Avatar BlaiseP says:

                When it comes to futures trading systems and artificial intelligence rules implementing risk policy, not only for trading but for insurance underwriting, yeah, I am the silverback gorilla around here. You might take me seriously enough to at least address the questions I ask.

                But I’m hardly alone in knowing how risk works around here: Mike Schilling is no slouch, I’m pretty sure he’s involved in risk taking. Zed seems bolted in, too. Michael Cain knows the mortgage angle well enough to earn my respect. Jaybird’s no dunce: far as I can tell, he managed to sum up the argument quite nicely by proposing exactly what I want to hear in fewer words than I have ever managed.

                Go sulk somewhere for a while, quietly if possible. You are out of your depth and I’m hardly alone in noting that fact. So is Hanley. I repeat myself in asking for you to make an intelligent noise.Report

              • Avatar Roger says:

                I am not in any way shape or form an expert in finance and have never pretended to be. As most here know, my background was in another area of risk, namely insurance. I ran innovation and new product development, design and implementation for one of the largest insurance companies in the US. My guess is that a significant number of the members of the league have either owned one of the products which I designed, or competitor products influenced by my designs. I am of course long since retired.

                I understand that James humiliated you and made a mockery of your imaginary silverback status. Please refrain from trying to regain it by attacking someone else who has never pretended to be an expert in the field.Report

              • Avatar BlaiseP says:

                This much I understand, Roger, for a guy who claims to understand insurance, a highly-regulated industry, you’re awfully weak on the subject of how we should regulate the financial industry. You do realise G-L-B threw insurance into the mix with banking, allowing them to coexist under the same roof. Any opinions on how that worked out?Report

              • Avatar Roger says:

                The whole mess imploded.Report

              • Avatar Dave says:

                You are worse than Tom. I have absolutely no idea why the League allows you and MA to continue to poison this site. We need to find a collective way to encourage more professional means of disagreement.

                My best contribution to the League as one of the original bloggers was my creative way of reminding people that we have a commenting policy (I was very good at challenging self-appointed alpha personalities). Enforcement of that policy around here has been quite lax. I think I’ll reapply for my old position. 🙂Report

              • Avatar Roger says:

                The libertarian crew would appreciate this, especially if you take a coercive, top down, activist role in this duty. JUST KIDDING!

                I think this would be great and is missing on the site. We need to self and other monitor better to keep the dialogue constructive. My guess is that everyone expects the writer of the post to act as monitor, but this won’t work if they are the one getting flamed, which they often are (and in some cases they are the flamer).Report

          • Avatar Mike Schilling says:

            The Simon Johnson piece says that the failed banks should have been nationalized rather then bailed out. No argument here. Cohan is saying that Wall Street types should be gambling with their own money, not other people’s (as partnerships, not corporations.) So, new rules:

            1. Corporations involved in finance will be liquidated and their charters revoked. No new charters will be issued.
            2. Failed banks which cannot find an acquirer under normal FDIC procedures will be nationalized. In order to insure a smooth transition, their employees will be retained for a period of not less than six months unless specifically released. During this period, their compensation will be set to current general services rates.

            Non-activist enough for you?Report

            • Avatar Roger says:

              I knew you wouldn’t agree, Mike. That is fine. What I would like to do though is clarify where we disagree.

              The classical liberals on this site are not suggesting the football players should go out onto the field with no rules. We are not suggesting that some teams be allowed to do whatever they want at the expense of other teams. What we are suggesting is that we have ruined the game by allowing activist refs into the field that are trying to influence the outcome of every play. As such the REAL game has shifted not to playing football, but to manipulating the on field refs.

              We see you guys as wanting better on field refs that manipulate the game more to your liking.

              I am absolutely sure your model leads to bad results. I see it as leading to S&L crises, the great recession and so forth. You disagree. Got it.Report

              • Avatar zic says:

                What we are suggesting is that we have ruined the game by allowing activist refs into the field that are trying to influence the outcome of every play. As such the REAL game has shifted not to playing football, but to manipulating the on field refs.

                Most classical liberals also think this is a problem. We even have a name for it: Regulatory Capture.

                Liberals also believe that it’s important to change the rules to encourage certain kinds of outcomes. In football, for instance, small children no longer pay tackle football, they play touch football. Because of the debilitating injuries they were suffering. I suspect there will be some rule changes when it comes to the problems of repeated head injury — not outright concussion, but repeated shaking — in the NFL.Report

              • Avatar Roger says:


                Yes, that is the term we use for it. I am obviously suggesting that regulatory capture has occurred and is a problem and that more regulation just feeds into it. I do agree that every game needs to have a gradual, methodical process for rules to evolve. Do you assume I don’t?Report

              • Avatar BlaiseP says:

                Heh. An activist process, guided by the hideous track record of damage done in the past? Surely not.Report

              • Avatar zic says:

                Roger, that’s great. But you do assume that regulation and more regulation piled upon regulation is the only way progressives/liberals think to deal with things; you repeatedly say so.

                So remember: we’re beginning the fifth year, minus about 60 days, where we’ve had a Democratic president without a Democratic majority in the House, so the laws to change regulations, including those necessary to eliminate identified regulatory capture, ain’t happening. There must be some other stuff in that tool kit.

                It’s not that you don’t agree some regulation is necessary, it’s that you constantly suggest that’s my ilk’s only view. It’s not. I’m not rebutting your stance on regulation, I’m rebutting your view of my stance on regulation.Report

              • Avatar Roger says:


                I’ve never suspected that your party wants to end regulatory capture.Report

              • Avatar Stillwater says:

                I’ve never suspected that your party wants to end regulatory capture.

                This is an amazing thing to say, Roger. I hope other readers ponder what your actually saying here so they can frame your future comments accordingly.

                I mean, you and I have gone over this before. But still…Report

              • Avatar Roger says:

                Better wording then… I have never SUGGESTED your party wants to end regulatory capture. This too is probably wrong though as it anthropomorphises a party.

                So let me try a third time. I believe regulatory capture is essential to the power base of the left and that it is virtually guaranteed (whether wanted or not) based upon their mode of problem solving, which is biased toward creating complex top down, centrally managed regulatory solutions.

                But of course I could still be wrong. Feel free to correct, but try to be civil please.Report

              • Avatar BlaiseP says:

                The essence of any sport resolves to how wins and losses are adjudicated. Why should anyone want a crooked ref on the field, even if he rules in favour of someone we like? Cricket is now faced with a serious problem in this regard. It’s driving many cricket fans away from the sport.

                All referees are activists. They enforce the rules. The rules can be amended. It seems to me you want a return to the Bad Old Days, when there were no rules. There was a day when football had fewer rules: it was nearly banned as a college sport. Theodore Roosevelt saved the game of football.

                You’re just playing the Blame Game. Anything you don’t like is the result of Activist Refs. It’s a sordid little line of rhetoric, often seen in Little League games, irate parents screaming at referees because Little Freddie was called out at home plate.Report

              • Avatar Roger says:

                No I am not playing the blame game. I clearly and repeatedly have stressed that I am not recommending no rules. And no, all referees are not activists. But based upon your accusation of my analogy being a sordid little line of rhetoric, I am assuming you do not want to discuss it. You just want to find new ways to be demeaning.

                To be honest, based upon the three rude comments and zic’s reply, I am seriously suspecting that my analogy hit a nerve that really bothers progressives. Not sure why. Is it because it is right, or wrong? If wrong, how so? Can you guys please respond without being snarky though? At least try.Report

              • Avatar BlaiseP says:

                Suspect away. You’re absolutely sure we’re on the wrong track without a whit of evidence to support your conclusion. We’ve ruined the game by allowing activist refs onto the field, seemingly determined to rule on every play.

                You are playing the Blame Game. Once the rules of the game are made, it’s you lot who are constantly snarling about anyone enforcing them. The last time we had a Libertarian at the helm of the Fed, the world economic system slid into the abyss. We’ve seen what your ideas of gradualism are, all right. Stop whining about personal attacks and start defending yourself with more than ignorant and fact-free condemnations.Report

              • Avatar clawback says:

                The hostile response you encountered was because the financial crisis is too complex to be analyzed with facile sports analogies. Until your contribution the discussion actually attempted to probe that complexity seriously.Report

              • Avatar Roger says:


                I started this as an obvious subthread comment about how classical liberals and progressives talk past each other. Specifically I was pointing out that we are not championing no rules or complete anarchy, as we have sometimes been accused.

                Accepting or disagreeing with my analogy has no bearing on what happened. It was intended to provide a framework to explain how classical liberals (or at least this one) interpret the essence of what went wrong.

                Seriously, there is nothing to be ashamed of for progressives to argue that activist refs are exactly what they want. Or they can argue that this is not at all what they want. My guess is they will argue both. Or they can argue this isn’t what they want nor what we have. Whatever.Report

              • Avatar clawback says:

                Roger, this part of the discussion isn’t difficult. All or most liberals will agree that we don’t want activist refs in general. The discussion, before it became derailed, concerned whether the specific details of the financial system necessitate a certain degree of activism, regardless of anyone’s overall preferences.Report

              • Avatar Roger says:

                Don’t let me derail your discussion on other topics. Nor would I disagree that some circumstances require activism, especially when it is already omnipresent.

                Do all the progressives agree with Claw that you do not want activist refs?Report

              • Avatar BlaiseP says:

                Give me one instance of an Activist Ref doing something terrible by way of financial regulation.

                Now, I can give you Alan Greenspan, who never saw a regulation he liked. But that didn’t stop him from Activist Intervention, whose prescription for America’s every evil was to lower the Fed Funds Rate. That’s Libertarian activism in my book. Of course, if it wasn’t very Libertarian, as anyone else would define the word, well, Activist needs defining. And you’re just the man to do it, I’m sure.Report

              • Avatar Stillwater says:

                Do all the progressives agree with Claw that you do not want activist refs?

                You’ll never believe that they don’t Roger. You’ve provided a definition of what you mean by “progressive”, and lots of people, including me, were pretty clear in saying that none of us even know of anyone who satisfies the definition.

                So, I’d say that a) we all agree with clawback on this and that b) it won’t make any difference to you since you’re fully entrenched in your (ridiculous) worldview.Report

              • Avatar Roger says:

                No Stillwater,

                In reality you denied my definition as most of the other progressives in that very post continued to substantively argue exactly as I said they would (biased toward top down, master planned and if necessary coercive solution sets as opposed to decentralized, voluntary, competitivve and bottoms up solutions). Indeed arguing with a classical liberal that you are not biased relative to him on this dimension is pretty absurd. It would be like me saying we are not biased toward freedom and non coercion. If I argued this you would suspect I am in some kind of pathetic denial.

                But you are again just changing the subject. My question is whether you all want activist referees. Clawback and you say no. Blaise mentions it depends upon how we define activist, which is of course an important next question. I will be glad to believe you and Claw, of course this assumes your later arguments continue to match your words ( and the answer to Blaise’s point).

                The fact that you guys are so snippy is interesting though. Relax. It is just a dialogue.Report

              • Avatar zic says:

                biased toward top down, master planned and if necessary coercive solution sets as opposed to decentralized, voluntary, competitivve and bottoms up solutions

                This makes no sense.

                Synthetic derivatives sunk the economy. They were completely unregulated. Nobody knew how much money was being gambled in this market, very few people selling the stuff understood what they were selling. If anything, it’s an example of top-down planning on the side of businesses selling the instruments. And as we saw once again, this is not the first time, I doubt it will be the last, business men, in the name of profit, blind themselves to the risk they create for large chunks of the economy, and in so doing, put people at risk who have nothing to do with their market.

                You speak as if the government is the only ‘top down’ group here; and that’s very naive. Government is also bottom-up; people elect the folks who decide the solutions. And business is often top-down; Wal-Mart’s top-down model has reshaped the world’s manufacturing economy. Banks top-down decisions to profit from synthetic derivatives sank that economy, putting millions and millions of people out of work.

                Your ‘some regulation’ will always be someone else’s ‘too much’ regulation, and the next person’s ‘not enough.’ With government, there’s some effort to reach a collective agreement.

                The same cannot be said of Goldman’s or WalMart. There’s a big difference between a share holder meeting and an election.Report

              • Avatar Roger says:

                Dear friendly people of leftist persuasion (Zic, Claw, SW, Mike and Blaise),

                Let me now address Blaise’s probe, which also applies to Zic.

                To provide an illustration on the difference between activist and impartial refs, let me use the same example I gave LWA. It is a topic on which I am a subject matter expert..

                In P&C insurance, some states have relatively non activist regulation. For example, they might have a few dozen pages of various regulations which pertain to not stealing, cheating, using violence, as well as unique problems within the industry such as ensuring the company has adequate reserves and that directors not be involved with more than one firm. It is a complex industry, but in general the regulation implies that market forces of competition and consumer choice will determine prices, products, practices and so forth.

                Good so far?

                Now the more activist states are quite different. Here the policies and endorsements are actually written by the state, and the insureds need to use these standardized products. New forms can be suggested by an insured, but there is no incentive to do so, because all the other firms get it approved for themselves free of work when approved, thus no competitive advantage in working on better products. Prices and underwriting guides are also set by the state. For example they may state that the first two tickets cannot influence your price or acceptance, but at fault accidents and three tickets or more can.

                In the most extreme cases, the state actually establishes every rate category and has its own actuaries publish exact rates by class and territory. Sometimes companies are allowed to ask the regulator for “deviations” from the published rate. Approval, which can take six months or more, is of course up to the regulator, and their relationship with the company and the industry as a whole.

                In some of these states the insurance commissioner is politically elected based upon a specific agenda, such as lowering rates or making insurance more available to people living in the path of hurricanes. These commissioners establish huge regulatory agencies which work on prices, audits, forms, complaint handling and so forth.

                Do you see the difference? In the first example, the decision making is decided among the decentralized actions of companies and customers as propelled by market competition. In the second case, the very nature and terms of the market are constructed in large part by the regulators. They actively define the terms and conditions to actively influence the market.

                So I ask again. Are you guys for the impartial or the activist model? Do you see finance as more like the former or the latter?Report

              • Avatar zic says:

                Yes Roger. Those different rules, 50 sets, which made the whole ACA debate difficult because people in each state had differing sets of problems. Local control. Control that left you uninsured or uninsurable in many places once you got sick.

                Try again.Report

              • Avatar clawback says:

                That’s easy, Roger. I’m in favor of that first model you mentioned. Right up until some insurance company finds a clever new way to collect premiums and not pay claims. Then I’m in favor of regulating that scheme away, but only in the narrowest way that closes the loophole. Then I’m in favor of letting the industry alone. Until the next evil genius discovers the next loophole …Report

              • Avatar James Hanley says:

                Roger, an excellent example. As to Zic’s response, not only is there is no inherent necessity that those regulations have to be at the state level, but also there is no necessity that at the federal level regulations have to be that closely detailed.

                An example I’m fond of using is that of trucking produce before Carter deregulated the trucking industry (think it was him, maybe Reagan, who followed up on deregs that Carter started). It’s not that de-regulation eliminated all regs of the trucking industry (I’m sure Rod, our OTR guy, could tell is in copious detail about the regs he has to comply with), but it shifted from controlling the competition to creating the arena for competition. Prior to the de-reg, for example, trucking firms had to get permission for particular routes to ship particular types of produce. If you have the charter to ship tomatoes from Farmersville to Megalopolis down route 33, then if I want to ship tomatoes from Cropsburg to Megalopolis, I have to get a charter for a different route–I couldn’t even use the same road. One of the effects was truckers most often had to dead-head back home; wasting time, money, and energy (fuel).

                I’ve noticed that when I present examples like this to liberals, the most common response is, “Oh, well, that was a stupid regulation.” But they were regulations devised by liberals, and most liberals supported them at the time and opposed the deregulation. And when proponents of competitive markets argue against still-extant rules of such byzantine structure, the liberal response is almost inevitably, “Oh, but this industry particular needs that type of rule.” That’s possibly so, for some particular industry–I don’t think they’re all quite the same (and I think health care is different, because of the problem of the low-cost folks being less likely to buy in than the high-cost folks, and quite possibly the financial industry, because of the exceptional difficulty of knowing what we’re buying). But I do think at some point liberals would start to say, “let’s take an evidence-based approach, and look at the history of deregulation, and see what has worked well and what hasn’t,” rather than sticking to the position of assuming that extant regulations necessarily are more beneficial than harmful.

                After all, like us libertarians, liberals are very concerned with regulatory capture. That should make them innately inclined to take a hard look at any existing regulations, just because it’s quite possible those particular regulations are themselves a product of regulatory capture.Report

              • Avatar James Hanley says:


                More evidence that the Bronc* is center-right, not left. 😉 (Seriously, I LMAO at folks who call him a socialist.)

                *No, that’s not a cheap anti-Obama stab. I think the “Bronco Bama” meme is just funny on multiple levels–how tiresome electoral politics is and the value of having a sense of humor about it, how funny kids’ perceptions of the world can be, and an apt description of Obama as a rodeo cowboy trying to ride and control an animal that’s trying to buck him off. I think Bronco Bama should be a welcome meme, and the Prez should go down in history as “the Bronk,” without any of it signifying anti-Obamaism.Report

              • Avatar Jaybird says:

                Nobel Prize Laureate Bronco Bama.Report

              • Avatar James Hanley says:

                The Nobel Peace Prize for President Drone Strikes –now there’s a joke that’s not funny at all; the Democrats’ Henry Kissinger.Report

              • Avatar BlaiseP says:

                Roger, who issues insurance charters? That’s right, the states. Who regulates insurance? Once again, state regulators. And we both know states don’t set rates. What you’re talking about is state approval of P&C rates submitted before they go into effect. Keeps price wars and from breaking out. Also keeps no-content policies from getting written.

                If we had Fed chartering, we could get some regulatory congruence. Sounds to me like you are advocating for federal charters. It’s unconstitutional while the states regulate insurance and issue charters. We already have NIPR, what more do we need by way of tracking troublesome insurers? But weirder, why would any Libertarian advocate for less regulation of an industry so obviously subject to fraud?Report

              • Avatar James Hanley says:

                Keeps price wars and from breaking out.

                God forbid we should let consumers benefit from price wars between suppliers.

                why would any Libertarian advocate for less regulation of an industry so obviously subject to fraud?

                Once again we have that simplistic “less/more” model. From that standard, why should we have ever more and more regulation, because apparently more is inherently better than less. Period. And it ignores that Roger explicitly argued for regulating against fraud. To imply that he wants to make fraud more likely is a misrepresentation of his position.

                …federal charters. It’s unconstitutional while the states regulate insurance and issue charters.

                Hmm, not my area of expertise within con law, but that sounds dubious. State regulation of something cannot normally preempt federal regulation, while federal regulation can preempt state regulation, or at least supercede it. This is called…wait for it…the preemption doctrine. (Else Colorado’s marijuana law would preempt federal law, which we all know it doesn’t.)

                All that could make federal regulation unconstitutional is if it’s beyond Congress’s Article 1, section 8 authority to regulate interstate commerce. And given how little economic activity today can’t be defined as interstate in scope, I can’t see that applying.

                But, as noted, this isn’t my strongest area of constitutional law, so I’m open to correction (by reference to evidence, not by mere assertion).Report

              • Avatar BlaiseP says:

                James, here’s one place where Roger actually knows what he’s talking about. Insurance is an industry where fraud can appear in every corner of that landscape. Now, he knows P&C and I know health insurance and I’ll defer to Roger on how these scams go down in his neck of the woods.

                At least two sorts of insurer fraud appear immediately. Many states have regs on P&C, something reading like No mortgage lender shall, in connection with any application for a mortgage loan in this state which is secured by a mortgage on residential real estate located in this state, require any prospective mortgagor to obtain by purchase or otherwise a property insurance policy in excess of the replacement value of the covered premises as a condition for granting such a mortgage. That’s a side effect of G-L-B by the way: now that insurance is in bed with the bankers. It’s a common gotcha at closing.

                But there’s another eviller scam, the cover-nothing policy. Sure, they’re cheap but they won’t pay out. Insurance isn’t Cleaner Fish: many contracts require insurance and all the parties must rely on solid, regulated insurance backing. I’m sure Roger can give us all some horror stories about how the shyster outfits manage to avoid P&C payouts.

                As for state-versus-Fed insurance regulations, there’s an outfit called NAIC. They’ve composed a convenient pdf by way of explanation.Report

              • Avatar Michael Drew says:

                I thought Roger was talking about refs being relatively activist. Turns out he was talking about rulebook writers (lawmakers) writing rules that are too restrictive/specific. These are entirely different things. I was surprised when the liberals professed not to usually want activist refs (regulators), but now it makes sense. The participants understood each other despite (as far as I can tell) using the wrong metaphor. LIberals generally don’t want overweening or excessive regulation – they just want the right regulations. But some (like Zic) may think that in the finance area the right regulations may have to be particularly specific and/or limiting (others may not).

                But one thing I thought liberlas did agree on was that vigorous enforcement (i.e. by appliers of written regulations – regulators, or “refs) was absolutely necessary for any finance regulation scheme to work. The record shows that the finance industry pursues loopholes and pushes on every curve and zag in every letter in the written law in a way that is unlike, or at least as intense, as in any other industry Part of the problem was that regulatory agencies are in a constant battle of attrition with firms to retain the talent necessary to create a rigorous regulator environment in which firms have to operate. The more zealous advocates on the free-market side in the early years after the meltdown sometimes used this as an argument for the particular futility of regulation of the more complex financial transactions. But it seemed to me that a consensus eventually emerged that active, rigorous application of smart regulations was necessary to protect the economy from the development of unstable financial structures like the ones that built up in the 2001-2007 era.

                I wasn’t particularly surprised to see Roger attacking that consensus, but I was surprised to see some of my liberal friends here avowing a general lack of support for active application of written regulations by refs, i.e. regulatory agencies. That approach was at the heart of the particular kind of regulatory capture – a general stepping back by staff (though not without some of the special favors for particular incumbents that we see under all all political regimes) – that characterized the George W. Bush years.

                But it turns out that’s not what anyone was talking about. If you all agree that you were talking about what Roger describes above, then when you referred to “refs,” what you actually meant was “the rulebook” – i.e. the question was whether the laws themselves should be “activist” or not.Report

              • Avatar James Hanley says:


                That’s an excellent job of rebutting an argument I didn’t make. Put another notch on the stock of your strawman rifle.

                Insurance isn’t Cleaner Fish
                Ah, you and the cleaner fish. Of course you know I was talking about a barter market there, and not a money-based market, but, hey, I’ve come to expect this kind of dishonest insinuation from you. And as to your general objection to the cleaner fish argument, it just seems to me to demonstrate your general ignorance of biology and animal behavior. It’s a great old pastime, trying to define what separates man from the animals, but in the end it appears that most of our activities are only more complex versions of activities found throughout nature. At this stage in our understanding of the natural world, can no more reasonably say there’s no market in fish teeth cleaning than we can say there’s no courtship among prairie hens or tool making by chimpanzees.

                Laugh all you want, but I’ve read the literature and you haven’t. Laughter from one’s own ignorance is, well, I suppose sad is the word.

                By the way, I just noticed that yesterday you did get around to explaining the CRS report. Sorry I missed that before. I’ll respond when I have time to read it carefully and digest it. As I admitted up front, you could be right about that report, and I just needed it pointed out to me. So give me some time and I’ll get to that.Report

              • Avatar BlaiseP says:

                @Michael Drew: practical example of over-regulation. Southern Illinois courts had a consistent track record of awarding huge malpractice settlements in OB/GYN cases. Result: the OB/GYN physicians (and anesthesiologists) simply left the jurisdiction.

                Are you a patent troll? You’ll love the United States District Court for the Eastern District of Texas, especially Judge T. John Ward’s court. All rise, cause Judge Ward just loves patent trolls.Report

              • Avatar James Hanley says:

                @Michael Drew,

                LIberals generally don’t want overweening or excessive regulation – they just want the right regulations.

                I think one of the difficulties in communication between libertarians and liberals is in that term “excessive regulation.” Obviously liberals don’t want excessive regulation, as they define excessive. It would be truly odd to hear someone say, “I do want excessive regulation.”

                It’s reasonable for libertarians to argue that contra liberals’ assessments, the regulations they propose actually are excessive, but it’s very stupid for libertarians to argue that liberals want excessive regulation.

                So there’s a problem there of language not really communicating ideas well. And I think it’s because libertarians’ fault. (Some probably actually think liberals know their regulation is excessive and they want it precisely because of the excess–those folks are idjits, of course.)Report

              • Avatar BlaiseP says:

                Look, James, it’s trivial to reconcile Liberals to Libertarians on the “regulation” issue. It’s an existential problem: “regulation” doesn’t matter unless it’s enforced. What am I always saying? — the worst evils arise from the best of intentions. That’s a Liberal sentiment.

                Libertarians are all about individual rights. What did Obama say yesterday? But we have always understood that when times change, so must we; that fidelity to our founding principles requires new responses to new challenges; that preserving our individual freedoms ultimately requires collective action.

                Collective action. Laws which apply to everyone and are equally enforced. Equal Justice Under Law. It’s common sense and every Libertarian complaint about trespass upon individual rights is a contradiction in terms. Who gave you those rights, or more precisely, who enumerated them? And when all is said and done, who’s going to enforce them? You’re not powerful enough and you lack mandate. More importantly, justice isn’t yours to dispense. The Somalia argument arises but not in the way you’d expect: if you don’t want excessive justice, keep mob justice from arising.Report

              • Avatar Michael Drew says:


                I agree. Generally, I would try not to use that construction, because it does beg the question. It was kind of a throwaway line there that I didn’t think about, because my point in that comment was obviously more just on the (in my view) slightly off use of the “refs” metaphor that had me completely misunderstanding what was actually beeing discussed – i.e. regulations (that old saw), rather than the (to me somewhat more interesting question of) regulators.Report

              • Avatar Roger says:

                Zic writes:

                “Yes Roger. Those different rules, 50 sets, which made the whole ACA debate difficult because people in each state had differing sets of problems. Local control. Control that left you uninsured or uninsurable in many places once you got sick. Try again.”

                Try what again? I just stated how the P&C market works in extreme cars for illustration. Not sure why I need to try again, or what this has to do with health insurance.

                Which model do you prefer, the activist or the non activist?Report

              • Avatar Roger says:


                Thanks. I agree with your comment. As systemic problems or new developments show up, the regulations need to evolve.Report

              • Avatar BlaiseP says:

                @Roger: re Not sure why I need to try again, or what this has to do with health insurance.

                I’m not sure this was exactly what Zic was alluding to with Those different rules, 50 sets, which made the whole ACA debate difficult because people in each state had differing sets of problems. Local control. — but here’s an ugly backlash in the fishing line of progress:

                HMO and PPOs are strong-arming physicians and health care providers into one-sided deals. They promise to cut down on the red tape in health care claims. It takes more time to process the claim than to treat the patient. Claims are routinely denied the first time around, Bureaucracy Hell isn’t limited to Big Government, you know. Physicians’ assistants now mostly deal with getting paid.

                Anyhoo, so the health care community got in the lobster trap. Now the HMOs and PPOs are driving down health care standards. This isn’t just cost-cutting, we’re talking about both huge rate increases for the insured and lower payouts for physicians and hospitals. It’s an amazingly profitable industry, health insurance.

                Talk about regulatory capture! There’s capture, all right. Cornering the market, fraud, waste, abuse of power — when I see the Libertarians as upset about this sort of capture and Unfree Markets as they are about hypothetical Activist Regulators. HIPAA was supposed to eliminate a lot of this mess, make health care portable, lower claims processing costs. Always getting their panties in a twist about goobulous monsters in the regulatory closet: these HMOs and PPOs are worse than any socialised medicine scheme in the world.

                Reality bites. ACA is a good first step and more ought to be done.Report

              • Avatar clawback says:

                And the old regulations should be reviewed periodically to ensure they still apply. Roger, I really don’t think any of this is particularly controversial among liberals, James’ No True Scotsman evasions about Obama and Carter notwithstanding.Report

              • Avatar Roger says:


                The range of state requirements on prices starts with those where companies can set their rates and inform the insurance department to those where the insurance department actuaries actually do the rate setting and companies file for approved deviations from the state rate level. The latter is extremely activist in my definition. The state is becoming a major force in the market. They are not just calling fouls on violations of consistent set of rules, they are determining who gets better or worse rates and which companies get what expected profit level.

                As an example, in more left leaning states, the department requires lower than actuarially predicted rates for such favored groups as young inner city males with bad credit and no prior insurance. The companies thus either charge higher rates for older, married suburban women with good credit, or “eat the difference” via lower profits. I am not arguing here for or against this practice, I am just providing an example which many lefties will resonate with. They often view this kind of activism as good — that is is better for society. Most libertarians of course would disagree.

                As to the price wars, in less activist states, they expect price wars to break out. That is considered a feature, not a bug. They do reasonably IMO set uniform requirements on reserves to ensure that shoddy players don’t collect low premiums and then bail at claim or catastrophe time. A very real threat, btw.

                I am not recommending for or against federal charters. I am just trying to define activist to distinguish a potential difference between our world views.

                As to “why would any Libertarian advocate for less regulation of an industry so obviously subject to fraud?” the answer is that as James points out we are not lobbying for allowing fraud. We believe regulators can protect against fraud without becoming activists and setting or or pre approving rates, underwriting standards, policy forms and such. Granted we could be wrong. My point is that we are not arguing no regs, just substantially less activist regs.

                Now that I have tried to define it, I wonder if progressives prefer the activist model or not, other than Claw, who has already answered.Report

              • Avatar BlaiseP says:

                You’ve kinda gotten yourself into a cleft stick of your own making, Roger. You want to change the laws. That’s fine. That’s also activism. Per se. No escaping that definition.Report

              • Avatar James Hanley says:

                Michael–I didn’t really mean to criticize your word choice. In fact I think the reason it’s there for you to use as a throwaway line is because libertarians have senselessly put it out there. Better for it to disappear, but no blame for liberals using, for rebuttal purposes, a phrase libertarians threw at them.

                Blaise–I think your last comment perfectly encapsulates the differences in our approaches. I prefer a carefully constructed argument, and you often use these impressionistic types of arguments that kind of snatch and grab at various bits of ideas. There are interesting threads in them, but I can’t interpret them into a whole fabric. I’m not saying there’s no there there, just that functionally it’s almost a different language; one that I can’t parse. I do think it reflects a particular of thought, and it reflects and fits with your interest in using poetry as part of your argument. But it’s not my mode of thought.Report

              • Avatar Roger says:

                I am not just referencing the number of rules, though I am sure we differ on that too. I am trying to specifically point out the difference between activist and non activist regulations.  In the activist model, which may or may not be best, the regulators actively and proactively attempt to influence market outcomes.  It isn’t just a matter of nobody can do this or that because it is bad, it is, as I explain to Blaise, that the state regulators become players trying to influence outcomes of the game. 

                There is a fundamental difference between regulating that nobody can discriminate in their rates or underwriting based upon race (a routine rule in non activist states), and in the state telling an insurer how much they can charge in the inner cities regardless of their profit level. There is a fundamental difference between saying companies must all be adequately reserved and pay claims owed, and stating that they must use this policy and accept this customer whether the company wants to or not.

                Going back to my hated sports analogy, there is a difference between refs calling fouls to the rule book, at one extreme, and requiring the team to run the plays by them before hand, or even telling the team what play they need to run and how best to run it.

                What I am getting at is something fundamental that libertarians bristle at.  It is not just the complexity or extent of regulation, it is also how activist it is.  

                Now that I have defined it better (hopefully), where do you lean? Report

              • Avatar BlaiseP says:

                ROFL. Quit trying to schoolmarm me, James Hanley. That shit might work on campus. It cuts no ice with me.Report

              • Avatar Roger says:


                I am definitely suggesting that there is a difference between occasionally modifying a set of impartial rules and establishing rules which empower the regulator to proactively influence the outcomes.

                I will agree that an indirect way to be activist is to contually change the rules in an attempt to establish winners and losers. Let’s just say this is a matter of degree.

                In other words, rules can evolve over time and still be impartial.Report

              • Avatar BlaiseP says:

                And I am definitely suggesting dismantling consumer protection laws just because some naive and trusting soul thinks the underlying problems won’t arise again ought to be accompanied by a stipulation, to wit, that should the problem re-arise, we can tie the deregulatory jackass to the nearest lamppost, douse him in lighter fluid and set him alight.Report

              • Avatar James Hanley says:


                Well, you can dismiss it as schoolmarming if you want, but that doesn’t change the facts. You throw out some impressionistic bits and pieces of ideas and think they add up to something without actually developing an analysis that would show whether they do or not. I don’t like that style because it’s incomplete. Sometimes the impressionistic ideas work out and sometimes they don’t, but only by getting analytical can we really see if they do or not.

                So I see people who stick to the impressionist route as folks who are intellectually lazy and afraid to put their own initial beliefs to the test. If that’s schoolmarming, I’m fine with that. I can’t see how any educated person could justify anything less.Report

              • Avatar BlaiseP says:

                James: I think it’s better if I never respond to you, again. It’s just not productive. I’m never writing comments on your diaries. I’m never responding to your comments. I’m not responding to your emails. And I’m not accepting your apologies. This is pretty much It, dude.Report

              • Avatar Roger says:


                Does your immolation model apply both ways?

                Can we burn people to lamp posts that suggest over regulation or activist regulation if it is captured by the regulated industry or leads to negative unintended consequences?

                Just asking….Report

              • Avatar James Hanley says:

                You want to change the laws. That’s fine. That’s also activism.

                Yes, changing the laws to prevent regulators from crafting specific outcomes is exactly the same as letting regulators craft specific outcomes, because they can both be defined as regulation.

                And I am definitely suggesting dismantling consumer protection laws just because some naive and trusting soul thinks the underlying problems won’t arise again ought to be accompanied by a stipulation, to wit, that should the problem re-arise, we can tie the deregulatory jackass to the nearest lamppost, douse him in lighter fluid and set him alight.

                Which of course isn’t at all what Roger’s arguing, but in typical Blaise fashion a very snarky misrepresentation of it.

                Blaise is great with the poetry and when recounting his own experiences, and he certainly has nice flashes of insight on pretty frequent occasions. But honest and sincere debate? No, he always goes for the misrepresentation.

                I know I’m a bit of a pompous prig about this, but what makes the League better than other blogs is the degree to which serious discussion is carried out with that kind of dishonesty. And given the natural tendency of political debate to trend towards dishonest misrepresentation of our opponents’ positions, I think the League’s superiority can only be maintained by constant maintenance, which means pointing out those who persistently engage in that cheap tactic.Report

              • Avatar James Hanley says:

                Gee, Blaise, we emailed each other what, once? A year or so ago? Initiated by you for a prospective co-authored piece on the Middle East that we never wrote? I’m going to be heartbroken that you’re not responding to all the emails that I’ve never sent you.

                And I’m really going to miss all the comments you don’t write on the diaries I don’t keep.

                But my contempt aside, I’ll try to keep up the bargain, too. You stay off my stuff and I’ll try to remember to stay off yours.Report

              • Avatar BlaiseP says:

                @Roger: we’ve already established that the health insurance industry uses its own byzantine internal regulations as a stick with which to beat the health care providers into submission, a subject upon which you have not commented. This I believe to be Regulatory Capture. Do you?

                If so, I’m all for your proposal. If ever there was a collection of criminals worthy of lighting Pennsylvania Avenue, it would be the lobbyists for Big Pharma and the Health Insurance Industry. We have the Negative Consequences of which you bravely speak: we pay more and receive less in terms of health care and these two Negative Trends seem to be holding true to course. But these are entirely Intentional, all the more reason to bring out the torches and the lighter fluid.Report

              • Avatar James Hanley says:

                Oh, and I didn’t offer you an apology, nor had the thought crossed my mind. I’ve never before apologized for calling a spade a spade, and I’m not going to start now.Report

              • Avatar BlaiseP says:

                … and with that, alas, I’ve written my last comment on this diary.Report

              • Avatar Michael Drew says:


                I didn’t say you were just talking about the number of regulations. I just made note that you’re talking about the set regulations, not regulators, when you talk about “refs.”Report

              • Avatar Major Zed says:

                It’s an amazingly profitable industry, health insurance.

                For the record, net income among health insurers in the US for the past 10 years has averaged about 4% of premiums and 15% of capital. Not what most people would consider “amazing.”Report

              • Avatar Tod Kelly says:

                “For the record, net income among health insurers in the US for the past 10 years has averaged about 4% of premiums and 15% of capital. Not what most people would consider “amazing.””

                Yeah. But on the other hand, that’s a 4% fee off the top of a low risk venture that for two generations grew almost 10% annually like clockwork. So not amazing, but also kind of amazing.Report

              • Avatar Major Zed says:

                low risk venture

                The figures I’m looking at (2001-2011) ranged from 0.8% to 6% for the entire industry in aggregate with individual firm results more volatile. Not exactly my definition of “low risk.” Especially when the political risk is unquantifiable.Report

              • Avatar Major Zed says:

                As to growth, what I find kind of amazing is that medical inflation is still about 50% higher than general inflation. Does that mean insurers aren’t being aggressive enough with cost containment? No, there is something structurally rotten with the system. But we are so far off from Glass-Steagal now, we should be doing a separate post….Report

              • Avatar Michael Drew says:

                But I do think at some point liberals would start to say, “let’s take an evidence-based approach, and look at the history of deregulation, and see what has worked well and what hasn’t,” rather than sticking to the position of assuming that extant regulations necessarily are more beneficial than harmful.

                I think they would do. Because they did.Report

              • Avatar James Hanley says:

                Really? Carter did, but he wasn’t very liberal (not economically, at least), and Reagan did, but he also wasn’t very liberal (at least in the modern sense of the term).

                Anyway, I am specifically referring to my liberal friends and acquaintances here at the League, from whom I really can’t remember ever seeing this kind of approach. What I’ve generally seen is the assumption that the existence of the regulation is evidence of its value. After all, if there wasn’t a public need, why did they pass the regulation?

                I mean, on just about any particular regulatory issue liberals can persuaded to look at it with the skepticism I recommend, but I just don’t see evidence that there are many, if any, liberals here who adopt that as a consistent and regularly applied approach; as their initial approach to regulation. (And keep in mind it doesn’t imply that all regulations will be found wanting, so I’m not encouraging liberals to just oppose all regulations; not by a long shot).Report

              • Avatar Michael Drew says:

                Um, well, Bill Clinton did G-L-B. I think his regulation/dereg. record is mixed, but then that’s in broad strokes what you’d want to see from an executive taking the approach you describe, isn’t it?

                I don’t really want to attempt to sum up what happens here at the League; I’d rather just say that I generally don’t think it’s representative of any of the major policy/political camps in the wider world. But I do think that you overgeneralize about what liberals say here in that assessment, and you also don’t recognize the conversation on regulation generally takes a broadly pro/anti format when you’re not there to guide it, and that’s as much to do with the incoming attitudes of free-marketers as it is with liberals starting attitudes in my view. In any case my sense is that what liberals do here, more often than not – certainly in this case – is try to review the record like you ask. That’s what Blaise is doing here (however much you dislike his methods). His argument is not that G-S was taken off the books, ergo it was the cause of the meltdown. he has an account; he’s limiting his claim to a form of the argument that :finance is different”; etc. At least formally, he engaging the particulars in an assessment of the record, like you ask of liberals. I really think that, all things being equal, if you seek to engage liberals here in assessments of particular regulations, you’ll get engagement on those terms. yeah, there’ll be exceptions. There’s only one Jesse, for example. There may be a couple more like him. But there are many more Stillwaters, Schillings, mes, etc., in my view. Sometimes, though, the issue will come up generally – regulation, good/bad, and then general biases, like Roger admits, will come out.

                But what’s the point in just batting back and forth different impressions of this place? This place doesn’t really matter. And you didn’t mind applying your description to liberals generally, only to better define it after being asked. More important is the question of why, when you hear a facial admission from a liberal that a given regulation is/was stupid, it strikes you more as evidence that the answer to the question Is Our Liberals Learning? is no rather than yes. Isn’t that what you’re looking for? Or are you more interested in some wider ideological victory? I mean, in the initial comment I respond to, your request is for liberals to take an approach of ““let’s take an evidence-based approach, and look at the history of deregulation, and see what has worked well and what hasn’t.” But in this last comment, it seems that may not be enough: “I mean, on just about any particular regulatory issue liberals can persuaded to look at it with the skepticism I recommend, but I just don’t see evidence that there are many, if any, liberals here who adopt that as a consistent and regularly applied approach; as their initial approach to regulation.”

                It’s true that liberals are always going to be somewhat reflexively more willing to be receptive to the broad concept of regulation. They think markets generally have greater failings needing of corrective action than libertarians do. This gets back to first principles. But if you gain assent for critical examination of particular regulations in all cases, aren’t you just holding out for a kind of signal ideological victory on general attitudes by not acknowledging the significance of a general willingness to assess particular cases? I mean, that’s clearly all that is necessary for a productive policy-assessment environment. The rest seems like it just amounts to little more than ideological teamsmanship, or a desire for some kind of final victory in the ideology wars.Report

              • Avatar Michael Drew says:

                One other distinction, or a couple others, I think I’d want to make among, let’s say, people not generically skeptical enough of regulation for James Hanley’s liking, based on the examples you’ve given: that’ between people who are genuinely zealous about regulation generically, from those who are (or, especially in the 70s-80 period you highlight) merely cautious about wholesale deregulation. This is a distinction I’m sure you, as a Burkean libertarian, would acknowledge. Maybe your particular experience leaves you feeling satisfied that the liberals you have in mind displayed excessive Burkeanism in the degree of libertarian move toward deregulation that they initially countenanced (which, as liberals, may have been against their first instincts). But I feel like that distinction is being completely lost in the way you describe them today.

                I also think that that distinction plays itself out in assessment of deregulation today, where you experience hesitance to admit to the fullness of the success of deregulation as some kind of proto-unreformed generic regulatory zeal, rather than simple caution at declaring the issue ideologically settled, or even just having a different view of the record on one particular issue.Report

              • Avatar Kim says:

                I’m willing to be persuaded. Ain’t gonna do your job for ya, but i’ll keep an open ear. In return, I’ll point out the shysters and what they stand to profit from “deregulation.”

                And then we can do a fine cost/benefit.Report

              • Avatar James Hanley says:


                Bill Clinton was a DLC guy, and the DLC famously pushed the “third way” argument against the Democrats’ more liberal wing. The example doesn’t really falsify my position.

                Above, clawback calls my position a “no true Scotsman evasion.” Possible, but I’m doubtful. Consider just the League for a moment, as a dataset that’s easier to workwith. How many threads have there been here where those who identify themselves as liberal, left, or progressive, have initiated discussions arguing that some area of economic activity was over-regulated? And how many have there been where a non-liberaal initiated that discussion and the dominant first response from liberals was not “you might have a point,” but something more reflexively critical?Report

              • Avatar James Hanley says:


                I’m in no way suggesting you shouldn’t keep watching the shysters. (Can I use that word if you used it first?) They shouldn’t be allowed to write the regulations or the deregulations, right?

                As I said, I’m not saying liberals should or will find all regulations fail their standards. I’m only saying that since they sincerely (and correctly) do believe in the existence of regulatory capture, that they should always harbor the suspicion that any particular regulation is actually a product of capture, and not really in the public interest but only marketed that way.

                Honestly, that was my wake-up moment as a liberal. That doesn’t mean I think every liberal should ultimately end up as a libertarian–by itself it wouldn’t have made me call myself a libertarian (it was a varied set of issues that collectively did so), and in fact, that being the wake-up issue for me partly explains why I’m such a soft libertarian (I wasn’t and still am not sanguine about businessmen’s interests, just as Adam Smith wasn’t). But taking regulator capture seriously is what made me realize I’d been far too sanguine in my support for economic regulations in general.Report

              • Avatar Michael Drew says:

                Bill Clinton is a liberal. But I wasn’t looking to falsify anything, just to look at the record.

                And again, I don’t really want to validate the particular collection of liberals here at the League as significant in any way. But I don’t think any of the rest of that has any import. There can be some reflexive defense of regulations against criticism, so long as there’s finally willingness to examine them on the merits. I don’t begrudge libertarians their natural skepticism. You can be on a quest to change that reflex in liberals, but I don’t lend that particular desire of yours any credence, so long as ultimately you get willing engagement on the merits. You have no cause to expect others to reform their basic political/policy dispositions at your asking. You can only expect that they be willing to engage you on the merits on all questions, and ultimately judge arguments by appeals to reason and evidence.Report

              • Avatar James Hanley says:

                Michael Drew,

                I don’t agree about Clinton, but let’s set that aside. Previously you seemed to be saying liberals do have the skeptical approach; now you’re saying I shouldn’t expect them to. Perhaps I’ve misunderstood, but that’s how it appears to me.

                *shrug* I think this is turning into another thread where we unhelpfully end up talking past each other.Report

              • Avatar Michael Drew says:

                What I initially said was that liberals had done what you said at some point you’d think they would do: ‘start to say, “let’s take an evidence-based approach, and look at the history of deregulation, and see what has worked well and what hasn’t,” rather than sticking to the position of assuming that extant regulations necessarily are more beneficial than harmful.’ By saying they had done that I had in mind, and I think I was clear, to say was that liberals have started to willingly look at the record of effects of individual regulations (or deregulation programs), which is what I took you to be saying they should do in that quote. We then found out that beyond simply willingly engaging in a merits-based assessment of effects, what you also wanted was for them to transform their initial approach to regulation from one of a degree of initial favor at a general level, to one of initial skepticism at a general level. That I quite clearly indicated I didn’t think liberals had done, and I further indicated that I didn’t think they need take any concern with your desire that they do so.

                I will say that your position on Bill Clinton smacks strongly of NTSism. He’s quite obviously liberal a who’s led many other liberals to be (somewhat) more like you want liberals to be. (Though I think probably even Clinton himself doesn’t have that initial skepticism that you want liberals to develop – he derived his positions out of 1) merits-based analysis on individual questions and 2) political opportunism.) I don’t know why you’d prefer not to see it that way.Report

              • Avatar clawback says:

                So now Carter, Clinton, and Obama are all non-liberals. Let’s just define the term “liberal” as “one who likes burdensome regulations” and be done with it.Report

              • Avatar Michael Drew says:

                We don’t have to do that. We can just take James’ meaning to be, ‘liberals of the kind of have in mind.’

                He did want to limit it to liberals around here, and I probably should have let him do that, but the fact is that liberals around here are a pretty mixed & moderate lot on regulation, and they do as often as not a take a let’s-look-at-the-record approach to most regulations, even if they (being liberals) continue to give regulation at a general remove, and in particular, an initial degree of benefit of the doubt (the form of which in particular cases amounts not much more than, ‘Well, let’s take a look at what the regulation was meant to accomplish, and give a charitable reading to the evidence as to whether it did anything toward that end before we declare ita n obvious failure…’Report

              • Avatar James Hanley says:


                I’m not no-true Scotsmaning Clinton. He was a big wheel in the Democratic Leadership Council, and the goal of that organization was to pull the Democratic Party away from the left to the center. And I can readily find more quotes about Bill Clinton’s centrism than I can actually link to (so I’ll ignore the links and give the quotes, which can be Googled).

                Matt Bai: “Mr. Clinton was able to set himself up against ideological extremism so successfully because he really was a centrist deal-maker,”

                Rachel Maddow called Clinton: ““the best Republican president the country ever had.”

                Bruce Bartlett: “the center of the party today is far to the right of where it was before 1992, when Bill Clinton was elected with a mission to move the party toward the right.”

                Jonathan Schwartz: “In reality, of course, Clinton knuckled under to the center right—much of which was located within the Democratic party—from the very beginning.”

                Sure, Clinton was a liberal in a very broad sense–in the European sense–but in the American sense and particularly the Democratic Party sense he was not liberal. He surrounded himself with and consistently cut deals with corporate lobbyists, he pushed NAFTA through the senate over the objections of American liberals, and he co-opted the Republicans reform of welfare, which was also strongly opposed by liberals. He also signed an executive order declaring that every resident of federal funded public housing had voluntarily waived their 4th Amendment rights against search and seizure.

                I’m not bashing Clinton, nor am I trying to squeeze him into a convenient box. But I think the historical record is clear that, like Obama, Clinton is best defined as center-right.Report

              • Avatar Michael Drew says:

                In the American politico-cultural sense he was a liberal. It you’re going to insist that no liberal who is (in his time) heterodox among liberals on economic and regulatory policy is a liberal for the purpose of the point you’re making, then clawback’s right, and you’re just defining “liberal” to exclude the thing you say you want liberals to become. That’s obvious, and asinine. Bill Clinton was a liberal who did the stuff you want liberals to to on regulation. Barack Obama is a liberal.Report

              • Avatar Kim says:

                Can we all call Nixon a liberal? The Epa and all that?Report

              • Avatar James Hanley says:

                Michael and Clawback,

                At this point I can’t respond substantively in anything approach a polite tone. Like Blaise, you’ve responded to a presentation of evidence without even the faintest attempt to rebut it, but simply say, “nuh uh.”

                I’m seriously tired of that kind of thing. Give me evidence in support of your argument or go away.

                Michael, I don’t know why all our discussions end up sucking like this. I don’t think you’re a bad guy, but it seems like we’ve never had a really good and productive discussion. Maybe we should just avoid each other, not out of spite or dislike, but just because it always goes south.Report

              • Avatar Michael Drew says:

                My evidence is that if you go out and ask people if Clinton was a liberal, you’ll find out he’s a liberal. You can’t go around saying what you want liberals to do and then deny the examples of them doing it just because they did it, which makes them not fit the first qualifying category. Bill Clinton campaigned to move a Democratic Party that had all the tendencies of liberals you describe back in the direction you say you want liberals to move. And because of that we know he wasn’t a liberal? No, a liberal can do that. Bill Clinton did.Report

              • Avatar Michael Drew says:

                On engaging you, James, I am, and have always been, here, since before you were, to debate things I feel like debating. Sometimes I don’t do the best job of it, but I am human. I try. Secondary to both of those things is maintaining relationships the way people want them. If we have ups and downs but mainly downs, then that’s how it is. I’ll still engage on the points I choose to here with everyone, because that’s why I come here in the first place. Secondary to that, I’ll try to make our interactions as positive as I can. I apologize for the use of asinine. You are obviously free to decline to engage whenever you wish, to include generally going forward.Report

              • Avatar James Hanley says:


                If I choose not to respond when you engage me, please understand that it’s not out of anger or dislike, but an unwillingness to continue to have mostly downs with someone with whom I’d prefer to have more ups.Report

              • Avatar Michael Drew says:

                I appreciate that, James.Report

              • Avatar Michael Drew says:

                In my view, you can absolutely be a liberal centrist. A liberal centrist wants to moderate his party’s more hard-left impulses and positions to make the overall political project of FDR American liberalism more politically sustainable inside of a polity that was arguably stretched by FDR’s policies, and certainly by some of LBJ’s. That person, who supports every single part of the core of FDR’s vision, is not not a liberal. That person, the liberal centrist – Bill Clinton being the ur-liberal-centrist – is the core internal joining ligament of the political coalition of American liberalism (in the fully corrupted, Americanized version of the term). To be a liberal, you don’t have to be against moving the Democratic Party back in the direction of moderation, especially in a political environment like the one the party faced after 1988, when such a move was so tactically indicated. You can’t be a full supporter of the main aspects of the FDR-LBJ social welfare state, advocating only moderating retrenchment for arguably political purposes, which I believe was always Bill Clinton’s primary aim, and not be an American liberal. American liberals overlap very considerably with American moderates/centrists – and so do conservatives. These are not exclusive categories.Report

            • Avatar Mike Schilling says:

              Roger, I honestly do not know what the hell you are going on about. I actually read the pieces you were praising and suggested rules to solve what they thought the problems were. Then you responded as if you hadn’t read or understood a word of it. (Something I should have figured out a long time ago.) You also claim to be speaking for James, except that he engaged with what I had to say (and even agreed with some of it), rather than spewing patronizing bullshit. If you want to be taken seriously, you’re going to have to actually put some effort in.Report

              • Avatar Roger says:


                Why accuse me of “spewing patronizing bullshit”? I simply provided am analogy to explain where we disagree. Do you disagree with the analogy, or do you find it offensive in some way? I guess you must because of your response.

                I have no interest in diverting the discussion to which parts of the articles recommendation back then I would or would not have agreed to. I see no point, do you? Indeed, doesn’t my analogy point out which way we will recommend?Report

              • Avatar Mike Schilling says:

                Why accuse me of “spewing patronizing bullshit”?

                If you prefer “useless platitudes”, that works too. Say something with actual content that doesn’t begin from “I have all the answers, but you’re too stubborn/stupid/ideological” to accept them, we might have the basis for a conversation.Report

              • Avatar Roger says:

                Thanks, Mike. You are really stepping up your professionalism.

                Can we just start by my asking where you disagree?Report

              • Avatar Mike Schilling says:

                Disagree with what? You’re said nothing of substance.Report

              • Avatar Roger says:

                I know you are, but what am I?

                Seriously though, I thought we were discussing my analogy. What are you insulting me about, if not that?Report

              • Avatar Mike Schilling says:

                You want to know where we disagree. Point to something real enough to agree or disagree with.Report

              • Avatar Roger says:

                I get it. My analogy has offended you. No more explanation is needed.Report

              • Avatar Mike Schilling says:

                No, your attitude offends me. Your analogy is simply too divorced from anything concrete to either agree with or disagree with in any useful way.Report

              • Avatar Roger says:


                Your comments toward me have been extremely rude.

                Peace, bro.Report

              • Avatar Mike Schilling says:

                I feel that I’ve some some concrete, thought-out points in comments to this post that you completely dismissed because you consider my ideology inferior to yours. That’s what I was reacting to. Anytime you want to engage on ideas starting from a position of mutual respect, I’m here.Report

              • Avatar Stillwater says:

                The ironic thing about this exchange between you and Roger is that it’s taking place in a subthread in which you favorably outlined two proposals from classical liberals, and Roger criticized you for rejecting/not understanding the views of classical liberals.

                It’s crazy.Report

              • Avatar Roger says:

                You guys are miffed because I didn’t seriously respond to the “non activist” solutions of liquidating and or nationalizing all companies involved in finance?

                Just to connect the dots for you all. No, I am not favorably disposed to this idea. Nor do I recommend replacing all the players on the field with referees.Report

              • Avatar Mike Schilling says:

                You praised the Simon Johnson article because you consider him to be on your team, but apparently without reading it. Makes it hard to take you seriously.Report

              • Avatar Roger says:

                No Mike, I REFERENCED Simon Johnson as , and I quote, “stressing an important point.” In the next paragraph I referenced that you had made that point as well (that we should not socialize losses or risks). Does this imply you are on my team too?

                Granted, my use of “we” in the next paragraph mushed things back up, but is this really what you and Stillwater are having a tissy fit over?

                My lead in was to attempt to lay out what I believe was an important misunderstanding between our positions. Namely that we (meaning classical liberals, not necessarily including you and Mr Johnson) are not opposed to regulation as much as activist regulation. This comment generated a couple of days worth of sub thread comments, so even if wrong, it couldn’t have been totally devoid of value.

                The only thing that is crystal clear is that you and your cheerleader are extremely reluctant to engage with my comment. Instead wasting several days accusing me of saying nothing and recommending nationalizing of industry as a productive example of non activism.

                Mike, let me be totally clear. Sometimes all you do is snark. Not always, but too often.

                Can you address my comment on activism without snarking please?

                I believe we are often talking past each other. Zed and James and the Simon Johnson link are all stressing an important point (as does Taleb elsewhere)

                Finance is one of the most regulated industries in the world. We ( or at least I) am not recommending no regulation. What we are saying is that activist, revolving door, crony capitalist regulation is not the solution. That is what we have now, and we all agree it is fished up, right? We’ve created a Rube Goldberg device which as even Mike mentions privatizes gains and socialized risks.Report

              • Avatar Kim says:

                yer laying out something uncontroversial, Roger. “What a bad regulation is”

                Do i get to wear the classical liberal hat now?Report

              • Avatar Stillwater says:

                Roger, you keep insisting that liberals won’t answer your criticism of them, but there’s a reason for that: it’s the ideological equivalent asking if we’ve stopped beating our wives yet. There is simply no answer that we can give that doesn’t impugn our motives and desired outcomes in your eyes. It’s a … what’s it called? … something with a number in it, and a catch…

                Mike called you out on this last time you were badgering him when he said that putting out a fire doesn’t make a person pro-arsonist. And that’s about as accurate a short-take I can think of regarding your view of liberals. That because we think government intervention is necessary to “put out a fire”, we somehow desire “top down, command-control, coercive” blahblahblah solutions.

                Here’s where you lost me, tho, specifically. I read the Johnson and Cohan pieces and each person’s respective analyses of the 2008 financial crisis was very libertarian friendly. But in each case they came to a conclusion regarding changes necessary to prevent similar type crises in the future. And both of them require strong government intervention. You reflexively reject that conclusion, of course. And importantly, your argument at that point isn’t with Mike or me or Michael Drew or even liberals in general. It’s with Johnson and Cohan!

                And here’s why that matters, Roger. You keep harping on liberals and topdowncommandtheregulatorycapture nonsense, but neither of those proposed solutions were regulatory in nature. And my guess is that liberals would be pretty keen on seeing them enacted. So all the horseshit about progressives wanting the state to take over the entirety of social and economic life seems coming out of you seems like just that: horseshit.Report

              • Avatar Roger says:


                Since when is preferring activist and or top down regulation the equivalent of beating one’s wife? Yes you are correct that my next move is to argue that these lead to less effective solutions, inefficiency, rent seeking, zero sum battles and regulatory capture.  However, the appropriate response will be to argue your pros against my cons, not deny that progressives are biased (compared to libertarians) toward things like Obamacare, public run schools, centrally coordinated retirement, activist insurance regulations, and so forth.  

                “.. because we think government intervention is necessary to “put out a fire”, we somehow desire “top down, command-control, coercive” blahblahblah solutions.”

                I too think government intervention is necessary to sometimes put out fires.  The difference is in what we consider fires and in which of these fires we call the government to fight, and how extensive their tole is.

                My example in insurance was that those more drawn toward top down solutions to the “fire” of inner city insurance affordability will take an activist role in setting the rates which can be charged (My bias would be to let market forces play out.) This progressive argument is a reasonable one that intelligent progressives can and do make. It may or may not lead to the bad things I warn of, but it is not the equivalent of “beating your wife.” 

                I actually DO think the financial mess was a fire which required top down, centrally planned intervention. However, I was not interested in debating the pros and cons of the recommendations of either of Zed’s referrals. I don’t see the point.  Zed feel free to jump I if you feel differently.

                “So all the horseshit about progressives wanting the state to take over the entirety of social and economic life seems coming out of you seems like just that: horseshit.”

                I believe socialists want the state to take over the entirety.  I do not believe progressives do.  I DO believe they are biased toward top down, coercive, over regulated solutions to too many fires which could be fought better in different ways. To even argue this point with a libertarian is absurd.  Of course, RELATIVE TO A LIBERTARIAN, you guys are biased toward government regulation.  The only question is whether your bias is superior to ours. That we can argue based both upon facts and values.  But don’t tell me this is the equivalent of beating your wife.  It just makes it seem like you are either ashamed of what you believe, or in denial.Report

              • Avatar Stillwater says:

                Since when is preferring activist and or top down regulation the equivalent of beating one’s wife?

                Because by your lights, the fact that a liberal believes restrictions on certain types of economic activity are necessary for healty markets means that they prefer those restrictions. Prefer as against what other option? An ideal model? That’s where you lose us, Roger, and where the “have you stopped beating your wife” business comes in. If a proposal is viewed as necessary to achieve a desired outcome, then it makes no sense to say that it is preferred. Healthy markets are what liberals prefer, and regulations/restrictions are necessary to realize that preference.

                Hanley talked about this a long time ago, but what I think you’re doing is comparing liberal-reality against your ideal libertarian model and coming to the conclusion that liberals reject your model because they favor – as a first order preference – coercive topdown command-control government solutions. I don’t know how many times liberals have to say this, but they don’t prefer those solutions. They believe they are necessary to achieve what ought to be uncontroversial: healthy markets.

                That’s not to say that liberals are always correct in their policy proposals, and that there isn’t room for disagreement about other issues. But your insistence that the root cause of the disagreement is liberal’s first-order desire for coercive government just confuses the issue and begs all the questions in your favor. It’s laughable, actually.Report

              • Avatar Stillwater says:

                And one other thing. I think you really ought to scrap the “activist refs” and football analogies in favor of something that actually reflects what you mean. You use that language to refer, in varying contexts, to legislation, enforcement, prosecution, court decisions, regulators, etc etc. For you, of course, it’s all the same. But when clawback and Mike S criticize you for using empty language, bordering on platitudes, you ought to understand that from our pov your language is exactly that.Report

              • Stillwater: It is my experience that using any word ending in “-ist” or “-ism” against a fellow interlocutor is generally a guaranteed way to end a conversation and start an argument.

                The exception to this is if you pretend that your interlocutor has never heard the term before and provide a detailed definition of what you mean by the word. Even then, by the time you provide that definition, the word itself is often superfluous.Report

              • Avatar Roger says:


                If I lose you, please ask me to slow down, try something different or clarify . The reason I come to this site is to find out how you think and how you react to my comments.  If I was not genuinely interested I would go to an echo chamber like 99% of the people on the Internet. 

                I think we need to be careful about getting into an argument on whether any of us really desire healthy markets.  In reality, I think if we dug deep we would find that both sides view healthy markets as a means to our desired ends, not so much ends in themselves. Thus I am not persuaded that you are advocating using regulations and restrictions to accomplish this as your desired outcome.  I don’t think Social Security, Obamacare, public schools, or mandated auto insurance premiums in inner cities is intended to make markets healthy.  I think these are all intended to achieve certain social outcomes.  I would be surprised if you disagree. Where we really disagree,in my opinion, is to what extent markets should be used if any in achieving these desired outcomes.  We may also disagree on what outcomes are desired.

                “…what I think you’re doing is comparing liberal-reality against your ideal libertarian model and coming to the conclusion that liberals reject your model because they favor – as a first order preference – coercive topdown command-control government solutions. I don’t know how many times liberals have to say this, but they don’t prefer those solutions. They believe they are necessary to achieve what ought to be uncontroversial: healthy markets.”

                Oddly enough other than the above correction, I pretty much agree completely. I believe you believe top down coercive government solutions are necessary to achieve your goals more often than I do.  I do not believe most League members prefer big government just for the sake of it.  I do suspect there are dynamics in both political parties which lead to the government for the sake of government, but this is probably a bit off topic.

                I repeat, most democratic voters are not voting for bigger government or active regulation for the sake of big government.  They vote for it when they believe it will solve problems better than alternative courses of action or inaction.  Libertarians of course tend to disagree with how often and how extensively that particular tool is used. Indeed we believe it leads to the previously mentioned bad results when used too extensively.  We of course could be wrong or have different goals. 

                “…your insistence that the root cause of the disagreement is liberal’s first-order desire for coercive government just confuses the issue and begs all the questions in your favor.”

                Hopefully I have clarified and eliminated this concern.  

                Finally, on the football analogy and the term in question. I have repeatedly tried to clarify via a term, an analogy and a concrete example (insurance) exactly what I mean.  The reason is that I suspect that it — once grasped– leads to a clarification of where our sides disagree.  I continue to see progressives saying that libertarians are just trying to eliminate all regulation or deregulate for the sake of deregulation. Similarly, I also see some libertarians stress deregulation sometimes for the sake of deregulation (granted they probably assume it will lead to better results). 

                I have repeatedly made the claim that once a market gets a certain degree of complexity of regulation, that deregulation can actually be as beneficial as pulling a random piece out of a jenga tower.  It can lead to unanticipated problems. Even disaster. The moderate libertarians that dominate these pages are not preaching no regulations or wanton deregulation of a complex jenga tower.

                You are completely correct that by “activist” I am referencing “legislation, enforcement, prosecution, court decisions, regulators” as well as procedural requirements.  The essence of what I am trying to get at, and I am open to a better word, is to identify where decision making is made and how routine problems are solved. It isnt so much what the decision is, but who is making the decision to influence outcomes I think the insurance example illustrates this best. 

                Libertarians are substantially more focused on keeping rules as thin, as consistent, as impartial and as decentralized as possible.  Contrary to Blaise’s accusations, we don’t want fraud, we prefer fraud to be controlled systemically via the working of voluntary interactions by the players on the field.  We believe this will be more effective with fewer bad side effects. In the case of insurance, we want the problem of fraud controlled by market forces where practical. It can alternatively, of course be controlled by an active government agency.  In one model prices are set by supply and demand and actuarial competition.  In the other they are set by government command.  But it is not beating your wife for you guys to to call for it.Report

              • Avatar Stillwater says:

                If I lose you, please ask me to slow down, try something different or clarify .

                Argh! This is getting quite comical.

                You don’t lose me because of the quickness of your thought or the subtlety and depth of your analysis. You lose me because you aren’t arguing anything of substance. At least in this context. Your general view is that liberals are Doin it Rong, no matter what they say, how they argue, what they propose. You have a thing for “progressives”.

                Again, I don’t know any liberal who thinks a priori that TopDownCoerciveCommandTheRegulators is the preferred policy. Even Jesse, New Dealer, zic, LWA, who you know as well as I. They’re very, very liberal, but they don’t advocate government solutions to collective action and other problems because they think government is a good in and of itself. They think it’s a means – a necessary means – to achieving some other good. You disagree, obviously. But it’s pretty clear that your disagreement is ideological and therefore circularly re-affirmed when you view people thru your ideological filter.

                One of the things that identifies an ideologue, it seems to me, is the insistence that other people who disagree with his or her views are doing so for specific reasons. From their pov, they’re just describing the world objectively and impartially, and it’s those pesky other people who are ideological. The logic is pretty obvious, I think: if a certain set of first principles and desired outcomes is so obvious – I mean, the principles are self-evident, aren’t they?! – why don’t other people see them too? There must be a reason, right? They’re either liars, deluded, or stupid.

                I’m not sure which category you put liberals into, Roger, but from what you’ve said to date on this board, it’s limited to one of the listed options.Report

              • Avatar Roger says:


                “…they don’t advocate government solutions to collective action and other problems because they think government is a good in and of itself. They think it’s a means – a necessary means – to achieving some other good. You disagree, obviously. But it’s pretty clear that your disagreement is ideological and therefore circularly re-affirmed when you view people thru your ideological filter.”

                Dude, seriously. You do realize that I agreed with this statement not once, not twice but six fishing times in my prior response. Let me illustrate by quoting myself from the prior comment…

                1) “I pretty much agree completely.” (said to your statement that liberals do not have a first order preference of big government.)

                2) “I believe you believe top down coercive government solutions ARE NECESSARY TO ACHIEVE YOUR GOALS more often than i do.” (emphasis added to he words to “are necessary to achieve your goals”)

                3)  “I do not believe most League members prefer big government just for the sake of it.” (said in reference to league liberals)

                4 and 5) “I repeat, most democratic voters are not voting for bigger government or active regulation for the sake of big government.  They vote for it when they believe it will solve problems better than alternative courses of action.”

                6) “Hopefully I have clarified and eliminated this concern.” (in response to your belief that I believe liberals have a first order desire for coercive government.)

                So, I agree with you explicitly a half dozen times, and your summation is that I disagree with this sentiment based upon an ideological blinder. Would you please respond to what I wrote?Report

              • Avatar Stillwater says:

                Would you please respond to what I wrote?

                I thought I was! You wrote – and I’ll paraphrase since I’m lazy right now – that liberals prefer biggumminttopdowncoerciveyadayada more than libertarians. Well, yeah!, when one side is ideologically opposed to gummint and believes it’s the source of all evils!

                And that’s not a cheap shot, Roger. You’ve been disinclined to blame any specific in my recollection on individual action, instead preferring an analysis of how gummint did things wrong and incented those actions. So gummint, rather than the individuals, is to blame. But entirely circular. It amounts to saying that if we could get the legislation just right, and enforce it just so, then everything would be hunkydory, and the fact that it isn’t just right and just so is because liberals are activists refs. Do you really believe there is a set of rules that can’t be gamed or exploited or corrupted to a powerful individual’s benefit?

                Dude, it’s a rearguard action. The powerful will always have the potential to corrupt an otherwise fair game. It’s an uphill battle. You want something that’s impossible and criticize liberals for not signing on with you.Report

              • Avatar Roger says:

                Just please do me a favor and don’t accuse me of being an ideologue because I do not agree with you, when I clearly and repeatedly do agree with you.

                I also agree players will routinely cheat, lie, steal and game the system if allowed to. I think rules and regulations and mores and customs are necessary to combat this. Yes I do believe that too few rules is a problem and that too many, or too intrusive, rules is a problem too. My guess is just about everyone would agree. And yes, I believe that society experiments around ranges of these issues.  There probably is no perfect balance point due both to varying goals and values,and due to the dynamics of game theory. 

                For the record I have in the past suggested extensive recommendations on how to make the rules evolve toward optimal balance ( it involves choice, competition and non coercion on which rule set we operate under where practical). 

                Does this sound like an ideologue to you?Report

              • Avatar Mike Schilling says:

                Namely that we (meaning classical liberals, not necessarily including you and Mr Johnson) are not opposed to regulation as much as activist regulation.

                I really wish I knew what that meant, because then I could agree or disagree with it. I’ll give you the benefit of the doubt that it’s not what Republicans mean by an activist court (which is one that makes rulings they disagree with.)

                How about this: you propose just one non-activist regulation that might address the problem we’ve been discussing, and contrast it with one activist regulation. Explain what puts each in its respective category. We can go from there. Maybe put it at the bottom of the page, so we don’t start at maximum indent level.Report

              • Avatar Roger says:


                I am really glad you brought up activist judges. I was starting to suspect that some of the instinctive pushback I was getting to the term was collateral damage from past battles over that term.

                I didn’t consciously choose the term because of how conservatives use it to describe judges and rulings they don’t like. Unconsciously, though, who knows.

                Yesterday I started wondering if this was affecting the discussion though.

                Let me provide examples this afternoon after surfing.Report

            • Avatar Stillwater says:

              Excellent comment Mike. That’s pretty much how I understood Cohen’s proposal as well. Zed mentioned that the Cohan article was very “libertarian friendly”, which struck me as odd, since the implementing the proposal struck me as completely antithetical to core libertarian principles.

              And I think Roger proved that since he didn’t take your (accurate) presentation of Cohan’s proposal seriously. Laughed at it, in fact.Report

              • Avatar Roger says:

                It was not an excellent comment, it was flat out rude. And I do not recall laughing at Mike on the above comment. I did notice, as Mike highlights, that some of the recommendations in the article to deal with the crisis back then were not exactly libertarianish, despite Zed’s label. So? The passing reference I had to the article was as one example of many of those recommending that we not socialize risk, another example came from Mike himself.Report

              • Avatar Major Zed says:

                My (possibly nonstandard) libertarian position is that if a bank is bankrupt, then it should go bankrupt, not be propped up.

                Given that we are so far away from the libertarian ideal that Blaise identified (gold standard, no fractional reserves) we have to face up to the thoroughly mixed-economy nature of finance today. That means, look for libertarian principles to guide gradual improvement. Thoughtless deregulation can be as bad as thoughtless regulation when you are this deep in.

                While I don’t think Simon’s proposal to break them up would pass libertarian muster, letting them fail would. The biggest problem I see is TBTF because it provides a perverse heads-I-win-tails-you-lose environment. You need to make the risk of failure real. That’s one small libertarianish step.Report

              • Avatar Mike Schilling says:

                No disagreement here. TBTF is one half of the biggest problem. The other is that if enough are pursuing the same risky strategies, it doesn’t matter if we’ve broken them up — they’ll all fail together. And since they’re all incented to do whatever makes the most short-term profit today, that’s a likely scenario.Report

              • Avatar zic says:

                Mike, this is the best insight I’ve read on the TBTF conundrum in a long time. Thank you.Report

              • Avatar BlaiseP says:

                Banks don’t go “bankrupt” in the usual sense. They are subject to stress tests and go into conservatorship under FDIC if they fail. Usually, banks know they’re getting in trouble and the bank is sold outright. It’s very rare for an entire chartered bank to result in FDIC checks being cut for stranded depositors.

                Given that the fractional-reserve banking system is the order of the day, stress testing is the only valid route I know to keep good order in the process. Cohan observes:

                Of course, even a dollar of debt is too much if you are clueless about how to manage risk. And with one or two notable exceptions (Goldman Sachs and JPMorgan Chase among them), by the time 2008 rolled around, risk management on Wall Street had become a farce, with risk managers being steamrolled by bankers, traders, and executives focused nearly exclusively on maximizing annual profits—and the size of their annual bonuses. Yet there was a long era—roughly between 1935 and the late 1980s—when Wall Street’s ability to manage risk was one of its singular successes, bringing its partners and executives great wealth, making its firms the envy of the world, and helping to raise the standard of living for most Americans by making capital available to businesses large and small alike. What changed was not so much the leverage, but the attitude toward risk. .

                There’s the nut graf, folks.Report

              • Avatar Major Zed says:

                Banks don’t go “bankrupt” in the usual sense.

                Not usually. But the Crisis was not business as usual.

                What changed was… the attitude towards risk.

                And why did the attitude towards risk change? Wall Street has always been driven by greed & fear. Why did fear take a holiday? (Not a rhetorical question; I don’t know and we may never know.) IIRC, there were some banks that did not jump into the game. Yet TARP did not reward them for their prudence. Perhaps there was some signaling, like the rebuffed attempts to rein in Fannie. Maybe some nudge-nudge-wink-wink between the good old boys on both sides of the revolving door. Or maybe the tidal wave of cheap credit was just too overwhelming and greed just plain overrode fear.Report

              • Avatar BlaiseP says:

                I have some theories on why the attitude toward risk changed. Chief among them, which will come as no surprise to anyone around here, was the repeal of Glass-Steagall and the ensuing madness of Gramm-Leach-Bliley. The financial industry just went apeshit in the wake of all that deregulation. I have no other explanation. I hold Greenspan personally responsible for much of the madness.

                The old guard had retired, the titans of Wall Street, the guys who’d come of age when G-S had gradually come unravelled, who still remembered the S&L fiasco. Enron was past history, trades were managed by supercomputers sedulously poring over trends-that-weren’t. Everything was great. Default risk was no longer a problem: as Black-Scholes had given the market the ability to price risk, the Gaussian copula automagically solved for default risk.

                Well, it didn’t work out so well. The quants knew better than to make simplistic assertions but hey-presto, it was so fashionable to use historical data and pass it through Gaussian copula rather than Ackshul Fackshul Real World Default Data.Report

              • Avatar Major Zed says:

                Interesting, Blaise. Thanks for taking my question seriously.

                Paragraph 1 – the OP disagrees and I have nothing to add, plus or minus, on G-S. But I hold Greenspan responsible, too – for the easy money policy. Objectivist traitor!

                Paragraphs 2&3 – the succession of generations and loss of institutional memory is plausible. But Enron and LTCM weren’t nearly as long ago as the S&L crisis. Do you think institutional memory can evaporate in just 10 years? And my understanding is that top management’s attitude towards quants is about the same as ours towards voice response units – useful artificial intelligence, but not to be confused with the real thing. So I don’t put much weight on techno cultural takeover. (But hey, glad my real name isn’t David Li.)Report

              • Avatar BlaiseP says:

                Heh. Greenspan was truly a traitor to Objectivism. For all their pious handwringing and Firm Statements, most Libertarians / Objectivists wouldn’t recognise either Force or Fraud if the both of ’em dressed up in purple muu-muus and danced on the table singing “Hey nonny nonny we’re Force and Fraud.” They’re not even good capitalists. Prudence is a virtue completely lost upon them.

                Ten years is a long time in business, any business. One of the guys at Morningstar and I have been friends since high school. Quants come in several flavours, I’m sure I don’t have to tell you such things. But the guys I deal with, bond guys, they’re concerned with implementing policy, mostly to deal with the problem of traders losing their way. Algorithmic trading systems are becoming the chief suppliers of liquidity to the markets. Spreads are razor thin. There’s no substitute for the human in the loop, the stuff I’ve done is adaptive. Increasingly, it’s trainable. These things will always have a grippable handle on them. We’ll always need the mathematicians, if for no other reason than to attenuate irrational fear and exuberance.Report

              • Avatar zic says:


                This American Life did a piece on an FDIC bank takeover; it’s act II at the link.

                Not like a bankruptcy or foreclosure at all, and interesting listening.

                I’ve had a friend who’s bank was on the receiving end of this process; she compared it to having the Men in Black come in, all smooth and in control, and not alarming anybody as the give you several thousand new accounts to instantly merge into your system, leaving you flabbergasted and very very busy.Report

              • Avatar Major Zed says:

                the problem of traders losing their way

                Sounds like a failure of risk management in keeping up with the trading technology. Position limits etc. are fine for short-term control, but that’s (supposed to be) just a small piece of risk management.Report

              • Avatar BlaiseP says:

                Heh. It’s more to keep traders from boofing themselves and the house. Kinda like a little kid telling you one lie, it’s funnier than hell watching him go on lying to keep covering his ass. Not so funny when a trader starts trying to chase his losses. Nick Leeson and that jamoke at UBS, what’s his name, Kweku Adoboli. Happens a lot more, just smaller sums.

                The most-watched people in Vegas are the dealers themselves.Report

              • Avatar Major Zed says:

                You’re talking about trading desk risk management — important as that is, it’s in portfolio risk management where the pooch was truly screwed. Suddenly the housing bubble burst and prices all over went down instead of up. Nearly everyone thought that couldn’t happen. That’s a massive failure of elementary risk management and I don’t think tech complexity explains it. Add to that the LTCM failure, an object lesson in not putting too much faith in models, was still being talked about in the early 20-oughts.Report

  8. Avatar Citizen Journalist says:

    James Hanley is solidly correct in his assessment of what lead up to the mortgage crisis.
    “People seem not to like thinking about the interactions of policies, but policy is much like chemistry, the mixture of multiple policies, like the mixture of multiple chemicals, can have undesired effects.”

    To suggest that this was the result of ‘unregulated’ markets, especially a derivatives market, is missing the key point James made. Bubbles do not happen on their own. They are created when policies comes together to move a market into an unhealthy balance. The point is proven when Texas and Canada can be brought up, showing how correct policies prevent bad policies from affecting their markets.

    Canada maintained it’s policies of letting banks require 20% down, which was the historical norm. Canada thus didn’t suffer the same run up in housing prices. Texas was the same way, although they were more affected by the economic boom times and interest rates, than Canada was.

    I do disagree slightly that the CRA didn’t play as much a role as James notes. There was much more going on under the CRA umbrella than most remember. It was the use of this law in the early 90’s by the justice department under the direction of Clinton, that banks who wanted to expand their footprint, could only do so after doing some “community activity”. James notes correctly that in order to overcome the limit of mortgages placed on banks, that MBS’s had to be easier to come by. This is where Fannie Mae’s role came along, in being the largest underwriter of mortgages, would work as a third leg between the banks and the administration. Here is an article describing such back in 1999.

  9. Avatar Roger says:


    Thanks for a phenomenal summary of the situation. Incredible job.Report

  10. Avatar James Hanley says:

    Well, it’s 9:45 P.M., Eastern Time., Sunday night. I’m off to do some light reading before bed, and tomorrow is tobogganing with the kids, so I may not be back on for a while.

    I’ll just note that up to this point Blaise has failed to defend his claim that Glass-Steagall would have prevented the mortgage crisis. He has produced a document that he claims shows that OTC trading of MBS was illegal before Gramm-Leach-Bliley repealed sections of Glass-Steagall, but he hasn’t cited anything from the document that supports his position. He apparently continues to think that his word ought to be more persuasive to me than the word of America’s top economists, but he hasn’t provided an explanation for that, either.Report

    • Avatar BlaiseP says:

      Declaring victory, eh? Glass-Steagall, right up to the end of its tenure, kept a wall erected between investment houses and retail banking. Securities (and a mortgage is a security) were to be regulated by the Comptroller of the Currency, which was meant to ensure such securities were liquid and thus rapidly convertible. And indeed, some securities which we would recognise as MBSes and even CDSes were tolerated in the G-S era.

      But the CDSes, especially the tranches at higher risk, were not easily convertible. This lack of liquidity would lead to the credit crunch.

      But in answer to the question: “where was OTC trading of MBS securities declared illegal”, the answer is buried in here, though James hasn’t actually read it:

      There are four sections of the GSA that operate to restrict the securities activities of commercial banks. Section 16 (12 U.S.C. § 24(Seventh)) applies directly to national banks, and as a result of GSA § 5, indirectly to state member banks.

      Although banks generally are precluded from underwriting and dealing in securities (particularly, equity securities), national banks have authority under GSA § 16 to deal in, underwrite, and purchase certain government (federal, state, and local) securities without quantitative limitation. These types of securities are referred to as “bank eligible securities.” All other securities are referred to as “bank ineligible securities.” Section 16 does, however, generally allow banks to buy and sell securities on behalf of customers (e.g., making private placements of commercial paper and other securities with institutional investors).

      Section 16 also provides banks with authority to make investment purchases of various marketable securities for their own accounts. Section 16 states that a bank may “purchase
      for its own account investment securities under such limitations and restrictions as the Comptroller of the Currency may prescribe.” Section 16 defines “investment securities” generally to mean debt securities, rather than equities. OCC regulations exclude investments that are “speculative in nature” from this definition.

      The regulations define “marketable” to include registered securities, municipal revenue bonds, investment grade securities sold in a Rule 144A offering, and other securities “that can be sold with reasonable promptness at a price that corresponds reasonably to … fair market value.”

      Note that “speculative in nature” line. That includes CDSes. Rule 144A offerings had to be liquid. But when G-S was repealed, the commercial banks became dependent on Wall Street both for mortgage origination money and a market for those mortgages. Some appearances had to be kept up, of course, so they brought in the ratings agencies to stamp these investment vehicles Grade A Beef. Before, those instruments had to be rated by the Comptroller of the Currency.

      Here’s where James’ argument fails completely. He can argue, over time, G-S had developed lots of loopholes, but its repeal led inevitably to self-dealing, a point he simply cannot gainsay. He wants to blame the Community Reinvestment Act. The fact is, the mortgage crisis of 2008 primarily impacted the building of new homes on spec out in the suburbs, as the S&L crisis had led to the crash of speculative commercial real estate.

      But the chief illegality inherent in the over-the-counter market in MBSes of all sorts, especially CDSes was the obfuscation of risk. It was a variant of the Enron scam. For years, Enron was able to fool its auditors and its regulators by playing a Shell Game, moving risk from one corporation to another. The only thing separating Enron from the CDS scam was this: the Shell Game was being run by every major player on Wall Street, each one completely unaware of its trading partners’ exposure to risk. Enron was running its own market floor, playing both dealer and gambler.

      Eventually, its own self-dealing caught up with Enron. James never quite got the point of “separating winners from losers”. I contend now, as I contended then, he doesn’t know what he’s talking about. I contend he’s now arguing in bad faith, unable to prove his own points, he is reduced to making others carry his water.Report

      • Avatar James Hanley says:

        There’s a lot of value in here. I’m not sure the argument is as strong as Blaise suggests–everything else I’ve seen suggests that the loopholes in G-S had been expanded to the point where Gramm-Leach-Bliley was more of a rubber stamp of a fait accompli than a substantive change in itself. But even if so, by removing the last lingering taint of illegality GLB might have spurred investment in these asset-backed securities.

        So I take this comment of his seriously. This is how a person should argue. Unfortunately even here he reverts to the criticism that we’re not both just arguing out of our own heads without reference to others (the making others carry my water remark). Few things could be more anti-intellectual than to demand that we not learn from others and build our arguments on them. The whole enterprise of the Enlightenment collapses if we follow the approach for which Blaise argues. Pick up any serious book or article, whether one written primarily for academics or one written for an intelligent and educated lay audience, and see what you find: authors who just say “I know this, so believe me,” without any references to other scholars, or authors who back up their claims with citations and quotations?Report

        • Avatar Kim says:

          In some fields, it’s better to leave the scholars out of it and just go back to the primary sources. But that’s what you get when you turn a physicist loose in the field of history. Math and numbers.Report

        • Avatar Dave says:


          By the way, I didn’t realize I was carrying your water. *facepalmReport

        • Avatar Wardsmith says:

          Blaise was 100% wrong on this point Note that “speculative in nature” line. That includes CDSes.. How would CDS’ which have been rated by ALL the ratings agencies as AAA be defined as “speculative in nature”? Were the ratings agencies wrong? Obviously! However it is not the Banks’ job to critique the ratings agencies, in point of fact they cannot. Therefore the banks point to AAA securities (which included Treasuries) and AAA=AAA=SECURE!! Obviously the ratings agencies were incredibly stupid and perhaps I’ll write something up sometime that explains precisely how they got there. This is a good jumping off pointReport

          • Avatar Dave says:

            There’s a lot up there that’s wrong or confusing. I’m thinking of taking a crack at it although I have no expectation of a response.

            In any case, I didn’t know that credit default swaps were securities. I thought they were derivatives.Report

            • Avatar Wardsmith says:

              Good catch Dave, I’d meant to say CDO’s and skipped a letter whilst futzing with the shift key. Better to have put it the way these guys did. The credit ratings agencies would give the CDO’s AAA ratings because they were insured by monoline insurance companies who themselves had AAA ratings. Essentially they were whoring out their AAA rating. What is incredibly impressive about the article is that it was written BEFORE the crisis happened (six months before). Michael Cain may be the best authority on these here but I think he left the discussion (unfortunately) because of all the bickering.

              I suspect you’re right that Blaise won’t be back to defend the indefensible. He was right to leave before his house of cards fully crumbled. He’s smart enough to know he was on shaky ground albeit not intellectually honest enough to admit it so bailed.

              Please please please consider writing that guest OP. Please. I love everything you’ve written so far and appreciate your in the trenches viewpoint. I had written a long treatise on all of this with my views and posted it on a free blog site (not as WardSmith but a previous nom de guerre). Unfortunately it got linked to by too many folks and apparently I violated the traffic AUP so they deleted it. Worse, I had a harddrive crash around that time and it wasn’t backed up. Every time I get into these discussion I think back to that and all I have left is a subfolder of bookmarks to random references (that /were/ backed up).Report

          • Avatar James Hanley says:

            How would CD[O] which have been rated by ALL the ratings agencies as AAA be defined as “speculative in nature”?

            Hmm, sounds like a good point. Dammit, Ward, just when I thought maybe I had to concede a big point to Blaise, you come along and make me pause. 😉

            That would explain why so many top economists argued that GLB didn’t make anything legal that wasn’t legal before (without requiring the hard-to-swallow assumption that all of them are just plain wrong).

            And Dave, I second appreciating your viewpoint. I take your critiques much more seriously because they’re couched in real explanation, and don’t simply say “trust me, I know better than you.”Report

            • Avatar Wardsmith says:

              James, here’s the deal. I had a friend who was a security officer at a credit union. He was in charge of IT security. Like Blaise, he felt that that made him an expert on all things banking. Over a two year period in email we had essentially the same fight you and Blaise were having here, with many of the exact same arguments. While I respected what he did at the CU, it was irrelevant to the discussion at hand and besides the sources available (then) online, I also have the private cell numbers of three regional bank presidents on my cell phone. They’re small by TBTF standards but still have assets in the tens of billions. Over lunches and cocktails over several years I’ve gotten their perspective on what happened and specifically how it affected them. I also bought more than a few books on the topic. My position on this subject is something on the order of informed citizen with a smattering of inside information.

              When TARP was first proposed (TARP 1 under Bush) I was thrilled. I said publicly then that it was an excellent opportunity for the government to make a ton of money. In fact it did, about 120% of the money was paid back. Unsurprisingly it has disappeared under this administration.Report

  11. Avatar Tel says:

    How can you guys completely ignore Ginnie Mae (GNMA) here?

    There’s nothing wrong with risk, but of course the problem is systematic mispricing of risk, especially when the normal balance of market forces is disrupted or corrupted (then hiding the results of that when they inevitably blow up). One example (amongst many) is a lot of those CEO types who say when times are good, “I get a big reward because I take big risks,” then when times are bad it is either, “So long sucker” like they did with the Twinkie factory, or “Help, Help I need a bailout!” like the finance industry. If reward and risk are linked (and no reason why they should not be) then we expect risk to mean something — bad consequences of bad action.

    So back to the mortgage industry — GNMA was doing two things: firstly it was going as guarantor for something like 90% of mortgages (please correct me if you know the exact value) and thus putting a government backstop behind the MBS market. But what exactly does it mean to have government underwriting an insurance contract? Government doesn’t have the sort of assets that can be sold off easily to pay for anything, government doesn’t actually make anything, so how can it be a backstop?

    What is actually happening when government goes guarantor is that some unnamed and unknown future taxpayer is being put up as the guarantor. The problem is that government also taxes about as much out of the economy as it thinks it can get away with already so in terms of capacity to load up future taxpayers with additional tax, that capacity is really quite small. Sure, I know, tax the rich, confiscate assets, yeah that can all be done, but rapidly becomes destructive (we can argue about how rapidly, but never mind, suffice to say there are limits).

    So here is GNMA offering to go guarantor (what amounts to cheap insurance) on what would otherwise be risky assets. So that artificially lifts the price of MBS and makes the whole mortgage industry look a lot sweeter than it really is. They are doing a back-door bailout of the same industry now by getting the Fed to buy MBS, once again jacking up the prices beyond any realistic market value. But here we go — the old link between risk and reward, taking a risk has to actually mean something, consequences and all that.

    I said GNMA does two things, well the second thing is that GNMA runs a standardized computerized assessment system for calculating risk. This was offered up to all sorts of real estate companies so they could run through this standardized risk assessment process. They required no particular expertise to do this, it was all handled by the experts at one central agency. Can you see where I’m going with this? GNMA became the one and the only assessment that ever got made, and pretty much the one and the only seller of insurance too — what sort of market is that? Worse! GNMA wasn’t betting with it’s own money, it was betting with the assets of future taxpayers!Report

  12. Avatar Mike says:

    For those who insist that Gramm–Leach–Bliley (which repealed part of Glass-Steagal) is ground zero of the financial crisis, please explain why the that wasn’t fixed in Frank-Dodd? Among actual legislators I’ve heard little interest in “fixing” Glass Steagal.Report

    • Avatar BlaiseP says:

      It’s still not fixed. The same problems are still baked into the cake. Over the counter CDSes are still tolerated.Report

      • Avatar Mike says:

        I realize it wasn’t fixed. That was my point. Why is it so thought of as the first cause of the financial crisis by left leaning bloggers, but a Democratic House and Senate put together Dodd Frank without addressing that issue?Report

        • Avatar BlaiseP says:

          Too big to fail means Too Big to Fail. Nothing’s bigger than the market. Do you remember when Obama summoned the CEOs of all those trading firms and banks to the White House? Everyone thought he was going to bend them over the desk in the Oval Office and beat them with the Ugly Stick about their bonuses. But he didn’t. Obama told them they had pitchforks at their backs.

          Then he gave them a pep talk. This was on the advice of Tim Geithner and VP Biden, he of the Banking State. The only analogy I can think of is a recalcitrant mule: if the mule doesn’t want to get up, no amount of beating will make him. If the government had nationalised the banks, the US government wouldn’t get its bailout money back. When all the terms had been cancelled out, the nation would still be on the hook for the bailout and the world economy would have gone in the tank for — by my estimates — for at least a decade. Tim Geithner understood this, few others did. Dodd-Frank was as much beating/encouragement as the markets could take at the time. And to Obama and Geithner’s credit, the market mule did get up and start pulling the wagon again.

          Obama’s strategy will be to enact consumer protection legislation. A far larger problem, one which is every bit as treacherous and deadly to the world economy, is credit cards and other revolving lines of credit. Lots of funny money in there, as well. These payday loan sharks are out there, as well. Once TARP has disgorged the majority of its assets, then Obama will do something but not before. He still needs Wall Street to pull the wagon.Report

          • Avatar Mike says:

            OK, although interesting, that wasn’t really responsive to what I was asking. If everyone with an avatar is so sure that Gramm–Leach–Bliley is the cause of the financial crisis, why was it totally ignored in the bill to “fix” the problem?Report

            • Avatar BlaiseP says:

              Fair point. Here’s the deal. G-L-B is too big to attack all at once. It will be easier to fix in pieces.Report

            • Avatar Michael Drew says:

              This is completely independent from any position on whether G-L-B caused the meltdown, one of which I don’t have. But as an indicator of anything like that as a fundamental question, and even as an indicator of the honestly held views of legislators making such policy, the banking policy emanating from the U.S. Congress is pretty much for shit for relying upon as such an indicator. If the banks didn’t want that considered, they might well have caused it not be considered, or at least gotten it taken off the table. There’s no function of the form, “”If” that was the problem, “then” when Congress legislated in that area, we can expect them to have accounted for it in legislation” that’s actually operational in the world. It could have been the problem, but Congress still not acted accordingly. And even if this view (that G-L-B was part of the problem) was not completely stifled, as a cover for bank capture of the legislative process – or for that matter on the merits to be complete about it – they could have concluded (or “concluded”) that, while it contributed, now the underlying situation was different, and restoring the Glass-Steagal wall wouldn’t have been prudent policy taking that into account. Or any of a number of other quasi-justifications.

              There’s also the question of whether it was completely ignored, or whether the votes in Congress were just such that it couldn’t (didn’t) pass. I mean, the law will be X and not not-X at the end of the day; that doesn’t mean all not-X was utterly ignored in the lawmaking process, or even that some not-X was not advocated for. (I don’t honestly know how much Glass-Steagal repeal was discussed in the Dodd-Frank process by marginal members, nor do I know if you’re defining “totally ignored” as “not in the final law,” or truly as “totally ignored” throughout the lawmaking process.)Report

  13. Avatar Shelley says:

    And why wasn’t HSBC prosecuted? It’s enough to make you bang your head on your desk.Report

  14. Avatar Nick says:

    Prosecuted for what, Shelley? Come on.Report

  15. Avatar Kim says:

    “Besides, look at the firms that were hard hit–they were mostly investment firms, not commercial banks. IAG, an insurance corporation. Bear Stearns, an investment bank. Merrill Lynch, an investment bank. Lehman Brothers, an investment bank. Fannie Mae and Freddie Mac, mortgage backers. Not a commercial bank in the bunch.”


    Bear Stearns is dead. Lehman Brothers, also dead. That’s 2/5 of the major investment banks. But Goldmann Sachs came out ahead…Report

  16. Avatar Jeffrey Haire says:

    This was a good, well-documented article. I don’t know who is more tiresome, Paul Krugman or BlaiseP.Report

  17. Avatar Wardsmith says:

    James, you wrote an excellent OP and the discussion was at times excellent as well. I found it more than a little interesting that Blaise who has caterwauled countless times on this site about Libertarians and acted as if they can only be scraped off of shoes chose to use as his defense LIBERTARIAN ARGUMENTS about the banking crisis. I’m curious not one other person noticed.

    I apologize for being late to the party, have been exceptionally busy in RL here. The “Financial Crisis Inquiry Commission” report was political smokescreen. The commission was hand-picked and loaded by the Democrats who at the time held every majority in Congress plus the presidency. However thinking people want to know what was in the minds of those luminaries who disagreed with the FCIC Final Report. The reader’s digest condensed version might be found here.

    There is a LOT more to the crisis including something not one person has mentioned here called “Mark to Market”. More than anything else M2M killed Bear Stearns and nearly killed a number of other firms. However, just because “the market” had frozen by no means meant that 100% of the underlying assets had lost 100% of their value, which in point of fact was exactly the accounting treatment of them at the time. Warren Buffet was clearly aware of this, which is why he made a $5B bet that has earned him at least $14B and counting. The M2M rules were revised, and egregiously so because of Sarbanes Oxley, and were yet another unintended consequence of misapplied and not-well-thought-out regulations. We have yet to see the utter disaster that has already been put into motion by Dodd Frank. Sad really.Report

    • Avatar James Hanley says:


      I purposely didn’t mention mark-to-market, and almost made a note in my OP clarifying that I didn’t. My reasoning is twofold. First, I wanted to focus on the mortgage collapse side, the underlying fundamentals, more than on the financial collapse side itself. There’s just so much in all to cover that I decided I had to limit myself somewhere. Second, I’ve read such conflicting arguments about whether mark-to-market was helpful or harmful that I remain unsettled on the issue. You may be right about it, but I just don’t, for myself, know. But other than making me squirm a bit, I think you’re right that it’s worth bringing in to the discussion.Report

      • Avatar clawback says:

        I agree. I’d love to hear all about why we should generally trust markets, except in this case.Report

        • Avatar James Hanley says:

          I don’t quite get your question, and I’m not sure if it’s directed at me or at Ward. All I can say is that you and I agree that there are markets and then there are markets, and some work well and others work badly. The simple existence of a market doesn’t mean all is hunky-dory, because we actually do know what makes markets work well and what makes them work badly.

          Here is the list of characteristics the are necessary for an ideal–perfectly competitive–market. Of course that’s a Platonic ideal, and no real-world market ever looks just like that. The issue is how far it deviates from that.

          In particular, some of the things that screw up markets (my interpretation here; grains of salt are cheerfully tolerated) are barriers to entry, lack of property rights, and lack of information. Did this market have good information? Nope. It was unusually deficient in information and that–in my half-assed opinion–was the major problem.

          I’ll admit, this assumption that we must love anything labeled a market is pretty thin. It either assumes all markets really are the same in their characteristics, or that we pro-market folks are incapable of ever discerning the differences. And sure, there may be some folks out there who lack any discernment, but I think eventually you’d glom on to the fact that you’re not talking to us, not them.Report

          • Avatar Kim says:

            Insurance in general seems to have a fairly high innate barrier to entry…
            Are there any markets where “lack of information” is fairly innate?Report

            • Avatar James Hanley says:

              Economist George Akerloff sort of created the sub-field of information asymmetry with his 1970 paper “The Market for Lemons: Quality Uncertainty and the Market Mechanism.” (He ultimately shared the Nobel Prize for his work in this field.)

              Since the specific market in the example was the used-car market, I’d tentatively suggest that it may be at least one example.Report

              • Avatar Kim says:

                Anyone who buys a used car without getting a trusted independent mechanic to look at it first is a chump.

                And at that point, you ought to have decent information.Report

          • Avatar clawback says:

            Among unsophisticated conservatives and libertarians we generally hear that markets are always right. The more sophisticated version is they’re not always right, but they’re the best way we have to value something. Among the above groups one would never hear that the market is flat-out wrong and should be ignored when placing valuations on assets. Except apparently in this case, which is what I found remarkable.Report

            • Avatar Kim says:

              The market is a panicky POS, ward’s right on that… (look at oil futures if you don’t believe me).
              Ward apparently thinks that lying to your investors (making up fairy tale valuations, with no checks and balances) is better than marking to market. (tell me I’m mischaracterizing him! please!)Report

            • Avatar James Hanley says:

              The market in this case wasn’t flat out wrong, and shouldn’t have been completely ignored. Seriously flawed is not the same as totally wrong.

              But set that aside, and let’s look at the information issue, because in order to assess a value for something you have to have information about it. In this case, some of that information was based on the Fed’s easy money rate, which produced low mortgage interest rates. I’m inclined to believe the market didn’t assess that information well, viewing it as more long-term than it ever was likely to be. So the market screwed up there. But government also screwed up, by feeding the market bad information. I think the market should have known it was bad information, but the point is that both sides screwed up. The government, through low interest rates, helped keep home valuations higher than they should have been.

              And if we want to talk about the regulators, rather than the Fed, it was the regulators (and courts) that had rolled back some of the restrictions in Glass-Steagall, restrictions that Blaise and others argue would have prevented the crisis. And of course the actual repeal of those arguably crucial sections of G-S was done by Congress and signed by the President.

              So cheerfu;ly granting–as I have done consistently from the OP on through all the threads–that the market screwed up in its valuation, I’m unsure that there’s any real evidence that government would have done better, because Fed, regulators, courts, Congress and president–all our federal gov’t through and through–apparently screwed up as well.

              I understand you don’t trust markets much, and that’s fine. But what in that story enables us to trust government any more than we trust the market?

              But there is a reason why we should generally trust markets more in evaluating value, and that’s because costs and benefits are more likely to be directly linked in the market than in any system of group decision-making. They are not always linked perfectly in markets, of course, but most often you know what you’re getting when you spend money and you can assess how much its worth to you. If it’s not worth it, you don’t buy.

              But in group decision-making the connection tends to get severed, and is much more indirect. I know whether my house is worth (to me) what I’m spending for it. I don’t know whether the amount I’m spending on my local police is worth it to me, both because I don’t have any idea how much I’m spending and because I don’t have any idea what the actual value of our local police force is to me.

              I’m not saying I think we’d be better off without police, just that I don’t know if the amount of police protection were getting is commensurate with what I’m paying–perhaps I’m paying too much for what I’m getting, and would like one or two more cops on the force, or perhaps I think we have one or two cops too many, and would like a reduction in both force and taxes, or perhaps even I’m getting a great deal, and for the amount of money I’m spending I’d have been satisfied with even fewer cops, so I see the extra as sort of a free bonus. The point is that there’s no way to tell.

              It’s our public officials’ job to evaluate those things, but they can’t really do it accurately because they don’t know how much each of their constituents values particular things. That’s the problem with value being subjective; none of us can know just what another person’s willing to sacrifice for any particular benefit.

              Pooling all that into a group selection process doesn’t solve the valuation problem. A group value is placed on it, but at best it’s only indirectly related to the valuations of individual members of the group. What the group selection process does is hide and obscure individual valuations. That can be necessary to achieving collective outcomes–and since humans are social animals, processes for achieving collective outcomes are inherently necessary–but that doesn’t mean it actually provides anything like an accurate calculation of the summed valuations of the group members.

              Elections don’t change this, because there are multiple issues at stake and only a single vote per person, and we still don’t know what each of those issues actually costs us.

              Regulators don’t change this, because they don’t necessarily use the valuations of the affected individuals. Often then make a serious effort to do so through benefit-cost analysis, but even then it’s only an approximation. And in some of our laws the regulators are explicitly forbidden to even attempt a benefit-cost analysis.

              Are markets perfect? Of course not. Does government valuation reasonably give us hope for superior valuation efforts? Unfortunately, no.

              What government can do through regulation is to help insure that markets provide adequate information to help people make good valuations. Information asymmetry between buyer and seller can make it difficult for the buyer to accurately assess value. Dishonest language in documents/contracts can make it difficult for the buyer to accurately assess value. And so on. That kind of regulation government can and should do. Otherwise we are often relying on markets that don’t actually meet any considered understanding of what a good market is.Report

              • Avatar clawback says:

                Right, so I take it you’re in favor of MTM, contra Wardsmith’s opinion. I agree.

                The only thing I’d disagree with is the supposed distorting effect of the Fed’s actions. Monetary policy is public and should be fully reflected in prices.Report

              • Avatar James Hanley says:

                So even though I explicitly said I was “unsettled” on the issue of MTM, you’re going to put me on record as supporting it? It’s not exactly Marquess of Queensberry rules is it? Are you auditioning for the cable talk shows? I’ll clarify my position, but that’s it. I’m not going to reward that garbage with continued engagement.

                As far as I can tell, neither with nor without MTM was there actually a good evaluation of the residential mortgage backed securities. Without MTM the valuations were sort of a free-floating guess, not really grounded in anything certain. With MTM they were grounded in a known falsehood (zero value). I don’t feel confident in saying a wild-ass guess is necessarily better than a known falsehood or that the known falsehood is necessarily better than a wild-ass guess.Report

              • Avatar clawback says:

                You wrote this:

                But there is a reason why we should generally trust markets more in evaluating value, and that’s because costs and benefits are more likely to be directly linked in the market than in any system of group decision-making. They are not always linked perfectly in markets, of course, but most often you know what you’re getting when you spend money and you can assess how much its worth to you. If it’s not worth it, you don’t buy.

                I agree with this paragraph in every detail. Yes, markets don’t work perfectly, but they work better than any other system of valuation we have.

                Based on this agreement, I made the apparently bold assumption you would agree that MTM is superior to other valuation methods. That’s because mark-to-market is, by definition, the same thing as valuing an asset based on its market value.

                So maybe you could explain how it’s possible to believe that market valuation is the best method available to value assets, but MTM is not. Or to even be “unsettled” on the issue.Report

              • Avatar James Hanley says:


                Both methods are market based. The MTM method is based on looking at last price sold for. That’s an unreliable method when market prices are very infrequently reported (there are not many sales on exchanges where the prices are made public) or when prices are very unsteady. Those conditions also make accounting fraud possible. (See the Wiki entry on MTM and search for the word fraud.)

                The alternative is to base the valuation on the expected net present value, counting (and discounting) the future value streams from the good mortgages in the security. That’s an unreliable method because they didn’t have any way to accurately evaluate how many good and how many bad mortgages were in the pool.

                So to say one of those ways is a market method and the other not is inaccurate. And to say one is clearly superior to the other in terms of accurately assessing value is also inaccurate. Both are market means, both suck, and yet you think I’m remiss in not being settled on the superiority of one over the other?

                I don’t think you’re seriously thinking here. I think you’re just playing the role of ideologue trying to score points. Great for cable talk shows, maybe, but then that’s the reason I never watch them.Report

              • Avatar Glyph says:

                Hey! I’m not even in this convo! 🙂Report

              • Avatar James Hanley says:

                Good lord. Sorry about that. I have no idea how I did that, but I think it’s a good hint that I ought to take a break. I’m home with a virus anyway, so I probably ought to do something more restful.Report

              • Avatar clawback says:

                You’re not even trying anymore. MTM, for all its imperfections, is based on market value. Expected NPV has nothing whatever to do with market value. So, despite your assertion, it certainly is accurate “to say one of those ways is a market method and the other not.”

                And please just skip the drama and insults and stick to the issue.Report

              • Avatar James Hanley says:

                Expected NPV has nothing whatever to do with market value.

                Nonsense. Transactions based on expected NPV are made every day.

                Now, here’s where I stand. Claims of certainty normally demand a lot more defense than a claim of uncertainty. Yet while I’ve made a real effort to defend my claim of uncertainty here, you’ve made no effort at all to defend your claim of certainty. All you’ve done is attack. So if you want to stick to the issue, it’s about time you pulled your weight around here and explained why you believe MTM is so clearly superior despite its problematic aspects.

                As to the drama and insults issue, aren’t you something special? You want to be able to blatantly misrepresent my position and not have to take some blows for it, eh? Fuck that–you opened the door.Report

              • Avatar Kim says:

                Yes. Including Market Transactions like Mark to Market.
                You’d be on better grounds to simply say, “This is a system prone to abuse by big players who can afford to take a small loss in order to artificially depress someone else’s net worth”Report

              • Avatar clawback says:

                Transactions based on expected NPV are made every day.

                Of course they are. But expected NPV is not itself based on market value. Therefore it is not a “market method,” contrary to your claim.

                Claims of certainty normally demand a lot more defense than a claim of uncertainty.

                Then I guess it’s a good thing I don’t claim to be certain about the superiority of MTM. As I’ve stated repeatedly, I agree with you in believing market prices to be the best available way to value assets. On the other hand, they’re deeply flawed, depending as they do on sufficient liquidity and absence of manipulation and other conditions. So I dunno. But I am certain whatever method is chosen should be used consistently. The banks were happy to build their leverage to the maximum allowed by MTM (regardless of NPV) while the bubble was floating; then you heard the howls of pain when that strategy worked against them after the crash. I’m unsympathetic.

                Fuck that–you opened the door.

                OK. Then I’ll just unilaterally stick to the issue.Report

              • Avatar James Hanley says:

                Doesn’t have to be unilateral. I play tit-for-tat. You play games, I’ll call you out. You don’t play games, I’ve got not reason to call you out.

                But expected NPV is not itself based on market value. Therefore it is not a “market method,” contrary to your claim.

                Disagreed, unless you want to go with a much more constrained definition of “market method” than I think is reasonable. ENPV is part of the method of settling on a price, hence it’s part of the market method. Is it “the” or “a” market method? OK, maybe not “the” or “a.” But “an integral part of the market method”? Yes.

                Then I guess it’s a good thing I don’t claim to be certain about the superiority of MTM.

                Honestly, you had me fooled. Above you wrote:
                Based on [our] agreement, I made the apparently bold assumption you would agree that MTM is superior to other valuation methods.
                That really sounds like you’re saying MTM is superior, because you suggest that agreement on the argument must lead to agreement that MTM is superior. Since you agree with the argument, how do you not end up agreeing that MTM is superior? I just don’t follow you here–it seems self-contradictory.

                As I’ve stated repeatedly, I agree with you in believing market prices to be the best available way to value assets. On the other hand, they’re deeply flawed, depending as they do on sufficient liquidity and absence of manipulation and other conditions. So I dunno. But I am certain whatever method is chosen should be used consistently. The banks were happy to build their leverage to the maximum allowed by MTM (regardless of NPV) while the bubble was floating; then you heard the howls of pain when that strategy worked against them after the crash. I’m unsympathetic.

                OK, here you say “I dunno,” and then decline to specify one method a superior but say we should consistently use, “whatever method is chosen,” I’m having a really hard time not seeing that as agreement with my initial claim of uncertainty.

                So I’m happy to stick to the issue, except at this point I have absolutely no idea what on earth you think the issue is.Report

              • Avatar clawback says:

                I’m having a really hard time not seeing that as agreement with my initial claim of uncertainty.

                Yes. I agree with your claim of uncertainty.

                Let’s explore where that uncertainty takes us. MTM has certain clear advantages. It’s objective. It’s hard to game. It draws on the collective wisdom — well OK, let’s just say collective opinion — of market participants.

                On the other hand, MTM is limited for the same reason markets are limited. They have varying levels of liquidity. They’re subject to booms and busts not corresponding to underlying worth.

                Alternative schemes, such as NPV calculations, may be based more on underlying value, but virtually all rely in important ways on subjective judgments about things like default risk, refinance risk, overall economic performance, etc. In many cases these judgments can be gamed.

                So, what should policy be? Should the regulators mandate MTM? Should they mandate NPV or something similar? Should they allow firms to choose one? Maybe they should allow them to switch from one method to another as convenient? Ideally, we’d prefer not to mandate anything, and let firms suffer the consequences of wrong decisions themselves. But apparently we haven’t figured out how to do that without substantial systemic risk.

                I guess my point is: regulation is hard. It might be great fun for all to rant about the evil government, but this stuff is just hard.Report

              • Avatar James Hanley says:

                Yes. I agree with your claim of uncertainty.

                So then why were you challenging me on that? And why should I even consider taking you seriously now? Especially when you follow that up by repeating an argument as though I hadn’t addressed it at all (again, read the section about fraud in the MTM wiki entry).

                Maybe your style is to play little games like that instead of putting your cards on the table and discussing things straight up, but I don’t respect it. You’re own your own.Report

              • Avatar clawback says:

                Yeah, I understand you’d like to focus on style issues rather than substance. Funny how that comes up when the discussion leads in a direction you don’t like.Report

              • Avatar Major Zed says:

                The problem with M2M is that it is liquidation accounting. Say a manufacturer had a piece of obsolete equipment that was working well and doing its job in the production process but that could only be sold for scrap. Would it be right to value it as scrap? Similarly, there are some situations where M2M gives a distorted picture of the vlaue of an asset in the context of a going concern business. I know insurance companies don’t like the idea of marking their bonds to market because they intend to hold them to maturity. The vagaries of the market do not affect the coupon cash flows in the least.Report

              • Avatar Kim says:

                I can value the police department quite nicely, I think. I can put a dollar value (positive or negative) on each of their activities, from discouraging/stopping vice to racial profiling. (In fact, if I asked, I’m pretty sure I could get the actual dollars spent, as well, but we’re talking valuation, which is how much I think it’s worth.)

                I’m not the only person who gets a say, sure…

                But I do know that I have more of a chance of getting gondolas flying through the air (city works to approve a well-designed project), than getting certain major companies to admit that they hired incompetent employees.

                If I asked you to give a rundown of security (or, hell, data collection) for a randomly selected group of companies, you’d be hard pressed to do it. Even if you do business with them, and trust them with your data (or to not take your data).Report

    • Avatar Kim says:

      Did we forget when the government stepped in and said “no shorting” of General Electric and General Motors (among other… financial firms)?
      That’s called getting the hedge funds by the short and curlies.
      Destroying their business model at the stroke of a pen.Report

    • Avatar Kim says:

      Cite me on the frozen market. I know about commercial paper, but I thought mortgages were still trading, if in a fairly panicky way. I mean, even greece was still trading their bonds throughout their crisis, and time was you could buy Ford stock WILDLY below a sane market value.

      Mark to Market is a good rule that ought to have been adopted at a better timeReport

    • Avatar Dave says:

      There is a LOT more to the crisis including something not one person has mentioned here called “Mark to Market”. More than anything else M2M killed Bear Stearns and nearly killed a number of other firms. However, just because “the market” had frozen by no means meant that 100% of the underlying assets had lost 100% of their value, which in point of fact was exactly the accounting treatment of them at the time.

      I think it’s fair to criticize mark-to-market accounting, but as far as the crisis is concerned, it’s a non-sequitir.

      Banks like Bear were being funded through the overnight credit markets via repurchase agreements. Institituions of different sorts would give the banks cash on an overnight basis, and in return they received collateral. Traditionally, collateral was generally Treasury securities, but at some point, the banks were using tranches in the mortgage-backed securities they created.

      From the perspective of the overnight lenders, when the markets froze, it would not have mattered what the actual market value of those assets were assuming those assets could be sold in a functioning market. What was true no matter what was going on was that the underlying value of those assets (i.e. the value of the collateral they were holding) was below the loan amounts. Absent mark to market accounting, the lenders would have still refused to roll over their loans and hold these securities as collateral because it became obvious that they were far too risky for the overnight lending markets.

      Regarding Warren Buffet, if he could have looked at Goldman and seen a good investment despite mark-to-market accounting, other investors could have looked at any other bank and come to the opposite conclusion about them (which happened with Lehman, Bear and Merrill). In a way, your Buffet claim seems to undermine mark-t0-marketing as a cause of the crisis.

      I haven’t completely worked out my views on MTM but I do see problems with it.Report

      • Avatar Kim says:

        ah. so what he was talking about was the commercial paper breaking the buck.Report

      • Avatar Wardsmith says:

        @Dave and @James,

        First to James This was an awesome comment! I’m not replying below it because there isn’t room anymore but you’ve hit multiple heads on multiple nails. Fundamentally, I think the disconnect here between a large number of LoOG folks is a massive misunderstanding of what constitutes a “market”. Too often people point to the “stock market” and call THAT “the market”. Unfortunately for hundreds of reasons the stock market is a highly imperfect representation of “the market”. Preferentially we need to look at main street not wall street for indication of the market. Unfortunately, main street isn’t open all the time, isn’t reported on all the time and doesn’t pack the wallop wall street does so our attentions are diverted elsewhere.

        The problem wasn’t M2M per se, but M2M in reference to the new accounting treatment under SoX. In the old days (pre Enron, which BTW abused M2M horribly and SoX did NOTHING to stop that abuse whatsoever!) an accountant had choices about how to value an asset. Post SoX, those choices were taken away and the entire asset class came down to “last quoted price” as James so eloquently stated above. Unfortunately for hundreds of reasons, last quoted price can be horribly wrong. ESPECIALLY in a “market” with too few participants. This had happened previously with energy trading, that was obviously bad, this was worse.

        The ideal market has an ideal number of participants. Something like Metcalf’s network valuation model, the value of a market goes up as the square of the number of participants because that many participants will do the best job of determining the optimum price point. You can’t have a proper “auction” if there is only one buyer and seller. The original stock market under the buttonwood tree was quite literally an auction and NYSE kept open outcry for years to continue the illusion that we had a legitimate auction environment. If NYSE is bad, how much worse the pseudo market the banks were trading MBS’ in?

        The ridiculous thing about Fannie Mae, Freddie Mac and all the rest was the indulgence of borrowing at short term interest rates to fund long term obligations. NPV formulas are indeed prevalent and if you’re cognizant of same you know that boiled into them is something called the discount rate. If I said to you today, loan me $100,000 at 1% interest for 30 years you’d be a fool to take it. Certainly between now and 30 years from now, interest is certain to be higher than 1%, not to mention inflation and risk of whether I’d even return the money (trust me, I’m good for it 😉 Effectively because of Fed policy at the time housing became a good carry trade but that made no sense on any level. Because short term money was so cheap, people were locking in long term contracts and continuously borrowing short term cash. That was a disaster waiting to happen and happen it did. The M2M problem was that the assets literally disappeared overnight.Report

        • Avatar Kim says:

          *wolfish grin*
          “You can’t have a proper “auction” if there is only one buyer and seller.”

          –some might say that’s the only time for an auction. When you’ve got the other party over a barrel, and you can afford to be …. generous.Report

  18. Avatar Major Zed says:

    Maybe it’s time for a symposium on regulation?Report

    • Avatar Mike Schilling says:

      Want to draw up a set of rules for one?Report

      • Avatar James Hanley says:

        We’ll tell you what yo have to write.Report

        • Avatar Major Zed says:

          I would hope knowledgeable people could define regulation, describe the different types that are happening now and in the past, provide historical context and trends, discuss the economic case pro and con (and touch upon regulation as a remedy for court failure), where it seems to be working and where it is contentious, where the rule-of-law is breaking down because the rules need to be interpreted on the fly, quantifying the economic burden (imposed costs), where there are good cost/benefit studies and where there aren’t. Personal stories, especially from actual or would-be business owners, about how regulation has affected them would be valuable.

          Unfortunately, I have little to offer; addressing any of the above would be basically a book report (Hello, Cato!). However, I would be willing to random sample a certain number of pages of the Federal Register and describe my findings.Report

  19. Avatar Roger says:

    Dave and James,

    I read Dave’s response in my email and thought it was excellent. However, I can’t even find it now in the threads, as they have gotten to long. Great points though Dave. I’ve really learned from your perspective.Report

  20. Avatar Michael Drew says:

    To continue a discussion from above here below.

    We were dicussing whether liberals have begun to taken an open, evidence-based approach to the issue of regulation and proposals for deregulation since the rise of deregulatory enthusiasm in policy attitudes in the 1970s and 80s. My contention was that Bill Clinton represented the fact that they had begun to do this – not that they’d uniformly or completely adopted this approach, but that they’d begun to. The response was a denial that Bill Clinton was a liberal. I hope it can be acknowledged that this terminological question, once contended on each side, can’t ever be definitively settled. But I’d like to suggest that if he can be identified as at least centrist liberal, then his considerable record of deregulation should not be dismissed in a discussion of whether liberals shouldn’t be dismissed. At the very least, Bill Clinton was the dominant force in the policy orientation of the major liberal party in our two-party system in the last quarter of the last century. Regardless of Clinton’s personal categorization, his political effect was to bring, to some considerable degree, the major liberal party in the country around to something very much like the very approach to policy analysis in question.

    This history can be obscured in debates today. When we see harder-left liberals today – ones who have in recent years re-claimed the name and jealously guard its application using a series of litmus indicators, a reflexive defense of regulation being among them – reflexively defending regulation sight unseen, it’s not in as part of a broad, long-lived, unreconstructed bloc of unthinking repeaters of nonanalytic dogma and blind attachment to regulation for its own sake (or just because it’s on the books) that continues to dominate thinking on the left. Instead, where we see that (and I contend we actually see little of it here at the League), it is a phenomenon that has a distinct history, to which it is largely a reaction. That is the history of the embrace by large parts of the liberal coalition precisely of deregulation justified by an evidence-based approach to policy analysis. There was always going to be resistance and reaction to this by farther left liberals – (we could even debate whether “liberal” is the right term for that view, rather than simply left or progressive, though that debate was rendered largely academic when its adherents reclaimed the name because of the fact that it came to have such a bad reception among precisely those to whom they most oppose themselves). This reaction was immeasurably strengthened by the onset of a legitimately-described “crisis of capitalism,” that, whatever the nature of its causes, followed directly on an era in which successive presidential administrations in increasing degrees embraced the deregulatory agenda: one liberal and one conservative. For those “liberals” predisposed to reflexive advocacy of “regulation” as an end in itself as a matter of reaction to a policy consensus over decades among liberals and conservatives in favor of deregulation often and where appropriate, if not always and everywhere, the financial crisis was a like a providential judgement on the vogue era of deregulation – definitive and final, questions of actual causality de damned. It was obvious.

    But these liberals are not all liberals, and they’re not even most liberals, as our commenter Mike points out below: this view isn’t indicated by the positions of most Congressional Democrats – just some, and I’d argue few (even those who do advocate “more regulation” are willing to offer their arguments based on evidence, not mere conviction in the broad idea). Moreover, again, these kinds of views don’t exist in ahistorical vacuum, and aren’t the timeless tendency of the American liberal persuasion. They were, perhaps, at one time. But then these guys named Al From and Bill Clinton came along. And that’s the whole point of this list I’m about to offer.

    It was claimed that Bill Clinton isn’t a liberal, so his embrace of an evidence-based approach to regulation doesn’t constitute a reform by liberals to their traditional approach. Well, Bill Clinton was at least a centrist liberal. He came out of the liberal tradition of FDR, Kennedy, and Johnson Democrats, and never flirted with any other broad political affiliation. We see this in his administration in the fact that, apart from the areas in question where he embraced an evidence-based program of reform of some arguable(!) excesses from the era of Great Society High Liberalism and arguably(!) unjustifiable regulatory holdovers from the aftermath of the Great Crash, and a few other centrist policies, otherwise his administration fit the profile of a liberal American president’s quite well.

    So on to the goods ):

    – biggest accomplishment thought to be overhaul of education. This you might assume would not indicate liberalism at first blush, but consider the highlights:
    -more spending for schools,
    -rising opportunities for gifted children,
    -an increase in vocational education,
    -raising of teachers’ salaries,
    -inclusion of a wider variety of courses,
    -compulsory teacher testing for aspiring educators


    – Family & Medical Leave Act – requirements on business to preserve the jobs of those taking family leave
    – effort to enact a health care reform that would have been to the left of Obamacare
    – a progressive tax hike to address budget deficits involving a rise in the top marginal rate, combined with lower rates and refundable credits for lower income workers,as well as small-business cuts
    – executive action meant to allow gays to serve in the military and prevent the military from inquiring into members’ sexual orientation
    – willingness to shut down the government over an arbitrarily drawn red line in cuts to entitlements sought by Republicans
    – I’m going to put NAFTA in here. IN context, the international free-trade fight did not break down along left-right ideological lines, but instead along traditionalist/technocratic lines. I’m going to claim this as an example of a liberal politician implementing a classical liberal reform that in the political context of its day was liberal in both the American and broad intellectual senses. Had Reagan signed NAFTA, he also would have been implementing a reform that was intellectual liberal and also political liberal in its time and place (America, mid-late 20th century).
    -SCHIP – increased federal spending for children’s health
    – his environmental record was mixed, but was characterized by early initiatives to follow through on very liberal campaign promises to address greenhouse gases. Many of these initiatives we abandoned and backsliding occurred throughout the term. Nevertheless, there were accomplishments: large tracts of land were set aside for natural habitat/lands protection, and perhaps most significantly a major tightening of air and water pollution standards was signed into law. The signing of the Kyoto treaty. Clinton also vetoed numerous attempts by the Gingrich Congress to loosen environmental standards. Even setting the record of enactments aside as inconclusive, the record of public statements strongly suggests ideological (modern American) liberalism in this area.
    – as far as I can make out, and apart from the significant (but largely to the point of our initial question) exception of the Treasury Department, Clinton’s record of appointments to federal administrative and agency executive positions was what we’d expect to see from a liberal centrist, not a true U.S. centrist or conservative(as opposed as a centrist among Democrats). He appointed environmentalists to EPA and Interior, people committed to the enforcement of the liberal vision of advancing equal opportunity in federal hiring and administrative policy to the relevant agencies like Justice and, HHS, and HUD, and included strong liberals like Reich at Labor to (in theory) balance the centrist forces at Treasury.
    – his foreign policy is that of a liberal internationalist, coalition builder, and clear if not totally consistent liberal interventionist
    – last but not least, Clinton appointed two (I hope) incontrovertibly liberal justices to the Supreme Court, who have done as much as anything else to advance the liberal aspect of his legacy, cf. most recently Ginsburg’s searing dissent on the central Commerce Clause question in the health care cases.

    Clearly, the principal pieces of evidence whereby we would claim Clinton to be a centrist or possibly a moderate conservative would be welfare reform, crime policy including the death penalty, and financial deregulation. It is a considerable degree of centrism. But those are centrist policies, not hard-right policies. I do not think it cancels out all the tendencies and actions above, to say nothing of his consistent allegiance to the point near-synonimity with what, universally deemed the major liberal American mainstream political party. so that

    Bill Clinton was centrist liberal who moved his party, the major liberal party of his country, from a leftism that had grown out of touch with an electoral majority in the country back to the center-left of the country and governing-party status. To do this, he embraced deregulation where indicated by evidence-based analysis of regulatory effectiveness as one means of effecting – and persuading – his party to make that move. Liberals are far past the the time when they started looking critically at regulations on the books as justified just because they’re. When we see some of them doing that today, it is a reaction – a small truth as next to the larger truth of the wholesale reform of how American liberals traditionally looked at regulation and other economic policy questions.Report

    • Avatar Wardsmith says:

      Michael, you have some great thoughts here. I’d sure like to see you polish this up and submit it as a guest OP. Barring that I’d like to see a front pager OP this as a comment rescue. It deserves more discussion than its going to get at the tail end of a week old almost 400 comment OP.Report

  21. Avatar Roger says:


    Great morning surf session. The rain scared off the crowds.

    “How about this: you propose just one non-activist regulation that might address the problem we’ve been discussing, and contrast it with one activist regulation. Explain what puts each in its respective category. We can go from there. Maybe put it at the bottom of the page, so we don’t start at maximum indent level.”

    An example of impartial, non activist regulation is to establish requirements for lower leverage ratios. Another would be to establish a requirement that all senior officers getting government bail out must pay a fine equivalent to last several years salary and bonus.

    An activist solution would be for what Simon characterizes as “policy by deal,” where ex employees working in the Treasury or Federal Reserve meet with executives of the distressed banks in closed door sessions that allow details of the bailout to be worked out. Another activist solution would be to make create administrative incentives to provide specific numbers of mortgages to specific risk groups.

    The difference between the two is the amount of active interference in the market made by the regulators. In the first examples, the rules are impartial, pre-set and not intended to affect specific market outcomes. They are aimed at ensuring that the markets work and do not implode, however they leave the decision making on the playing field between financial firms, their employees and customers.

    In the activist camp, we have decisions which are made subjectively by empowered regulators. They are on the field of play and can reward favorites or pursue specific agendas which attempt to influence who succeeds and fails, who gets a loan and so forth.

    I still prefer the sports analogy though. An activist ref is one who has input on which plays are called, or who changes rules on the fly. A non activist ref is one who makes impartial calls on whether a specific, objective rule that both teams agreed to before the game started was complied with or violated. The non activist ensures the game is played as designed. The activist is trying to influence outcomes.

    The observation that activist applies not just to the refs, but to the flexibility, complexity and number of rules, the nature of regulations, the frequency of change and so forth is correct. The non activist situation corresponds more with rule of law. The activist more with rule of man.

    Also note that I am not arguing for or against any of the above examples. I am not arguing that activist regulations are always bad or that non activist are always better. I am simply defining the terms.Report

  22. Avatar Stillwater says:

    An example of impartial, non activist regulation is to establish requirements for lower leverage ratios.

    The substance of Johnson’s article (or was it Cohan’s) is that leverage wasn’t the cause of crisis. I’m not opposed to the idea, but it surely isn’t a cure.

    Another would be to establish a requirement that all senior officers getting government bail out must pay a fine equivalent to last several years salary and bonus.

    That’s regulation, yes? So isn’t this fall squarely “In the activist camp, [where] we have decisions which are made subjectively by empowered regulators”? I mean, this requires identification, enforcement, prosecution, judicial decisions, etc etc.Report

    • Avatar Roger says:

      I’m just providing examples. I am not lobbying for or against any example. Too many potential unintended consequences.

      The salary and bonus loss would be established up front as a rule that would apply if and only if the company seeks a bail out. It would be impartial, consistent and is not intended to manipulate. The intention of course is to incentivize responsibility and accountability in he senior management. Indeed it is even somewhat voluntary.Report