(Community Matters) Pardon the copy & paste but my response in another blog’s comment trail to questions about the advisability of free markets and discerning the pursuit vs worship of money . . . .
Big Picture, I’m reminded of a favorite line of Steven Tomlinson’s in his sermons about money, “how would you know if money became your God?” fyi: Steven is an economist with a Stanford PhD as well as a theologian (in addition, my husband).
Anyhow, to your question, Bobster. Yes, I know, I’m not a “conservative,” though fiscally I’m closer to a conservative than to a liberal.
While grossly imperfect, free markets are vastly superior to other economic systems. And, because of their imperfections, government must regulate. We must especially regulate against externalities, i.e., the secondary or unintended consequences, the costs of which owners are able to shift to society or other sources.
There’s plenty of blame to go around in the current financial meltdown – even if we assume good intentions such as promoting home ownership, financial innovation to leverage available liquidity and well-intentioned but ill-advised subprime lending. Then of course, the not so well intended market realities of greed which leads to short term gains at the long term expense, allowing for recklessness, misleading financial reporting & fat bonuses even in the face of forecasted consequences. Warren Buffett called these (derivatives) investment time bombs as long ago as 2003.
No one really knows the leverage (the full dollar amount of exposure) that exists. Credit Default Swaps, a financial derivative, are thought to total somewhere between $40 to $65 TRILLION. My good friend Jack asked how do CDSs leverage at such multiples, hell if I know. I can’t find a good explanation – if you have one, please send.
Plenty of blame to go around. And, yet – and here is where my political bias might trip others up – the philosophy of unencumbered markets and less regulation as good has just failed us. No doubt regulations get out of control, stifling innovation and productivity. However, blinded bias against regulation has resulted in the meltdown we’re experiencing today.
John Thornton in his blog Insomniactive has written extensively about the Federal Housing Finance Administration, led by James Lockhart, which was responsible for oversight of Freddie and Fannie.
Ill written essays and articles which claim the meltdown is completely from within the well-regulated side of the financial industry are either disingenuous or intentionally misleading. Mr. Lockhart spent lavishly but his agency failed in their oversight, apparently not even heeding auditor warnings and questions, certainly not employing even standard practice to monitor, regulate and quantify risk. In fact, the agency reflected the philosophy of administration principals: dismantle regulation and deploy cronyism. As John notes, Mr. Lockhart is another Michael Brown, the FHFA another FEMA. Thankfully this catastrophe not as costly as Katrina in human lives, though many times more costly financially.
Seems there is an opportunity to cover much of the bailout cost (if not even make gains) if we appropriately discount the securities before purchasing and take options to capture a true fair share of the gains in values of the companies putting these securities to taxpayers. Let’s hope our government negotiates such, though my forecast is Wall Street and other financiers will wait the appropriate time before convincing the government to sale the distressed securities for private workout and most gains will accrue to those bailed out.