Matt Taibbi on Greenspan, Rand and the Crisis

Rolling Stones reporter Matt Taibbi’s book Griftopia: Bubble Machines, Vampire Squids and the Long Con that is Breaking America is not only a must read book, but his writing style makes it immensely fun to read.  His argument is essentially that thanks to de-regulation and out of control capitalism, a small elite has been profiting handsomely by rigging the game in their favor.  This not only has led to a massive shift of relative wealth to those at the top, but has undercut the very foundation of American strength and productivity.   The result is a real threat that America’s best days may be behind us, unless we can reassert the capacity of the state to regulate the market so that it functions for everyone, and can’t be hijacked by the moneyed elite.

The book itself is worth reading, even if you disagree with it (in fact, those who are skeptical of his argument should read it — we all should read books from a perspective we disagree with).     My favorite chapter is the second, entitled “The Biggest Asshole in the Universe,” which is about Alan Greenspan.   A taste of his writing style, starting on page 38 as he describes Greenspan’s flirt with the pseudo-religion ‘objectivism.’:

“It is important to spend some time on the seriously demented early history of objectivism, because this lunatic religion that should have choked to death in its sleep decades ago would go on, thanks in large part to Greenspan, to provide virtually the entire intellectual context for the financial disasters of the early twenty-first century…

“One of the defining characteristics of Rand’s clique was its absolutist ideas about good and evil, expressed in a wildly off-putting uncompromising bombastic rhetoric that almost certainly bled downward to the group ranks from its Russian emigre leader who might have been one of the most humor deprived people to ever walk the earth…”  (p.38-39)

After mocking Atlas Shrugged he goes on, page 41: “According to objectivists, the belief in ‘objective reality’ means that ‘facts are facts’ and ‘wishing’ won’t make facts change.   What it actually means is ‘When I’m right, I’m right’ and ‘My facts are facts and your facts are not facts.

“This belief in ‘objective reality’ is what gives objectivists their characteristic dickish attitude: since they do not really believe that facts look different from different points of view, they don’t feel the need to question themselves or look at things through the eyes of others. ..the real meat of Randian thought (and why this all comes back to Greenspan) comes in their belief in self-interest as an ethical ideal and pure capitalism as the model for society’s political structure.  Regarding the latter, Randians believe government has absolutely no role in economic affairs; in principle government should never use ‘force’ except against such people as criminals and foreign invaders.  This means no taxes and no regulation.

“To sum it all up the Rand belief system looks like this: 1. Facts are facts, things can be absolutely right or absolutely wrong, determined by reason.  2.  According to my reasoning, I am absolutely right.  3.  Charity is immoral.  4.  Pay for your own fucking schools.

“Rand, like  all great con artists was exceedingly clever in the way she treated the question of how her ideas would be employed.  She used a strategic vagueness that allowed her to paper over certain uncomfortable contradictions.”  (Taibbi goes through and tears Rand apparent by pointing out clear contradictions in how her ‘theory’ could be applied)

Page 42: “A conspicuous feature of Rand’s politics is that they make absolutely perfect sense to someone whose needs are limited to keeping burglars and foreign communists from trespassing on their Newport manses, but none at all to people who might want different returns for their tax dollar.  Obviously it’s true that a Randian self-made millionaire can spend money on private guards to protect his mansion from B and E artists.  But exactly where do the rest of us look in the Yellow Pages to hire private protection against insider trading?  Against price-fixing in the corn and gasoline markets?  Is each individual family supposed to hire Pinkertons to keep the local factory from dumping dioxin in the county reservoir?

“Rand’s answer to all these questions was to ignore them.  There were no two headed thalidomide flipper-babies in Rand’s novels, no Madoff scandals, no oil bubbles.  There were, however, a lot of lazy-ass poor people demanding welfare checks and school taxes.  It was belief in this simplistic black and white world of pure commerce and blood sucking parasites that allowed Rand’s adherents to present themselves as absolutists, against all taxes, all regulation and all government interference in private affairs — despite the fact that all of these ideological absolutes quietly collapsed whenever pragmatic necessity required it.  In other words, it was incoherent and entirely subjective.  Its rhetoric flattered its followers as Atlases with bottomless integrity, but the fine print allowed them to do whatever they wanted.   This slippery self-serving idea ended up being enormously influential in mainstream American politics later on.”

He also recounts how Rand used Stalinist like methods with her group, showing her to probably be one of the most depraved “thinkers” of the 20th Century.   To this day so-called “objectivists” even try to pay philosophy professors to use Rand in their courses, even though her thinking has no philosophical weight.

The sad thing is that this kind of anti-government attitude led to a weakening of the structures of the state meant to protect us from the dangers of unrestrained greed, and caused even the working poor to somehow think the brokers earning multi-million dollar bonuses selling worthless mortgage backed securities shouldn’t pay taxes or have their work scrutinized.   The current financial collapse is an indictment of de-regulation and a belief that somehow capitalism can work without a strong state.   It’s one reason why America lacks true conservatives — conservatism sees the community and its health as important.   American conservatives have strayed from that ideal.

Taibbi investigates this through the mortgage scams, the run up of oil prices due to commodity speculation (controlled by a few big financial institutions), the health care reform act (which he says helps the insiders) and the economic “bubble machine.”    Does he overstate the extent of the problem?   Probably.  But his facts are eye openers, his real life examples show how average people suffered thanks to de-regulation and insider abuse, and even the skeptical will come away from this book realizing that “business good, government bad” view (reminiscent of Orwell’s “four legs good, two legs bad”) is insanely simplistic.  Moreover, when government is essentially controlled by big money, we all pay the price.  Both left and right should be able to agree on that!

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  1. #1 by Susan on September 16, 2011 - 18:23

    I am enjoying the book. Thanks for the recommendation.

  2. #2 by renaissanceguy on September 17, 2011 - 22:50

    Scott, I probably could not stomach the book, although I probably should read it.

    There are problems with just what you wrote about it.

    First, what deregulation? The number of government regulations grows yearly. There are thousands upon thousands of pages of regulations written by hundreds of pseudo-governmental agencies. In effect we have unelected bureaucrats writing and enforcing laws. This is unconstitutional.

    Second, to talk about capitalism being out of control is to define capitalism in a strange way. Capitalism is freedom. To control it is to destroy it. Control and freedom are opposites.

    Third, when you talk about a small elite rigging the game in their favor, you are making the exact opposite point from what you think you are making. Regulation is one of the things that allows that group to rig the game. They regulate competitors out of the game. They promise votes in exchange for regulations in their favor. (How much did Barney Frank and his personal friends make from his investiments in Fannie Mae?) Getting government out of business is the solution, not letting them have even more power over business.

    You and I agree on the problem–the gap is growing between rich and poor. We disagree on the solution, which I believe is letting the poor and middle class compete. It is promoting a free and booming economy with more opportunity to start businesses, get jobs, and earn promotions and raises. Anything that stifles the economy allows the ones who are most sly and who already have the most money to beat those who have little and who are not as clever.

    Fourth, all those people who label Alan Greenspan an objectivist are completely dishonest. Objectivists look at Greenspan as a turncoat. For goodness’ sake, many objectivists want to eliminate the Federal Reserve and the regulation of money–how could Greenspan have been an objectivist when he was the Fed Chairman? Although Greenspan was not as “bad” as other chairmen, he was not even close to an objectivist. He was one at one time, and the people writing these books and articles know that he left the movement and abandoned that viewpoint.

    Fifth, the author is illogical in describing Objectivists as saying, “When I am right, I am right.” Actually we all generally think that way, including Mr. Taibbi. Including you. If you thought that you were wrong, why would you go on thinking the same things?

    Underneath the veneer of self-righteousness of liberals is the reality that they are just selfish people, just like everyone else. Some of the wealthiest members of Congress are the most liberal ones, and their promise to take from the rich and give to the poor is a way to appease voters, who want their piece of the pie without earning it. At least Objectivists are honest in saying that we all want what we want. They are more moral in that they are not willing to take it unfairly or dishonestly from other people. And, no, they do not favor robber barons. They favor a free market that can stop robber barons in their tracks by undercutting them.

    We already had an FDA and drug regulations when thalidomide caused birth defects. How did regulations stop its use? What stopped its use was the terrible effects that it had.

    Bernie Madoff was convicted of breaking 11 federal laws. In other words, we already had regulations designed to stop him. How did the regulations help? In fact, the many regulations probably gave investors a false sense of confidence. People who believe that the government will keep them safe from getting ripped off will not use due diligence.

    As for the oil bubble, if stupid investors want to take big risks with their own money, why should the government stop them. Is the government our little nursemaid, holding our hand in every decision in life. The smartest economists were warning people about trouble with the rising oil prices.

    Some of your criticisms are ad hominem arguments against Rand. I’ll admit that she wasn’t the nicest person in the world. However, you know that it doesn’t make her arguments wrong–unless she was arguing that objectivism makes everyone sweet and humble.

    • #3 by Scott Erb on September 17, 2011 - 23:41

      You are absolutely right that there are too many regulations overall. Unfortunately, where regulations were needed — over the counter derivatives and the financial industry — they were lacking. I’d support regulatory reform that really focuses on which ones are needed, and which does not reflect the interests of lobbyists.

      I disagree with equating capitalism with freedom; I think unregulated capitalism leads to exploitation and less freedom. Market capitalism needs both the state and regulation to both survive and thrive, from my studies of political economy. Also the idea that market competition will solve the problem is contrary to all of history, as well as economic theory. I’m not sure why you believe that will work. I’ve read and studied a lot of economics, and have looked at real world studies and examples, and I see no possible reason to believe that what you suggest will work.

      As to objectivism, he touches on Greenspan’s contradictory behavior joining government, but the point is that too often people who tend towards objectivism (not always!) also tend to a kind of self-righteous “this is the truth, and since there is only one truth I don’t have to consider any alternatives.” Most people believe there is only one truth, but what it is and how to understand it changes with perspective (sort of the blind with the elephant kind of example). That’s why it’s important to consider other ideas, and question what one believes. Also most people realize that we probably don’t know the complete truth, so at best we have our best guess at what it is.

      Taibbi’s style is clearly designed to be “in your face,” and when his chapter title is “the biggest asshole in the universe”, it’s clear he’s embracing ad hominems, so that charge is certainly accurate. But the point that economists make is that those with inside information and who can control markets (like the big financial institutions) can rig the game to make sure they make massive profits and prey on those who fall for their schemes. The people who bought the AAA rated bonds thinking they were safe and secure (because that is what the rating means) were massive numbers of normal citizens, retirement plans, towns, fire departments…one can say “well, they should have known better,” but in reality the powerful cons will win — in a complex society people don’t have access to the info, and often the media provides false info, as do experts — without realizing its false. This repeats itself over and over, even if you start distrusting one set of experts and go for others. Ultimately this cause societal disintegration and an increasing gap between the very rich and the rest. Government can play a positive role to prevent that. Markets don’t do that, they are not perfect nor are they magic. They’ll work in reality as they do in theory only if people have complete information and equal power to stack the deck. Simple Isms work fine in theory when the assumptions are kept in check and one goes with a few simple beliefs and extrapolates out into a complex society. In the real world, though, NO theory works perfectly. The world is too complex, and our perspectives gives each and every one of us a set of biases we can never completely escape. We need to be humble about our theories and explanations of reality.

  3. #4 by renaissanceguy on September 18, 2011 - 00:36

    Scott, as sometimes happens, you and I agree. I would like to see our Congress enact only the most necessary and the most beneficial (truly beneficial) “regulations.” I put regulations in quotations, because I think people define the word differently. I don’t want government interfering in the free market, but I do want laws that limit people who want to purposely harm others, to break their agreements, and to break their promises., In other words, I favor laws based on a strict justice or fairness model.

    You think that I am starry-eyed in regard to markets, but I would say that you are starry-eyed in regard to government. What government ever acted in a self-disinterested way solely for the good of the people governed? Especially in our system of government by lawyers-turned-politicians, it is unreasonable to think that they are not strongly inclined to do what is best for themselves personally and for those whom they wish to favor or for those whom they depend on for their position. (You ignored my sincere question about Barney Frank, and he is just one example.)

    Your motives are absolutely pure and good. In fact, they are the same as mine. I want to see the ordinary Joe given every opportunity to succeed–as far as he can dream and to the extent that he works for it. If I thought that our current system is the one that is helping him do it, I would support it. However, your own statistics prove that it is not helping that ordinary Joe (or Jane). Why do more of the same?

    Scott, if “capitalism” is not the word for a free-market system, then what word would you use? I think it is sad that those of us who believe in a free-market economy have to qualify the word to make ourselves understood. We have to say “laissez-faire capitalism” or “free-market capitalism.” To me those terms are cumbersome and redundant. I think that those who favor a “mixed-economy” should come up with their own term. What they, and you, favor is actually semi-socialism or a “moderately regulated economy.” It is not capitalism, as many conservatives and many libertarians understand and use the term. The worst part of it is that people criticize what they label “capitalism” but is really a controlled and managed economy. (Even our money itself is controlled!)

    You say that you have looked at historical examples. When has a free-market economy really existed? I would suggest that there are no real-world examples to look at. Mercantilism came close, and look how it enriched people who were commoners? A few of the American colonial communities, particuarly the two first Rhode Island colonies, Providence and Portsmouth, came close. In that case, there was a great deal of prosperity and upward mobility. The settlement at Albemarle Sound came close. I would say that early Pennsylvania did, too.

    The problem is that every time people have tried to found a society with full economic freedom, the forces of control and regulation always take over. People want economic “security,” people want to rig the game, as you pointed out. All intrusive regulation arises from somebody wanting some kind of advantage that freedom does not give them.

    I understand your point about the average person or group not being able to detect a con man or cheat. Then I ask you again, how did all those laws STOP Madoff from doing what he did. How did the myriad regulations prevent that disaster? Don’t you see that government nanny-ism gives all those investors a false sense of security. I read a lot about the Enron fiasco, and the problem was that some of the principle actors were thinking that everything must be okay, because auditors were certifying everything and government officials were giving a nod, as well. My point is that these things happen WITH regulations, not because of a lack of regulations.

    When you point out that no theory works perfectly in the real world, I am unmoved. It is because of your understanding of “works” that you disagree with freedom. A free society would promise people nothing except that they can do whatever they wish, as long as they do not harm anyone. It would not promise people prosperity–they have to work for that. It would not promise them success–they have to apply their brains and their backs to achieve that. You say that you want everyone to have opportunity, and that is exactly what you have–and only that–in a free society. So, no the free market is not magical or perfect, it just is. I have no illusions otherwise. It is you who think that something called “government” is magical and perfect, although you do sometimes admit that it is not. You think that government “works” and yet, our government has not ended poverty despite decades of a war on it. (A private business would close after just a few years of failure!) As you point out, poverty is a bigger problem NOW then it was a few years ago.

    • #5 by classicliberal2 on September 18, 2011 - 04:47

      “What they, and you, favor is actually semi-socialism or a ‘moderately regulated economy.’ It is not capitalism, as many conservatives and many libertarians understand and use the term.”

      That’s because the way those “conservative” and “libertarians” use the term is utter nonsense. Ahistorical, anti-democratic utopianist rubbish. The efforts those usages reflect–to turn capitalism into some sort of purist ideology–long post-date capitalism itself. Capitalism is what exists in the U.S. and practically every other advanced industrialized economy. Regulation, taxation, the welfare state, and all the rest aren’t deviations from it–they are integral features of it, as it has organically developed over the years. Governments are as dangerous as Scott says, and there was never a time when government didn’t side with one group or other, nor will there ever be such a time (I would expand Scott’s remarks in this vein to cover all concentrations of power–they’re all potentially dangerous). People have to exercise some sort of democratic control over this machine, the very sort of control the “capitalist” ideologists try to crush at every opportunity.. Yes, democratically-enacted regulations do sometimes impede business. That’s because the natural tendencies of business sometimes need to be impeded. Yes, private centers of power, which are inherently anti-democratic, will try to game the system in their own favor, and, if they’re allowed enough power, will usually even succeed. That tendency must be resisted. Allowing those centers of power free reign and cutting of the only way the public can reign them in is a recipe for allowing them to game the system ever further in their own favor. For, in short, disaster.

  4. #6 by Scott Erb on September 18, 2011 - 01:09

    Great Britain had its “libertarian” period during the early industrial revolution. You had sweat shops and mass exploitation. That led to the rise of socialism and finally interventionist liberalism (liberalism classically defined) of folk like John Stuart Mill. Also, when one sees government collapse, then things get much much worse. More directly I’d say you don’t see it functioning because it is impossible — it is as likely as true utopian communism where everyone freely works for the good of all. The two extremes look great in theory, but everything I’ve studied about economics and politics say they are impossible in reality. You’ve not seen it because it can’t exist. When we’ve been closer exploitation and poverty get so high there is a political reaction.

    I am not starry eyed on governments. Governments are the most dangerous thing humans have invented, especially large governments that use abstract rules to control massive populations. Governments cause war, engage in genocides, and have been brutal. Yet any society without governance fails unless it is very small and can be governed by shared norms and customs — something not likely in a large industrial society. Therefore to me the problem is to limit government, to put individual rights as primary values, not allow people in government to evade or be above the law, and have strict constitutional limits on government. Democracy is good because the people have ultimate oversight. If government disappeared, it would reemerge because power relations permeate society and people will take power. But it took a long time to get democracy, it should be cherished, especially its role in limiting governmental abuses.

    My goal is freedom. I think freedom is denied when powerful actors exploit others and rig the game in their favor. Positive freedom is very important; if one only focuses on negative freedom, then you end up rationalizing abuses of wealth and power to benefit oneself unfairly because another person agreed. But if you agree to a limit set of bad options, while others have numerous good options, isn’t the person whose options have been limited also less free? The power to rig the game to control the options others can freely choose from is anti-freedom. I see your approach leading to considerably less freedom in that you are so worried about the government you don’t see how private citizens can use power to limit the freedom of others. I’m worried about both, I see myself as more concerned about freedom (or I think I might have a better understanding of it — you are just as concerned).

    I’m not sure about your point on mercantilism — that’s usually seen as pre-capitalist and anti-market. Colonial economic life had extreme poverty alongside some extreme wealth, but pre-industrial economies were very different creatures. Again, pre-industrial small communities governed by custom and shared values can function very well without legal regulation — regulation comes from their norms and customs. A modern industrial society is much different. I’ve been studying political economy for geez, about 30 years now. I do like a lot of what libertarians like Mises and Hayek write, as well as neo-classical economists like Keynes (who is often misunderstood, he’d have detested high government debt) and Marxian and socialist economists. I try to learn bits from all, they are often all really intelligent people who look at the world from a particular perspective and see something others miss. No theory is perfect, neither is any government nor any market. It’s complex, there’s no easy answer key, but through trial and error we find what works best towards our common goal: maximizing human liberty so people can take responsibility for their lives and have the opportunity to live a successful life, free even to define what success means to them (it may not be material, it could be spiritual).

  5. #7 by renaissanceguy on September 18, 2011 - 09:17

    My mistake on Mercantilism. I was actually thinking of the rise of the middle class and of private banking. I’m not sure why that term popped out of my brain.

    I’m not an expert on the history of the word “capitalism,” but certainly the concept of an unfettered market is older than Classical Liberal is suggesting. The term “laissez-faire” is from the late 17th Century, and tthe concept of free trade from the middle of the 18th. I ask again, what word would either of you use for a system of free markets, private ownership, and no stifling regulations?

  6. #8 by Scott Erb on September 18, 2011 - 21:56

    I don’t think anyone wants “stifling” regulations. But people disagree on what that means. Adam Smith had the concept of “absolute advantage” supporting free trade, Ricardo later expanded it to comparative advantage (even if you are worse at all things you do better if you specialize at what you’re best at). Smith’s 1776 book is usually when capitalism as a market based economy is described, though Smith’s writing can also be seen as very critical of unrestrained capitalism — and he was Karl Marx’s favorite economist. The term itself covers a broad range — Scandinavian countries are very pro-market and capitalist in their external orientation and treatment of business, yet they are also Social Democratic in terms of taxation and social welfare protections. They are also very wealthy and top lists of high quality of life. I guess if you want to specify the kind of capitalism you’d want I’d say “market libertarianism” or “libertarian capitalism.” In Europe at least my view would be seen as “left libertarian” because I’m skeptical of both government and big business. Labels inherently simplify and cover up both similarities and differences. That’s probably why I get irritated when someone (I’m not saying anyone is doing that here!) labels an argument then gives generic arguments against that label.

    Oh and as for Madoff — there are laws against murder and numerous cops on duty, yet there are over 10,000 murders a year. People often get away with breaking the law. I do think there wasn’t enough scrutiny concerning existing laws and regulations.

  7. #9 by renaissanceguy on September 18, 2011 - 23:53

    Scott, you have actually made the exact point that I was thinking. Laws do not stop people from doing wrong. They are meant to state what is permissible and impermissible and to prescribe punishment for wrongdoers.

    So who should have scrutinized Bernie Madoff–if not the people investing with him? And who should have scrutinized the scrutinizers? Where would the money come from for all the investigators and auditors? The only people who can pay for such things are THE PEOPLE, who are the ones you say cannot afford to check up on people like Madoff. It’s not as if there is one group of people–taxpayers–and a completely different group of people–consumers.

    (Then again, about half of the citizens of the United States are paying national income tax, and the other half are not. So maybe there are two different groups–those who pay and those who play.)

    In the case of Enron, which I am more familiar with, the auditors were certifying that it was sound and above-board. Nobody was auditing the auditors. So we need people to check on the people who are supposed to check on the people doing business. But what if those people are corrupt and are taking bribes? What if they or their friends have a financial interest in cooking the books?

    There were people on the inside and the outside who knew what was going on. There was at least one analyst warning people that Enron’s stock prices were unrealistic.

    The lesson may be that if something sounds too good to be true, it probably is. Let the buyer beware. That’s why I did not join Amway when my friend wanted me to.

  8. #10 by Scott Erb on September 19, 2011 - 00:16

    Really the only thing that works is to have regulatory oversight bodies and then guard against bribery and corruption. It is easy to see when something is “too good to be true.” Unfortunately many cases are not that way. Product safety, rigged financial games that look secure and ‘normal’ (the mortgage based CDOs didn’t appear too good to be true, they just looked like a secure investment giving decent — but not great — returns). In a complex societies people can’t research every product, every investment (they may try, but it may be impossible to get the information they truly need — information they might not know is out there), and every bank any more than we can defend against organized crime without a police force. The A Team is expensive, after all!

    Right now I think we agree that too much of the regulatory regime has been created by lobbyists designed to defend the companies they were meant to regulate. That’s the worst of big government and big business — they’re in bed together. Buyer beware sounds good in theory, but in reality even the most astute and cautious buyer might get burned badly, potentially in mass numbers that damage the economy. I don’t think its a coincidence that the financial sector imploded after over a decade of de-regulation.

  9. #11 by Susan on September 19, 2011 - 15:24

    The book is opening my eyes to Greenspan. Here is a quote from the book (around page 73 of 250 pages):

    “Greenspan’s frantic deregulation of the financial markets in the late nineties had led directly to the housing bubble; in particular, the deregulation of the derivatives market had allowed Wall Street to create a vast infrastructure for chopping up mortgage debt, disguising bad loans as AAA-rated investments, and selling the whole mess off on a secondary market as securities. Once Wall Street perfected this mechanism, it was suddenly able to create hundreds of billions of dollars in crap mortages and sell them off to unsuspecting pension funds, insurance companies, unions, and other suckers as grade-A investments, as I’ll detail in the next chapter”

  10. #12 by Susan on September 19, 2011 - 15:37

    Here is another quote from page 76: “It wasn’t until October 2008, after the collapses of Bear Stearns and Lehman Brothers and AIG, after massive federal bailouts were implemented to stave off total panic, that Greenspan budged–sort of. In testimoney before Henry Waxman’s Committee and Oversight and Government Reform, he admitted (sort of) that his Randian faith in the eternal efficacy of self-regulating markets had been off, a little”

    • #13 by Scott Erb on September 19, 2011 - 17:05

      Go to the website for the FRONTLINE show and check out the episode about Brooksley Borne’s efforts to regulate derivative trade in the 90s — the big banks wanted to keep this completely unregulated and non-transparent. They got there way and look what happened:
      http://www.pbs.org/wgbh/pages/frontline/warning/view/

  11. #14 by renaissanceguy on September 19, 2011 - 22:19

    Okay. Educate me. What regulations were in place that would have stopped Bernie Madoff, and when did Alan Greenspan rescind them? And how could he do such a thing single-handedly?

    I do not understand all this talk of “deregulation” when all I know from what I hear is that we have more and more regulations every year.

    Your last post, Scott, talks about somebody’s efforts to regulate derivative trade. What would that mean? What would it look like? It sounds like you mean “ban” it. That’s not what I would call regulation.

    Enlighten me.

    • #15 by Scott Erb on September 19, 2011 - 23:55

      Check out the link. She basically wanted derivative trading to be reported so that they could know the scope of it. Since it was totally secret and unregulated it grew in massive proportions from 2000 to 2008 as financial institutions found a way to easy money — playing investors as suckers. “The Big Short” by Michael Lewis describes this well, through the eyes of those very few people who figured the game out. If it was known how dangerous this was and the scope, things would not have gotten so out of control. Please do me a favor RG and read up on what happened — even Alan Greenspan admitted he had been wrong in thinking “markets get it right.”

      I’m not sure why you’re focused on Madoff. He was one of a few con men who got away playing ponzi schemes for awhile – and was caught when things crashed. People get away with breaking the law. But he was a side show (albeit one that hurt a lot of people!)

  12. #16 by Susan on September 19, 2011 - 22:51

    To Renaissanceguy,
    I’d recommend that you watch the movie The Warning. It was an excellent movie! Also Taibbi’s book gives you examples.

    One example that he gave was that companies were selling/buying derivatives without adequate collateral so that when the gig was up…..they had NO money to pay. Ultimately that was the cause of the needed bail out of the financial institutions if I understood him correctly. So regulation would be that if you’re going to contract to buy something in the future, you need to have the money available to follow thru on that potential purchase. Perhaps Scott will correct me if he doesn’t agree with my example. Another regulation would be disclosure. WHO is making money on the deal? If you’re buying something from B and B is making a HUGE commission on it, you should be told. Transparency.

    I also think that there is something wrong with the fact that some financial institutions were selling securities and then also buying derivatives that would give them a profit IF the securities that they were selling turned out to be worthless. Doesn’t it seem that there is something wrong with that? You shouldn’t make a HUGE profit by selling crap. You should only sell things that you think are worth the asking price. IF you know its crap and buy bets that it will be disclosed to be crap, and those bets are going to make you a LOT of money; then that seems VERY wrong to me.

    I also think that we need regulation so that nothing is TOO BIG to fail in such a way that the taxpayer would be called upon to bail it out.

    Susan

  13. #17 by Susan on September 19, 2011 - 23:05

    Here is a quote from the book:
    Greenspan’s reigning achievement in this area was his shrewd undermining of the Glass-Steagall Act, a depression-era law that barred insurance companies,, investment banks, and commercial banks from merging. around page 64
    Then on page 65:
    Moreover, Glass-Steagall had helped prevent exactly the sort of situation we found ourselves subject to in 2008, when a handful of companies that were “too big to fail” went belly up thanks to their own arrogance and stupidity, and the government was left with no choice but to bail them out.

  14. #18 by Susan on September 19, 2011 - 23:24

    To Renaissanceguy,
    Madoff broke existing laws. The SEC just didn’t catch him. It was a LOT of money. I bet the people that LOST their money do wish the SEC would have caught Madoff earlier.
    This is what the SEC says they need in order to catch people like Matoff:
    http://www.usatoday.com/money/companies/regulation/2009-09-29-sec-proposed-changes_N.htm

  15. #19 by renaissanceguy on September 20, 2011 - 15:58

    Scott, I referred to Madoff because of one of your quotes saying that Rand did not live in a world with the Madoff scandal when she devised her philosophy.

    Susan, thanks for the information. I’ll give it some attention when I can.

    My initial reaction is that it sounds like you are saying that people need Big Brother to take care of them because they cannot take care of themselves. It sounds like you are also saying that people should never be allowed to take risks or that they should be guaranteed that they will always succeed, no matter how risky a venture is. That’s naive and impossible.

    • #20 by Scott Erb on September 20, 2011 - 17:43

      Why use imagery of “big brother” to describe any regulation. Why do you job from wanting some government protections and restrictions to go to the extreme — that people ‘can’t take care of themselves’ and ‘never be allowed…’ The world is not defined by two extremes, you know I distrust too much government and too much limitation of risk. You are setting up a straw man. For instance, I (and I presume you) want regulations for the road, and laws against drunk driving. I can’t ‘take care of myself’ on the road with my own capacities if there isn’t regulation. An out of control driver or people not caring about stop signs and traffic lights create situations I cannot handle on my own. THAT is a better analogy — in those areas where it is beyond the capacity for people to be able to protect themselves from harm (and to protect the greater good — look what the derivatives trade bubble did to the country’s economy, a lot of people became unemployed because of that, they had no way to protect themselves from the impact of these events).

      If you have to recast the other side’s argument in absurdly extreme terms then that may be a sign that you aren’t taking it seriously. We each want real limits on government power and oppose needless regulation. We may disagree about what regulations are needed, but it’s not big brother or never taking any risks!

  16. #21 by Susan on September 20, 2011 - 16:15

    Renaissanceguy,
    Even Ayn Rand says that we should have laws against fraud. Yes?
    Is that big brother? Or is that just citizens trying to make life easier. We’d like to be confident that people are going to honestly enter into contracts and honor those contracts. Regulations just map out what that means. Even Ayn Rand says we should honor property rights, yes? Regulations help map out those rights.

    Are you referring to this quote that Scott offered in his original post: “Rand’s answer to all these questions was to ignore them. There were no two headed thalidomide flipper-babies in Rand’s novels, no Madoff scandals, no oil bubbles.”

    The quote doesn’t imply that Madoff characters didn’t exist during the period of time that Rand lived. That quote is saying that she didn’t include such characters in her novels.

  17. #22 by Susan on September 20, 2011 - 18:15

    One thing in the book that I didn’t get:

    Taibbi said that Greenspan talked Reagan into raising the social security rates. That part I get. I even googled it to verify that. BUT then Taibbi said that Reason used that tax increase to show a decreased deficit. I thought the social security trust fund was separate from the regular budget.

  18. #23 by Sean on September 26, 2011 - 19:00

    I don’t want to put my head in the lion’s mouth but this post is wrong on regulation and partially (not wholly) wrong on Rand.

    Firstly, there was and has been extensive financial regulation. The OTC derivatives, for instance, is an example where regulation pushed banks into this market. The Basel framework made it more capital efficient for banks to have structured credit products and off-balance sheet financing arrangements than to keep the assets simple and on balance sheet. Therefore, like water on a pavement, the cracks were found and hence banks were incentivised towards these opaque financing arrangements.

    Secondly, the sub-prime mortgage market was “urged” by the US Federal Government via Fannie Mae and Freddie Mac. For a free market country the US Government has been extensive involved in financing the housing market since the 1930s. Had these two bodies not been in the market it is doubtful the subprime mortgage market would have been 15% of the total market. It would have been significant but not 15%.

    Finally, the Randian critique is poor. You could argue that Rand became the very opposite of what she espoused (she was a dictator to her clique). You could argue that her characters are simplistic. But you have failed to see her point was that people who expect to live off others are not worthy individuals. They use language to get their own way – “fair”, “noble” etc – and are not people in genuine need but are greedy for other people’s money. Not from their hard work but from expecting others to provide from them.

    I reckon my post will be ripped apart from some of the readers but I am stoic in taking slings and arrows!

  19. #24 by Scott Erb on September 26, 2011 - 23:36

    Sean, I think the reality of deregulation of financial markets is hard to deny. The Clinton Administration was very keen on letting the market get it right, and stopped Brooksley Borne from even getting banks to report the transactions. This became after 2000 the fastest growing investment sector and home of the bubble. Moreover, states that deregulated like the US — Ireland and Iceland chief among them — had huge bubbles burst, and turned out to be in worse conditions than states that maintained stronger regulations, like Germany.

    The subprime market was not the real problem, the entire housing sector was a bubble and even well off borrowers took out home equity loans and got in over their head. But the real subprime problem was when, in order to keep issuing CDO’s, the big financial institutions started to buy any mortgage they could get their hands on, which pushed brokers to cheat, lie and not care about risk. That was not due to government ‘urging,’ it was financial institutions who needed mortgages of some sort to feed the bonds that got rated AAA but were full of junk. Not that Freddie and Fannie don’t have problems, but the crisis can’t be laid at their feet.

    I think the point he makes about Rand (Taibbi’s point — I’m quoting him) is that her argument is simplistic. Marx argued that the wealthy shouldn’t life off the work of the poor. Rand argued the poor shouldn’t live of others. Both are right. But in the real world of power relations and complexity, calling all wealthy “capitalist exploiters” and all poor on welfare “unworthy living off others” is too simple. You need the wealthy to make the market work. Most poor don’t want to rely on welfare, and want to work. Some things like schools, health care, legal and police protections, etc., are necessary to assure people have true opportunity. Rand and Marx argue against caricatures – the greedy capitalist who sucks the life from workers, the lazy welfare recipient who doesn’t want to put forth effort. No doubt each extreme exists, but are probably a small minority of the real business owners and welfare recipients. The goal of social welfare programs should be to liberate people from having to rely on aid, that ultimately harms both them and society. But just as relying on the government doesn’t work, neither does relying on the market. Rather, a well regulated market designed to try to promote equal opportunity (not equal outcomes) can function best.

  20. #25 by johanna lawrence on November 15, 2011 - 15:28

    I like Matt one of the few people talking abo ut the mortgage scam. He is right about Greenspan. He is wrong about deregulation Greenspan only took the part of ayn rand philosophy which means he did not follow her philosophy the banks wallstreet and the goverment are all involved in the downfall of this country croney capitalism is what the problem is

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