Skip to comments.Free-market Thinkers
Posted on 10/31/2009 6:54:29 PM PDT by Coleus
With bailouts and other unabashed socialist projects being embraced by both political parties to "save our economy," has free-market economics been proved faulty? In the bailout-a-week political climate, it is all too easy to believe that free-market economics are as passé as powdered wigs. Everyone, it seems, is a socialist now, and the old gospel of laissez-faire and free enterprise has been discredited by a cascade of free-market failures that threaten to bring down the economy of the entire developed world.
"For too long, the prevailing attitude in Washington has been that the market always knows best," Congressman Henry Waxman (D-Calif.) said recently. Economist and newly minted Nobel Laureate Paul Krugman has counseled the new Obama administration to "figure out how much help they think the economy needs, then add 50 percent." According to Krugman, "it's much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little."
In short, the free markets, we are told, have failed, and more government supervision and central planning is the only possible cure. In truth, the economic meltdown we are now experiencing is a result of government intervention, not the free market. But that does not stop the proponents of interventionism from blaming the market for the problem and advocating more intervention as the solution. (See, for example, Brian Farmer's article "Government Bailout.")
In such times, we would do well to remember that free-market capitalism has been defended eloquently for over 200 years, and that the West, particularly the United States, has prospered because of the acceptance, mostly in the 19th century, of economic freedom, in principle if not always in practice. The men who gave us the theory of free-market economics were lonely, often misunderstood voices in their day as much as in ours, offering timeless economic truths to any who had, and have, ears to hear.
Adam Smith (1723-1790)
Generally regarded as the founder of the modern science of economics, the late 18th-century product of the Scottish Enlightenment, and a contemporary of Hume and Hutcheson, among others, Smith has a less-deserved reputation as a champion of free-market economics per se. By all accounts an eccentric if affable academician, Adam Smith popularized certain ideas that have come to be taken for granted by free-market economists, such as the notion that men in their economic activities are guided by self-interest (not necessarily selfishness), giving the appearance of an "invisible hand" that organizes human enterprise and guides it into maximally productive channels. "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner," wrote Smith in his most famous work, An Inquiry into the Nature and Causes of the Wealth of Nations, "but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."
Elsewhere in that landmark work, Smith pointed out that the division of labor in a free market leads to much greater productivity because it permits greater specialization. A single person manufacturing pins, for example, might produce 20 per day, but many different people engaged individually in the various steps of pin manufacture might produce many thousands during the same interval.
Smith believed that value arose from the amount of labor required to produce a given product, a notion that came to be known as the "labor theory of value." This idea, unfortunately, was mistaken, as later generations of economists, especially in the so-called Austrian School, discovered. However, the labor theory of value was used by Karl Marx and other communist and socialist economists to justify central planning since, if value was a strict consequence of labor invested, then "correct" valuations could be determined by enlightened central planners. Some noteworthy economists, like Murray Rothbard and Joseph Schumpeter, believed Adam Smith's contributions to economics to be greatly overstated. Rothbard believed that Smith copied many of the ideas of the great French economist Turgot, while Schumpeter doubted his stature as a thinker of the first rank:
Had he been more brilliant, he would not have been taken so seriously. Had he dug more deeply, had he unearthed more recondite truth, had he used more difficult and ingenious methods, he would not have been understood. But he ... never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.
Whatever his shortcomings, Adam Smith deserves to be remembered as one of the first popularizers of free-market economics, expounding in clear, still-readable language some of the most important precepts of free-market economics in an age when many were ready to hear the sweet doctrines of liberty.
Jean-Baptiste Say (1767-1832)
Best known for the law of economics that bears his name, Say was one of the first "pure" free-market economists. A survivor of both the French Revolution and the Napoleonic dictatorship, Say had experienced firsthand the ravages of Utopian social planning and its inevitable concomitants, oppression and terror. Censored by the Napoleonic regime and dismissed from a government post, Say quietly put his economic beliefs into practice, founding a successful cotton mill that employed roughly 500 people. Unable to publish his works while the dictatorship lasted, Say privately revised and rewrote his treatises in his leisure time.
Say's Law is sometimes understood to mean that supply creates its own demand, but it really means that supply and demand are but two sides of the same coin. In an economy, different products are exchanged for each other, with money as the medium of transfer; there is no mystical dividing line between supply and demand. Say devoted a good deal of scholarship to demolishing the old mercantilist fallacy still lamentably fashionable among modern economists that money is the source of wealth. Money, Say took pains to explain, has value only insofar as it is desired to mediate indirect exchange in the market; wealth per se consists in other goods for which money is exchanged. Say probably understood better than anyone else in his generation the workings of the free market. His Treatise on Political Economy remains one of the finest and most original works in the entire history of economic thought.
Frederic Bastiat (1801-1850)
A Frenchman whom Karl Marx once dismissed as "the shallowest and therefore the most successful representative of the apologists of vulgar economics," Frederic Bastiat labored tirelessly throughout his short life to promote the philosophy of freedom, both economic and political, in trenchant, highly readable language that has influenced millions of readers over many generations. Best-known for his posthumously published pamphlet The Law, Bastiat authored many books, essays, and tracts on liberty and limited government that probably did more to popularize freedom than anything since the time of the American founding.
Bastiat had a gift for illustrating his points with clever, memorable examples. His "broken window fallacy," in which onlookers, observing a shop window broken by vandals, erroneously conclude that the act of destruction will be beneficial to the economy because it will make work for the glazier, is one of his most famous economic parables. For Bastiat, good economics was merely refined common sense; most onlookers would initially (and correctly) decry the broken window as a wicked and destructive act, and only later allow themselves to be led into the false rationalizing with which the science of economics is so unfortunately replete.
Such false rationalizing has led many to believe that World War II and the work it created were responsible for ending the Great Depression. In WWII, the military-industrial complex and the destruction were on a gargantuan scale compared to the glazier and broken window, but the economic principle illustrated by the parable is the same. The cardinal error of bad economists, Bastiat explained, is to ignore the "big picture." In the case of the broken window, the vandals have indeed given the glazier work but that work will merely replace a good that has been destroyed. What the confused onlookers forget is the other goods that the glazier might have produced, that would have added to the stock of wealth, had their energies not been diverted by a destructive act. Good economics recognizes both the seen (in this case, the broken window and its replacement) and the unseen (what might have been produced with the resources diverted to replace the window).
In his magnum opus, The Law, Bastiat explained as concisely as has ever been done the origin of rights and liberty, and their relationship to the state. God-given rights are superior to man-made government, and the latter, to the extent that it has any legitimacy, is derived from the former:
Life, faculties, production in other words, individuality, liberty, property - this is man. And in spite of the cunning of artful political leaders, these three gifts from God precede all human legislation, and are superior to it. Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place.
Government, in Bastiat's view, cannot justly do anything that morality would forbid in individual action. If it is wrong for individuals to steal, defraud, or commit murder, then it is surely wrong for governments which derive their powers from individuals to do likewise. But government and laws are frequently abused, used to achieve collectively what most men would scruple to do individually. In this way, wealth is confiscated from some individuals and given to others in the time-dishonored pattern of socialist redistribution. This Bastiat called "legal plunder":
But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime. Bastiat, who believed unswervingly that "the solution to the problems of human relationships is to be found in liberty," probably gave his life in service to that belief. While traveling around Europe promoting his beliefs, he contracted tuberculosis and died at just 49. He was perhaps the purest of the so-called "classical liberals," a man who never deviated from his passion for liberty, and whose written works continue to inspire and enlighten.
Ludwig von Mises (1881-1973)
The best-known and most influential of the school of economics known as the Austrian School, Ludwig von Mises was the most eminent free-market economist of the 20th century. Forced to flee his native Austria by the Nazi invasion, von Mises took refuge in Geneva before emigrating to the United States, where he took an unsalaried position at New York University. Influenced by Carl Menger, the founder of the Austrian School, and Eugen von Boehm-Bawerk, another of the economic school's early eminenti, the precocious von Mises took Menger's ideas into then-unfashionable realms, criticizing socialism and credit expansion by central banks, among many other state-sponsored evils.
The Theory of Money and Credit analyzed minutely the nature of money, banking, and finance, while Socialism showed how central planning was irrational and unworkable because correct economic calculation and decision-making cannot be achieved by state planners. Mises' magnum opus, Human Action, laid out a theory of what Mises called "praxeology," the study of human actions and their motives. His praxeology was the foundation for his entire economic and philosophical world view, and helped de-mystify the "dismal science" for a generation befuddled by the sophisms of John Maynard Keynes and other thinkers hostile to the free market. However, Mises was not a gifted popularizer like Bastiat; much of his writing is dense and subtly reasoned, compelling the reader to work hard for his intellectual rewards. Yet Mises is the towering figure in 20th-century free-market economic thought. Many other economists, as well as statesmen like Congressman Ron Paul, and innumerable partisans of liberty (including this humble author), count Ludwig von Mises among their most important influences. One cannot truly understand freedom without some familiarity with the man and his ideas.
Friedrich Hayek (1899-1992)
One of Ludwig von Mises' most eminent students, Hayek, also Austrian by birth, was the only Austrian economist to win the Nobel Prize in economics, thereby helping to confer scholarly legitimacy on a school of thought that collectivist economists like the disciples of John Maynard Keynes had worked hard to discredit.
Although not as consistent a defender of aspects of the free market as his mentor von Mises (or his contemporary Murray Rothbard), Hayek's influential 1944 book The Road to Serfdom remains one of the most devastating attacks yet written on collectivism and its consequences. Written in an era of totalitarianism ascendant, the book was wildly popular, attracting acclaim from the likes of George Orwell (a professed socialist himself). Serfdom (which might more aptly but perhaps less memorably have been entitled The Road to Tyranny) argued that collectivism always leads to tyranny, as the inefficiencies and shortages brought about by central planning encourage the mistaken perception that more government is needed to "fix" all the problems. At the time of its publication, Nazi Germany and the Soviet Union were the preeminent examples of the extremes to which socialism eventually leads. Subsequent decades, which saw much of the "free world" move aggressively into socialist regimentation without being taken over by mass-murdering dictators, lulled many into the belief that, after all, socialism can be "done right" and totalitarianism averted.
This, of course, is precisely what left-wing pundits and politicians are saying in the context of the ongoing economic crisis. A little socialism, temporary and kept within strict limits, we are told, has become a necessary evil to save us from the consequences of too much economic freedom. The death camps and other extremities of totalitarianism are in the rearview mirror now, except in a few backwaters like North Korea, and serfdom is an impossible outcome in an age of information and economic plenty. But the road to serfdom may follow different paths, or take longer to reach its destination in a country like the United States, where many more barriers, both legal and cultural, protect us from totalitarianism than was the case in Czarist Russia or Weimar Germany. But the early indicators of our likely destination (absent a change in course) abound: a declining standard in living, rising levels of debt both public and private, and most ominously, mushrooming government, including ever-more intrusive police powers over American citizens. We ignore the warnings of Hayek to our peril.
Murray Rothbard (1926-1995)
Of all of Mises' many students, Murray Rothbard was perhaps the most prolific and also the most unapologetic defender of economic freedom. His magnificent treatise on free-market economics, Man, Economy, and State, remains the most readable text on the subject ever produced. Both a historian and an economist, Rothbard wrote voluminously on economic history, particularly in the United States. His early book on the Panic of 1819 remains the best work on the subject, while a later history of the early years of the Great Depression (America's Great Depression) is the best explanation ever set forth for that turbulent period.
Drawing on the Austrian theory of the credit cycle, Rothbard showed that the Great Depression was triggered by the 1929 bust that followed reckless credit expansion in the 1920s by the Federal Reserve, the Bank of England, and other major central banks. The economic correction of 1929-1930 might have resolved itself fairly quickly (as had happened previously following the Panic of 1907 and the severe recession of 1920-1921), Rothbard explained, but the interventionist policies of Presidents Hoover and Roosevelt prevented the markets from returning to equilibrium. The New Deal exacerbated and prolonged the event in a textbook case of misbegotten government intervention worsening the very problems it was supposed to cure.
Rothbard devoted a lot of ink to demystifying banking and finance, believing fractional-reserve banking and its modern outgrowth, fiat money, to be among the very worst evils. His The Mystery of Banking is a concise explanation of that arcane science (if slightly dated, in light of the various new techniques for creating money that the Federal Reserve has adopted in recent months), while A History of Money and Banking in the United States shows how banking and banking interests have militated against liberty since the foundation of our republic.
Known for his aggressive and uncompromising defense of liberty in every domain of human activity (a philosophy he termed anarcho-capitalism), Rothbard was derided by neocons and "respectable" conservatives of every stripe, earning from the late William F. Buckley an especially bilious obituary in the National Review. A maverick he may have seemed, but the indomitable Rothbard understood better than most that liberty can only survive when it is defended without respite and without compromise.
Henry Hazlitt (1894-1993)
No list of eminent free-market thinkers would be complete without mention of Henry Hazlitt, the 20th century's answer to Frederic Bastiat. In an age of professional academics, Hazlitt was a rara avis, a self-trained economist without a college degree who wrote not for rarefied professional journals but for ordinary men and women.
A journalist by profession, Hazlitt, like Bastiat, used his considerable literary gifts to explain freedom and free-market economics in terms that were both easy and enjoyable to read. He wrote prolifically, authoring more than 20 books and numerous articles in his lifetime, including many pieces for the Wall Street Journal, the New York Times, and Newsweek. His best-known work, Economics in One Lesson, is in essence a modern restatement of certain of Bastiat's axioms applied to 20th-century statist sophisms. Like Bastiat, Hazlitt believed that the errors of bad economists arose from a failure to anticipate the consequences of a given policy over the entire economy (rather than just a given sector) and over the long term instead of just the immediate future. Hazlitt is probably the man most responsible for popularizing the ideas of Austrian economics (which is to say, free-market economics undiluted).
The Economic Road Less Traveled
Sadly, the arguments of the champions of the free market have yet to capture the popular imagination or sway the actions of political leadership in the way that socialism has done. These arguments, after all, are generally ignored or dismissed by our major cultural organs such as the media. Moreover, freedom entails both risk and personal responsibility, whereas shills for socialism offer false promises of emancipation from both without harmful side effects. Particularly in times of crisis, public ignorance of free-market economics can prove a costly liability as government takes advantage of a climate of hysteria to enlarge its powers ("You don't ever want a crisis to go to waste," Illinois Congressman Rahm Emanuel, President-elect Obama's chief of staff, has said).
Economics is one subject on which every man fancies himself an expert, but which few take the time to study. Yet economics affects every one of us every minute of every day. None of us can hide from the workings of the market, or escape the consequences of bad economic policies, whether or not we choose to understand them. A grasp of the fundamentals of the free market is an essential part of appreciating liberty. To cure economic ignorance, the writings of Smith, Bastiat, Hazlitt, Rothbard, and other free-market economists are very good medicine indeed.
ping for later
“In truth, the economic meltdown we are now experiencing is a result of government intervention, not the free market. “
No, gov’t deregulated and the “free” market went to town and now we have a big depression. It is to be expected that unbridled greed will do things like this.
parsy, who thinks markets need regulation and anybody who don’t after this meltdown is a few pickles short of a full jar.
Yeah, this was caused by too little government. LOL!
Just for laughs, what regulations were removed that led to this depression?
thinks FEELS markets need MORE regulation and anybody who dont after this meltdown is a few pickles short of a full jar.
Just for laughs, what extra regulations will prevent something like this from happening again?
parsy, who will send you more
parsy, who will send you more
If the rest of the stuff you'll send is this funny, don't bother.
Oh, its no bother. I like making people laugh. Besides, I occasionally learn stuff from you whenever I can prod you into making positive statements.
parsy, the prodder
No need to link to outside sources, let's hear it in your own words.
You feel that deregulation led to the current situation.
Which regulation(s) did the government remove?
Why repeat the repeal of Glass Steagall, the Brooksley Born thing, and CommMod of what 99-2000, when it is all in one site like crashopedia? And that site has a surplus of cites and links. If you are really curious, that is a good place to start reading.Plus a whole lot of info is available daily and in the archives over at Naked Capitalism.
Now for my little amateur ideas-first reinstate Glass Steagall, which helps whittle the TBTF down, put all derivatives on exchanges, and fix positions limits. Eliminate derivatives which are simply side bets, like the old bucket shop stuff. Regulate energy commodity just like ags. I would also work to discourage day trading and impose a transaction tax and implement minimum stock holding periods of at least 30 days.
parsy, who thinks the links are still your best bet
Excellent! How did their repeal lead to the mess?
Glass Steagall repeal allowed investment banks and depository banks to combine and which allowed them to grow. It also interlinked the dickens out of the banks. Not regulating derivatives, let all the CDO stuff grow real real big to something like 600 trillion or 1.4 quadrillion, who knows. As you pointed out, “debits and credits” tend to cancel out but when you have a notional value that large, it don’t take but a few % of f*ck ups to equal trillions of dollar shock wave thru system.
Now, there are still derivatives which are unwinding a year later. AIG was making doo doo pots full of moneys writing them so they wrote a big bunch and in the process got themselves way the heck over leverages. When it started to unwind, they didn’t have the money. I think I read that GS didn’t even have the money and wsas in fact owed money by AIG.
If the real estate market didn’t have all the multiple CDO stuff written on it, the real estate downturn would not have crashed anyone but the goobers who overlent. They might have lost half of their money on a bad day, but probably less. But, because all the big guys were derivatived up, betting for and against the housing market, they were exposed to the downturn.
Now, what do you think caused the meltdown? And, what do you think could be done systemically to prevent or lessen a future bo bo like this?
parsy, who is using the cattle prod now
The combination caused the recession? How?
As you pointed out, debits and credits tend to cancel out but when you have a notional value that large, it dont take but a few % of f*ck ups to equal trillions of dollar shock wave thru system.
Derivative shock waves caused the recession?
When it started to unwind, they didnt have the money.
You may be at the edge of stumbling onto something. When what started to unwind (still nothing to do with your original claim)?
If the real estate market didnt have all the multiple CDO stuff written on it, the real estate downturn would not have crashed anyone but the goobers who overlent.
Multiple CDO stuff? How is that different from single CDO stuff? And what does this have to do with deregulation?
Now, what do you think caused the meltdown?
Why did the banks hold so much subprime paper?
parsy, who is using the cattle prod now
Now your muddled thinking makes more sense. You shouldn't prod yourself with high voltage, you'll sound like a liberal.
Let me repeat myself:
It seems pretty clear to me.I found this at crashopedia. There seems to be plenty of documentation. If you don’t believe it, I don’t know what to say. If you think banks holding too much sub-prime paper is what caused it, please explain why. How much were they holding and how much did it decline? What part do you think derivatives played in this and if you think none, why are all thes people sayingthatit did??? Why did AIG go down the tubes and Lehman Brothers down the tubes?
You’re asking questions and I am giving you the sites where I have done my reading. If you have a different idea, please set it forth. Give me some cites and I will read yours.
In the meantime, it looks to me like I have answered your questions.
parsy, who wishes you weren’t so passive-aggressive
Documentation of what? That deregulation caused the crisis?
If you think banks holding too much sub-prime paper is what caused it, please explain why.
You don't think sub prime loans were a big money loser? A driver of higher real estate prices? Did you ever wonder why big banks held so much of that paper?
What part do you think derivatives played in this
What do derivatives do exactly? They don't lose money to a big hole in the sky.
Youre asking questions and I am giving you the sites where I have done my reading.
Giving me sites with dozens of links in response to my question isn't a great help.
parsy, who wishes you werent so passive-aggressive
I'm wishing you didn't regurgitate the MSM line with no back up.
If you have a different idea, please set it forth.
Here's my idea. No banks were brought down by their investment bank division. No investment banks were brought down by their banking division. So much for Glass Steagall.
Derivatives weren't regulated before, so their deregulation didn't cause our problems.
Keep looking for that good old regulation that was erased that would have prevented this mess.
Yeah, scary stuff. But nobody lost money to a hole in the sky.
Derivatives don't cause loses. They can transmit losses.
CDOs didn't cause trillions in losses, all they could do is move those losses from one place to another.
Think about it. If you're still confused tomorrow (I crack myself up), I'll try to help some more. Nite.
“Derivatives weren’t regulated before, so their deregulation didn’t cause our problems.”
Yes they were. Many states had bucket shop laws and insurable interest laws. The CMA specifically pre-empted these regulations.
parsy, who can find this link too if you need it
Are we at least off the idea that Glass Steagall would have some how prevented the housing bubble or the recession?
Don’t worry about it, systemic risk is invisible so it can’t be regulated. Politicians and tools like Tax Cheat Timmy will gladly regulate the crap out of anything that moves while leaving Goldman free to bet on the demise of their competitor and, when the bet couldn’t be paid, arrange to have the bookie AIG bailed out.
“Here’s my idea. No banks were brought down by their investment bank division. No investment banks were brought down by their banking division. So much for Glass Steagall.”
Then how about this one?
parsy, who don’t think he’s imagining things-—alone
What about it?
Did you read it?
Let me cut and paste for you. (BTW, did you know they 11’ed today?)
During the 1920s, the institution then known as National City Bank opened stores around the country to encourage the burgeoning middle class to invest in stocks and bonds. With little money down 10 percent of the cost of a trade was all an investor needed to buy shares investors poured into the stock market. Charles E. Mitchell, C.E.O. of National City, hyped these sales throughout the period. His nickname was Sunshine Charley.
Then came the Great Crash of 1929. Vilified as a bankster in the aftermath of the crash, Mr. Mitchell testified to Congress that banks were too ready to loan, too ready to meet the competition of neighbors, too willing to cut down their margins to a point of encouraging excessive bargaining.
Before the crash, industry practice allowed National City not only to underwrite securities but also to employ a sales army to peddle them to depositors. After Congressional hearings determined that this conflict of interest was a major cause of the debacle, lawmakers passed the Glass-Steagall Act, separating activities of commercial banks (which offered plain old savings accounts and loans) from those of investment firms (which trafficked in more highflying endeavors like stock trading and underwriting).
Although thousands of smaller banks failed, government policies to prop up the banking sector helped National City and other major banks weather the Depression.
parsy, with part 1
By 1998, Citicorp had more than regained its footing and was willing to take a more aggressive stance. At the direction of its chief executive, John S. Reed, Citicorp agreed to join forces with the Travelers Group, an amalgam of insurance, brokerage and investment banking services run by a brash dealmaker named Sanford I. Weill. The largest merger in history followed, creating a colossus named Citigroup with $700 billion in assets.
Because Travelers had an investment firm under its umbrella, the creation of Citigroup prompted Congress to eliminate what remained of the Depression-era separation between Main Street banking and Wall Street trading. Mr. Reed and Mr. Weill argued persuasively for the change, and, along with the rest of the financial industry, deployed an armada of lobbyists in Washington. In 1999, Congress overturned Glass-Steagall.
parsy, who is still condensing it
You mean this part?
The primary reason for Citigroups woes, of course, is relatively straightforward. The bank simply placed too large a bet on risky consumer loans, especially mortgages.
Or was there another passage that proved my point that you liked better?
Even with occasional regulatory restraints, Citigroups assets ballooned from $1.49 trillion to $2.19 trillion from 2005 to 2007, an increase of 46.9 percent (and three times the size of Citigroups balance sheet when the merger that created it occurred).
But amid that impressive growth, dubious mortgage loans and questionable trading in mortgage and other debt-related securities began to undermine Citigroups finances. One ugly class of securities continues to haunt the bank: collateralized debt obligations, or C.D.O.s.
From 2004 to the beginning of 2008, Citigroup underwrote $70 billion in C.D.O.s but had to keep $57 billion of that amount on its own books when it couldnt find buyers, according to a class-action lawsuit filed in federal court in Manhattan, on behalf of disgruntled Citigroup investors. The suit contends that by late 2006, Citigroups C.D.O. operations had devolved into a Ponzi scheme where unsold portions of older C.D.O. securitizations were recycled as the asset base for new C.D.O. securitizations.
parsy, who says now we are into the derivatives
Citigroup? Or should I laugh at your confusion some more?
What derivatives do you imagine we're into now?
If Citigroup was driving blind, regulators seem to have been unaware. Officials at the Office of Comptroller of the Currency and the New York Fed overseen at the time by Mr. Geithner, who has since become the Treasury secretary stood by as Citigroup amassed a portfolio that would ultimately generate losses of more than $35 billion.
CITIGROUPS financial architecture remains rickety. One reason is that it relies much more heavily than most other large domestic banks on uninsured deposits in overseas locales, where customers are quick to pull their money at the first sign of trouble. Also, some of the accounting machinery it put in place to temporarily move assets off of its balance sheet (and make the bank look financially healthier) has backfired.
Mr. Pandit maintained that Citigroups strategy would take some time and depended in part on how the economy fared. Should the economy continue to improve, for instance, he said the bank would snare handsome returns when it sells off assets. Other assets, like some mortgages, for example, will simply be paid off over time, he said.
We have time, he said. If markets do turn around, these are going to be very valuable businesses. This is going to take awhile. Yet analysts say that for Citigroup to survive, it must quickly sell the businesses it wants to exit. And that is especially hard to do given that it is shopping its wares at a time when few people appear to want them, particularly Citigroups middle-tier operations in far-flung regions around the globe.
That means the plan to offload the orphan businesses is likely to take much longer than Citigroups management had hoped. In January 2009, two years was an estimate for this wind-down, but that is looking more improbable by the day, according to analysts and others familiar with the banks operations.
So, if I am delusional, at least I have company. It was a bank. It added an investment company. It got deep into credit defaults. It all went to poo poo. Now it is in chapter 11.
parsy, who met your conditions
Do more than laugh at my confusion. Explain.
No. I think you're alone in your delusion.
It was a bank. It added an investment company.
And yet, the bank managed to lose money all on its own.
It all went to poo poo. Now it is in chapter 11.
CIT Group is not Citigroup.
Yep, I’m confused. They were both on same page here:
The question started out, are we off Glass Steagall yet? So I provided the four part thingie. Apparently, GS was repealed after the merger. A bank added the investment side and went to doo doo pretty quickly in large part because of derivatives.
I do not believe they were holding the actual sub prime mortgages.
You needn't have bothered. From your link, a 2 sentence thingie.
The primary reason for Citigroups woes, of course, is relatively straightforward. The bank simply placed too large a bet on risky consumer loans, especially mortgages..
You know they could do the whole mortgage thingie even under Glass Steagall? Don't you?
“...who thinks markets need regulation and anybody who dont after this meltdown is a few pickles short of a full jar.”
parsy, whom I am beginning to think is Andy Rooney.
Is that you, Andy?
Simpleminded perplexedness is unamusing in real life.
Yes, I do know they could but I appreciate you asking. I do not mind being treated like a first grader on this stuff at all. I have been reading some more and I am not sure that Citigroup’s mortgages were all mortages, which is why they seem to be called different things in the articles, such as mortgage backed securities.
It looks like they got a bunch of their mortgages back when CDO were “returned”?
This seems to encapsulate most of what I have read:
parsy, who is multitasking
Reinstating Glass-Steagall is a simple response to a complex issue. While simple may be all we can swallow, it remains the case that the Federal Reserve has not been successful in striking a balance between helping out the economy and condoning bad behavior by financial firms."
From Glass-Steagall Redux
There are many other factors behind the recession and financial collapse (or near collapse) that are not discussed in the article that also have nothing to do with Glass-Steagal. There are other regulations that could also be discussed, but none of them would have negated or prevented the major causes of lending system seizure and recession last year: like the commodities bubble and its popping in July08; the carry trade from years of super low rates in Japan; the stupid European hedge funds and banks that bet on our housing bubble; the Greenspan put; etc...
Assume Glass Steagall is re-instated. What’s the harm for the future? Would it have prevented the meltdown all by itself? No, I don’t think so either. It may have lessened the TBTF part.
Probably the CMA and failure to regulate derivatives did a lot more. It’s not like there weren’t warning signs. I think there is not a single reg that can save us in the future. it is an ongoing job. I think there are lots of little things that can be done to slow down bubbles.
parsy, who is trying to be realistic
The Fed is currently pumping money into the carry trade, the dollar is dropping as a result as people borrow dollars and buy stupid worthless foreign currencies for the "guaranteed" return (e.g. Aussie rates are rising). That bubble will pop with very negative consequences overseas.
The Fed is pumping money into the housing market in a ridiculous attempt to reinflate that bubble. That pumping creating artificially low long term rates is helping to fund a huge debt bubble, which is mostly Federal now. That will pop and bite us very hard with long term rates overshooting to compensate. 1982 will be a picnic in comparison.
The stock market itself is in a bubble within a broader bear market. There is junk being bid up, a lot of which is related to the other bubbles (e.g. FNM, FRD). The Fed act surprised when it crashes. There are many other bubbles right now like gold and oil, they will crash and the speculators on those will have losses that ripple into the market.
None of these have anything to do with regulation or lack thereof. There is no good reason to create bubbles and there is certainly no good reason to propose regulation to control what should not be created. That regulation will inevitably stomp legitimate economic activity while letting the bubbles continue to massive proportions (part of the nature of politics and the ease of regulating what is easy to regulate).
Yeah, mortgage backed securities have been issued by Fannie Mae for decades as in well before Glass Steagall was repealed. As in banks bought them before banks could own investment banks.
It looks like they got a bunch of their mortgages back when CDO were returned?
Could have been home mortgages or any other kind of collateralized debt.
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