Monday, July 7, 2014
History Now Says Excessive Government Regulation of Capitalism Can And Does Result in Market Crashes.
Panic and Market Crash of 2008 Not the Result of Pure Unregulated Capitalism Myth Making and the Market Collapse. the Rush to Blame George Bush as the New Herbert Hoover is On. Would More Regulation Have Prevented the Collapse? Lex Loeb Contributor Network . Journalists and scholars are presently working on the final word on who was responsible for the financial crash and panic of 2008. Economist are studying the causes and effect perhaps a little more objectively and there too the interpretation takes on political hues. A majority of critics are blaming the bubble and subsequent crash on unregulated raw capitalism primarily. They seem to forget that the US markets were considered the safest in the world as the most regulated. The Securities exchange commission actually had recent new rules passed called Sarbanes Oxley that addressed a variety of issues including financial transparency of public corporations. Unfortunately that set of regulations had side effects including causing market activity to move out of New York and Chicago overseas principle to London and American Firms found they had to move offices there to compete with foreign companies. There also had been some deregulation of banks and brokerage companies as they gained the right to merge together which really became pronounced after the crash as a factor than before it when we saw Bank of America take over Merrill Lynch corporation in a fire sale pushed by government officials. Fannie Mae and Freddie Mac wore public private partnerships devised by the congress of the united states and it appears that President Bill Clinton had the opportunity to choose the people in charge of running those public private corporations. To say that Keynesian economics was not built into the system that ultimately collapsed is simply not the case. The keynesians and anti-monetarists became instant celebrities as some "predicted" the big crash that occurred, although none probably expected the exact time frame when it occurred. I rather don't think that had some of these critics been in the white house before the crash that the bubble would have been prevented in the first place? What were they going to do ? Go around to home owners and tell them that they could not sell their homes for more than they purchased them for? My recollection is that no one among the democrats in congress was complaining that interest rates were too low when the surge in interest in real estate went totally wild? I watched homes appreciating in value at the time and thought it was completely unreal. I eventually resigned myself that it probably was reality because some people found they could rent out their homes by the room in cities like Portland, Oregon where relative scarcity of homes and a large new influx of population coming to town needed somewhere to live so some homes used as rental properties actually penciled out. The ones that did not pencil out were by families looking for family homes where the mortgage , insurance and taxes per month exceeded $2000 just to live in one's own home requiring annual income after taxes of over $24,000.00 and that was relatively cheap. One of the reasons homes kept going up in price was greater fool theory which happens in all markets where people hold investments for eventual resale purposes. It is hard to imagine a government preventing people from getting to sell their assets for more than they paid to prevent market panics and collapse and still re-elected to public office. No one in real estate wanted regulations when prices were sky high and the boom was in full bloom. There were a few people who saw more danger in the bubble than the home owners who were enjoying riding the wave. It is hard to imagine a law that would have prevented what was happening in the home real estate market. Easy credit gets a lot of blame but it did not prove to be nearly as inflationary in other parts of the economy as it did in housing prices. A law against easy credit would have had President George Bush put out of office before his first term was over. Were Bush Opponents calling for higher interest rates to contain the housing boom at that time? I don't remember too many on television or in newspapers. The whole way money was produced to fund the boom in homes and financial assets was an admittedly Keynesian federal reserve and Treasury. The US is famous for having a "mixed " economy which means a mixture of capitalism and socialism together and there is no evidence that the capitalist supply of US dollars has any trade goods what so ever backing them up. Milton Friedman's influence was not anti Keynesian when it came to using dollar printing runs to solve financial problems with monetary printing presses. Friedman suggested at times that money just automatically be printed at a regular precipitable rate to inflate the currency reserves as the economy grows at a predetermined rate. Giving him a lot of blame for the crash panic fiasco seems silly. What about regulating oil prices? It was tried before and failed miserably. The markets have proved to be better allocators of capital than policy makers. President Nixon and Carter, Hoover and FDR, tried to set market prices with disastrous results and unintended consequences. Derivatives get the blame . Stocks and condominium agreement sand even mortgages are derivatives of financial transactions so they can't all be bad, Options and futures are derivatives and they keep liquidity in markets according to real data compiled over years as beneficial to markets. The idea of regulating these more than they were probably would not have prevented a housing bubble, a commodities bubble or the stock market bubble surges that occurred? How? The government has been working on these problems since before 1929 and never seems to find just the right regulation. r The proof that there is no regulation by the government that is going to prevent , not just prohibit, a major financial market collapse and panic comes from all the world financial markets that fell more than the US market did at about the same time the US Markets prices collapsed! Some of the countries whose markets collapsed worse by percentage loss than the US were in countries that pretended like they were a lot more socialistic with heavy handed regulation than the US market. When I saw that the Swedish market and others were falling harder than the US market It just dawned on me that there is a lot of snake oil being sold in the popular media about all the nonsense that could have been done to prevent the market crash and panic. I look at the data and also see that markets in the world that were less regulated by their governments than us financial markets were doing better than the US market. So where is the Keynesian truth? When you look at the real financial numbers that you can find in the back of the economist magazine it cuts thought the crap really fast. The US decline although catastrophic for a few institutions , which seems to be a normal market occurrence from time to time, fared better than some world markets and worse than others and the main thing you don't see is a relationship between big regulation and government control and the magnitude of the collapse. The same thing happened for Herbert Hoover. You look at market data from other world markets and you see Germany completely destroyed , London and Paris hitting bottom long before the US did. I don't know which were more or less regulated back then and it does not matter with the wealth of data from the 2008 world market crashes. Not even the oil rich Saudis and Dubai ans were spared in the crash of 2008. Cuba had zero crash and so did north Korea but they also had no boom. Venezuela was not as bad as most markets but it had mostly been destroyed by government heading down the road to a new Castro like Cuba so when I looked they were only down 6%! They were maybe down 75 % before the crash and then down an extra 6% more when the us was down 35% verses 40% for Sweden at the time I last looked before writing this piece. Next time you read an article blaming the lack of regulation for a financial panic and crash consider this article as the antidote to the brain washing you are getting by reading that. Blaming the USA is silly too since it is not the first of the markets to go into collapse mode nor the one that reached the highest pinnacle of the bubble phase first. Which came first the chicken or the egg? Which market was too inflated as a bubble that created declines in the others first? I think there is fair blame to place on the USA as i have in other articles but it is hard to believe government intervention could have prevented the bubble. The reality is that governments usually provide the core circumstances for bubbles to form. Easy credit was not made by corporations with printing presses because that is a felony crime called counterfeiting. So governments according to the neo Marxists and anti monetarist Keynesian's are supposed to print easy money and then also regulate every aspect of how an economic system puts that money to work? Is that possible? Maybe government needs more than one head? One that says yes and the other one that always says NO? Public schools could get a little blame because they teach young Americans nothing about the real estate market or what a mortgage is in civics class. Public schools teach more math that has no use to most students in later life like trigonometry and calculus. In social studies American students are taught how to save a dying environment and other political crap that has nothing to do with real life in a real capitalist country. I was in classes where we had to go out and collect garbage and recycle it as a lesson but I had to go to get a real estate license to learn any basics about how the real economy and laws work. I was surprised just how ignorant the schools made me when i finally did. I knew more about names of countries in Africa than what a mortgage really is and how to calculate the cost of borrowing money. It is no wonder so many American's got in trouble with real estate . If I went around and told people they were paying too much, and I did do that when I was younger, they gave me the evil eye to tell me how dare I suggest that they should not all become instant home owner millionaires. I too was in awe watching people flip new condos at ever high prices when so many new condos were still in the process of being built and coming on the market. If you asked one of the big time flippers when they think the time is to get out they would say Never! Why shouldn't people have the right to profit in a boom time market? Funny thing is how quickly they flip themselves and become anti-market forces when the price comes down 10-20 percent from what they paid. For some reason the boom seems super rational and you see people buying financial self help books like Rich Dad and then when the market declines and they have trouble covering their debts they and everyone else becomes totally irrational and start selling into the market weakness. The crowd follows the crowd until total panic results and the markets go catastrophic. There have been fairly regular cycles where this happens and it is documented . In spite of all the political rhetoric that starts after a crash and panic that something could have been done to prevent it, history with all its market cycles says otherwise. This time we have so many markets that crashed that even the ones with the preventive measures in place ended up able to crash more than the US market. How does a law against a popular Mania work? If the Beatles become a popular rock group and too many people drive up the price of the records they sell should the government step in and A. Ruin their popularity? B. Help make enough records so that the price does not go up? or C. should the government wait until people who paid too much for records and borrowed money and complain? Usually governments go to C and then over regulate and control the markets till the adverse consequences prevail and the cycle begins again. It is funny how government suddenly wants to over regulate after the bubble bursts when it is precisely the wrong thing to do because a market collapse is really just a real sale when bargains are available to people in markets who still have capital to invest. If you have a big fire sale and government says it should suddenly be illegal and credit should be contained at that point then if no one comes nothing sells. This is the real danger of what really happened after 1929 and history is trying to repeat itself. .