Since I’m an economist, people ask me who to blame for this finance mess. I’m with Michael Lewis: Christopher Cox … [is] chairman of the Securities and Exchange Commission, and so has the job of regulating these companies that helped make it possible for every poor American to get a mortgage and are now, as a result, falling apart. … He went as far out of his way as he could to enable the brokerage firms by harassing the small group of informed financial people who have been trying to tell the truth to the markets: the short sellers. They bet against the stock price of a company and so have always had a bad reputation with the public. But in this case, they are the closest thing we have to heroes.
The "market" bought trillions of dollars of mortgage-backed securities without noticing that:
a. mortgage loan standards were going down the drain because loan originators weren't risking any of their own moneyb. housing prices were rising at an unsustainable ratec. the companies that sold insurance (i.e. credit default swaps) on those mortgage-backed securities couldn't possibly pay off on claims if housing prices stopped rising and defaults occurred on a large scale,
none of which were exactly secret information. Is it Michael Lewis and Robin's position that this happened mainly because the S.E.C. made some vague treats against short sellers and demanded to see their emails?
It seems like we have much better candidates to assign the blame:
- rationality: some people buying mortgage-backed securities knew what they were getting into, but didn't care because they were playing with other people's money and were in a "heads I win, tails someone else loses" situation- irrationality: those playing with their own money failed to properly account for risks
Maybe short selling can be a cure for both of these problems, but if so we'd need to figure out how to encourage it to occur on a much bigger scale, because the natural market incentives don't seem to be enough.
"Since I'm an economist, people ask me who to blame for this finance mess."
Alan Greenspan, mostly. Stock jobbing, manias, "episodes of greed", asset bubbles, are effects that generally follow from excess monetary inflation.
This is mostly about lowering the interest rates to absurdly low levels, a history of bailouts, etc.
I'm going with the theories of those who predicted this finance mess prior to it happening. The William Fleckensteins of the world, the people over at mises.org. Austrian theory, not Monetarist theory or whatever the hell Greenspan specifically believes that lead him to pump and pump the money supply.
The blame for the crises is squarely with Libertarian ideologues, and Libertarian economists, and Libertarian blog commentators. Thanks to their propoganda the US financial sector did not implement regulations needed for the complexities of modern operations.
There were extreme booms and busts long before there was much governemnt regulation (as records prior to the 1930s clearly show). In fact, as James Hughes just pointed out, this was a clear weakness of unregulated markets. As more government regulations were implemented, the extremes were mitigated. This is clearly seen in the current big US government bail-outs, (nationalization of these business is good old fashioned socialism) without which world markets would have totally implored.
"Surely the Federal Reserve is to blame. By keeping interest rates so low they made so much credit available as to encourage all sorts of risky investments. And now today, to solve all these problems they are injecting still more liquidity."
look for people (economists (UBS), politicians) who say 'have to return to normal conditions, normal growth conditions'. these are the people to blame, in this case almost everybody. who says growth is the normal condition?
One theory for the restrictions on short selling is that regulators are embarrassed by successful short sellers because the latter often reveal fraud that the regulators missed (or hid).
This is a common problem. Many are blaming the symptoms, such as 'derivatives', a word that covers so many products it is almost meaningless (eg, 'we need to regulate derivatives'). Derivatives basically allow one to create 'complete markets', and bet on all sorts of things that are unavailable when products do not have these things. But this is the tail, not the dog.
The problem, the subtlety, of the current crisis is int the complex set of incentives that led to new underwriting standards in an effort to increase home ownership, especially for minorities, and indeed home ownership increased significantly over the past 10 years, something the government and regulators thought was a good thing. To cry wolf in 1995 when policies were just being created, would have been 'proven' false by 2000 at least.
I suppose one could argue derivatives exacerbated this overshoot, but one could also say derivatives highlighted this overinvestment into homes earlier than would have otherwise been (note first signs were really signaled by the ABX subprime indices in early 2007).
I'm disappointed with the attribution of restrictions on naked short sellers. First, you'd have to demonstrate that there was insufficient opportunity to short sell the normal way. Second, you'd have to somehow tie the stock values of these companies (which is a 2nd order measurement) to the underlying fundamental problem of bad loans and bubbley housing prices.
that helped make it possible for every poor American to get a mortgage Isn't that the problem, right there?
We're going to have to get over the idea that everyone is entitled to certain kinds of financial services -- and more generally, that everyone is entitled to everything.
Surely the Federal Reserve is to blame. By keeping interest rates so low they made so much credit available as to encourage all sorts of risky investments. And now today, to solve all these problems they are injecting still more liquidity.
And what about the few responsible people who actually worked hard, were thrifty, and saved (as old fashion as that idea is). Now their savings are devalued. And for what? So normally non-credit worthy people can get credit. It is like a giant wealth transfer system more powerful than taxes.
Didn't short selling help finance 9-11?
"ISRAELIS were 9-11 short sale stock buyers, betting on WTC terror strikes"
- http://portland.indymedia.org/en/2005/04/315296.shtml
It's easier to blow things up rather than build things - and short selling makes it easier to profit from the misfortune of others.
Wei, I didn't say they were the only people to blame.
The "market" bought trillions of dollars of mortgage-backed securities without noticing that:
a. mortgage loan standards were going down the drain because loan originators weren't risking any of their own moneyb. housing prices were rising at an unsustainable ratec. the companies that sold insurance (i.e. credit default swaps) on those mortgage-backed securities couldn't possibly pay off on claims if housing prices stopped rising and defaults occurred on a large scale,
none of which were exactly secret information. Is it Michael Lewis and Robin's position that this happened mainly because the S.E.C. made some vague treats against short sellers and demanded to see their emails?
It seems like we have much better candidates to assign the blame:
- rationality: some people buying mortgage-backed securities knew what they were getting into, but didn't care because they were playing with other people's money and were in a "heads I win, tails someone else loses" situation- irrationality: those playing with their own money failed to properly account for risks
Maybe short selling can be a cure for both of these problems, but if so we'd need to figure out how to encourage it to occur on a much bigger scale, because the natural market incentives don't seem to be enough.
"Since I'm an economist, people ask me who to blame for this finance mess."
Alan Greenspan, mostly. Stock jobbing, manias, "episodes of greed", asset bubbles, are effects that generally follow from excess monetary inflation.
This is mostly about lowering the interest rates to absurdly low levels, a history of bailouts, etc.
I'm going with the theories of those who predicted this finance mess prior to it happening. The William Fleckensteins of the world, the people over at mises.org. Austrian theory, not Monetarist theory or whatever the hell Greenspan specifically believes that lead him to pump and pump the money supply.
Thanks for the link MZ; I just blogged it.
SEC puts a 10-day ban on short selling.
The blame for the crises is squarely with Libertarian ideologues, and Libertarian economists, and Libertarian blog commentators. Thanks to their propoganda the US financial sector did not implement regulations needed for the complexities of modern operations.
There were extreme booms and busts long before there was much governemnt regulation (as records prior to the 1930s clearly show). In fact, as James Hughes just pointed out, this was a clear weakness of unregulated markets. As more government regulations were implemented, the extremes were mitigated. This is clearly seen in the current big US government bail-outs, (nationalization of these business is good old fashioned socialism) without which world markets would have totally implored.
For what it's worth the second half of TAL last weekend was about Cox and naked short selling among other things. Enforcers
"Surely the Federal Reserve is to blame. By keeping interest rates so low they made so much credit available as to encourage all sorts of risky investments. And now today, to solve all these problems they are injecting still more liquidity."
Yep. They're basically printing inflation.
look for people (economists (UBS), politicians) who say 'have to return to normal conditions, normal growth conditions'. these are the people to blame, in this case almost everybody. who says growth is the normal condition?
Britain too has apparently "banned short-selling" if the AP is to be believed:AP: UK puts ban on short-selling of financial shares
One theory for the restrictions on short selling is that regulators are embarrassed by successful short sellers because the latter often reveal fraud that the regulators missed (or hid).
This is a common problem. Many are blaming the symptoms, such as 'derivatives', a word that covers so many products it is almost meaningless (eg, 'we need to regulate derivatives'). Derivatives basically allow one to create 'complete markets', and bet on all sorts of things that are unavailable when products do not have these things. But this is the tail, not the dog.
The problem, the subtlety, of the current crisis is int the complex set of incentives that led to new underwriting standards in an effort to increase home ownership, especially for minorities, and indeed home ownership increased significantly over the past 10 years, something the government and regulators thought was a good thing. To cry wolf in 1995 when policies were just being created, would have been 'proven' false by 2000 at least.
I suppose one could argue derivatives exacerbated this overshoot, but one could also say derivatives highlighted this overinvestment into homes earlier than would have otherwise been (note first signs were really signaled by the ABX subprime indices in early 2007).
I'm disappointed with the attribution of restrictions on naked short sellers. First, you'd have to demonstrate that there was insufficient opportunity to short sell the normal way. Second, you'd have to somehow tie the stock values of these companies (which is a 2nd order measurement) to the underlying fundamental problem of bad loans and bubbley housing prices.
I blame greenspan.
that helped make it possible for every poor American to get a mortgage Isn't that the problem, right there?
We're going to have to get over the idea that everyone is entitled to certain kinds of financial services -- and more generally, that everyone is entitled to everything.
Surely the Federal Reserve is to blame. By keeping interest rates so low they made so much credit available as to encourage all sorts of risky investments. And now today, to solve all these problems they are injecting still more liquidity.
And what about the few responsible people who actually worked hard, were thrifty, and saved (as old fashion as that idea is). Now their savings are devalued. And for what? So normally non-credit worthy people can get credit. It is like a giant wealth transfer system more powerful than taxes.