Yves here. Bill Black flags a new stunning bit of bank propaganda, that risk is an unavoidable natural condition that is futile for regulators to control. There are indeed some risks that can’t be managed, namely exogenous risks, like that of a hurricane or an explosion destroying a major facility at a company in which you’ve invested. But financial institutions also generate risk all on their own, for instance, via Minskian cycles of more and more speculative lending that lead to asset price inflation and eventual busts and bank and investor losses.
As Andrew Haldane of the Bank of England pointed out, in general, following Robert Merton:
Tail risk within some systems is determined by God – in economist-speak, it is exogenous. Natural disasters, like earthquakes and floods, are examples of such tail risk. Although exogenous, even these events have been shown to occur more frequently than a normal distribution would imply. God’s distribution has fat tails.
Tail risk within financial systems is not determined by God but by man; it is not exogenous but endogenous. This has important implications for regulatory control. Finance theory tells us that risk brings return. So there are natural incentives within the financial system to generate tail risk and to avoid regulatory control. In the run-up to this crisis, examples of such risk-hunting and regulatory arbitrage were legion. They included escalating leverage, increased trading portfolios and the design of tail-heavy financial instruments.
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Jointly published with New Economic Perspectives
Michael Grunwald has written a column attacking Senator Bernie Sanders. It is entitled “Don’t break up the megabanks.” As Grunwald appropriately discloses, he is Timothy Geithner’s ghost writer and a fervent co-religionist of Geithner’s gospel of adoration of and devoted service to the world’s most fraudulent bankers.
Grunwald gives the reader fair warning that he has no financial expertise and is prepared to say anything to try to defend the banksters and Geithner when he makes his first argument the claim that it is “un-American” to break up banks that pose a global systemic risk. To the contrary, few things could be more American if you are even remotely familiar with American views of megabanks from the founding of our Republic.
I will return to responding to Grunwald’s efforts to prove that Geithner was correct to protect the world’s largest and most criminal banks and banksters from effective regulation and prosecution in a subsequent column. First, however, I will write a series of columns on Grunwald’s heroic effort to convert Geithner (with Alan Greenspan and Bernanke) from one of the Nation’s three worst anti-regulators into a regulatory sage complete with a parable of the “river of risk.” Geithner infamously boasted that he was never a regulator in a rare foray into candor. But the new Geithner is reimagined by Grunwald as a regulatory guru. Grunwald’s effort at sycophancy is in another demonstration of our family rule that it is impossible to compete with unintentional self-parody.
My readers may recall that this is the second effort at rehabilitating Geithner’s regulatory catastrophes. Geithner’s first effort floated a soccer simile. My column explained why the simile demonstrated that Geithner knows as little about soccer as regulation. His simile also lacked gravitas.
I did not get very involved with the emerging concerns about the subprime mortgage market. Ned Gramlich, a Fed governor in Washington, was already leading a process to examine excesses and abuses in the mortgage business serving lower-income Americans. I was impressed by Gramlich’s work, and those issues seemed to be getting a fair amount of attention from the Fed in Washington. I didn’t want us to be like kid soccer players, all swarming around the ball. I wanted us to focus on the systemic vulnerabilities that were getting less attention – starting with our own banks, but looking outside them as well.
A parable is much better on the gravitas dimension that Geithner has always lacked. Here is the Geithner’s gospel of risk and regulation according to Grunwald, complete with the “river of risk” parable.
In retrospect, America’s pre-crisis regulations for commercial banks like JP Morgan and Citi were clearly too weak. But they were strong enough to drive trillions of dollars worth of risky assets into the less regulated “shadow banking system”—investment banks like Bear and Lehman, government-sponsored enterprises like Fannie and Freddie, and insurers like AIG, not to mention off-balance-sheet vehicles that commercial banks like Citi used to dodge their regulatory constraints. Risk has a way of migrating to the path of least resistance; Geithner likes to compare it to a river finding its way around stones. The post-crisis reforms significantly broadened the scope of financial regulation, especially for large institutions, but it’s hard to predict where risk will migrate next. It would be even harder to predict what radically restructuring the industry would do to risk.
What’s safe to predict is that risk won’t go away. The goal should be to monitor and manage it, not to eradicate it. Financial reformers often make grand pronouncements about how this or that reform will eliminate the risk of meltdowns and bailouts, but those risks will remain as long as human beings are susceptible to manias like the one that inflated the credit bubble before the crisis and panics like the one that nearly shredded the system during the crisis—in other words, as long as human beings are human.
Sadly for Grunwald and Geithner, the more they try to float the myth of Geithner as Regulatory Guru the more they reveal their ignorance of finance and Geithner’s abject failure as a regulator. Geithner and Grunwald simply continue to ignore the three most destructive epidemics of accounting control fraud that drove our financial crisis and Great Recession. As I will show (but you already know) it is way too late given all the whistleblowers and admissions for Grunwald and Geithner to pretend that they do not know that the fraud epidemics drove the crisis. Note that Geithner’s ghost, even now, is peddling the nonsense that the housing bubble was inflated by a “mania” and that the crisis stage was simply a “panic.” But that is the subject of my second column in this series.
I will start with the fact that Grunwald/Geithner do not understand “risk.” Grunwald/Geithner suggest that regulation is essentially useless because risk is like a “river finding its way around stones (regulators).” We can all agree that Geithner regulated like an insensate, stationary stone – and that effective regulators are dynamic, but that will be the subject of the third column in my series.
In this column I respond to the Grunwald/Geithner claim that: “The goal should be to monitor and manage [risk], not to eradicate it.” No. Grunwald/Geithner betray their ignorance of the fact that there are many “risks” and they are not equivalent. In particular, it is insane to seek to try to “manage” the risk of fraud rather than to act vigorously and systematically every day to reduce fraud risk. It is true that one can never “eradicate” fraud and that it is too expensive to try to eradicate all minor frauds. With regard to the major frauds led by banksters, however, our mission as (honest) bankers, regulators, investigators, and prosecutors is eternal vigilance against fraud.
Grunwald/Geithner appear to assume that all financial “risks” are the same and that they are akin to credit risk. Honest banks and bankers make their money primarily through taking prudent credit risk. When it comes to credit risk, the bankers’ task is to identify, understand, measure, price, and monitor it. Bankers can develop expertise and experience in each of these vital tasks. The “expected value” of prudent lending by prudent bankers is positive – that is primarily how honest bankers add value and create a profit.
The expected value of taking interest rate or exchange rate is zero, and the bank that takes on substantial unhedged interest rate or exchange risk materially increases its overall risk without creating societal value. A financial regulator, therefore, should act to prevent a firm, much less an industry from taking substantial unhedged interest or exchange rate risk. (And it should ensure that the counterparty on the hedge can pay even if there are extreme movements in interest or exchange risks. So-called “dynamic hedging” is not a hedge and can add to systemic risk.)
The expected value of taking substantial prepayment risk is also zero, but because of “convexity” and the much greater volatility of prepayment rates lenders who take on prepayment risk tend to lose their bet frequently and to lose a lot when they lose the bet. These same characteristics make it technically difficult to hedge prepayment risk.
Basis risk is one of the technical risks of hedging. It too has an expected value of zero and should be minimized.
Taking significant liquidity risk typically has a negative expected value. Banking regulators should be resolute against banks taking material liquidity risk. The downside is vastly larger than the upside.
Fraud risk has a negative expected value. Particularly on large value lending where the money goes out of the bank near the start of the loan – real estate lending – the goal of any honest bankers is to minimize fraud risk. Fraudulent CEOs pose, by far, the greatest fraud risk to banks. Such frauds become epidemic when the environment is made criminogenic. People like Geithner, Greenspan, and Bernanke have been making the environment vastly more criminogenic for decades, refusing “to learn from experience.”
But “fraud risk” is a misleading term when one is talking about “accounting control fraud” or “looting” by the bank’s controlling officers. This is not simply a “risk” – it is an actuality that has caused (in economic terms) loss and it threatens the bank’s survival. One does not “model,” “monitor,” or “manage” such frauds if one is honest and competent. Instead, one seeks to counter and end the fraud on an emergency basis.
Geithner boasts about his ignorance of economics, but he might in his therapy sessions with his ghost/apologist acquaint Grunwald with George Akerlof and Paul Romer’s famous 1993 warning in their famous article “Looting: The Economic Underworld of Bankruptcy for Profit.” They made this the last paragraph of their article in order to emphasize their central findings.
The S&L crisis, however, was also caused by misunderstanding. Neither the public nor economists foresaw that the regulations of the 1980s were bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself (Akerlof & Romer 1993: 60).
The Fed – which is to say Geithner, Greenspan, and Bernake – was also warned repeatedly about a series of developing “Gresham’s” dynamics that intensify and spread the criminogenic environment through Geithner’s “river” – creating a tidal bore of elite accounting control fraud (and related corruption) that pollutes the entire river.
George Akerlof used the metaphor to Gresham’s law in his article on markets for “lemons” – another control fraud variant in which the seller uses his asymmetrical information advantage as to the quality of the goods or services being sold to deceive the buyer.
[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence (Akerlof 1970).
The Financial Crisis Inquiry Commission (FCIC) described an example of the deliberate creation by the fraudulent officers leading the lenders and their agents the loan brokers of an “echo” epidemic of fraud in the recent crisis.
From 2000 to 2007, a coalition of appraisal organizations … delivered to Washington officials a public petition; signed by 11,000 appraisers…. [I]t charged that lenders were pressuring appraisers to place artificially high prices on properties [and] “blacklisting honest appraisers” and instead assigning business only to appraisers who would hit the desired price targets (FCIC 2010:18).
Fed Governor Gramlich warned the Fed – and Geithner concedes (see my prior article on his soccer simile) that he heard the warning in the early 2000s. Geithner dishonestly states that Greenspan acted on Gramlich’s warnings. Even Greenspan admits that he did no such thing.
I have written several columns about Steven Krystofiak’s testimony to the Fed warning them of the coming disaster of endemically fraudulent “liar’s” loans plus appraisal fraud. Tom Miller, the Attorney General of Iowa, described the Gresham’s dynamic in his testimony to the Fed – and explained that it was the lenders and their agents that were overwhelmingly putting the lies in the liar’s loans.
Over the last several years, the subprime market has created a race to the bottom in which unethical actors have been handsomely rewarded for their misdeeds and ethical actors have lost market share…. The market incentives rewarded irresponsible lending and made it more difficult for responsible lenders to compete.
[Many originators invent] non-existent occupations or income sources, or simply inflat[e] income totals to support loan applications. Importantly, our investigations have found that most stated income fraud occurs at the suggestion and direction of the loan originator, not the consumer.
Despite the well documented performance struggles of 2006 vintage loans, originators continued to use products with the same characteristics in 2007 (Tom Miller, AG, Iowa, August 14, 2007 testimony to Fed.)
I have often written of the MARI’s famous warnings to the industry in early 2006 about liar’s loans and the FBI’s September 2004 warning about the developing “epidemic” of mortgage fraud that it predicted would cause a financial “crisis” if it were not halted. In response to those warnings, and surging early payment defaults (EPDs) the fraudulent lenders poured on more liar’s loans until by 2006 they represented 40% of total loans originated that year.
Regular readers understand the accounting control fraud “recipe” for a real estate lender or loan purchaser. They know that this produces the classic three “sure things” – the antithesis of “risk” as we normally use the term in finance.
Geithner is either so oblivious, or pretending to be, to the three most destructive epidemics of fraud in history that he advises: “The goal should be to monitor and manage it, not to eradicate it.” People who think they can “monitor” or “manage” fraud epidemics are delusional (or lying). One will never “eradicate” fraud, but the regulatory and prosecutorial response to banking fraud epidemics is to break the epidemic as the most urgent priority. Our paramount role as banking regulators is to prevent, or failing that, halt such fraud epidemics before they cause catastrophic systemic harm. Even seven years after the acute phase of the crisis Grunwald/Geithner are either delusional or disingenuous. But Geithner is certainly right that he sat like an inert anti-regulatory rock while massive fraud and corruption polluted the “river” of finance when he was President of the NY Fed.
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Thanks for this Mr. Black. This totally explains why what Geithner said years ago about the crisis, “History repeats itself”, sounded more like he was saying it was an immutable law rather than a choice.
I love the “rock” and “river” metaphor–so appropriate.
So, by Geithner’s “logic” there is no point in outlawing crime since crime will occur anyway.
As Bugs Bunny would say “what a maroon”.
Exactly! And, let’s not forget to include Obama and his “we’re not going to look back” mantra when he took office. Oh, the joys and privileges of being an elite lawbreaker!!
And let’s not forget it was Obama that wanted the banks bailed out with no strings attached, even the GS wanted strings attached. Shows you how bad things have gotten when a “democrat” like Obama is welcomed with open arms.
I’m sorry, but I disagree. When BB writes: ” In particular, it is insane to seek to try to “manage” the risk of fraud rather than to act vigorously and systematically every day to reduce fraud risk.” – acting vigorously to reduce [any] risk is “just” managing the risk. The risk of fraud can be eliminated in only one way – killing every human but one on the planet (so effectively killing everyone anyways).
What you can do, and where I do agree, is that you can’t treat all risks the same, and need to set the bar differently for different risks. To get back to the fraud, I believe you need to set the bar very low (i.e. treat even minor frauds very seriously) – and yes, it’s expensive, so it may sound unreasonable. But what looks like unreasonable response short term often is the reasonable response long term as it significantly moves the risk/reward goalposts. Indeed, moving the risk/reward goalposts is what it needs to be all about.
On the other hand insisting that IR risk needs to be fully statically hedged is just dumb. It’s impossible. It just implies the author hasn’t thought it through, as there are few “natural” IR hedges, much less than there are loans that can be reasonably originated. Hedge is just moving risk from party A to party B – and doesn’t reduce overall risk unless party B has a natural offset. But while say in commodities and FX there’s often natural offset (producers/consumers and importers/exporters), there’s little if any natural offset in interest rates. Borrowers want to lock rates (fix) – which is ok. But if lenders fix rates, they are automatically taking on interest rates risk.
If you insist on perfect static IR hedging, we move to the world of floating rates only, or to the world of maturity matching (which is a can of worms of its own, since it creates different risks, including liquidity).
But then IR risk is actually relatively simple (for linear products), because you can reasonably well quantify the total losses. So you can set the goalposts by requiring that there’s enough capital to deal with a truly catastrophic scenario (and they can be worked out, not just semi-random VaR examples).
And you can easily say that any non-linear risk (excepting convexity, which you can’t get rid of) is only on a fully-funded basis (so you sell an option? You need to hold the full capital for the option as if the cpty was going to exercise it, and can’t offset it with anything) to remove leverage.
Even so you won’t remove risk. If you have any price, and the price can move arbitrarily, you have a risk. The only thing to get rid of that risk you can do is to remove the freedom for the price to move, or to remove the price entirely.
When my father was a banker and one of his upper middle class clients wanted a personal loan, my father would politely but firmly ask for collateral. The man (back in those days it was almost always a man) would then say “I have stocks and bonds–how much can I borrow against them?” My dad would then look up the value of the items, DISCOUNT them 10%, and say “I can give you $90,000 on your $100,000 of collateral.” That was managing risk. No serious banker from my father’s generation (started work in 1940, volunteered to take a few years off to fight the Japanese, and kept at it until 1984, all with the same bank) would lend money on fractional collateral. If you make companies and individuals put up or shut up, you don’t have to worry too much about systemic risk.
The deeper problem is that you have people taking out loans for idiotic reasons like speculation or buying back stock. Loans should exist for meeting needs that the normal run of savings and cash flow can’t meet: that would be new plant and equipment, inventories, expensive R&D projects, and unforeseen disasters. All other loans are superfluous. The problem we have is that our corporations and our banks are hooked on a system of creating loans to try to make money with the money. This is not how the system should work or was initially intended to work.
Indeed.
Excellent synopsis.
And Geithner seems to think that system of ‘making money from money’ translates to a viable economy.
It does not.
It never will.
Put a sock in it old man!
But no really…one man’s “speculation” is another’s “investment” (even better, with a “fiduciary obligation” thereof). Debt is cheaper than equity and investors (shareholders) understandably feel that capital is more effective in their hands — to reinvest as they please or elsewhere — than in those of company management; and, go figure, there’s just a way to capitalize your company with a higher ratio of debt to equity and at the same time placate shareholders: buybacks! Are speculative investors less entitled to a loan than an empire-building, greedy CEO is? I don’t know!
But come on, man, that’s nonsense! That’s something Warren Buffett would say at a shareholder meeting before whispering to himself offstage “My folksiness: works every time!”. The financial system doesn’t revolve around your Judeo-Christian considerations of debt.
Investors (shareholders) – do they exist as individuals actively deciding to “invest” in the debt of an empire building corporation or are they millions of regular joe’s plunking some bucks into a 401k/ IRA/ 403B savings plan with no clue as to where that money is ending up? Tax policy and lots of marketing by the financial industry has removed regular joe’s from making the decisions about how their money is invested.
One fool’s nonsense might be the widely held opinion that never sees the light of day, thanks to the financial system that has judged it nonsense.
I agree in theory. A fundamental problem in the industry is a top-bottom lack of transparency: GP’s can take advantage of their LP’s who can take advantage of “regular joe’s plunking some bucks into a 401k/ IRA/ 403B savings plan with no clue as to where that money is ending up”. There should be an enhanced bottom-to-top collective bargaining of financial interests.
My point in the post above was entirely different — that “debt”, in and of itself, isn’t a bad thing; to the contrary, to not leverage your equity on principle (as a corporation or as an individual) is kinda stupid.
You appear to be conflating risk and fraud – as if they were the same thing and that if everyone is given a chance to, they will commit fraud. Respectfully, Not true. Glass-Stegal almost totally shut down their risk-taking for almost 75 years. Either take the risk out of the job for workers (CEO’s) or take the risky workers (CEO’s) out of the job. Besides, there’s almost no risk today for the banksters to create frauds except for a slap on the wrist. They’ve got the financial world hostage and government shaking in it’s boots. Of course there’s always risk in life, but should we be openly inviting it in? Or should we be taking steps to prevent the big bad wolf from blowing the house down?
Perhaps you misconstrue Dr. Black’s remedy. His recipe for “managing fraud risk” is aggressive prosecution and incarceration of fraudsters – reducing the incentives to engage in the behavior. The missing ingredient is scale. At the scale of the fraud and the global financial ponzi scheme, serious corrective action would have created a difficult mess that would have required large-scale nationalization of our banking system. Because this concept – nationalizing the largest part of the banking system – is ideologically offensive to the major players, it was simply unthinkable. Hence the bailouts, the continuing frauds, and continuing risk of collapse. I have advocated this for quite some time and will here again – the path to salvation lies in removing profit-seeking from commercial banking. My approach would be to offer FDIC-type insurance only to accounts at not-for-profit institutions and setting fairly high reserve requirements on all financial institutions. There may be better approaches, but the problem needs to be discussed.
Hey, did you all notice that Jamie Dimon said that Elizabeth Warren doesn’t understand the global banking system. What a maroon.
I invite you and TedWa to re-read my comment. I’d like to attract your attention to the bit where I say “To get back to the fraud, I believe you need to set the bar very low (i.e. treat even minor frauds very seriously)”
But it’s still fraud management. You manage the result of the fraud (by locking them up) or you manage the risk of the fraud (by trying to prevent it etc.. – although you’ll never be successful there).
But it’s still risk management. And risk management, contrary to some opinions, is not just the management of the risk. It’s integral part is the management of the consequences that the risk event happens (as far as you can tell what they would be). In the fraud case, one of the reasons why you prosecute fraud mercilessly way over and above the “reasonable cost” is deterrence.
As I rember from Bill Black’s writings is that: The FBI sounded warnings of endemic fraud in Mortgages but, the FBI was limited by the definition of mortgage fraud to would be homeowners and realtors but specifically excluded institutional fraud that was the vast majority of fraud activity. It was as if a murderer answered the door to the police…with the body in the kitchen….and told the police that the only place to look would be the bedroom and they would have to use the window to the bedroom to look…..the police then said OK and proceeded to find nothing.
It is inherent to the conservative temperament to mistake the works of man for the works of God.
AI & Human Conditions
Because the majority chooses to see spiritual, intellectual and physical poverty as normal, and adopts laws on the assumption, doesn’t mean that you have to follow blindly along, or break the law. If you do nothing more than one thing a day to move forward, you will have done far more than the majority, which is always devolving.
With the benefit of hindsight, how difficult do you suppose it would be to program a replacement for the Fed, arbitrarily distributing debt, along with its derivatives? Where do you suppose that would get you? Have you noticed that the critters running public, private and non-profit corporations, blaming each other for outcomes as if they are separate entities, are utterly incapable of work?
Interviewing the middle class derivatives and replacing them with dc computers is in no way a threat to labor, which gears up every day. Careful with whom you choose to engage in war. Many plumbers don’t make more than many engineers, in terms of wages to rent, by accident.
Funny, how many critters are standing in line for my income, but don’t want the job, and demand equal rights accordingly. As you can see, I have added several wrinkles, since the last time the professors couldn’t comprehend my code. The US dollar can only buy drugged up mercenaries, like any other communist regime.
The artificial borders of the drive-by Christian empire are disappearing accordingly. America, the proffered solution to European stagnation, is becoming more like Europe every day, falling into the hands of communism, again. Public education is an abject failure, but instill a fear of peer pressure in children right out of the womb, expecting a different result, that’ll work. Fear on.
You, as an individual, choose whether growth is economic or inflation, regardless of any convenient State apparition, employed as a scapegoat. The State has no jurisdiction over marriage, and to the extent the majority tries to enforce jurisdiction, it destroys itself. That’s History, of empire. Life is not a negotiation.
Obviously, the H1B1s can’t program their way out of a paper bag, and the planet has empire by the upper middle class neck, removing circulation from the extremities up. Open commercial lines of credit for small business, expressing confidence in future cash flows, or keep hiring housekeepers with SMART technology, expecting a different result.
Labor isn’t going to show up on Shark Tank or at the SBA, peddling toys for bipolar adults or infrastructure for artificial emotion, Bruce Jenner or no Bruce Jenner, Obamacare surveillance or no. Labor expects the majority to ride the brake, and eliminate its own regeneration, from birth. There is no such thing as security from insecurity, false choices.
Michael Grunwald vs. Bernie Sanders is a false choice.
In 2010, I went to my county attorney’s office in MN to report mortgage fraud in my own case….it was a Colonel Mustard in the kitchen with a lead pipe sort of a deal… very clear and irrefutable evidence….I had them. I spoke with the head of the Mortgage Fraud Task Force. After reviewing my documentation, he said, “Well that may very well be true. But we like to go after people defrauding banks, NOT the other way around.”
Mr. Black, I’m looking forward to the next two articles. Thanks for this entry.
I wonder if the Greenwald article is due to the following Bernie Sanders is gaining – preemptive swing, perhaps?
Also, looting isn’t just reserved for banksters. In the healthcare biz, those of us who are dedicated to exposing looters of government contracts and government programs like Medicaid are constantly reminded by the Federal and state regulators that efforts to crack down on fraud will cause an access to care crisis as providers drop out because they fear becoming a target. Greshem’s dynamic is fully at work in healthcare as those looting the system expand operations under the watchful eye of regulators who go to great length to not do anything, lest they scare off the crooks.
There’s a mention above of whistle blowers as one bit of impediment to untrammelled fraud-o-“capitalism.” I vaguely recall early readings in Naked Capitalism that mentioned the existence of many somewhat fearful Lesser Gekkos who had their stashes of smoking-gun, rat-on-the-rats, “state’s evidence” papers and flash drives that they were ready to turn over and explain to the largely clueless, or was it not-interested, investigators and enforcement regulators. A couple of years of uneasy shifting in their ergo chairs and $10,000 shoes, and crickets, crickets, and all went comfortably back to grabbing with both hands.
Statutes of limitation are running. Any of those people still around? Or all IBG, YBG? Burned the smoking guns, or melted them down, or just disappeared them?
When I was in basic training at Fort Leonard Wood, MO, a guy in my company went to sick call three days in a row. Malaise, increasing fever, stiff neck, headache, given aspirin and sent back to duty in the cold and snow… and on the fourth day he convulsed and died, from meningitis. The guy’s father showed up two days later, a patriotic redneck from Arkansas, wanting to know who had killed his boy. He also had a shotgun and a .45. I have been a little surprised that none of us ordinary people showed up with similar accessories and intent to address the killing of their sons and daughters and savings and homes and jobs… Maybe they have, and we just don’t hear about it. That distressed father disappeared under a heap of MPs, and off to “the stockade…”
But Timmay is merely a river boat captain like Mark Twain. His objective is to avoid the sandbars and hidden snags that can beleagure the plangent voyage to deliver the passengers and the cotton bales to the queen city.
couldn’t we just reduce fdic insurance to only the first 17.5 billion and let good ole charlie munger write a supplemental insurance policy like the ones handed out for self insured workmans comp policies..,
or
maybe jaymee deamon can do without all those mean regulations and just drop fdic insurance since everyone would trust him with their money without taxpayer backstop
fdic insurance ??..we dont have any fdic insurance…we dont need no fdic insurance … I dont need to show you no stinkin fdic insurance
badges…
“I have often written of the MARI’s famous warnings to the industry in early 2006 about liar’s loans and the FBI’s September 2004 warning about the developing “epidemic” of mortgage fraud that it predicted would cause a financial “crisis” if it were not halted.”
A question I have for Yves and Bill Black is are there any such warnings being given out right now or within the past few years about our current fraudulent market?
It is my opinion that so called “exogenous risk” is basically an elaborate argument from ignorance. We didn’t predict something, therefore it can’t be predicted, thus… markets! Yves gave two examples; hurricanes and plant explosions. And yes, I grant that Yves was speaking from an economic perspective.
I disagree all the same, even from an economics only perspective.
Hurricanes can’t be prevented or predicted. But we know they will happen and can take steps to mitigate there impact. We can build housing and structures to withstand high winds, sea walls help control flooding, one can place extra food, water, and fuel, as well as other preparations.
Exploding plants also don’t just happen. BP is well know for cutting corners, not performing adequate maintenance, man power shortages, inadequate training. Exploding plants do not happen to those who follow proper process safety, adequate backups, fail safes, full manpower, aggressive training and emergency drills.
The problem here is not that we can not manage these risks. We can, and have done so in the past. But it doesn’t happen because these sorts of preparations demand something called elasticity, a notion completely incompatible with the neo-classical notions of “efficient markets.”
Efficient markets demand we build our houses only just strong enough to support it’s own weight. Extra food and supplies are just forms of waste to be eliminated. Eliminate preventative maintenance; repairs are done only as needed, and even then only to get the machines on line and producing money. Back-ups? You mean you want to install this equipment in the corner that ideally will never be used? All of these costs are unacceptable to neo-classical thinking that insist on squeezing out every penny in order to fatten up CEO pay and dividends.
And when the inevitable happens, it get’s labeled as an exogenous risks that is comply unforeseeable.