25 people to blame for the Financial Crisis

[noah617]

But...but...but FOX told me it was all Barney Frank's fault.

 

[SonOfSlobone]

Scapegoating is so much fun, isn't it? Unfortunately the list is a little short -- by about 25 million.

Like all the people who took out mortgages they couldn't afford without reading the fine print. And all the banks that issued those mortgages. And the realtors who sold them the houses. And the insurance companies that insured the mortgages against default. And the speculators looking for a quick buck.

And all the middle class Americans whose spending gave us a negative savings rate for the first time in history.

Am I leaving anybody out?

 

[NickCole]

Scapegoating is so much fun, isn't it? Unfortunately the list is a little short -- by about 25 million.

Like all the people who took out mortgages they couldn't afford without reading the fine print. And all the banks that issued those mortgages. And the realtors who sold them the houses. And the insurance companies that insured the mortgages against default. And the speculators looking for a quick buck.

And all the middle class Americans whose spending gave us a negative savings rate for the first time in history.

Am I leaving anybody out?

Probably. But that's a damn good start!

 

[palemale]

The Economist is considered a Conservative magazine. But I agree with GOMR, it's a very fine magazine, perhaps the best for comprehensive news from all over the world. I used to subscribe to it, just couldn't keep up with all of the reading. But I still buy it from time to time.

I would put Lawrence Summers on the list. I regret Obama appointed him to anything.

 

[naked gent]

But...but...but FOX told me it was all Barney Frank's fault.

Don't forget Chris Dodd.

 

[justapixel]

Don't forget Chris Dodd.

You are right.

Barney Frank and Christopher Dodd caused the recession.

They and they alone are the guilty culprits.

 

[JB3]

Toriko, please listen to me without getting all Glenn Beck-ish.

The economists crammed deregulation down our throats, insisting that regulation was stifling business. What they never took into account was human nature—human psychology.

Deregulation is the financial equivalent of anarchy. Anarchy and deregulation will never work because they don't take into account the criminal element.

And now some economists are still insisting that we let the market take care of itself. After all the laissez-faire that has fueled this meltdown in the first place, they still haven't learned their lessons.

What's more, they seldom agree. If they can't agree on anything, what good are they in the first place? I maintain that economics is a pseudoscience.

And on the flipside, excessive regulation stifles innovation and causes markets to SHRINK.

What's needed is a balance of both, which I hope to God is what Obama intends to seek.

 

[naked gent]

You are right.

Barney Frank and Christopher Dodd caused the recession.

They and they alone are the guilty culprits.

No doubt about it.....I also found out today that Michael Jackson was murdered and The Illuminati were behind 9-11, yes its been a busy day.

 

[Kulindahr]

4. I think even you would admit that economists never agree. How can economics, then, be a science?

String theory physicists rarely agree, either.

Economics is sort of like physics if the lab were riding out a series of nuclear explosions the inhabitants were trying to study: nothing stays put long enough to get a clear picture.

I once heard an economist answer the question of what would it take for economists to be able to get a solid handle on the way things work. Her answer was that first we'd need Congress to stop passing laws... for about twenty-five years.

 

[Kulindahr]

Kulindahr soundly handled this one... I'd also throw in meterology and astronomy as two other sciences that you'd consider "pseudoscience" under your poor definition and grasp.

Meteorology works; it, too, deals with a system that won't stand still so it can be examined. Astronomy isn't bad at all -- things are pretty simple in that one; though astrophysics could work.

When I took meteorology in college, our prof noted that while economics is called "the dismal science", meteorology qualifies as the runner-up. Yet even so, both are science, because they deal in objective measurements, however much there are strong elements of chaos (scientifically speaking) in the system.
And yes, chaos is being applied to economics, and it indeed clarifies a lot about the behavior of individuals en masse, by treating them as particles subject to random fluctuation. Fluid dynamics has something to say -- a lot, IMO -- about economics, for that matter, just as it does about traffic (notably, it explained why adding an additional highway in an area can actually make traffic worse).

Speaking of fluid dynamics, it was once as murky as economics, but it was still a science. It had a boost up, though: it was possible to set up situations for the study of fluids, in which all the variables were controlled -- try doing that for economics... but the lack of that approach doesn't make economics not a science.

 

[Kulindahr]

Toriko, surely you know that the support of deregulation, as a method of economic growth, is a basic tenet of economics theory

Yet, this same deregulation is what got us in this mess in the first place. I believe that deregulation works against human nature because it does not take into account the criminal class. All it takes is a few of them (the Times article mentions 25) to bring the economy of the whole world to its knees.

What got us into this mess wasn't deregulation as any economist would recommend, it was politically-bastardized selective deregulation -- so don't blame economists for this, blame the politicians who instead of replacing all the tires on a vehicle took one off, deflated another, put a wagon wheel in place of another, and replaced the last but got the wrong size. With respect to the financial situation, the 'deregulation' could be compared to drilling a tiny hole through a dam -- but the real problem was the politicians who then slapped a pump on that hole and proceeded to blast through more water than the hole could handle... to the detriment of both dam and reservoir.

As for economics being a pseudoscience, Toriko, maybe I'm not explaining the idea correctly. The idea really is simple, Toriko:

If economics is so unsure a "science" as to be wrong most of the time, then, I repeat: What good is it? You might as well read the tea leaves.

"What good is it?" may be a valid complaint, but that doesn't make it a pseudo-science, it just means it's still developing the tools to do the job. I'll again invoke meteorology, mentioned by Toriko: it can't give us a dependable ten-day forecast... so what good is it? When I was in college, it couldn't give us a dependable five-day forecast -- but it was still a science.

Economics may just need one thing that meteorology got: computers and software powerful enough to handle billions of "particles" in four dimensions -- though for economics, the power must be greater, since the interactions between "particles" (individuals) are far more numerous and complex [meteorology can slice the world into "cells"' economics can't get away with that] and they have to deal with action-at-a-distance [which meteorology doesn't].

 

[HenryReardon]

The Economist is considered a Conservative magazine. But I agree with GOMR, it's a very fine magazine, perhaps the best for comprehensive news from all over the world. .

Considered Conservative by whom? For that matter how?

My ex was a surscriber, and I read it often during the many years we were together. It slanted heavily to the left. Look at the stated goals of the magazine and you'll find a plethora of left wing ideology.

 

[Kulindahr]

I think what meteorology benefits from, but economics doesn't, is the presence of politics. I don't see too many politicians arguing about how a snow day really is coming Wednesday, hypothetically speaking, though some constituents do care for business purposes. Politics drenches economics and hijacks it, giving it the perspective that it lacks objectivity.

I think you meant "the absence of politics".

 

[landers]

Okay, I'll bite Kulindahr. Explain how a different kind of regulation (other than selective bastardization) and what that deregulation is, that wouldn't have resulted in that economic quagmire that we here in a more heavily regulated Canada have mostly avoided.

 

[01solara]

I once heard an economist answer the question of what would it take for economists to be able to get a solid handle on the way things work. Her answer was that first we'd need Congress to stop passing laws... for about twenty-five years.

No new laws would be an improvement sometimes. It would take more than twenty five years to understand the laws already on the books. Even the court system can't agree on what they mean.

We need to stop thousand page bills that even lawmakers haven't read or understood before putting them in place. I think it is high time to start with a clean federal budget that is new from scratch and a simple understandable tax code free of loopholes and social policy.

Payroll deductions should be replaced with people having to write checks to the government. If we all had to write checks there would be far greater interest and political participation. Fraud would be viewed far more seriously and I believe the likelihood of financial crises could be greatly reduced.

 

[01solara]

Yeah and on that day DNA gene splicing will have us all buying pink, purple, and yellow unicorns for pets and riding pegasus' to work.

No need to be rude. If we don't start doing things differently how will they ever get better? I don't agree with your politics at all but you are a very intelligent man. How do we fix this? If things aren't fixed and quickly the future is grim.

 

[Kulindahr]

Okay, I'll bite Kulindahr. Explain how a different kind of regulation (other than selective bastardization) and what that deregulation is, that wouldn't have resulted in that economic quagmire that we here in a more heavily regulated Canada have mostly avoided.

Regulations that deregulate across the board, instead of punching a hole here and a hole there would be better -- when you punch a hole here and a hole there, people after a quick profit get accountants to find nifty ways to exploit this sudden weak spot.
But as I said, it wasn't the deregulation, but the politicians who abused it, by urging institutions to make loans that were beyond merely risky. That drove the accountants to develop some vehicle for hiding the real nature of the critter, so they developed packages of loans they could bury the bad ones in....
A good regulation to have would be one that kept politicians from meddling in business matters.

Ha, indeed.

Wow, meteorology and the presence of politics... what a combination made in heaven!

Heh -- a combination guaranteed to ruin a vacation.

Toriko and Kulindahr: thanks for your patience.

I was going to go into a long diatribe about why economics is so wildly unreliable, and why I consider it a pseudoscience, but you both already have conceded its inherent reliability.

What annoys me the most is that politicians, especially the right wing, see economics theory as some monolith of truth to which to turn, and base their policies on this "truth", when really it's about as reliable as reading the Tarot Cards. This course of action, which affects millions of people, has brought us catastrophe.

I think politicians should stop listening so much to economics professors—some of whom are pretty nutty, anyway—and start listening to common sense.

I think you meant "inherent unreliability", given the rest of your post.

All I conceded, though, was its inherent complexity, and the present lack of tools powerful enough to analyze that complexity. In that concession I set an admonition to the lawmakers to stop messing around with the economy every time they so much as sneeze -- a moratorium on new laws affecting business in any way for twenty years would be good; by the end of that time, things might have been consistent long enough that the economists could figure out some broader principles. As it is, economists have a task similar to trying to bowl a perfect game while engineers are continually changing the length, width, and slope of the lane, altering the placement, mass, and centers of gravity of the pins, trying different kinds (and colors) of lighting, removing and replacing walls....

Personally I'd recommend to politicians to ignore economics professors who haven't ever been anywhere but the university, unless they managed a Nobel Prize.

 

[Kulindahr]

Regulation is not some panacea either! Look up "George Stigler Economic Theory of Regulation". By its very nature regulators end up passing laws/statutes that benefit those companies that have been lobbying, and thus tilt the market in favor of those larger, more organized special interest companies.

Harry Browne has a great section on this in his book Why Government Doesn't Work. Over and over, the very boards set up to regulate industries get populated by 'veterans' of those industries -- who almost invariably pursue policies that benefit their friends still running big companies, and incidentally favor the companies they still have stock in.

Economics theory ignores the very vital human psychology that drives the economy in the first place!

Actually, economics is based on human psychology: free-market economics rests on the aim of humans to maximize their own interest, and thus does a good job of describing how people will act in a situation where no one has changed the playing field by the introduction of laws (economists used to assume that people would act to maximize their own gain, but that was pretty obviously false; maximizing their own pleasure is closer, but also fails).

Free-market economics is thus the starting point for any economics, since it describes what people will do if left unbothered. The real difficulty arises not from the randomness of those multitudinous human decisions, but from the randomness which arises as humans respond to laws that alter the risk of various decisions. As an example, there's Benjamin Franklin's observation that is ever before us as a siggie in this discussion: it assesses a trend, but it gives no quantification -- and without quantification, predictions are guesswork. Yet it also suffers from another problem: it doesn't cover the whole spectrum -- there are people who, once their basic needs are provided for, blossom and become creative and productive. The conclusion from this is that the introduction of laws to provide for the poor produces unpredictable variables and thus unpredictable results.

Take politicians and lawyers out of economics, and it would be a relative breeze.

 

[Kulindahr]

Honestly I'm really starting to lean towards instituting the Fairness Doctrine again, and banning corporate donations to the political process.

Screw the "Fairness Doctrine" -- but if corporate donations to politics had been banned ten years ago, we wouldn't have had this crisis -- because there wouldn't have been politicians defending a system that was breaking down.

Assumably you are talking about FannieMae and FreddieMac.

They're institutions, not politicians. I'm talking about the politicians who not only refused to entertain the possibility that there might have been something problematic about the way things were going, but who urged banks to make even more risky loans.

 

[Kulindahr]

That was my point. What kind of "risky loans" are you talking about?

You're kidding, right?