Economics

"Only rules can bring the markets back in the longer run"

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Writing in today's New York Sun, economic historian Amity Shlaes stresses the importance of rules over rulers in these troubled financial times, offering "three rules-based reforms [that] cry out for implementation":

First, no more bailouts. Otherwise, it is already clear, the auto companies will be next. The airlines are also in line.

Heck, you can even give this reform a name: The Lehman Rule—and then hope that the Treasury abides by it. One reason the Dow drooped during Mr. Paulson's press briefing on Monday was that he seemed to be indicating he might break the rule soon.

Second, clean up the rating system so that numbers speak something closer to the truth.

Third, make America more competitive by lowering corporate taxes and other levies so foreign firms will want to fill our new vacuum. The worst thing about John McCain's new "crisis" advertisement is that it suggests a strong man—and not a strong country—is the answer. Here President Bush's response, that he had faith in our economy, was more useful.

Whole thing here.

NEXT: Ron Paul Was Right!

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  1. First, no more bailouts.
    AMEN. Go cold turkey starting now.

    Second, clean up the rating system so that numbers speak something closer to the truth.
    Ummmm OK. How you gonna do that? How close to the truth does it have to be? How will you know?

    Third, make America more competitive by lowering corporate taxes and other levies so foreign firms will want to fill our new vacuum.
    Not a bad idea, but there are others that are better. Repealing Sarbanes-Oxley for starters.

  2. Free markets don’t need no fucking rules.

  3. The airlines are also in line.

    Didn’t they already get bailed out after 9/11 ?

  4. First, no more bailouts.

    Just stop there. Done. I can live with a world where the guvmint stops betting other people’s money on these epic failure shitheads.

  5. Election years are the cruelest years,
    breeding Obamas out of the dead land, mixing
    McCain and Palin, stirring
    Knee-jerk policy with autumn rain.

  6. As a peaceful anarchist, I must add that rules must emerge spontaneously to be worth a shit. Government rules never work, not to mention they change constantly.

  7. Maybe this isn’t the time or the thread, but is there any accuracy to the enhanced business climate outlined in, “The Fair Tax?”

  8. What are the roots that clutch, what branches grow
    Out of this Bushy rubbish? Son of man,
    You cannot say, or guess, for you know only
    A heap of broken Mortgages, where the sun beats,
    And the dead tree gives no shelter, the collection agent no relief,
    And the dry stone no sound of water. Only
    There is shadow under this red rock, 25
    (Come in under the shadow of this red rock),
    And I will show you something different from either candidate
    Your Obama at morning striding behind you
    Or your McCain at evening rising to meet

  9. Third, make America more competitive by lowering corporate taxes and other levies so foreign firms will want to fill our new vacuum.
    Not a bad idea, but there are others that are better. Repealing Sarbanes-Oxley for starters.

    Speaking of which, why would we need SOX if we just made corporate sales taxes subject to the same reporting that they do for reporting income to the market? The incentive to inflate profits would be counteracted by the incentive to not pay taxes.

  10. Markets are magical!

  11. I had no idea T.S. Eliot was a Chicago-school economist.

  12. And let’s not consider how the existing heap of rules has driven a great deal of the market into foreign bourses.

  13. AIG, Lehman, Bears Stearns
    Killed by idiots
    CEOs laugh at poor schmucks

  14. “Government rules never work, not to mention they change constantly.”

    True enough I guess. But rules that attempt to limit the extent of permissable government action seem worth another try — even for anarchists. No more bailouts sounds good to me. But we’re pretty far down the slippery slope, and I’m not too hopeful there’s anyone among our “leaders” with the long-term vision or the guts to speak and act the truth on this one. Let’s just hope it stops before the U.S. is entirely socialized.

  15. Some of Eliot requires no updating for current circumstances:

    ‘My nerves are bad to-night. Yes, bad. Stay with me.
    ‘Speak to me. Why do you never speak? Speak.
    ‘What are you thinking of? What thinking? What?
    ‘I never know what you are thinking. Think.’

    I think we are in rats’ alley
    Where the dead men lost their bones.

  16. “I had no idea T.S. Eliot was a Chicago-school economist.”

    He was ahead of his time.

    But those pointy headed intellectuals were always intermingling their personal juices like apes on a darkling plain.

    It makes me want to puke. I strive for an America which rejoices in its Palinesque ordinariness – where children are pump-silged with Creationism and liberal books with dangerous ideas are burned at public libraries along with John Lennon songs!


  17. Second, clean up the rating system so that numbers speak something closer to the truth.

    That’s bold! Is she actually advocating regulations, or is this a voluntary measure? If the former, what? If the latter,why should we take it seriously, given all the mendacity and book-cooking we’ve seen already?

    Also, more truthful ratings would be even more alarming to the market — as HnR pointed out recently, the ratings agencies have downgraded companies only after actual bankruptcies. If they suddenly went through downgrading every firm that looks shaky, there’d be very little AAA left in the financial sector, and that would force massive sell-offs.

  18. …economic historian Amity Shlaes stresses the importance of rules over rulers in these troubled financial times…

    Cool, but I prefer Kydland and Prescott’s version of “Rules rather than discretion”.

    First, no more bailouts. Otherwise, it is already clear, the auto companies will be next. The airlines are also in line.

    Absolutely this needs to be a rule vs. a discretionary policy. The reason is that even if the discretionary policy is “No more bailouts” the reality is that when crunch time comes it is far more desireable to renege on the “promise” and bail them out. Forward looking market participants will then realize this and have little incentive to eschew overly risky ventures.

    So make this a rule, one requiring a super-majority or even unanimity to over-ride. Takes care of that “the rules always change” criticism.

  19. If you want the market to work, get out of its way. Private citizens making poor financial decisions are supposed to lose, just as they are supposed to win when they make the right call. As an aggregate, the Americans made a long series of bum calls, from zero-down mortgages to securitizing invisible debts. The pain is real and deserved. As for regs, the federal reserve, however unconstitutional, is ever with us. So let’s put it to its stated, and only just, purpose: ensuring that America’s banks are sound and obey the law. Not inflation. Not employment. That’s our job, or have we given up capitalism already?

  20. two comments on what Amity Shlaes wrote:

    “One reason the Dow dropped”: no one knows WHY the Dow goes up or down so STFU.

    My new rule: No financial plan too difficult to explain to a Liberal Arts major should be legal. If regular people cannot understand it, it’s just another case of smooth talkers stealing. Like the “tax shelters” that the IRS spends years trying to figure out. Or that Enron asshole claiming the business was beyond balance sheets. Otherwise we’re always going to end up with “Nobody could have anticipated…” when it was really because nobody (who wasn’t in on the scheme) could understand.

  21. “Speaking of which, why would we need SOX if we just made corporate sales taxes subject to the same reporting that they do for reporting income to the market? The incentive to inflate profits would be counteracted by the incentive to not pay taxes.”

    Interesting … but we would have to change our taxation system so that taxes were paid on GAAP income/revenue basis as opposed to the cash basis tax system that we currently have.

    And that would then make GAAP accounting a matter of tax policy … which is probably not a good result.

  22. It’s a bit surprising that Lehman Brothers didn’t get a bailout when you look at the
    Top ten members of Congress: campaign contributions from Lehman Brothers employees, 1989-2008

    Sen. Hillary Clinton, D-N.Y. $409,980
    Sen. Barack Obama, D-Ill. $395,574*
    Sen. Charles Schumer, D-N.Y. $181,450
    Sen. Christopher Dodd, D-Conn. $165,800
    Sen. Joe Lieberman, I-Conn. $165,450
    Sen. John Kerry, D-Mass. $151,664
    Sen. John McCain, R-Ariz. $145,100
    Rep. Charles Rangel, D-N.Y. $38,650
    Rep. Mike Castle, R-Del. $38,500

    You think David Letterman can get them together to do a list?

    * Unlike the other nine, Obama has only been in Congress since 2005.

  23. LOL, McBush is an idiot. he is a proven LIAR. How can anyone with a single ounce of common sense believe anything out of McBushes mouth? What a joke!

    Jester
    http://www.anonymize.us.tc

  24. I like SOX and but I really like SOXX (the semiconductor average/exchange).

    But I really like the fact that Skilling, Kozlowski, the Christian cable assholes from Adelphia, and so many other GOP “true believers” are in federal prison that I can’t stand my relative success!

    Now if we could just indict Pat Robertson, Joel Osteen, Rick ‘Saddleback’ and the other Jesus cocksmokers we will really clear out the Shit Bin!

  25. For a decade reformers have tried to persuade Congress that they were allowing a serious risk to the government’s credit to develop in Fannie Mae and Freddie Mac, but few lawmakers would take action.

    One of the reasons for this was the extraordinary power of Fannie and Freddie. They not only spent close to $150 million in lobbying over the last decade, but they also got their constituents-the securities industry, the homebuilders and the realtors-all powerful industries that depend on Fannie and Freddie’s largesse-to support their sole legislative objective: the defeat of any attempt to control their growth. Congress, as usual knuckled under to the special interest.

    However, a very small number of lawmakers saw this problem for what it was, and were willing to stand up to the power of Fannie and Freddie-and I am proud to say that John McCain was one of them. In 2005, he joined a small group of Republican Senators to cosponsor the Federal Housing Enterprise Regulatory Reform Act, the strongest legislation introduced up to that time to control Fannie and Freddie. In a statement, he noted that “For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac?and the sheer magnitude of these companies and the role they play in the housing market?If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie and Freddie pose to the housing market, the overall financial system, and the economy as a whole.”

    These were prophetic words, given what we know now, but they did not spring from a sudden conversion in that year. Three years earlier, McCain had introduced legislation-co-sponsored with the House Democratic leader Dick Gephardt-to create a Corporate Subsidy Reform Commission. The purpose of this group was to eliminate what McCain called “corporate welfare”. . . .

    In other words, as far back as 2002, John McCain realized that underlying what would ultimately become the Fannie and Freddie crisis was the willingness of Congress to provide financial support to private corporations. And he was willing to take on powerful interests to stop this process. If his bill had resulted in action at that time, the unprecedented steps that the Secretary of the Treasury and Congress had to take in the last two weeks would not have been necessary.

  26. “What are the roots that clutch, what branches grow
    Out of this Bushy rubbish? Son of man,
    You cannot say, or guess, for you know only
    A heap of broken Mortgages, where the sun beats,
    And the dead tree gives no shelter, the collection agent no relief,
    And the dry stone no sound of water. Only
    There is shadow under this red rock, 25
    (Come in under the shadow of this red rock),
    And I will show you something different from either candidate
    Your Obama at morning striding behind you
    Or your McCain at evening rising to meet”

    Dear “poet”,

    Don’t give up your day job.

  27. I’m hearing Lehman actually got a back door bailout (line of operating credit) by the NY Fed through JP Morgan. Undisclosed, of course.

  28. Wow, Brenda Bot

    The GOP actually killed that bipartisan Bill.

    The House bill, the 2005 Federal Housing Finance Reform Act, would have created a stronger regulator with new powers to increase capital at Fannie and Freddie, to limit their portfolios and to deal with the possibility of receivership.

    Mr Oxley reached out to Barney Frank, then the ranking Democrat on the committee and now its chairman, to secure support on the other side of the aisle. But after winning bipartisan support in the House, where the bill passed by 331 to 90 votes, the legislation lacked a champion in the Senate and faced hostility from the Bush administration.

    Adamant that the only solution to the problems posed by Fannie and Freddie was their privatization, the White House attacked the bill. Mr Greenspan also weighed in, saying that the House legislation was worse than no bill at all.

    From FT.com.

    And now Mike Oxley (R) is blaming Bush – and MeCain actually voted AGAINST the bill.

    Bots are shittly liars.

  29. Billy Shaky-

    Dear “poet”,

    Don’t give up your day job.

    Piece rate is your enemy.

  30. Amity Schlaes… sounds familiar. Ah yes, the same nutbar that the Financial Times fired for writing utter whankery with regard to the Bush Administration and the Katrina events.

    Right, you whankers want to cite that cunt as your benchmark for rational analysis. Not a proper actual commentator like Martin Wolf with good proper economic analysis published, but Amity Schlaes, lunatic (not econ historian by any measure).

    You people are indeed the modern equivalent of Bolsheviks. Other side of the line, pretending to be pro free market, blah blah, but bloody Bolsheviks in spirit.

  31. “Wow, Brenda Bot

    The GOP actually killed that bipartisan Bill.”

    And that’s McCain’s fault how?

  32. I should add that the list itself is pure magical thinking.

    Clean up the rating system? Who is going to do that, eh? Ratings are purely market run, no government standards set. The failure was purely a market one, although rather too much apparatus, regulatory and private market was built around these sand castles.

    Lowering corporate tax rates?

    What the fuck does that have to do with the current issues? None, it’s pure bollocks, that is the key sign of an unserious ideological whanker. No better than those fucking Leftist loons who take the slightest excuse to go ranting on about Class and ownership and whatever.

    American libertrians, the Right equivalent of Bolshevism.

  33. McCain voted against the 2005 Federal Housing Reform Act.

    I’m scotched out now.

    But I can still prove it.

  34. I must add that rules must emerge spontaneously to be worth a shit.

    And by spontaneous he means you cannot ever talk about them or come up with one on your own or track its conception to a single person.

    We must only just walk around and one day we seem to be following a rule for some unexplained reason.

    And for god fucking sake never ever fucking write one down on a piece of paper!!!!

  35. I must add that rules must emerge spontaneously to be worth a shit.

    Is the rule that rules must be spontaneous a spontaneous rule?

  36. Strike-

    What’s your problem with Joel Osteen?

  37. “McCain voted against the 2005 Federal Housing Reform Act.”

    The “2005 Federal Housing Reform Act” and the “Federal Housing Enterprise Regulatory Reform Act” are two different bills.

    There could be any number of reasons why McCain voted against the former.

    Mr. Apples, meet Mr. Oranges.

    But then perhaps to you, all fruits look exactly the same.

  38. This is another set of recommendations that misses the core issue.

    The core issue is that Fed policy and Bush fiscal policy created an asset price bubble in real estate.

    That asset price bubble artificially suppressed foreclosure rates for several years. This had the effect of encouraging – almost demanding – unsound lending practices in response.

    There’s no point to even talking about how to avoid similar disasters in the future without talking about taking away the power of the Fed and the state to try to eliminate the business cycle with repeated stimulus.

    There is no regulatory scheme that can protect you from shoddy lending during a bubble. The proper response to decreasing foreclosure rates is increased lending. If you want to avoid shoddy lending, stop using the power of the state to create bubbles.

    But don’t create a bubble, benefit politically from the “high times” during the bubble, and then come back to me and bitch later when the financial system falls apart when the bubble ends.

    Sarbanes-Oxley and the bond rating system and all the rest of it are trivia. You can tinker with them all you want and it won’t solve anything, if we continue to let the Congress and the Fed rush in with cheap money every time it looks like we might have a mild recession. Nobody wanted to accept the mild recession we were due in 2002, not the Fed and certainly not the President or the Congress, and so rates were cut and the deficit was exploded and there was no recession after all. They’re paying the piper now though, aren’t they?

  39. The first thing we learned at AA meetings was not to believe the things we learned at AA meetings. It has stood the test of time, watching government work its magic.

  40. My name is Bill-

    There are many that post on these here blogs who, to borrow a phrase upthread or on some other thread today, “thank god they are atheists”, yet profess unwavering faith in governemnt.

  41. You missed my cynicism, apparently.

  42. “Sarbanes-Oxley and the bond rating system and all the rest of it are trivia.”

    No. Sarbanes-Oxley is a millstoned of the three meter board.

  43. Correction – No. Sarbanes-Oxley is a millstoned DIVE Off the three meter board.

    Damn you Big Booze!

  44. Warren and Lounsbury, the rules regarding rating agencies should be quite simple:

    1) If you rate an offering, you can’t go sell it- an obvious conflict of interest.

    2) Issuers should be required to rotate rating agencies to avoid the conflict of those agencies hoping for continuous repeat business and the continuous fees that would go along with it.

  45. “Amity Schlaes… sounds familiar. Ah yes, the same nutbar that the Financial Times fired for writing utter whankery with regard to the Bush Administration and the Katrina events.

    Right, you whankers want to cite that cunt as your benchmark for rational analysis.

    You people are indeed the modern equivalent of Bolsheviks….

    None, it’s pure bollocks, that is the key sign of an unserious ideological whanker..

    American libertrians, the Right equivalent of Bolshevism.”

    Wanker. Wanker. The word is wanker. Oh, and you repeat yourself quite a bit. It kind of gives me the creeps.

  46. Morgan Stanley is going within 48 hours.

    In the words of Warcraft:

    Epic Fail.

  47. My Name is Bill-

    No, I didn’t.

  48. Now if we could just indict Pat Robertson, Joel Osteen, Rick ‘Saddleback’ and the other Jesus cocksmokers we will really clear out the Shit Bin!

    You want to throw your ideological opponents in jail? How very liberal.

    Right, you whankers want to cite that cunt as your benchmark for rational analysis. Not a proper actual commentator like Martin Wolf with good proper economic analysis published, but Amity Schlaes, lunatic (not econ historian by any measure).

    Yeah, your comment just screams “rational analysis.”

  49. “Morgan Stanley is going within 48 hours.”

    I dunno about that; Wachovia may well be the white knight. Goldman would still need a dance partner, but I have more hope for Goldman that any other independant IB.

  50. Adamant that the only solution to the problems posed by Fannie and Freddie was their privatization, the White House attacked the bill.

    And this has been proven wrong how, exactly?

    I agree with Fluffy @ 8:32pm, except I’m not so sure SOX is “trivia”. I’d like to see someone knowledgeable explore the possible connection between (a) legislation (in the form of SOX) that significantly burdens the business of investment banks and places US investment banks at a competitive business and (b) the failure of those banks. It could be just a coincidence, and certainly can’t be more than a contributing factor given the overexposure and leverage that are the proximate cause of the bank failures, but still . . .

  51. The golden rule: he who has the gold makes the rules.

    Wall Street is begging government for money, so increased regulation is for certain.

    When the tables turn, and they always do, regulation will decrease when government needs a bailout from Wall Street (I’m guessing sometime close to 2017 when Social Security pays out more than it takes in).

  52. The core issue is that Fed policy and Bush fiscal policy created an asset price bubble in real estate.

    Too naiive. The market is far too complex for that.

    Recall that the credit squeeze started over a year ago, mostly from European banks, along with a smaller contraction out of Asia.

    Also recall the big run-up in housing prices – circa 2004. The time the SEC relaxed a rule that affected the large investment banks – in effect they could now leverage at more than double their current rate. Also recall prior to 2004 the run-up began with lots of foreign money buying mortgage assets. Circa 2004, Fannie and Freddie were losing gobs of market share because of this. The SEC relaxed their leveraging rule in response to the European Union relaxing theirs a year earlier. You can blame that on Bush (he’s the one in the kitchen after all) but it’s certain that any chap on duty would have followed suit.

    Let’s not be too self-centered – the housing bubble happened in more countries than just the U.S.

    http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/

  53. I’m just glad they threw all those investigative resources at things like e-gold, which might actually help in a crisis like this. Sigh…

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