Economics

Hi Ho Hobbyhorse, Away!

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From a top Obama advisor and 29 other experts, a list of ways to fix what ain't broke.

The plan—which recommends limiting the size of banks, setting guidelines for executive pay and regulating hedge funds—offers the first hint of the kind of changes to the financial system President-elect Barack Obama might push for in the coming weeks and months.

This is basically the same thing that happened after 9/11: Experts in a variety of fields relabeling initiatives they have been pushing all along as a vital part of the response to a disaster.

It's extremely difficult to make the case that executive pay (at non-GSEs, anyway) was the cause of the economic meltdown, or even a major contributing factor. Likewise with unregulated hedge funds and private equity. You could try to construct a tale where limiting the size of banks might have helped, but (as I argued in the print magazine last month), big multi-function banks buying up smaller, crashing banks also probably helped avert an even worse crash, so there are arguments on both sides.

Some of the proposed reforms are probably good ideas—the lead author on the report is Paul Volcker, the former chairman of the Federal Reserve during the Carter and Reagan administrations who will serve as a special Obama White House adviser, and who is a very smart dude (read all about our love for him in last month's print issue as well)—but when a big proposal for reform/spending/restructuring come up, everyone jumps on their hobbyhorses and starts trying to claim things that they've been wanting to do all along are very particularly vital to this project.

This bit's a good idea, for instance:

The proposal suggests that the U.S. government should clarify the status of mortgage giants Fannie Mae and Freddie Mac, either making them into government agencies or regulating them as independent mortgage brokers. 

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  1. Knowing that the fish sticks in the school cafeteria are really made out of tortured sea kittens makes most kids want to lose their lunch!

  2. setting guidelines for executive pay

    At the barrel of a gun, I’m sure.

  3. Uh, yeah, nothing broke about the financial sector.

    How many moons in the sky in your work, Katherine?

  4. I don’t feel so good…….

  5. “Paul Volcker, the former chairman of the Federal Reserve during the Carter and Reagan administrations who will serve as a special Obama White House adviser, and who is a very smart dude (read all about our love for him in last month’s print issue as well)-”

    Ya know, libertarians love Paul Volcker because he raised rates and ended inflation which was the problem of the era in which he was appointed. He changed the way we thought about appropriate monetary policy and unemployment. Bernanke is pulling out all the stops in the other direction – which is also appropriate given the circumstances of deflation we now endure. But instead of libertarians applauding smart monetary policy, they cry foul – let me say it once again – you are fighting the last war.

  6. Nothing broken that the guys who helped break it can’t break some more, no.

  7. As far as I can tell, “the market” didn’t suffer from too many, too big, or too freewheeling hedge funds, it suffered from not nearly enough of them.

    Hedge funds are basically mutual funds that are allowed to do things other mutual funds aren’t allowed to do, including dealing in options and short transactions. Because of this, they can only sell to “sophisticated” investors, and so are already subject to a pretty severe regulatory restriction.

    A bubble (including the real estate bubble that just popped) is a sure sign that not enough people are trading options and shorting that sector.

    So, what’s the Hope ‘n’ Change for fixing the financial sector? Cripple the very market mechanisms and players that should be expanded and turned loose.

  8. How about some radical free market magic, like, oh, LETTING THE MARKETS WORK IT OUT?

    Sorry for shouting. I was just all giddy about being more radical than K M-W on something 🙂

  9. “The proposal suggests that the U.S. government should clarify the status of mortgage giants Fannie Mae and Freddie Mac, either making them into government agencies or regulating them as independent mortgage brokers.”

    Nahhh, they need to keep them “private” so they can blame the free market when they die of too much regulation.

  10. Executive pay may not have much to do with the meltdown, but the vast increases in CEO pay in recent years has nothing to do with the free market. If the market were operating properly, those salaries (even for completely inept CEOs) would never be able to be sustained.

  11. Why doesn’t anybody ever ask libertarians what to do? I mean, libertarianism is a perfect ideology based on eternally true principles and has no flaws. What the fuck? C’mon, ask Bob Barr!

  12. What does Bob Barr have to do with libertarianism?

  13. Tony,

    True, the pay of a few hundred people, no matter how great, could not really contribute to “taking down” that merket.

    But how are you meaning that the free market could not sustain salaries that “high”?*

    *I am of the school of no salary is too high as long as the checks clear.

  14. LUG,

    Not a great deal but I still voted for him.

  15. But instead of libertarians applauding smart monetary policy, they cry foul – let me say it once again – you are fighting the last war.

    domo,

    I like to think of it as “talking my book”.
    Something you are obviously familiar with:)
    Long TIPS?

  16. “But how are you meaning that the free market could not sustain salaries that “high”?*”

    Well, if the pay reflected actual performance instead of short-term illusory profits…

  17. Look, I don’t know how to tell you guys this, but the Bush Administration and the GOP congress sold the policies that help land us in this mess as “letting the market work its magic unfettered.” So now that everything has gone wrong don’t be so shocked if the American people are’nt going to listen to you guys shouting “let the market work its magic unfettered” as a solution.

  18. I mean, you can argue all day that they didn’t “really” let the market work its magic unfettered, that it was the regulations they left that made the mess, etc., etc. (I think your wrong, but it’s at least worth arguing about) but the real people’s ass you should be kicking are people like Phil Gramm et al. who drilled it into everyone’s head that he was unleashing the market with the resulting mess we are in.

  19. There’s no question that a large number of people think that (1) the Bush administration and the GOP Congress were pro-market and (2) deregulation caused this mess. There’s also no question that both perceptions are incredibly wrong.

  20. Uh, yeah, nothing broke about the financial sector.

    Correction, Joe, there used to be something broke in the financial sector. Capitalism fixed it and showed us what the real value of these assets are.

    Now government is trying to unfix the process by bringing the value of those assets back to what they were when the financial sector was broke.

  21. Well, if the pay reflected actual performance instead of short-term illusory profits…

    If you are limiting the market to making decisions that narrowly then I could see your point. But the market does not do that in reality. When one hires a human they have more things going on than just that. Chrysler’s Lee Iococca hire is a decent example. He was bringing with him some unquantafiable vision. So did the eventual shareholders who bought in.

    Lots of other examples but I have had a couple of beers so they are not coming to me and I sense this comment is quite long already.

  22. Awsome! Marxist Nice Guy (MNG) joins the thread bashing the Bush administration for doing nothing that he accuses them of doing, but Obama and his Keynsian Magic will fix everything.

    Tell us Marxist MG, are you with The joe in wanting the bailout to be in the trillions?

    How much for the downtrodden literature students who contribute ever so much to our society?

  23. Reading the group of 30 report, there’s an awful lot of question begging. Just for example, this part of recommendation 9:

    Regulatory standards for governance and risk management should be raised, with particular
    emphasis on:
    a. Strengthening boards of directors with greater engagement of independent members
    having financial industry and risk management expertise;
    b. Coordinating board oversight of compensation and risk management policies, with
    the aim of balancing risk taking with prudence and the long-run interests of and
    returns to shareholders;

    Considering both of these (and many of those that follow) have ostenibly been the main purpose, and in the case of (b) pretty much the sole purpose, of corporate boards since their inception in the modern (post ww2) era, I’d like to know exactly what the gang of 30 actually plans to do to change things.

  24. Kolohe,

    LOL, that question was funny! Great setup.

  25. Why doesn’t anybody ever ask libertarians what to do?

    Because they’re reaganite half-wit anti-government fanatics who could grab their asses with both hands if their lives depended on it?

  26. Sorry..couldn’t grab…

  27. LOL Lefiti, your 2014 version was better.

  28. You’re right, Guy. The one thing libertarians probably can do is grab their asses with both hands.

  29. Uh, yeah, nothing broke about the financial sector.

    joe, when your car won’t start, do you change the tires?

  30. Cunnivore,

    When your brain short circuits, how do you tell?

  31. Hmmmm. Who appointed Katie M-W Chairperson of the Council of Economic Advisors? Oh, that’s right, NO ONE!

    Since five economists from Harvard/Princeton/Yale would give us five different takes on this package, the idea that Katie can pass judgment on it all is a bit thick.

  32. “You’re right, Guy. The one thing libertarians probably can do is grab their asses with both hands.”

    We need to cover our asses with both hands.

  33. Uh, yeah, nothing broke about the financial sector.

    How many moons in the sky in your work, Katherine?

    i think she can give you a number. she went to yale.

    Since five economists from Harvard/Princeton/Yale would give us five different takes on this package, the idea that Katie can pass judgment on it all is a bit thick.

    she went to yale.

  34. joe,

    Current events are basically outside the expertise of anyone (dead or alive). As that is the case I’m not quite sure why anyone would think that all these stimulus plans will be efficacious.

    This of course points to one of the most significant problems with economics; practitioners of that art have very little to rely on when it comes to outlier events like significant downturns in an economy.

  35. You could try to construct a tale where limiting the size of banks might have helped…

    A fair number of economists – some of whom are Keynesians I think – argue that it was the limits on bank size and geographic expansion that was a significant factor that led to the liquidity crisis of the early 1930s. That’s back when branch banking was difficult to do.

  36. How did such an imprecise endeavor as economics become the center of true-believer cults, i.e., vulgar marxism and right-wing libertarianism?

  37. “How did such an imprecise endeavor as economics become the center of true-believer cults, i.e., vulgar marxism and right-wing libertarianism?”

    It probably happened as a result of the left’s misguided religious faith in the god-state, an endeavor which is to precision as Blagojevich is to ethics.

  38. keynes had the answer decades ago but the rightwing echochamber just won’t listen.

  39. It seems “right-wing” is the McCarthyism du jour.

  40. Or, should I say — slur du jour?

  41. It is not a slur.

  42. Nobody, It is keynes who got us into this mess.

  43. Guy Montag,

    What possible market mechanism could account for the atmospheric rise in executive compensation in recent years? They now make around 350 times as much as their average employee, whereas not too long ago it was in the range of 60 times. Did their performance increase that much? What changed about the rules of supply and demand that would merit such a vast increase in the paychecks of executives?

    My answer is that the market is not what provided this compensation, but rather loopholes, manipulation, and cronyism. Just once I’d like a libertarian to rage against manipulations of the market that favor the very wealthy with the same fervor you rage against the minimum wage.

  44. “The Market” is not some magical machine. It’s a result of people’s choices. If people choose to pay CEOs bazillions of dollars, then there’s your mechanism.

  45. “Just once I’d like a libertarian to rage against manipulations of the market that favor the very wealthy with the same fervor you rage against the minimum wage.”

    I’ve read many libertarians who’ve raged against government/corporate enmeshment which creates favoritism and cronyism and unearned wealth. I rage against it all the time. With a truly limited government this wouldn’t exist, and neither would minimum wage laws.

  46. Jordan wrote the same answer I have for you Mike Farmer.

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