I am a democrat, let me start by saying that. I pose a scenario to those who agree or disagree with me, I would appreciate some discussion. Republicans are generally in favor of small government, minimal taxes, and religion as a part of state. Democrats want capitalistic regulation, social justice, and peace.
Could a larger, more encompassing, and regulatory government have caught Madoff prior to his scheme unfolding and ruining so many lives? We all know that the speculators will find a way to circumvent regulation. The pain of the markets ups and downs are felt by the investors (not the speculators). We all agree that speculators, generally, have enough money to move the market and are to be feared (example the gas speculation from the summer of 08). People have everything they intend to live on, during retirement, in the market (due to the shift from pensions to 401ks). 401ks do not provide the possibility to go all cash, nor do they recommend it (who makes money managing money when there's none to manage in the market). Speculation is necessary in the market, to move the price. This all comes back to the fact that govt involvement in the markets, hence a temporary "rangling in" of speculators, hurts everyone. Govt regulation will cause the speculators to find a loophole, or create another way to exploit the system. Simple, consistent returns are not what they want. They want large swings for short-term shorts and longs, big bucks quick. 401ks want long steady returns. These two will never mix. And to add, 401ks will always suffer when speculators have the money (and ability) to drastically swing the market.
Democratic View: Regulation, and enforcement. This is good in principal, but bad in practice. The capital in the market will leave and find a place that can be exploited. 401ks need steady returns to survive. Remove those steady returns, kill 401ks and increase those on Social Security.
Republican View: Let the free market take its course. The result of this is a further division of wealth and the drounding of 401ks. The will never perform well enough to achieve a sustainable way of life for seniors. This results in more people that are poor, in latter life, therefore relying on Social Security. Republicans will lean on the idea that the smart will be successful and survive. I think the collapse of the market in 2008-2009 can debunk that bullshit (everyone lost money due to speculation).
To me, this is a no-win situation. If we let them run free, they'll push the market in both directions and run 401ks into the ground. If we constrict the market too much, the capital in the market will move to other markets (i.e. foreign). What should a sensible economist do to fix this scenario? Please, leave the partisan hoo-hah at home, I want real answers.
Monday, March 23, 2009
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More regulation would not have caught Madoff. He was PART of the mechanism. He's a prime example of how empowering AND RELYING on the Federal Government is a recipe for failure. The more powerful the Federal Government becomes, the more powerful those who have "good connections" become.
ReplyDeleteMadoff's investors did not do any research. They couldn't have. They didn't seek to protect themselves, but instead counted on someone else to do it for them.
Why is it that 401k holders, who literally do NOTHING in the way of researching their positions, are not considered "speculators"? Aren't they just blindly putting money into the slot machine that they've been told pays off in the long run? Literally buying stocks each and every month, regardless of price or value?
What about those that bought houses well beyond their means, under the assumption that if worse came to worse, they could probably still sell it for a profit?
Sounds an awful lot like speculation to me. And quite frankly, the concept of keeping informed market participants out of the game in order to prop up the speculation of the masses sounds amazingly arrogant and dangerous.
p.s. this blog really makes commenting difficult. Take a look at Disqus...
I disagree with your assertion that he was part of the mechanism, maybe I just don't understand. To me he exploited the lazy govt, who ignored the economic conditions wholeheartedly in latter part of 2008. I see your point that more powerful officials could imply more corruption and favoritism. However, you must see that the rich do that regardless of the situation. An example is George Bush. We all know that he was incapable as a president, but being wealthy (hence connected) enabled him to become something more than he was fit for.
ReplyDeleteI don't disagree that blind 401k investors are speculating, but *pure* speculators move the market. Institutional investors smell the movements (from the pure speculators) and follow, hoping for returns. The problem is that they can be on the retrace and lose. More wealthy and powerful (i.e. connected) speculators can move the market more quickly and to greater degree (similar to an accordion). This is publicly known (see Jim Cramer's admission on youtube). I hope you see the problem there.
I don't think we can mix the pure speculators with institutional investors holding people's lives in their hands. In case you don't know, 401k investors don't actively know (without extensive research) the underlying equities in the funds they invest in. This leads to ignorant decisions. There are also penalties in place that keep 401k investors from switching funds frequently. I guess one could see those as trade costs, nonetheless they exist.
BTW - I appreciate your input.
Madoff was chairman of the Nasdaq and his daughter was married to an SEC official. He was untouchable, thus the ignoring of multiple warnings to the SEC from prudent fund of funds managers.
ReplyDeleteSpeculation doesn't move markets nearly as powerfully as the constant, ignorant bidding on stocks by 401k auto-investors....literally dumping billions of buy orders into the market, in predictable patterns.
I think 401k plans, IRA plans, "home ownership" initiatives are all symptoms of a government trying to tell people what is good for them. They get people that should NOT be investing in companies/houses (yet) into the market, in size, and counting on the return.
At the end of the day, people need to realize that the government is INCAPABLE of saving them from themselves. It is buyer beware.
Also, I think your breakdown of "democrat" vs. "republican" is disingenuous. I know a lot of democrats that want "religion in government" if that means enforcing morality and I know almost every republican wants peace.
It's quite simple the means that are of debate....most of humanity agrees on the desired ends.
I know you said to leave the partisan hoo-hah at home, but I have to address at least part of it. Republicans like to say they believe in small government, but the reality is that they don't.
ReplyDeletehttp://www.cnn.com/2009/POLITICS/03/18/zelizer.small.government/
I know very little about the market, but watching Jim Cramer on youtube has given me some insight into the BS that goes on behind closed doors. The other day on the Daily Show, they did an interview with another guy and talked about the disparity between speculating and reality. Too much speculation can cause the market to move which can break companies and destroy lives in extreme cases.
I hate my 401k. I have no faith in the system, but I do it anyhow because it is my best option. Some would argue that I could maybe do better, and certainly over the last year we all could have done better just stuffing money into a mattress.
Imposing a lot of regulation on the market would defeat the purpose of the market. That makes sense to me. What I don't get is how to protect ourselves from this greed in the future?
I really don't understand how bailing out AIG and the banks so that they can loan more money again is supposed to help us. The more I hear it, the more I feel like I am watching someone with a gambling problem in a casino. Sometimes the best decision is to cut your losses and walk away, certainly not to double down and try to win your money back.
Fundamentally, as a country, we spend too much money. We spend more than we make. I am just as guilty as everyone else. The government encourages this. I wish I knew more and could wrap all of this around my head...
Andy G is right. CONSERVATIVES want smaller government. Republicans pretend to want smaller government.
ReplyDelete