[ExI] Don't be evil

[Lee Corbin]

The Avantguardian wrote:

 > [Dan wrote]
>>
>> The point is, in a free society, you don't have to deal with psychopathic 
>> businessmen. If you know you're not going to be bailed out at taxpayers' expense 
>> (or via some other government program, such as credit expansion), then you'll 
>> likely take much more care in selecting who to hand your money to.
> 
> But of course, the solution is to lobby for deregulation of banking so
 > that you don't have to care who you hand your money to because you can
 > do so and be governmentally insured. Since at the end of the day, you
 > can claim it was the government's fault for deregulating you.

That's exactly what the finance quants want to do: deregulate
one-half of the problem, so that they can reap massive rewards
by not having to try as hard to circumvent the system.

The answer is not to deregulate half the system but to slowly
extricate the government entirely. Here is analogy that makes
the point:

    Instead of a $100,000 government guarantee to every
    individual depositor---which creates a vast potential
    for mischief, imagine a 100,000 volt potential difference
    between a wire and ground, with only some reasonably good
    insulation (regulation) preventing a discharge. Now in the
    case of merely physical systems, which are not wily and
    creative, you have a chance that this can reach steady-
    state, at least for a rather long term.

    But if the (now $250,000) potential difference is being
    attacked by the cleverest people that your society can
    produce, there is nothing, really, that will prevent an
    ultimate discharge.

    (It's no wonder that the very brightest have deserted the
    sciences for high finance. What an awful and destructive
    shame.)

http://www.amazon.com/Quants-Whizzes-Conquered-Street-Destroyed/dp/0307453375

So, you are right. Yet you did not address Dan's point directly,
if you go back and read what he said.

> Especially if loaning money to people who can't afford to
 > pay it back allows a politician to point at all the money
 > going around and say "look how good the economy is doing".

Right, though you left out the part where they also say, "and
look how many poor people we are helping with our new laws
making it possible for them to buy homes, and forcing those
mean and nasty bankers to be nicer."

>> In my view, it's because of 
>> moral hazards created by bailouts and such plus the attitude that regulation 
>> works (it doesn't; it merely creates burdens for some and deludes most into 
>> believing the world is safer because there's some regulation in place) that 
>> people generally don't do the proper due diligence on investments and the like. 
>> It's the unintended consequences of all these policies that have led to the bad 
>> outcomes.
> 
> So you think that there is no correlation between the repeal
 > of the Glass-Steagall Act (Banking Act of 1933) in 1999 by
 > the the Gramm–Leach–Bliley Act and the current global financial
 > crisis?
> http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act

I don't know about Dan, but I agree with you that this was a
contributing factor, but a factor that merely accelerated what
had to happen anyway, once, as you say, a situation is created
wherein a vast amount of money is allocated to people (both poor
and rich) who will not be able to pay it back (after the interest
rates rise, or after their highly profitable games of "hot potato"
come to an end).

>> Of course, some of the policies probably don't intend to some 
>> public good -- whatever that is -- but merely toward some private benefit at 
>> public expense and then the policies are sold as supporting the public good. The 
>> recent wave of bank and auto bailouts were all of this sort. The public was not 
>> really helped in any way. Just some big executives and investors got to 
>> redistribute their losses to everyone else. Some have even pointed out, since 
>> this happens time and again, that the nature of all such regulations and 
>> policies is merely to insure the elites always win out, regardless of the fact 
>> that this causes periodic financial crises.
>  
> Well then it seems a win-win situation for the elites. Win with deregulation
 > and win with regulation.

You got it. So long as huge amounts of money are paid to
poor people who'll not be able to pay it back, and are
in effect given (created) anew with each "advance" of
financial innovation, and so long as the government
stands ready to guarantee all these---from Fannie Mae
to Freddy Mac, from bailouts of big loser banks to
individual depositors who need show no discretion,
but who just give their money to whatever FDIC
backed risk-taking bank, indeed those financial
elites always win.

Now if the government were to just stop supporting these
disastrous activities, there would be no more loans to
people who won't be able to pay them back, because the
(free) bankers would be too wary. There would be no
Freddie or Fanny to be able to step in, because there'd
be no government guarantees backing them. There would be
no government bailouts, so the quants would be much more
cautious, and have take their lickings when their schemes
fail.

And finally, there would be no huge $250,000 guaranteed
potential for each individual depositor, so that they
too would have incentive to bank only with reliable
firms having long, good, and very solid reputations.

If we don't slowly unwind from all this, a huge huge
crash of practically everything, all around the world,
becomes just a matter of time.

Lee