Rebuttal to Opening Arguments:
Rebuttal to Opening Arguments: What should be done to improve the economy now that the economic stabilization act is law?
Bailout Should Not Become Excuse for More Bloated Government
RebuttalBait and SwitchThe Oxymoron of Effective RegulationOriginal ArgumentAn Unprecedented ActionThe Long-Run Negative ImpactThe Real ProblemThe Real Solution
The past month has been a case study of political incompetence and a sobering lesson about the need to reduce the size and burden of the federal government. Misguided policies created a housing bubble, with most of the blame belonging to the Federal Reserve’s easy-money policy, the corrupt system of housing subsidies at Fannie Mae and Freddie Mac, and so-called affordable-lending quotas that
extorted and/or lured banks into making bad loans. The bubble now has burst, and the economy is enduring the inevitable readjustment as asset prices return to their true levels.To be sure, many executives and companies tried to ride the bubble too far and too long, and their failure to properly assess risk means they failed their customers and shareholders.
In other words, the financial turmoil of the past month was caused by bad government policy, augmented by mistakes in the private sector. In a logical world, the mistakes enacted by politicians would be reversed and the folks in the private sector who messed up would look for new jobs. In the upside-down world of Washington, however, the politicians have decided to expand the size and burden of government and bail out the Wall Street high-flyers.
The bailout was largely orchestrated by Treasury Secretary Hank Paulson, but his supposed Wall Street acumen has not translated in astute policy making. The Dow Jones Industrial Average was close to 11,400 when he first claimed that the government had to intervene. Once he got involved, the market dropped and began to display extreme volatility.
But he did manage to panic Congress into approving the bailout. The silver lining to that dark cloud is that politicians finally seem to run out of ideas for new forms of regulation and intervention – at least with regards to financial markets. This should give private-sector forces an opportunity to begin to fix the economy’s underlying imbalances. As such, the stock market should finally begin to climb again.
But this does not mean taxpayers can relax. The politicians and interest groups are now looking for new ways of seizing unearned wealth. The latest gimmick is to call for new “stimulus” legislation, which is based on the rather fanciful notion that the economy benefits when resources are transferred from the productive sector to government. Yet if more government spending is good for economic performance, then why are high-tax welfare states such as France suffering from stagnation and high unemployment?
The moral of the story is that the political class is first and foremost interested in expanding the size and power of government. Every time politicians get more control over the economy, they increase the pool of people who feel compelled to donate money in order to either obtain handout or avoid being fleeced. The bailout is just the latest example of this scam. The additional $700 billion in Washington is a great opportunity for politicians, lobbyists, and the special interests. They will all become richer, but the American people – the ones paying for this corrupt exercise – will have a harder time paying bills and making ends meet.
The United States has been a lucky country because our Founding Fathers bequeathed a system based on economic liberty and individual freedom. But government intervention is like water dripping on a stone. No single drop erodes the rock, but the cumulative burden of endless dripping eventually can turn a mighty boulder into a pebble. To preserve America’s special status, government needs to be smaller rather than bigger.
Rebuttal
In his analysis of the bailout, John Irons makes several astute observations. He notes that the bailout grants unprecedented power to the Secretary of the Treasury, while failing to provide necessary oversight and transparency. He also notes that the Administration’s original proposal to buy toxic assets was unclear, at best.
Notwithstanding these well-placed concerns, Irons endorses the bailout, stating that, “it was absolutely necessary given the rapid deterioration of credit markets and the potential impact on all working Americans.” This analysis is backwards. The government’s massive intervention has destabilized markets rather than helped them. When Treasury Secretary Paulson first decided to interfere with the economy, the Dow Jones Industrial Average was well above 11,000. The remarkable volatility and sharp sell-off in the past few weeks certainly seems to indicate that the bailout was absolutely misguided rather than “absolutely necessary.”
To be fair, some of the market’s behavior may be an overreaction. Indeed, the Administration’s reckless “pass-the-bailout-or-the-world-will-end!” rhetoric probably convinced some investors to liquidate investments. It is quite likely that some of these people already are re-investing their funds now that it appears politicians and regulators have no more surprises up their collective sleeves. While it is impossible to know what would have happened to markets if different approaches were followed, it certainly seems safe to conclude that investors are greatly troubled about the prospect that politicians now will have more power over the economy.
Bait and Switch
After his seemingly perfunctory – and largely misguided – remarks about the bailout, Irons then changes the subject and devotes most of his article to a call for bigger government. In the section entitled, “Addressing the crisis in the real economy,” he endorses a laundry-list of new spending and he argues that expanding the size of government somehow will create jobs. His specific proposals include:
- Subsidies for profligate states – Irons wants taxpayers to finance another bailout. This time, the recipients would be governors and state legislators. In many cases, such as California, states face fiscal crises because of a combination of excessive spending and job-killing tax increases. A bailout thus would reward politicians who made irresponsible choices. Politicians might argue that taxpayers already bailed out Wall Street, so why not hand out money to other constituencies, but we should remember what our mothers taught us in that “two wrongs don’t make a right.
- Pork-barrel spending – Irons proposes big spending increases for a wide array of so-called infrastructure programs such as roads, schools, and sewers. Yet at no point does he explain why the federal government should be in charge of financing programs that belong on the state and local level. Federal involvement is an open invitation to corrupt endeavors such as the infamous Bridge to Nowhere.
- More welfare – Last but not least, Irons wants taxpayers to finance more income redistribution, including subsidies for joblessness that would encourage greater unemployment. Like the infrastructure spending, the expanded welfare spending would involve federal encroachment on areas that should be reserved for state and local government. Moreover, income distribution penalizes those who work and entraps recipients into becoming dependents.
All of these spending increases are bad policy, but Irons apparently is willing to argue that somehow these expenditures will help by injecting money into the economy. This is the theory of Keynesian economics, and it assumes that recipients of government outlays will then spend the money on good and services, which will lead to workers behind hired in response to that demand, which will then mean more disposable income that can be spent on goods and services, which will lead to more hiring, in a never-ending cycle.
Keynesian economics is the fiscal-theory equivalent of the perpetual-motion machine. The most obvious reason why the theory is nonsensical is that government cannot “inject” a dollar into the economy without first taking that dollar from the private sector, either by taxation or borrowing. So when politicians spend money on bailouts, pork-barrel projects, and expanded welfare programs, the net result is that money is transferred from the productive sector of the economy and wasted on inefficient government programs.
This is why Keynesian “stimulus” measures did not work during the 1930s and 1970s in the United States. It is why Keynesian policy did not work in Japan in the 1990s. And it is why perpetual-motion machine fiscal policy will not work in America in the 21st Century.
The Oxymoron of Effective Regulation
Irons eventually returns to the issue at hand by closing his article with a generic call for more regulation and better regulation of financial markets. Because of the lack of specificity, it is difficult to respond, but it is worth noting that the financial services industry is one of the most heavily regulated in the United States. It is unclear how more regulation is supposed to solve problems, particularly when it was government policy mistakes that created the conditions for the current turmoil in financial markets.
Moreover, some regulations actually helped create the current instability. Fannie Mae and Freddie Mac, for instance, were directed by politicians to increase their risky behavior. The politicians wanted to increase home ownership and they saw government-sponsored enterprises such as Fannie Mae and Freddie Mac as convenient, off-budget, mechanisms for steering funds to favored industries and campaign contributors.
In conclusion, the financial mess is a sobering reminder that government intervention often imposes a very harsh cost on the economy. This does not mean that markets are perfect. Indeed, one of the most valuable roles of the market is the process of innovation and competition that weeds out those who make mistakes (at least if there are no bailouts). Government, by contrast, is in the business of subsidizing and perpetuating mistakes.
An Unprecedented Action
Congress has voted to give the Treasury Secretary nearly unlimited power to spend $700 billion to bailout Wall Street. The policy is designed to help financial institutions by paying above-market prices for money-losing portfolios. Taxpayers, of course, will be the ones picking up the tab. The bailout is unprecedented because of a) the approach that was chosen; b) the process that is being used, and; c) what it is intended to accomplish. More specifically:
a) Regarding the approach, politicians periodically have sought to subsidize certain industries, generally by using loans, protectionism, or grants, but this is an enormous subsidy and it is the first time the financial services industry has been the direct beneficiary of significant government intervention.
b) The process is unprecedented in that the bailout provides the Treasury secretary with a blank check to decide what assets to buy and how much to pay for them. Congress attempted to address this concern with provisions such as a congressional oversight panel, but cosmetic gestures will have no meaningful impact on the process.
c) Last but not least, the bailout is intended to reward managers and shareholders on Wall Street – groups that traditionally do not get much sympathy from politicians – who made poor decisions.
The bailout has generated considerable debate, both from a philosophical perspective and a practical perspective. The philosophical issue is fairly straightforward, with critics from all parts of the ideological spectrum complaining that the bailout is misguided. Conservatives and libertarians, not surprisingly, condemn the bailout because it represents a significant intervention by the government in the private economy. They argue that the proposal will not work in either the short run or long run, and that it is instead likely to cause additional economic damage. Liberals and populists, by contrast, have no objection to intervention, but assert that government largesse should be directed at parties other than the Wall Street executives, shareholders and institutions.
It already is becoming apparent that the short-run argument for the bailout was erroneous. The Dow Jones Industrial Average plunged several hundred points the moment the bailout passed on Friday, and this week began with a huge plunge. To be sure, not all of this bad news may be due to the bailout, and it also is true that psychological factors can drive short-term stock market performance (especially the “Keynesian beauty contest,” where speculators try to guess the outlook of other investors rather than assess the underlying value of companies). Nonetheless, it certainly appears that financial markets are less than enthusiastic about the bailout – which is rather surprising since the Administration irresponsibly encouraged a falling stock market before the vote by claiming that the bailout was necessary to prevent a meltdown. While this tactic was reckless from an economic perspective, it presumably was smart politics since it maximized the possibility of a rising stock market after the bailout. Credit markets, meanwhile, have not responded positively – at least for those who think that a return to anything-goes lending standards would be a step in the right direction.
The Long-Run Negative Impact
If the short-run news is bad, the long-run outlook is even worse. The issue is not whether the bailout will work, but rather how much damage it will cause. This is because the bailout represents a substantial increase in the burden of government, both directly and indirectly. This unavoidably means that the United States will enjoy less economic growth in the future. Key problems with the bailout include:
- Creating Uncertainty: To avoid the mistakes that Japan made in the 1990s, bankrupt firms should be allowed to fail and over-valued assets should be allowed to fall to the market price. These steps clean out the system and allow a strong rebound. This process will be hindered, however, by the bailout. Moreover, because nobody knows which “toxic” assets will be purchased, the damage will be compounded by an additional layer of uncertainty.
- Moral Hazard: The current turmoil in financial markets exists in part because the corrupt subsidies from Fannie Mae and Freddie Mac encouraged private investors to engage in riskier behavior. The bailoutrewards this excessive risk and will lead investors in the future to be even more imprudent.
- Misallocation of capital: Myriad subsidies and preferences have encouraged over-investment in residential housing. One potential silver lining to the dark cloud of financial turmoil is that capital and labor will shift to more productive uses. The bailout will hinder this shift. More generally, the bailout means political forces will become more important in determining the allocation of investment, further undermining market efficiency.
- Opportunities for Corruption: By giving the Treasury Secretary a $700 billion slush fund with almost no guidelines or rules, the bailout will dramatically increase the power of the lobbying community and lead to an orgy of influence peddling. The haphazard nature of the bailout also has negative implications for the rule of law, which will further increase the power of Washington.
The Real Problem
To add insult to injury, the bailout is being portrayed as a necessary step to clean up the mistakes of the free market. Yet the main causes of the bailout – easy-money policy by the Federal Reserve, corrupt subsidies from Fannie Mae and Freddie Mac, and other housing preferences – are all mistakes by government. Many people on Wall Street did get greedy and tried to profit from the government-created bubble, but they already are getting their just desserts (or at least would be in the absence of a bailout). Politicians, though, get the best of all worlds. Their policies created the bubble, which led to the current turmoil, and they have used the turmoil they created to grab even more power over the economy.
The best we can hope for is that politicians do not cause additional damage. A stock market correction was turned into a Great Depression in part because politicians raised tax rates (Hoover and Roosevelt), increased spending (Hoover and Roosevelt), interfered with private markets (Hoover and Roosevelt), and imposed protectionism (Hoover). Given the lack of economic knowledge in Washington (or the disregard of knowledge if it interferes with the pursuit of political power), there are many reasons to be pessimistic.
The Real Solution
So what should be done? In an ideal world, the bailout would never have happened. Bankrupt institutions would have been allowed to fail. Asset prices - especially housing - would have been permitted to fall. The market, if it had been allowed to function, would have addressed the problem. Some have called this the "pain-is-good" plan, but it would be better to call it the "don't-make-things-worse" plan. The key thing to understand is that pain is unavoidable once a bubble is created by government mistakes, but the way to minimize the damage is to let market forces quickly operate.
This does not necessarily mean that the government is totally absent from the process. Since bankruptcy law is ill suited to financial institutions, the Federal Reserve and Federal Deposit Insurance Corporation have the ability to handle insolvent institutions while generally protecting the interests of customers. This is basically what happened with Wachovia, Lehman Brothers, and Washington Mutual (and to a lesser extent with AIG and Bear Stearns). This approach may not be perfect, but it is much preferable to the bailout since shareholders and management are penalized rather than rewarded for their mistakes.
While market forces are the best way of dealing with the problem, particularly with the Fed and FDIC facilitating the orderly merger/liquidation of insolvent institution, the bailout interferes with this process. It will subsidize bankrupt institutions. It will prevent asset prices from returning to market levels. It will cause uncertainty as investors, lenders, borrowers, and others play a guessing game as they wait for the Treasury Department to use its $700 billion piggy bank. And it presumably will supplant the Fed and FDIC from their relatively benign activities.
But since the bailout already has been approved and there is no chance that politicians will admit their mistake and repeal the measure, it still leaves the question of the next step. The answer does not change. Market forces are still the best way to clean up the mess created by government. The bailout throws some sand in the gears, but that simply highlights the importance of letting the market operate as soon as possible.
Relying on the market does not magically preclude economic dislocation. Government policy mistakes made turmoil inevitable once a bubble was created. As noted above, the real issue is how to minimize pain. The Japanese experience in the 1990s is very instructive. Japan had a bubble, and politicians responded to the bursting of that bubble by trying to prop up insolvent institutions and trying to keep asset prices artificially high. That was a big mistake, and Japan suffered a lengthy period of economic stagnation. By approving a $700 billion bailout, American politicians took a first step in that direction. Hopefully, it will be the last.
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Virmantas Galdikas
Very close to real reasons
You are right regarding the perpetual-motion machine in economics. You are close to reveal a real reason what is happening in economics around the globe. The main problem is a way of human thinking. All traditional schools of economics represent the Value Oriented Approach of thinking, which is a basic reason for failure of application of all theories in practice. I would like to invite you to reconsider the knowledge you have collected over your life into the Human Centric Approach of thinking.
Changing the way of thinking may provide many positive solutions and reveal well forgotten truths of Human Society in this world (see my knoll).
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Quicken for Dummies
Real Truth — Real Sad
The situation we find ourselves in didn't just appear out of thin air. It's been orchestrated & the powers that be are making huge profits & gaining control over our lives from it.
First, the Federal Reserve Bank is neither "federal", nor a "reserve". It is a scam and a farce perpetrated upon the American people. Why do the people need a private bank issuing our currency & charging us interest? Where do they get the "money" to issue into circulation? There isn't any. They create it out of thin air (computer entries). Then they charge us interest & require us to pay it all back to them. Rubbish! Where did the so-called trillions go? The Fed won't say, but we the people are expected to pay for this, with interest, This must stop now. We need to have a money system based on productivity, not credit expasion.
Second, Taxes. Our favorite issue, NOT. Here's the rub. There is no law that makes us subject to the so-called "income tax". It doesn't exist. Try arguing that with the IRS & see how far it goes. This is just an indicator of how far we've go down the path towards tyranny. When the government enforces a law upon us that doesn't exist, & we cough up with the ransome is a clear indicator, we've lost control. Just who is wagging the tail? If we can eliminate this abuse, chuck the Federal Reserve, it would surprise us how fast our economy would spring back. We would have a prosperity like never seen before.
Real simple stuff. Real truth. Real sad.
~Q
Aug 13, 2009 7:59 PM
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Kent L Cootes
Long, with some good points, but Irons has it mostly correct.
The key to economic revival is to use public funds for truly productive projects--those which will really add value and competitive advantage--and put unemployed people back to work quickly. Some mistakes will be made but every effort must be taken to assure that money is not wasted on "bridges to nowhere". An excellent example of two projects that will meet the criteria of productivity, competitive advantage and ability to quickly create jobs here are: 1) a replacement for our Rt.99 viaduct--old and a possible earthquake catastrophe any time. 2) Enhancement of our limited, but presently under construction, light rail project.
A major national project that would jumpstart the economy are grants and tax credits to individual homeowners for energy conservation. There are also plenty of construction-ready road and bridge repair jobs, as well as others not mentioned here, and by Irons and many others.
When one invests in one's home and efficiency, there will be a payoff, sooner or later. In the short run, people will make and spend their increased income. In the long run, the USA will garner additional payoffs and competitive advantage. The caveat and the hard part is that these projects must be managed properly to assure that sloppy work, corruption and graft do not occur--there has been far too much of this kind of wasteful activity in the past 15 to 20 years. The rich have gotten too rich and have not done enough to raise all boats along with theirs--with the exception of Bill and Melissa Gates and too few others.
Prosecution and clawbacks should be the order of the day, along with these projects. I know what they would/will do in China to those who cheat and steal from the people. We don't need to go quite so far, but a few good lessons like those imposed on the Enron, Adelphia and Tyco folks would be useful in the national healing that is necessary. Thank you.
Jan 26, 2009 3:34 PM
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Anonymous
Bad government policy
Artical had been point it out most of the good and bads effect of Amarican econamy. by considering what mistake of privat sector financilal market should be able to overcome econamic benifits on the other hand report had consider of size of goverment how effect to econamic and also stil politician are more control over the econmy. How ever by considering power and outhority of financial secatory's transperancy could minimiz corrp. Not only that misguid of size of government could creat jobs that is not true
Finaly ,for insfrastructure programe such as roads are good, if local governmet can mange but not allow to corrupt. wealfare programe good but it should be only for develop human resource and consider of policy mistake of financial market.
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norton antivirus 2008
The $ 700 BN Bailout
I am a resident of a developing counrty..The fifancial crisis has hit my counrty's exports to the US, since the demand has slowed down.
According to me, this huge government initiative will lead to economic recession and less fall in the growth of world economy.
The good side is that however, demand for precious commodities like oil would comedown leading to low prices.
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Anonymous
Government intervention as a measure of last resort
My observation is that most commentators here seem to be policy people and academics rather than banking practitioners, so let me provide some more perspective.
The responsibilities and process of recovery from the fallout of this financial crisis have to be multi-lateral and the solutions have to integrate and accord with each other as seamlessly as possible. What has happened since Bretton Woods is that jurisdictional regulation, how the central banks operate and how financial institutions have been allowed near absolute autonomy to self-regulate has been implemented on a haphazard and inconsistent basis.
In certain ways, it may be good to use how architectural planning is done in Paris as an allegorical comparison. Unlike other capitals and metropolises random piecemeal buildings are not allowed to be built without proper co-ordination. This is to ensure both proper functioning of traffic systems (fewer traffic jams arising from roads being closed off for building works and then roads being dug-up and re-dug up) as well as the aesthetics of not disturbing the neo-classical skylines and eye views of Paris.
Now likewise we have to have a FULLY CO-ORDINATED future technological system that facilitates regulatory bodies, central banks, financial institutions and ordinary investors alike so that it flags the build up of potential bubbles and the solutions of how to prevent their formation and bursting more readily.
That's the solution we have an opportunity and a responsibility to build globally this generation.
Turning to the blame game and who should be carrying the costs of collective folly..........
Financial institutions DID not sit idle waiting for Govt. to rescue them. Many of them tried, within international accounting laws between Q3 2006 to date, to identify and isolate their toxic assets and to write down those assets. Moreover, they tried to dispose of those toxic assets through classical market mechanisms --- in exactly the way Dan Mitchell explicates in his arguments.
Unfortunately, the contagion was such that no other financial institution was prepared to buy those risky and illiquid assets and to expose their own balance sheets to this form of credit risk. Additionally, acquiring those assets may have meant they themselves exceeded credit risk limits set by the Basel II Accord.
That's why an inertia set in at the banks; they had exhausted the mechanisms available to them to dispose of the toxic assets and the only remaining option was to seek assistance from their respective governments.
There is now also emergent analysis which indicates the financial institutions were aware of potential problems in mortgage market securities as far back as 2005 (http://sternfinance.blogspot.com/2008/10/subprime-mortgage-crisis-could-we-have.html). It is clear that they DID TRY TO TAKE ACTION a long time prior to the US housing market bubble burst of July/August 2007. If we examine the way a number of them closed down their proprietary trading outfits and hedge funds because they were making US$250+ million losses off trading mortgage-related securities during 2005 and 2006, then we have some indication that the financial institutions were taking actions because they were concerned. Moreover, they were writing down mortgage -related instruments.
The nature of writedowns is that it still does NOT remove the asset from a balance sheet. All it is is a means to reduce the ACCOUNTING VALUE of the asset. The only way to dispose of those assets is to sell it on to another party prepared to assume the risks.
In the case of the US$700 billion bailout the US government is acting as the garbage collector. The owners of the garbage (the financial institutions) tried to sell it on and hoped to recycle it into clean and usable materials via market mechanisms but they were unable to do so because NO ONE WANTED TO BUY THEIR TOXIC TRASH.
It sat around for two years in US banks --- segregated off to their garbage basements, then started to cultivate all kinds of toxins and diseases which spread around the global financial system and infected that.
Only at this point did the governments and central banks smell the overwhelming pollution emanating from these basements and decided to take concerted actions:
(1.) to reduce interest rates in the hope the financial institutions would now have the means to dispose of their own toxic waste.
(2.) to encourage others to buy and recycle that toxic waste.
(3.) finally, as a measure of last resort, to act as garbage collection and disposal experts themselves.
The challenge ahead is BIGGER THAN US POLICY in isolation. This crisis shows how closely interconnected financial markets are and the domino effects of one economy faltering impacting upon others.
The way forward is to ask: WHAT CAN WE BUILD TO PREVENT A FUTURE RE-OCCURRENCE?
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Anonymous
SHOW + TELL TRANSPARENCY & HOW TECHNOLGY PLAYS ITS PART
Daniel,
As a former banker, what's struck me in all the media coverage of what's been happening is the lack of simple ((( show + tell ))) to explain to ordinary investors how each of the moving parts and parties are interconnected.
Most commentary remains predominantly text-oriented which is fine for those who may have studied International Economics and can follow Socratian reasoning in this way. Nevertheless, a few diagrams would help the general populus gain a holistic picture of the scenario the world faces, US policy and beyond.
I tried to remedy this for myself as a means to keep track of events by producing a slide presentation.
SOLUTION: SMART HUMANS + SYSTEMS IN SYMBIOSIS
==============================================
From my perspective and since I'm fairly cognisant of cutting-edge technologies, the solutions ahead have to involve harnessing global collective intelligence (smart humans and systems) on an unprecedented and open scale.
My initial personal take on it is 3-fold:
(1.) As well as the political and regulatory mechanisms concerning the global financial system which need overhauling, so is there also a genuine need for more coherent technology systems --- independent of the banks and other vested interest institutions --- which are openly accessible to ordinary investors.
That information should be presented in a ((( show + tell ))) way on a par with how Google Finance presents corporate stock info:
* http://finance.google.com/finance?q=NASDAQ%3AAAPL
We as ordinary global citizens should be able to take the types of report released by the IMF in September 2008, which statically track bubbles and signs of imminent financial collapse from 1940s to date....
* http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf
AND PUT THEM INTO A DYNAMIC GRAPHS which the global community can then comment on and annotate notes to, in order to keep up-to-date and even "ahead of the economic curves" --- Keynesian or heterodoxian.
We comment on blogs and YouTube videos, so.....
WHY NOT FOSTER A TECH ENVIRONMENT WITH TOOLS IN WHICH WE NOT ONLY PASSIVELY CONSUME UPDATES ABOUT WHAT'S HAPPENING BUT PLAY OUR ACTIVE PART IN PREVENTING FUTURE RE-OCCURRENCES?
A start would be to comment on these events and try to make sense of it. Then with more information lobby our political representatives for further answers AND actions.
I have also had several exchanges with former bank colleagues and friends in the hedge fund sector about the crisis. EVERYONE has been caught out and wants solutions. Unravelling the transactions and the death cycle of short-selling is near impossible.
Personally, what I would like to have seen governments do to reduce market panic was to issue lists of definitely non-toxics, so that hedge funds were not selling short BLIND on otherwise robust companies.
(3.) Techco's have a great opportunity to reduce the likelihood of this:
http://bits.blogs.nytimes.com/2008/09/18/how-wall-streets-quants-lied-to-their-computers/
The how and when are to be explored and need proper thinking, planning and implementation. The what is clear: the way forward.
THE CULPABILITY CHAIN
======================
These are the "Six Sigma / Degrees of Shame":
(1.) Gramm-Leach-Bliley Bill.
(2.) Basel II Accord and international GAAP requirements.
(3.) US and European governments fostering a credit boom-bust cycle.
(4.) German government changing the maximum thresholds on alternative assets allocation by hedge funds.
(5.) Financial services sector regulators (SEC, FSA, etc.) not pushing hard enough for hedge fund sector transparency and regulation.
(6.) Supposedly independent ratings agencies, mgmt consultancies, accounting giants, legal firms acting in near collusion with the financial institutions when their primary fiduciary duty of care was to ordinary investors.
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