[gavanwoolery]

Respectfully, I think you are overanalyzing something that is very simple.

1) Humans are very good at cheating the system. In fact, we are built to cheat, and we have come up with amazing ways of cheating and scamming people out of their money. To ignore this is to ignore hard facts that are right in our face.

2) Most people are honest. But it only takes a few dishonest people to do a lot of damage. And with the right amount of money, you can get away with anything in this country.

3) Corruption is the most seductive activity you can engage in with your clothes still on.

4) It goes beyond conspiracy at this point - we can literally see money transferring hands. Is it not funny that almost everybody was against the bailouts, but the govt. green flagged them regardless? Is it also not a bit strange that every past Secretary of Treasury for the past few decades has been affiliated with Goldman Sachs?

As for free markets and regulation:

Do you believe in evolution? I do. Evolution gets a LOT of things wrong in the beginning, but in the end, it usually produces pretty ideal designs. Evolution is what happens when you have an environment free of artificial contraints.

Likewise, I think that the best economy will be produced by many mistakes, and learning from them. One thing I am pretty sure we will learn is that no corruptible entity should ever control an economy, because corruption is always the end result. (All hail our new robot overlords :D)

And I will just leave this here: http://en.wikipedia.org/wiki/Friedrich_von_Hayek I'm sure you have probably read up on this guy.

[Spyro7]

I appreciate your thoughtful reply. While I am making the transition to a web developer at the moment, I have a graduate degree in Economics and I have spent some time working in the investment industry (Main St, not Wall St). I would just like to share an alternative viewpoint with you:

1) I wouldn't think of it as "cheating the system", but I would think of it as rational self-interest. Given a set of constraints, people will optimize for the best personal outcome.

2) People maximize their utility (utility is a measure of happiness). Whether someone is honest or dishonest is nothing more than a preference input into their utility maximization functions.

What this means is that if the punishment for breaking some law is exceeded by the benefits (to the individual) of doing so, then that individual will break the law. Think about how many people casually drive 5 to 10 miles over the speed limit (or 20 to 30 down here in Texas).

With that said, whose dishonesty is responsible for the housing collapse:

* Were the homeowners dishonest for taking on loans they could not afford to pay back?

* Were the lenders and real estate agents dishonest for making the loans to the home owners?

* Were the finance guys responsible for thinking that risk could be mitigated using the tools of finance?

* Were the investors being dishonest for cheering on returns that were above market-average without considering the risk?

Painting a market with the brushes of corruption and dishonesty does very little to advance an understanding of how the event happened and what can be done to prevent it in the future.

4) Professionals with an understanding of the financial industry were generally in favor of the bailouts. The government listened to the professionals.

Goldman Sachs hires a lot of economists and finance guys, and they hire the people with the best resumes. One should hardly scream conspiracy if it turns out that some of these "cream of the crop" individuals end up working in the treasury. Statistically, the probability of it happening randomly is actually quite high.

"Likewise, I think that the best economy will be produced by many mistakes, and learning from them."

I completely agree with this.

"One thing I am pretty sure we will learn is that no corruptible entity should ever control an economy, because corruption is always the end result. (All hail our new robot overlords :D)"

There is no need for us to resort to robots. We simply have to understand that people are self-interested and build a system that channels this self-interest into outcomes that are efficient for society as a whole.

"And I will just leave this here: http://en.wikipedia.org/wiki/Friedrich_von_Hayek I'm sure you have probably read up on this guy."

Hayek was an amazing logician, but the application of his theories to the modern economy is unproductive. The questions that he asked have been answered by modern economics in the 50 years that have passed since he asked them.

I consider myself an advocate for breaking down the wall that exists between modern economics and people that would like to increase their understanding of modern economics without being economists themselves. If you have anything that you would like to ask me about anything that I wrote above (or any of Hayek's specific points), then I would be happy to answer them (regardless of the beating that my karma takes).

[gavanwoolery]

Thank you for your thoughtful response to my response :)

As for who was responsible - I agree that finger-pointing and conspiracy does not really get us anywhere. In fact conspiracy is the least of my concerns...I am more concerned about the money that is being handed out in plain sight.

When it comes down to it, you cannot pin responsibility on any one party, but one thing did happen as a result, and some of this result was intentionally manufactured. That end result is the poor/middle-class getting poorer, and a few (transparently) dishonest people getting richer. But worst of all, a huge blow was taken on the economy that is affecting everybody, including the (honest) wealthy classes.

You can trace the beginning of the recession back 15 years or so. The funny thing is that people try to point fingers at Democrats or Republicans exclusively, while both parties have done their fair share of damage. And even US citizens have done a lot of damage, but there is a difference between being reckless and being naive. The former describes the people who leveraged debt, the latter describes your average US home buyer.

When it comes down to it, maybe no one was singularly responsible, but that does not really matter. What matters is that wealthy owners of private organizations were given tax-payer money. Executives were given golden parachutes even though their companies were bankrupt - guess who paid for these? Tax payer money was funneled into private companies with the purpose of "saving" them, only to have them trade as junk stock within a few months. Honest people were given mortgages that would soon turn into foreclosures - no one's fault, but I think they should be the people bailed out, not these corporations.

[iand]

"There is no need for us to resort to robots. We simply have to understand that people are self-interested and build a system that channels this self-interest into outcomes that are efficient for society as a whole."

Here's the difficulty that Hayek was pointing out in his book Road to Serfdom. Who gets to decide what the right outcomes are and whether they are efficient?

[Spyro7]

"Who gets to decide what the right outcomes are and whether they are efficient?"

Whether or not an outcome is "right" is subjective, and is more in the field of law and philosophy than economics.

Whether or not an outcome is efficient for society does not need to be determined as it can be measured. An outcome is efficient for society if it makes at least one individual better off without leaving any other individuals worse off. (This is Pareto efficiency).

Of course in the real world, there will almost always be winners and losers with any policy change. The solution is thus to make sure that the total net benefits of any policy change is positive.

The net benefits are the benefits (both implied and explicit) of a policy minus both the costs of doing the policy and the costs of potential gains that could have been had by pursuing alternative policies. Both the costs and the benefits should be aggregates that include the costs and the benefits to all parties affected by a policy.

One thing that I think is worth thinking about when you look at recent developments in the markets is this. From the time period of roughly the 1950s to roughly the 1980s this form of detailed cost-benefit analysis was popularly employed by both governments and private companies. (I am not actually this old, but I have heard this story multiple times from economists considerably more seasoned than me).

Unfortunately, starting in the 1980s, a more expedient form of cost-benefit analysis that focuses mostly on the immediate costs and benefits to the organization conducting the analysis began to dominate. This type of analysis was championed by the finance and accounting oriented economists that began to spring up at around this time. (Disagreement over this and other issues led to university economics departments around the nation dividing from business departments and finding a new home - and less funding - with the liberal arts and social sciences.)

It is expensive and time-consuming to conduct a thorough impact analysis, so I can understand why the more academic approach would fade away in favor of something more expedient. However, I think that a lot of the recent problems we see in governance can be traced to this fast-food economic analysis:

* Lack of investment in infrastructure? - Well, this report on my desk says that it will be expensive to fix those roads and the ones we have now seem to be holding up just fine

* Internet providers want to throttle bandwidth based on its source? - Makes sense, according to this report on my desk providing bandwidth obviously costs money - why not charge for it?

* A tax on transactions? - Well, this report on my desk says that would make it more expensive to trade stocks - there's no way this could be beneficial.

While the right answers to many of these questions can be found either in economic journals or by speaking with an independent consultant, policymakers rarely have the enthusiasm for a topic to dive so deeply.

I hope that soul-searching due to the financial meltdown brings the old approach back in favor. It is sorely missed.

[wnight]

> 1) I wouldn't think of it as "cheating the system", but I would think of it as rational self-interest. Given a set of constraints, people will optimize for the best personal outcome.

In doing so they did break a number of laws, isn't that "cheating"?

But despite the technicalities, the point of it is that any adult could look at the results of their actions and decide that because they would produce negative outcomes for society that they should stop doing them, regardless of laws.

If these were Montana hermits hiding from civilization I'd cut them a break but these are giant institutions demanding not only legal protection from people trying to reclaim their funds, but bailouts as they hold our economy hostage.

> With that said, whose dishonesty is responsible for the housing collapse: > * Were the homeowners dishonest for taking on loans they could not afford to pay back? > * Were the lenders and real estate agents dishonest for making the loans to the home owners? > * Were the finance guys responsible for thinking that risk could be mitigated using the tools of finance? > * Were the investors being dishonest for cheering on returns that were above market-average without considering the risk?

Yes.

But the bankers who saw the big-picture were more dishonest and more responsible than the mortgage pushers and the investors who both should have known it was too good to be true, and all of them more responsible than the consumers who we don't actually expect to be actuarial experts, who did what their bank and society were encouraging them to do.

But yes, to the degree that they couldn't read that fine-print and educate themselves appropriately, then lobby to change things, they are ultimately responsible as they are where the government derives its mandate - to the degree that it does.

> Painting a market with the brushes of corruption and dishonesty does very little to advance an understanding of how the event happened and what can be done to prevent it in the future.

The reality is corruption and dishonesty, painting that picture is the only reasonable thing. Yes, we do need to understand that humanity is rife with the willingness to lie for gain, but we don't have to embrace it and treat it as okay just because it's normal.

"Normal" in that context is a branch up-side the head and the other guy is "right". But we strive for more than that, and need to be held accountable when we hurt others by failing.

We need reality-based finance, which assumes every other player is Mallory or Eve. Like with security.

> Goldman Sachs hires a lot of economists and finance guys, and they hire the people with the best resumes. One should hardly scream conspiracy if it turns out that some of these "cream of the crop" individuals end up working in the treasury. Statistically, the probability of it happening randomly is actually quite high.

Not at all. You approach it like working for or against corruption is the flip of a coin. Most people who'd go into regulatory agencies for reasons the public would approve wouldn't be interested in an industry job after. The fact that there's such a crossover only goes to show the positions are being held by amoral defectors.