On "Regulation"

One of the things that pissed me off most about the current administration is that it repeatedly and regularly described regulation as inhibition of the market and deliberately conflated it with communitarian impulses. To be pro-regulatory was to be anti-market.

In the opaque and unregulated middle-tier market of hedge funds and financial instruments, the interests of stockholders and those whose debt instruments were put into play were secondary to those of market managers, who let the system run wild as long as it benefitted them. No less a lassez-faire libertarian than Alan Greenspan has testified before Congress that this was the primary problem. The market system become so complex that it got away from our human ability to understand it and rein it in. It had too large a headaround. At some point, we were no longer making money with the system; instead, fund managers were taking money out of a system no one understood or could understand. The post-mortem is showing us just how the enconopocalypse ran on the ecology called "the market," but somehow evolved such that it no longer served the human beings who make up that ecology.

Regulation is not always "just" a drag on economies. The night watchman state, the only purpose of which is to prevent loss and extract justice among soveriegn citizens due to violence or deception-- the kind of state Grover Norquist says he wanted-- requires market regulation of a kind that guarantees uniform acquiescence to rules of transparency and comprehensibility. That is the regulatory responsibility that our most recent administration failed to take seriously, and was one reason-- and the only reason I would have needed, really-- why I washed my hands of them and their legacy in the last election.

On "On Regulation."

It's funny; I wrote a draft of my previous entry, "On regulation," yesterday. Today, Paul Krugman links to a paper from a year ago showing that the rise in both the market and personal incomes over the past eight years is so strongly weighted by the financial market and "financial barons" that the rest of us may as well have been standing still.

All that success was all an illusion. As Karl Denninger wrote,

The "shadow banking system", including ratings agencies, investment banks and hedge funds, were engaged for years in the intentional misrepresentation of credit quality. In conjunction with those who were bought and paid for to provide these grossly-inflated "ratings" (the famous "we'll rate a deal securitized by cows" quote in sworn testimony before Congress), the banks, issuers and traders of this debt gamed the ratings (and reserve) system so they would not have to hold back as much in reserves as would have been required on the actual underlying credit quality. That is, they said that there was less risk in these loans than really existed.

Why is this important?

Because by under-reserving on purpose these entities obtained a capacity to loan (and for you to borrow) that did not exist, and as a result, there was more money available to lend - lots more and at a much cheaper interest rate - than should have been the case.

In addition this deception radically accelerated the velocity of money (credit) in circulation, which in combination with the fraudulently-created credit created a classic asset inflation.

Since money and credit are fungible - that is, they both spend exactly the same (your credit card and $100 in 20 dollar bills spend the same way at the store; they both buy exactly the same amount of goods or services) this had precisely the same effect in the economy - and on you as a consumer - as the banker literally walking over to his color copier and running off $100 bills by the truckload. [emphasis in the original]

What pisses people like me off more than anything else is the knowledge that for the past five years these people have been taking cash out of the system, converting wealth into cash, destroying wealth while exploiting a system that wasn't generating much new wealth. The "new barons of finance" were fraudsters through and through, most of them still have their cash, and not one of them has done a perpwalk.

It's entirely possible than no one will, too. They'll leave the system with enough cash, enough assets, to never need to lift a finger again except perhaps to pick their own noses. Most of these financial wizards showed less moral backbone than your average McDonalds workers, and will suffer almost not at all for their sociopathy.

We're now members of the Pwnership Society. We've been pwned.