Witnessing colossal failures of capitalism?

I just wanted to say thanks to the contributors to this thread. I am getting some good reads out of it and didn't want to be a lurker anymore. An extra big thanks to 2_Thumbs & zook. Keep the discussion going.

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Originally Posted by mcatdog

That's kind of my point. Some of the activities that took place may have been beyond the scope of the SEC, but most of them the SEC had the authority to regulate, but simply chose not to. Probably because they didn't want to step on the toes of the big investment banks.

For example, here's an article where an SEC official says the SEC allowed five of the biggest firms to bend the rules and leverage themselves more than other firms were allowed to do. Regardless of whether this particular allegation is true, I think it's natural for the biggest firms to find a way to game the system and hire expensive lobbyists and get regulatory agencies to do what the firms want, just like the railroad companies did in the Milton Friedman video. The irony in this case is that the investment firms were probably excited that they got the government to give them all an unfair advantage, but in fact they were just setting themselves up to go broke.

I just don't think it's realistic to say, well there needs to be "better" regulation that works the way zook wants it to, because zook isn't going to be there to oversee the SEC. Once this crisis blows over, we're all going to stop paying attention to the SEC for the most part, but you can be sure that Goldman Sachs and Fannie and Freddie will still be there with their lobbyists making sure the SEC does what they want.

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Are you arguing for less regulation? It seems that if the regulations we had in place weren't effective then we need to improve them, not get rid of them. The 40:1 rule change put in place in 2004 is clearly bad, but if instead there were no rules about debt leveraging don't you think the big 5 still would have been overleveraged? I think the NYT article I linked a few posts up shows the danger of having no rules in place pretty clearly.

I do think that gov't is part of the problem, but mainly when it tries to clean up these messes by throwing a bunch of money at people and institutions that made the mess in the first place. That creates moral hazard and effectively eliminates the free market's ability to deter risk-taking. The problem is that if these companies completely failed it would effect so many innocent people with money invested in them. That's the issue I can't figure out how to deal with.

How are you going to incentivize government regulators? How many of them do you think were fired for the horrible job they did that allowed this mess? Most of them probably gained powers after this lousy performance.

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Originally Posted by 2_Thumbs_Up

How are you going to incentivize government regulators?

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Don't you think they're bitter that they're not making as much money as the fatcats they're regulating? Seems like they have plenty of incentive to take them down :)

http://www.washington.edu/insight/financialcrisis/

second vid down easily the best thing ive come across about this situation. as it should be since it's a live forum with qualified professors. first part is good, but the best is the QnA which starts about half way

Regulation isn't the answer, transparency is. Unfortunately figuring out how to create & maintain transparency in the complicated investment vehicles that are mostly to blame for this situation with minimal regulation is the hard part.