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OK Free-Market Economists, Help Me Out Here

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Release Date: March 16, 2008 For immediate release The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth. First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York. Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee�s target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days. The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc. http://www.federalreserve.gov/newse...y/20080316a.htm

So the Fed intervened and helped bail out the market here. From what I understand here it appears the fed broadened up their lending program, allowing the largest of Wall Street investment banks to now start borrowing from them. Furthermore, they also essentially co-signed a $30 billion loan in the deal between JP Morgan buying Bear, that is guaranteeing $30 billion of the loan if those loans go bad for JP Morgan.

Okay, I see the importance of this move, and it very likely will help prevent a further collapse into a recession. I do understand this.

What I don't understand, however, is how this squares well with those free-market folks out there, especially those who run these companies who are getting their asses bailed out by none other than the dreaded Federal Government. So am I to understand that it's only a free-market when there's a profit, but it's perfectly acceptable to be more socialized when times are tough?

How can this not be a gigantic crock of bullshit to a true, free-market economy and philosophy that so many economists and financial analysts hold so dear?

There's nothing free market about it. It's a government bailout any way you slice it in my opinion.

The subject has been covered pretty thoroughly starting around this page:

http://tranceaddict.com/forums/show...6&pagenumber=28

Agree with Capitalizt.

It's akin to the government bailout of Air Canada up here when they were about to go under - it would have been catastrophic for the country had they not...

Not just because Air Canada was the largest airline in the country but the spin-off because of it...

Re: OK Free-Market Economists, Help Me Out Here

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Originally posted by MisterOpus1 So the Fed intervened and helped bail out the market here. From what I understand here it appears the fed broadened up their lending program, allowing the largest of Wall Street investment banks to now start borrowing from them. Furthermore, they also essentially co-signed a $30 billion loan in the deal between JP Morgan buying Bear, that is guaranteeing $30 billion of the loan if those loans go bad for JP Morgan. Okay, I see the importance of this move, and it very likely will help prevent a further collapse into a recession. I do understand this. What I don't understand, however, is how this squares well with those free-market folks out there, especially those who run these companies who are getting their asses bailed out by none other than the dreaded Federal Government. So am I to understand that it's only a free-market when there's a profit, but it's perfectly acceptable to be more socialized when times are tough? How can this not be a gigantic crock of bullshit to a true, free-market economy and philosophy that so many economists and financial analysts hold so dear?

i'm far from an economist but my understanding is that the sheer size of these companies portfolios represent a very substantial and consequential chunk of the very free market we're talking about. when the Federal Government and the Fed Reserve are given a choice between doing something and nothing, economic philosophies do tend to be marginalized in favor of careful pragmatism...as i understand it anyways.

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Originally posted by Fir3start3r Agree with Capitalizt. It's akin to the government bailout of Air Canada up here when they were about to go under - it would have been catastrophic for the country had they not... Not just because Air Canada was the largest airline in the country but the spin-off because of it...

I'm on side here too. The central banks have been flagrantly manipulating the market to protect companies (bankers in particular) from those same market mechanisims that they so often cite as golden rules.

Air Canada is a great case study along with the other North American air carriers. The industry has been heavily protected with respect to companies being kept alive long past thier time. When i was studying the industry years back it looked like there were one or two major airlines to many in North America and that without letting them faill all of the others were suffering by having to compete to artificially low prices.

The problem is that no one is for a free market when the invisible hand is pushing them off of the gravy train.

Opus, it sucks to be perfectly honest. I do acknowledge that the Fed has a mandate and that the ramifications of letting some of what currently ails our system play out could be far more disastrous than the massive intervention that we've seen....however, it makes me sick to see the degree of moral hazard and government intervention going on right now--especially given that it is an election year which just means the cries for help are that much louder. Personally, I have been very frustrated by this because I have made very specific bets in my job which have been confounded by the endless intervention we've been seeing since last September. To answer your question, everyone loves capitalism and free markets when you're riding the waves of prosperity and euphoria, but it seems there are far too many who are quick to cry uncle and want to suckle the teat of socialist-like policies and massive government intervention when they can't bare to deal with the consequences of their own reckless actions.

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Originally posted by Shakka Personally, I have been very frustrated by this because I have made very specific bets in my job which have been confounded by the endless intervention we've been seeing since last September.

that explains so much....sorry to hear that man.

To answer the original poster's question, this move is certainly not free market economics. However, as Shakka stated, the Fed has a mandate to protect the financial markets, not to protect free markets. In fact, the financial markets have been anything but free markets for a very long time. Until recently, commercial banks were prohibited from doing much of what they do now; commercial banks could not function as investment banks or insurance companies, and banks were severly restricted in where and how they could operate. For the past 100 years banking has been one of the most highly regulated industries in this country.

With respect to his question:

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How can this not be a gigantic crock of bullshit to a true, free-market economy and philosophy that so many economists and financial analysts hold so dear?

as shakka said before, some firms are considered "too big to fail." Whether that is true or not, that is the conventional belief. Many people believe that the failure of such a large firm would create a domino effect in the industry. The problem with this theory, in my opinion, is that it is just that. I can't remember a specific time when the government allowed a large firm to fail, and it was proven that the subsequent failure of other firms was directly a result of the first firm's failure (which isn't to say it hasn't happened, i just can't recall).

this isn't a true government bailout as others may have you believe. A government bailout usually suggests that the government is giving money to a firm with no expectation of getting the money back. In this case, the fed will only lose if JPM defaults and the security they take can not be sold to cover the loan. We have no idea how much security the fed is getting in return and we don't know if JPM intends to default.

This move by the fed is basically an accounting trick so that JPM does not have to expose its own balance sheet to the hard to sell assets, which JPM fears would reduce the value of its other holdings. The main purpose of this short term loan is to keep bear running, but since JP guaranteed Bear's business, the Fed loan will prop up the JP balance sheet while it has time to dispose of some of the bear assets. Everyone is assuming that the fed will lose because those assets are hard to sell. Well, if you have been reading the wsj, credit is not moving like it did one or two years ago, which does not mean it will not be paid back. The fact that credit is hard to sell means other people don't want to assume the risk that it will not be paid back. There is a difference. Furthermore, we have no idea how much security the fed is taking in return. If the fed is taking a security interest in all of Bears 'illiquid' assets, it could be significantly greater than the 30 billion loaned.

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Originally posted by Shakka To answer your question, everyone loves capitalism and free markets when you're riding the waves of prosperity and euphoria, but it seems there are far too many who are quick to cry uncle and want to suckle the teat of socialist-like policies and massive government intervention when they can't bare to deal with the consequences of their own reckless actions.

That pretty much sums it all up right there...

And just to be fair, there are plenty of people who did NOT make reckless decisions who would've been negatively impacted even moreso had there not been so much intervention, so they will probably be glad that someone is "coming to the rescue" so to speak.

And of course, to be fair again, there are plenty of people who sat on the sidelines throughout this whole housing/real-estate/loose-lending fiasco, who were being prudent, not being caught up in the mania, patiently waiting for the market to come back to them so that they could make a smart financial/economic decision. And now, the Fed and the government have thrown gasoline on the moral hazard fire and their prudent actions are not being rewarded, if not simply being outright punished. They are the losers, and they should be rightfully pissed off.

I don't think this puppy has fully played out yet as there are still mountains of unsold home inventories out there and without home price appreciation and mortgage equity withdrawals to pull from, I don't see what's going to give strong support to housing prices for the foreseeable future. The game is simply much, much more complicated now.

Life's a bitch. Fuck politics.

/end of rant.

Greenspan started it with the 1% interest rate in 2003. Money became too easy to get. So lenders started taking on enormous risk. The simple fact of the matter is the American economy is a psuedo free-market. While business has a relatively high degree of freedom (compared to say Venezuela), ultimately the economy is centrally planned. I guess you can call it a centralized capitalism.

Now, the action taken by the Fed with Bear Stearns merely highlights the fact that when the Fed messes up, as in making money too cheap as it did in 2003-2004, they have to clean up their own mess. Yes, government intervention is a paradox of capitalism, but then again, the American economy is far from a laissez free market system.

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Originally posted by Krypton Greenspan started it with the 1% interest rate in 2003. Money became too easy to get. So lenders started taking on enormous risk. The simple fact of the matter is the American economy is a psuedo free-market. While business has a relatively high degree of freedom (compared to say Venezuela), ultimately the economy is centrally planned. I guess you can call it a centralized capitalism. Now, the action taken by the Fed with Bear Stearns merely highlights the fact that when the Fed messes up, as in making money too cheap as it did in 2003-2004, they have to clean up their own mess. Yes, government intervention is a paradox of capitalism, but then again, the American economy is far from a laissez free market system.

I agree that Greenspan played a huge role in facilitating this mess. It's no secret he lowered rates to the floor and then encouraged people to take out adjustable rate mortgages, but he is not entirely to blame. I was reading an investment newsletter earlier tonight, and as much as I hate to "defend" Greenspan, the author did make a few salient points.

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In Defense of Alan Greenspan Alan Greenspan is routinely blamed in many circles for creating the housing bubble. It was his keeping rates too low, we are assured, that was responsible for the run-up in home prices. Now, he probably did keep rates too low for too long, but I am not certain that we can lay the blame at his feet. He had a lot of help. First, a point made by Peter Bernstein. Housing prices rose by almost 50% from 1998 to 2001, before Greenspan started on his rate-cutting binge. 50% in three years when the Fed funds rate was over 6% is not exactly encouragement from the Fed to buy homes. It seems people were ready to do it without low rates. So, a good part of the bubble was not due to lower rates. And home prices continued to rise rather sharply, even as the Fed began to raise rates in 2005-6. We built 3.5 million more homes over the last ten years than the trend growth suggested we needed. They were not all built during the period of low interest rates. While low rates did help, the bubble was aided and abetted by sloppy lending practices. It now looks like some two million people took out loans they are going to have difficulty repaying, and are likely headed for foreclosure. Rating agencies labeled these loans as AAA credits. Mortgage and investment bankers sold them to all manner of institutions. All these culprits took advantage of the low rates, but that was not the cause of the bubble. If proper lending practices had been followed, there would have been far fewer buyers and less building, less speculation, and so on. Greenspan, in hindsight, should have raised rates sooner, which I said at the time. And lower rates did make homes more affordable. No question about that. But to lay the blame for the housing bubble at his feet is not entirely fair. He had a lot of helpers who did the really heavy lifting.

There were plenty of cooks in the kitchen brewing the toxic broth.

As much as I love pinpointing shit on Bush as often as my little bleeding librul heart can muster, I realize this financial scenario doesn't fall squarely on his shoulders.

But I do tend to wonder with his "ownership society" speech and philosophical views a few years back, right when we began borrowing the shit out of everything for home purchases, that it might have played a wee speck of a role in this mess.

Any thoughts on that?

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Originally posted by MisterOpus1 As much as I love pinpointing shit on Bush as often as my little bleeding librul heart can muster, I realize this financial scenario doesn't fall squarely on his shoulders. But I do tend to wonder with his "ownership society" speech and philosophical views a few years back, right when we began borrowing the shit out of everything for home purchases, that it might have played a wee speck of a role in this mess. Any thoughts on that?

this ownership society philosophy has been ingrained in american society for as long as we have been a country. from the homestead act, to the mortgage interest deduction and the deduction for real property taxes, the government provides more benefits to purchasing than to leasing. the mortgage interest deduction itself is a huge reason many people purchase homes instead of renting. depending on your income and the size of your loan, you can save thousands of dollars a year by purchasing a home. This is a major factor in housing prices because sellers have been valuing their home prices on the amount of mortgage payments a potential purchaser could make instead of valuing the property based on the rental value of the property (which is the correct base for valuing real property). When you include the beneficial tax deductions you get from the mortgage interest and the real property tax deduction, the purchaser can then take out a greater loan because the borrower has more cash flow. Residential property values are severely inflated by these benefits. Now that people can't afford the mortgage payments (because of interest resets), they can't sell their houses for what they paid. If they based the price of their house on the amount they could have rented the house, then selling the house would be much easier (or they could just rent the house to cover the costs).

but to specifically answer your question, bush had nothing to do with this mess. even though i don't like bush, this has everything to do with uninformed consumers being mislead by predatory lenders who took on little liability for bad loans because they were selling the loans. These lenders were telling people they could afford loans they simply couldn't afford, and that was propping up property values. It's a combination of bad business practices and stupid consumers living beyond their means.

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Originally posted by MisterOpus1 But I do tend to wonder with his "ownership society" speech and philosophical views a few years back, right when we began borrowing the shit out of everything for home purchases, that it might have played a wee speck of a role in this mess. Any thoughts on that?

oh come on. the mess was created by people borrowing beyond their means, pure and simple. you cant blame a central bank or a government for stupid people.

and as for all the capitalists whining and bitching about government intervention (my heart bleeds) its just another example of government stepping up to the plate during perceived market failure. that's how our economies work. private industry cant come together to organise anything for the good of the country (funny how they can get together to collude or insider trade though) so its the role of the govt to try and rectify the problem(s). the pragmatists among us realise that a mixed economy and government intervention is the only way to help alleviate the very real problems with free markets.

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ultimately the economy is centrally planned

i suggest you do some research on the USSR before you start calling the US a planned economy.

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Originally posted by pkcRAISTLIN i suggest you do some research on the USSR before you start calling the US a planned economy.

Taking on the mission of "price stability", I think you need to plan a monetary policy, essntially central planning, but with a capitalist twist.

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Originally posted by Krypton Taking on the mission of "price stability", I think you need to plan a monetary policy, essntially central planning, but with a capitalist twist.

you can't have a policy without a central plan. there's no such thing as an unplanned policy, and you can't expect various private players to come up with a central policy. In fact, if that happened, it would be collusion, an anti free market concept.

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Originally posted by Krypton Taking on the mission of "price stability", I think you need to plan a monetary policy, essntially central planning, but with a capitalist twist.

yeah, but a "planned economy" is defined by government control of production, prices, distribution etc of goods and services. monetary policy isn't the same thing as a controlled or planned economy. though im happy to be shown otherwise

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Originally posted by jerZ07002 you can't have a policy without a central plan. there's no such thing as an unplanned policy.

Exactly, so if we go back to Mr. Opus's concern about Fed intervention, the central plan (monetary policy) is the reason for the boom, bust, recovery business cycles. As I said before, the Fed's aggressive intervention this year is damage control from the previous Greenspan management. Shakka posted an interest read on Greenspan not being the main reason for the housing bubble, but I still disagree. Yes, there was demand for subprime financial products, but, these did not become widely available until the interest rates were lowered to 1%..

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Originally posted by pkcRAISTLIN yeah, but a "planned economy" is defined by government control of production, prices, distribution etc of goods and services. monetary policy isn't the same thing as a controlled or planned economy. though im happy to be shown otherwise

This is a better definition...

"A planned economy is an economic system in which the state or government manages the economy." - Alec Nove (1987), "planned economy," The New Palgrave: A Dictionary of Economics, v. 3, pp. 879-80.


There are several types of planned economies, which do not necessarily have to revolve around government control of production. All central bank monetary policy is central planning, as I said, socialist or capitalist, doesn't matter.

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Originally posted by Krypton This is a better definition... "A planned economy is an economic system in which the state or government manages the economy." - Alec Nove (1987), "planned economy," The New Palgrave: A Dictionary of Economics, v. 3, pp. 879-80.

that's an awful definition. ambiguous and lacking substance! yay for wiki!

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Originally posted by Krypton There are several types of planned economies,

see, i didn't know that.

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Originally posted by Krypton which do not necessarily have to revolve around government control of production. All central bank monetary policy is central planning, as I said, socialist or capitalist, doesn't matter.

see, if we continue the wiki paragraph you quoted

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Its most extensive form is referred to as a command economy,[2] centrally planned economy, or command and control economy[3]) In such economies, the state or government controls all major sectors of the economy and formulates all decisions about their use and about the distribution of income,[4] The planners decide what should be produced and direct enterprises to produce those goods.[5] Planned economies are in contrast to unplanned economies, i.e. a market economy, where production, distribution, and pricing decisions are made by the private owners of the factors of production based upon their own and their customers' interests rather than upon furthering some overarching macroeconomic plan. Less extensive forms of planned economies include those that use indicative planning in which the state employs "influence, subsidies, grants, and taxes, but does not compel."[6] A planned economy may consist of state-owned enterprises, private enterprises directed by the state, or a combination of both. Though "planned economy" and "command economy" are often used as synonyms, some make the distinction that under a command economy, the means of production are publicly owned. That is, a planned economy is "an economic system in which the government controls and regulates production, distribution, prices, etc." [1] but a command economy, while also having this type of regulation, necessarily has substantial public ownership of industry. [2] Therefore, command economies are planned economies, but not necessarily the reverse (example: Nazi Germany's private ownership yet use of the Four Year Plan could construe them as a planned economy in the wide sense, but not necessarily a command economy, while the Soviet Union with public ownership would be a command economy). Important planned economies that existed in the past include the economy of the Soviet Union, which was for a time the world's second-largest economy, and China during its Great Leap Forward. Beginning in the 1980s and 1990s, many governments presiding over planned economies began deregulating (or as in the Soviet Union, the system collapsed) and moving toward market-based economies by allowing the private sector to make the pricing, production, and distribution decisions. Although most economies today are market economies or mixed economies (which are partially planned), planned economies exist in some countries such as Cuba, North Korea, and Myanmar.[7]

so, at best, you might have a "partially planned" economy argument.

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Originally posted by Krypton There are several types of planned economies, which do not necessarily have to revolve around government control of production. All central bank monetary policy is central planning, as I said, socialist or capitalist, doesn't matter.

i have to disagree with you on this....monetary policy is not economic planning equivalent to a planned economy. monetary policy is mostly the control of money supply. Controlling money supply may increase or decrease growth, but it doesn't allocate economic resources further than that. a planned economy, as Pkcraistlin quoted, means the government controls the uses and distribution of economic resources.

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Originally posted by Krypton Exactly, so if we go back to Mr. Opus's concern about Fed intervention, the central plan (monetary policy) is the reason for the boom, bust, recovery business cycles. As I said before, the Fed's aggressive intervention this year is damage control from the previous Greenspan management. Shakka posted an interest read on Greenspan not being the main reason for the housing bubble, but I still disagree. Yes, there was demand for subprime financial products, but, these did not become widely available until the interest rates were lowered to 1%..

i agree with you that greenspan deserves much of the blame for the current situation.

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Originally posted by pkcRAISTLIN that's an awful definition. ambiguous and lacking substance! yay for wiki! see, i didn't know that. see, if we continue the wiki paragraph you quoted so, at best, you might have a "partially planned" economy argument.

Wiki, yes, but there were plenty of references. I never quote wikipedia per se, I quote what was quoted from the original source.

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i have to disagree with you on this....monetary policy is not economic planning equivalent to a planned economy. monetary policy is mostly the control of money supply. Controlling money supply may increase or decrease growth, but it doesn't allocate economic resources further than that. a planned economy, as Pkcraistlin quoted, means the government controls the uses and distribution of economic resources.

So what do you call an industry/corporate bailout?

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Originally posted by Krypton Wiki, yes, but there were plenty of references. I never quote wikipedia per se, I quote what was quoted from the original source. So what do you call an industry/corporate bailout?

an allocation of government resources. You are mistaking government intervention to assist the economy with government control over the economy.

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Originally posted by jerZ07002 an allocation of government resources. You are mistaking government intervention to assist the economy with government control over the economy.

Government resources? I thought the Fed was private?

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