Bear Stearns debacle

by Russ Roberts on March 26, 2008

in Regulation

Here is my piece on the Bear Stearns debacle that aired on NPR’s All Things Considered. I argue that the government’s role creates a moral hazard problem and creates political pressure for a homeowner/lender bailout as well as raising the probability of increased regulation of investment banks. Arnold disagrees with the moral hazard point:

Bear Stearns was liquidated in a hurry. The market was in the process
of liquidating it and forcing it to sell its assets for less than what
I believe they were worth. I believe that both J.P. Morgan and the
taxpayers are going to make a profit at Bear Stearns’ expense. I don’t
see this as creating moral hazard.

My reasoning is that the government is playing with prices. The Fed and the Treasury originally wanted a price for Bear Stearns of $2 a share to make sure that Bear Stearns execs didn’t make "too much" from the transaction. Then the shareholders balked and JP Morgan agreed to pay $10 a share. But even that price would have been higher if the Fed hadn’t guaranteed $29 billion of the $30 billion in Bear Stearns assets that are in subprime mortgages. So Bear Stearns isn’t paying the full price for its failure.

I assume Arnold is arguing that Bear Stearns is "really" worth more than that but I don’t know how you can know that if no one else seems eager to buy them. One of the stranger parts of this episode is why JP Morgan was given the access to what now appears to have been a sweetheart deal of $2. Would no one else wanted to bid at that rate? Especially now that JP Morgan is still willing to go through with the deal at five times the original price.

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muirgeo March 26, 2008 at 4:12 pm

One of the most amazing things of all this to me is how some of the world's best financial minds at a big firm like Bear Stearns could not see this coming. I can point to articles 5 years old or more from lowly fiancial reporters that foresaw this. So how could they accumulate all these overvalued assets of just ridiculous proportions as I understand it and think everything was going to some how work out OK? Is this blind greed taking over all sense of rationality or do some small few actually profit from this by getting out while the getting is good?

It seems to me that there is an argument to be made that the general group of CEO's running our banking and financial institutions are guilty of the one of the greatest degrees of professional incompetence ever displayed in modern history.

If some one is an advocate of liberalized markets I can only assume you would be furious with our financial sectors leadership for calling into question the efficiency of liberal markets.

Marcus March 26, 2008 at 4:21 pm

Could you guys please explain why this 'bailout' is always presented in the media as being funded on the backs of taxpayers? How?

The Fed doesn't spend taxpayer money, that's Congress. If Congress legislated a bailout then that would be a bailout on the backs of taxpayers.

The Fed, as I understand it, is trading treasuries for mortgage backed bonds. Presumably these are treasuries they purchased in their open market operations. It seems to me all that could do is drive up interest rates on treasuries which, at this particular time, doesn't seem to be much of an issue as treasuries yields are at all time lows.

muirgeo March 26, 2008 at 4:35 pm

Marcus,

If the fed gave every home owner who ill financed with some subprime loan a re-finance package with a 3% fixed rate loan would THAT be a bailout? They'd have the house as collateral right?

You said mortgage backed bonds…You mean pieces of paper that say a $250,000 dollar house is worth $ 750,000?

You think you are uneffected by the dollars devaluation or the real rate of inflation resulting from the Feds printing money like candy?

Marcus March 26, 2008 at 4:40 pm

You think you are uneffected by the dollars devaluation or the real rate of inflation resulting from the Feds printing money like candy?

Of course not, but devaluing the dollar affects holders of dollars, not specifically U.S. taxpayers.

U.S. taxpayers may be a subset of 'holders of dollars' but 'holders of dollars' is a much larger group than U.S. taxpayers. For example, China holds a trillion dollars in cash, as I understand it.

REW March 26, 2008 at 4:42 pm

The Fed is the key to all of this.
This is entirely their mess. In the face of legitimate growth and stable prices, the Fed began mismanaging the money supply over a fear of inflation. They killed growth, killed housing, and killed all appetite for risk. They have yet to get us back to even.

They so killed risk-taking that no one would step forward and purchase these various debt products even at a fraction of their stated value. Every one feared the Fed would wreak more havoc once they owned the bad assets.

Only when the Fed stepped up and said, this was our fault, so we'll make good on Bear's bad assets and we'll open our window to others with bad assets, did a buyer emerge.

Goverment intereference in the markets is never good, but if government creates the mess, market participants always look to the government to fix it.

Methinks March 26, 2008 at 4:48 pm

It's hard to agree with Arnold that Bear's assets would have been sold below market value. Nobody is trading them at all right now and institutions are increasingly less willing to accept them as collateral for repos. Without trading, there is no reliable price for the debt. BTW, does anybody know if that $30 Billion in MBS's and CDO's the Fed is essentially taking on its books, the notional or the best guess at the Market value? I'll bet it's the not MV because there is no MV.

There's already a massive bailout of lenders and borrowers underway.

The cap on the size of mortgages that Fanny can buy has already been lifted in order to reduce the mortgage rate for a larger number of mortgages. The Fed is doing its bit by hacking away at the Fed Funds rate in an effort to drive mortgage rates down and making borrowing cheaper for banks by lowering the discount rate to maintain the fiction of their solvency. Meanwhile, Paulson (otherwise known as "the other one"), is busy publicly begging borrowers to not walk away from their mortgages and encouraging them to refinance arms with fixed mortgages. It's pretty clear that the Fed and Treasury are giving the same bad borrowers a window in which they can refinance to fixed mortgages while the Fed inflates the housing market by stoking inflation in general. The only problem with stoking inflation, of course, is that if you don't stoke it "just right", expectations of future inflation change and that second derivative will kick you in the head like an angry mule.

scott clark March 26, 2008 at 4:59 pm

Marcus,

This is on the backs of the tax payer in the following way.

The Fed has heretofore operated at a profit, due to its special relation with the Treasury and its unique status. That profit is annually returned to the US Treasury. If, due to these new deals, swaping less risky assets for more risky assets at unwarrented prices, the Fed begins to make losses, they will not be able to return anything to the Treasury, they may take money directly from the Treasury, and the US Gov will tax and borrower more than it otherwise would. So it is a little round-about, but it all comes back to the taxpayer in the end.

Methinks March 26, 2008 at 5:00 pm

Marcus,

The Fed has been lending to member banks and accepting CDOs as collateral. The fear is that the loans are based on the notional value of the collateral and that the borrowing bank will become insolvent and not be able to repay the loan. If this happens enough times and the Fed is stuck with enough of this near-worthless paper, the Fed itself may need a bail-out. Suddenly, we'll find ourselves watching congress using tax dollars to put together a bailout package and maybe even taking over the Fed.

Methinks March 26, 2008 at 5:10 pm

REW, this is largely the market's fault, not the Fed's. Credit spreads were at historically tight levels at the beginning of July 2007. That's not the Fed's fault.

muirgeo March 26, 2008 at 5:12 pm

The rescue of Bear Stearns marks liberalisation’s limit, by Martin Wolf, Commentary, Financial Times: Remember Friday March 14 2008: it was the day the dream of global free-market capitalism died.

Great discussion at Economist's View.

Methinks March 26, 2008 at 5:18 pm

Well done, Muirgeo. You finally found the appropriate thread for that article.

Mesa Econoguy March 26, 2008 at 6:19 pm

Professor Roberts has it right. A few quick thoughts:

The price of $2 was arrived at taking into account a number of factors: 1) it’s not 1, which is close to 0, 2) Bear Stearns had no say in this whatsoever, 3) it was small, but not 0 or 1.

It apparently did not take into account various exogenous (and largely nonmarket) forces such as threat of shareholder class action lawsuit, judging from the $10 number which has emerged since.

Each member bank of the Federal Reserve is required to post real-time assets and liabilities for the Fed, and Bear presumably would have had to as well, being escorted to the discount window by JP Morgan.

You can back into the worst case scenario number (underlying the $2 price) by examining total exposure on Bear Stearns’ balance sheet, the number Morgan, Bear, and the Fed were presumably working from.

There are people not involved in the negotiations who know that number. I have not seen it, but would very much like to.

FreedomLover March 26, 2008 at 6:49 pm

Marcus,

If the fed gave every home owner who ill financed with some subprime loan a re-finance package with a 3% fixed rate loan would THAT be a bailout? They'd have the house as collateral right?

You said mortgage backed bonds…You mean pieces of paper that say a $250,000 dollar house is worth $ 750,000?

You think you are uneffected by the dollars devaluation or the real rate of inflation resulting from the Feds printing money like candy?

Posted by: muirgeo | Mar 26, 2008 4:35:54 PM

Ok I'll bite ducky. If they still don't pay the refi, will you kick them out into street? Or another big government bailout?

cef March 26, 2008 at 7:08 pm

Russ –

I think if you look at it from the perspective of signaling. The Fed was concerned that had the deal not gone through on that Sunday before the Japanese Markets opened, we might have had a worldwide panic. By doing the deal, they avoided the panic. $2 was JP Morgan's price for going along with the deal that quickly.

Everybody expected the terms to change after the fact — heck, the merger agreement itself has blanks in it! $2 was never a solid number. The important thing was that markets understood that the Fed was ready to interpose itself if necessary.

Dave March 26, 2008 at 7:28 pm

Why no mention of Bear's bond holders? Bear's leverage ratio was 33:1. Seems like they were the real winners of the bailout. Shareholders lost a lot of their value, but these loose lenders will retain most of theirs. Despite being first in line for Bear's assets, they were worried that that the deal wouldn't go through.

andy March 26, 2008 at 8:25 pm

Muriego, there is no doubt these institutions are driven by incompetent people. However, there is also no doubt that the government is driven by even more incompetent people – remeber Bernanke's "the subprime crises is contained"? Can you explain how would a financial sector containing both competent and incompetent people benefit from being regulated by totally incompetent people? I don't get the logic.

BTW: you simply cannot blame free market for this.
1) the money is centrally planned (even Greenspan admitted it)
2) there is huge moral hazard problem. The Fed just DEMONSTRATED it. Thinking people could foresee these credit problems, however thinking people could perfectly foresee government's reaction too.

In the situation with central planning of interest rates AND state-created moral hazard these problems PREDICTABLY occur. Free market makes people to use every effective way to get rich in the prevailing environment. If the environment contains incentives of moral hazard, you can be sure that sooner or later people find ways to exploit it. Is central planning your answer?

Except that such regulation would kill not only bad behaviour, but good one as well.

Michael Fernwood March 26, 2008 at 9:44 pm

Nearly everyone (except The Economist)confuses the party bailed out in this instance; it was JPMorgan and every other counter-party of Bear Stearns.

No one on Wall Street thinks they're the dumbest guy in the room. It's everyone else that is stupid. You can make a buck off stupid. The only worry used to be knowing when to stop. Now, you don't even having the timing problem.

Murraymises March 26, 2008 at 10:00 pm

Someone might have already mentioned this but the deal was pushed by the New York Fed. Guess who sits on its board? The CEO of JPMorgan. That would seem to explain how it got access to such a sweet deal.

Methinks March 26, 2008 at 10:45 pm

Jim Rogers is not pleased by neither I-banks' behaviour not by the Fed's. Although, he exaggerates about the 29-year old bankers with Maseratis and seven figure bonuses, he makes some good points.

Methinks March 26, 2008 at 10:47 pm

as always, sorry for the typos resulting in grammatical errors.

vidyohs March 27, 2008 at 7:22 am

scott clark,

Do you have any hard evidence for this statement?

"The Fed has heretofore operated at a profit, due to its special relation with the Treasury and its unique status. That profit is annually returned to the US Treasury.
Posted by: scott clark | Mar 26, 2008 4:59:49 PM"

The FED is privately owned and the owners are not all USA based, not at all.

The Grace report says that every single penny collected as income taxes (after paying IRS operating expenses) goes directly to pay the interest on the loans from the FED.

How does those two facts jibe with your statement?

Marcus March 27, 2008 at 7:33 am

Methinks wrote, "REW, this is largely the market's fault, not the Fed's. Credit spreads were at historically tight levels at the beginning of July 2007. That's not the Fed's fault."

Would you elaborate on that?

What I am seeing in the media today, including the link by muirgeo, is a lot of focus on how the government is stepping in to solve the problem but no analysis at all of how those same institutions promoted the problem to begin with.

Today David Wessel at the WSJ had this to say about policy makers, I kid you not, "It's messy, uncomfortable and undoubtedly flawed in many details. Like firefighters rushing to a five-alarm fire, policy makers are making mistakes that will be apparent only in retrospect."

So, as it turns out, policy makers are just as blind as anyone else. Only, they get a break.

Paul Krugman does the same thing. In a recent article he waxed romantically on how regulations could have prevented the Great Depression. Ignoring, entirely, the fact he is speaking with 20/20 hindsight. Something the regulators at the time would not have had.

The fact is, policy makers celebrated the housing boom until the bubble burst. Bush instituted the 2003 American Dream Down Payment Initiative which relaxed lending standards yet now we don't hear anything about that.

I'm not suggesting the market played no role in this, I just find it delusional that people armed with 20/20 hindsight blame the market and think policy makers can some how fly blind into the future more assuredly than anyone else.

If there is any truth to it at all its not because policy makers are better at it but simply that their policies will stifle innovation.

colson March 27, 2008 at 11:19 am

I tend to agree with Marcus. While businesses are very human-like organizational structures, they take on the trait of responding to incentives laid out before it. If they find an area they can exploit (in the neutral sense of the word), they will do so.

There was a significant shift in the late 90's to make home buying easier for those who would not otherwise qualify for a loan of any other sort. Sure, there were a host of loans and financing schemes that arose to deliver on the government's promise. But the banks were not willing to risk everything in all cases in the beginning.

Thus, it permitted the loan brokering businesses to package and re-package loans and sell them up the food chain while obscuring a lot of the underlying risk. I would wager a bet that while many of the larger banks knew what they were holding, they didn't know the overall exposure they were holding in entirety.

If I were a bank owner, I would walk away with a very valuable lesson – is it better to offer a mortgage at a fixed rate of return or run the risk of interest rate increases and an increase in foreclosures? I think there would be a good series of games derived from game theory on this.

Methinks March 27, 2008 at 11:48 am

Would you elaborate on that?

Sure, Marcus.

First of all, we are in complete agreement about government intervention.

I'll explain what I meant: The interest rate at which lenders lend is determined by the risk free rate (for which treasuries is usually the proxy) plus a credit spread. Obviously, the riskier the borrower, the larger the credit spread.

Over the last ten years, credit spreads have been tightening, which amounts to lenders accepting a lower return for a given level of risk. While there may have been some government interference with subprime mortgages (some have argued that red-lining laws forced lenders to accept a lower return for high risk borrowers), there is no question that credit spreads tightened across the board as lenders competed with each other to make loans.

While credit spreads tightened, leverage increased. Leverage increases risk. For example: if a portfolio is levered 10 to 1, then a 5% decrease in the price of the assets held in the portfolio translates into a 50% reduction in the value of the portfolio. In addition to increased leverage and lower returns for a given level of risk, portfolio risk management became quit lax – at least, in my opinion. BTW, lower credit spreads, more leverage and laxer risk management are all related.

The Wall Street Journal's editorial page loves to blame Greenspan for lowering the Fed Funds rate to around 1% after 9/11 and, certainly, that did make money very cheap. However, the FED is not responsible for the decision to increase leverage, tighten the credit spread or reduce risk controls.

Government is also not responsible for borrowers making poor decisions, lying and outright fraud.

As you point out, nobody was complaining and seeking to regulate anything when everyone was making money in the housing market. Now that there are losses, participants are screaming that they should not be the only ones to bear them. We must share the losses with those who did not participate in these imprudent decisions. A perfect example of privatized profits and socialized losses.

The risk was taken by participants in the housing market – both borrowers and lenders – and the losses are rightfully borne by those same participants. The argument that government must step in because this "crisis" will hurt everyone is, in the words of Penn & Teller, Bullshit.

Methinks March 27, 2008 at 12:18 pm

Colson,

While it's true that government lowered "standards", that only means that it removed some regulation.

Market participants were not forced to lower their standards.

The lending institutions, not the loan brokers, repackeged the loans. ABS (asset backed securities) have been around for decades. They are not a problem. The question is: why would a buyer of a CDO not insist on knowing the assets underlying it? And if he doesn't know the underlying assets, then what gives him the comfort to leverage the portfolio of CDOs 10 to 1? Most importantly, why should anyone but the participants involved in this deal bear the risk?

Thanks to the government's socialist policies in response to this "crisis" (it's not a crisis but the government will make it one), bankers are walking away with quite a different message: We can do what we like, taxpayers will ultimately bear the risk and we will receive any gains. That's a pretty powerful incentive for a repeat of very same behaviours that got us into this pickle in the first place.

Incidentally,

If I were a bank owner, I would walk away with a very valuable lesson – is it better to offer a mortgage at a fixed rate of return or run the risk of interest rate increases and an increase in foreclosures? Neither is better and it's not a game theory question. It's a practical risk question answered by banks every day. There are many derivative products available to hedge interest rate risk. Banks generally borrow at the short end of the curve, which by definition, means they borrow floating. They tend to lend at a fixed rate at the long end of the curve. So, not only do they have a fixed/floating mis-match but they also have a duration mis-match. To capture the spread (profit) on that loan while reducing interest rate and curve risk, banks enter into swap and forward agreements and may also use use caps, floors and swaptions to hedge these two risks.

muirgeo March 27, 2008 at 12:22 pm

Marcus,

There is NO 20/20 hindsight. Here is an article from 3 years ago that sounds the alarm bells
loud and clear. Back then when I cited it as a reference people just blew me/it off.

I still want to know how the most intelligent investors and CEO's could have been so blind and utterly incompetent. (serious replies only)

As far as the Fed and regulatory agencies it seems they are often the same group of beer drinking buddies as those they should be regulating. They caved policy to the desires of Wall Street and the Bankers to be able to take more and more risk rather then earning money the boring old fashioned way.

"A Lion like greed makes the show but it needs a tamer or things become not so fun."

That's a quote from me…I just made it up. Others can use it with permission. TY

Methinks March 27, 2008 at 1:01 pm

I still want to know how the most intelligent investors and CEO's could have been so blind and utterly incompetent.

Hey, what's with the "intelligent people" all of the sudden? Weren't you calling these same people "Wall Street paper pushers" on every thread before this one? Which is it, muirdiot?

Here's the question keeping me up at night:

How is it that you couldn't get into vet school but managed to be accepted to medical school and are now licensed to practice on children? That seems like kind of a screwed up system to me. Why would we let people not smart enough to worm dogs graduate med school?

andy March 27, 2008 at 4:53 pm

Muriego, I think we should blame Fed for doing this. What is the reason for lowering interest rate? To facilitate credit. If the Banks found that the options they have are too risky, the Fed would lower rates even lower.
If the banks didn't facilitate credit, we would have to say that monetary policy was ineffective. The banks, unfortunately, did exactly what Fed wanted.

I don't get it – you say that tighter regulation would have prevented the problem when the banks did exactly what the regulators wanted?

Marcus March 27, 2008 at 5:46 pm

"Here is an article from 3 years ago that sounds the alarm bells loud and clear. Back then when I cited it as a reference people just blew me/it off."

That article doesn't demonstrate at all that regulators weren't cheering on the bubble.

Here's the thing muirgeo, your whole policitcal philosophy depends upon having the right person regulating the market (plus other problems I'll leave for later).

But if people can't regulate themselves why do you think they can elect somebody to regulate them for them?

Mesa Econoguy March 27, 2008 at 6:04 pm

The lessons of Enron

" As we begin to look for ways to better monitor the financial system, it's important to remember that calls for more regulation after the Long-Term Capital Management collapse in 1998 didn't prevent Enron. And calls for more rules after Enron didn't stop the financial services sector from imploding in a cloud of greed in the past six months.

And while any new restrictions might seem like a good idea in eye of the storm right now, they certainly won't prevent the next crisis — whatever and whenever that is — from overtaking us again some years from now, when we least expect it."

Amen.

Sam Grove March 27, 2008 at 6:57 pm

Markets don't fail, they blowback.

muirgeo March 27, 2008 at 7:57 pm

Amen.

Posted by: Mesa Econoguy

Mesa,

Were there any similiar big failures or massive scandals from 1940 to 1965 like we've seen since Reagan.

Maybe I'm wrong but I get the impression that good oversight during that time keep failures and corruption to a minimum increasing confidence in the markets and spurring stable strong economic growth.

muirgeo March 27, 2008 at 8:02 pm

But if people can't regulate themselves why do you think they can elect somebody to regulate them for them?

Posted by: Marcus

Couldn't I use the same felonious argument to say why have police? Sure police can be corrupt too but better to have them then not.

grunyen March 27, 2008 at 8:08 pm

I'm just an undergrad marketing student looking forward to a master's in economics next, so I'm no expert…

But I am writing an essay currently on pain in the market place. There were a long chain of actors leading up to this mess, from Congress, the media, the lenders, the borrowers, the appraisers, etc…

Any one of those individual groups could bear responsibility, or they all could. However, pain serves its purpose in the marketplace.

If those who acted poorly are spared the burden of the pain they created for themselves, they will continue such behavior in the future. In fact, there will be an increase in this behavior by others.

US airlines were vulnerable because they had the "safety" of knowing the government would shield them from the pain of liability from a terrorist attack. And sure enough, they were bailed out. Had our government not had a decades long record of acting as a hammock, liability minded airlines would have prevented 9/11 from ever happening.

That event was conceivably one of the worst pains a market could face. But we did not learn its lesson because the safety net stepped in yet again.

Sam Grove March 27, 2008 at 8:40 pm

Had our government not had a decades long record of acting as a hammock, liability minded airlines would have prevented 9/11 from ever happening.

Not to mention the official policy of giving in to hijacker demands.

Sam Grove March 27, 2008 at 9:09 pm

Couldn't I use the same felonious argument to say why have police? Sure police can be corrupt too but better to have them then not.

Sure you wanna go there?

"Employing FBI "Return A Record Card" data, this study examines the impact of municipal police strikes on reported rates of burglary, robbery, larceny, and auto theft in 11 U.S. cities. Relationships reflecting the view that police presence is essential for crime prevention and social order are examined for variation duration of police strike, city size, and offense category. Overall, analysis yields very limited support for the police presence argument, suggesting that strikes have neither a significant nor a systematic impact on rates of reported crime. Implications of findings for the formulation of police policy are discussed."
link

Mesa Econoguy March 27, 2008 at 10:20 pm

Were there any similiar big failures or massive scandals from 1940 to 1965 like we've seen since Reagan.[sic.]
Posted by: muirgeo

The 1930s were THE failure.

Maybe you’re wrong?

Dumbass:

The Great Depression.

How stupid are you? Wait, don’t answer that.

Doctor, my ass…. Your patients must be dead by now.

Mesa Econoguy March 27, 2008 at 11:51 pm

As always, Pink Floyd lyrics provide the answer:
Me:
Money, it’s a hit –
Don’t give me that do-goodey-good bullshit
Here.
Muirgeo:
Encumbered forever, by desire & ambition,
There’s a hunger still unsatisfied
Our weary eyes still stray to the horizon,
Though down this road we’ve been so many times…..
Here.

andy March 28, 2008 at 5:21 am

Were there any similiar big failures or massive scandals from 1940 to 1965 like we've seen since Reagan.

In the beginning of 1950's the system was fully cleansed of bad companies, it takes some time for bad decisions to show.

Maybe I'm wrong but I get the impression that good oversight during that time keep failures and corruption to a minimum increasing confidence in the markets and spurring stable strong economic growth.

Look, this is like saying that if you jump from a skyscraper, there is no problem in the 100's stock. Nor in the 50's. Inflation causes these problems to be hidden – but these problems are build up for a long time. There was no incompetence in 2006. The incompetence was all done in 2007. No, there was incompetent lending in whole 2002-'s period, but low interest rates have hidden it. And the same is valid for the 1950's, money supply expansion simply prevented these failures to materialize. It has absolutely nothing with 'good oversight', because you just cannot guarantee that the oversight is going to be good.

You may guarantee that the oversight will kill the finance industry. Yes, if you don't produce, there are no failures. But if the enterpreneur cannot reliably predict that his businessplan is feasible, how the regulator can?

Methinks March 28, 2008 at 10:17 am

More regulation will mean that large sections of the population simply won't have access to credit. This group will include the young, the lower income brackets and anyone without an exceptionally high FICO score.

We've already tried that.

Methinks March 28, 2008 at 10:20 am

Couldn't I use the same felonious argument to say why have police? Sure police can be corrupt too but better to have them then not. – Muirdiot

Before we answer any more of your stupid questions about the financial industry's "wizardry", I want to see you answer my question:

How is it that you couldn't get into vet school but managed to be accepted to medical school and are now licensed to practice on children? That seems like kind of a screwed up system to me. Why would we let people not smart enough to worm dogs graduate med school?

Go on. Let's see an explanation, "doctor".

Sam Grove March 28, 2008 at 10:42 am

Muigeo assumes that the failure of Bear Stearns is an example of market failure.
To us free marketers, this failure is market discipline. A free market is not a guarantee of ideal human behavior or success. A free market must allow people to suffer the consequences of bad or erroneous decisions.

This is a lesson for all people.

A government bailout is subsidized relief for bad decisions and a violation of market functioning.

muirgeo March 28, 2008 at 1:42 pm

A free market must allow people to suffer the consequences of bad or erroneous decisions.

Posted by: Sam Grove

So in the free market who will be the first to try the latest drug claimed to cure insomnia when the last one another comopany came up with took 20 deaths to find out it's wasn't such a good idea.

That's how it would work with out an FDA (yes we can do better) and I suspect such inovation would suffer.

Would we have such clean air without catalytic converters?

Sam, I think you live in a world of non-market innovation that you take for granted based on assumptions that do not fit with historical facts.

Sam Grove March 28, 2008 at 2:16 pm

So in the free market who will be the first to try the latest drug claimed to cure insomnia when the last one another comopany came up with took 20 deaths to find out it's wasn't such a good idea.

Are you trying to score a point or make one?

Have you any idea how many people die each year because they are unable to have access to drugs, in use in other places, because they have not received FDA approval?

You don't think pharmaceutical companies should bear risks for their decisions?

Why do they bother? They take the risk for the promise of profits. If they aren't sufficiently cautious about the promises they make for their product, then they suffer the cost. This makes them cautious.

There is no evidence of any NET benefit from having an FDA to replace liability.

When people die because of FDA decisions, no one at the FDA has to bear the cost. In fact, when government policy fails it tends to justify more government and greater subsidy. "Oh, it wasn't done right" or, "They didn't have enough funding.", etc.

You make a lot of claims about how things would work in a free market, but these are based on what I consider to be flawed premises. I don't even know how things would work out, specifically, in a free market.

What I do understand is that attempting to 'fix' things or make things work via political agency often produces perverse results, wastes resources, and produces a government so powerful that it enables some people, like the current administration, to use our resources are used in ways to which I have great moral objection.

There is no utopia. I make no claim for utopia. I don't even know what utopia would or should look like. I just operate from my comprehension of human behavior and motivations.

I understand that people are self interested. That's why I do not trust people with political power. Especially those with good intentions. Most especially, those who desire political power.

The idea that government and bureaucracies selflessly serve the common good is entirely lacking in either conceptual construction or historical evidence.

Sam Grove March 28, 2008 at 2:52 pm

It has been stated that as many as 100,000 people die each year due to medication errors.

That doesn't stop people from taking medications.

The FDA denies experimental use of drugs to attempt to save the lives of those with a medical death sentence and who are willing to take the chance.

muirgeo March 28, 2008 at 4:24 pm

"There is no evidence of any NET benefit from having an FDA to replace liability."
Sam

There's not? Which country has the most innovative approach and successful production of new pharmaceuticals?

Aaaand….Which one has an FDA? And an NIH?

muirgeo March 28, 2008 at 4:26 pm

"I don't even know how things would work out, specifically, in a free market."
Sam

That's my point. With no real world examples it seems a faith based belief to me.

Methinks March 28, 2008 at 4:45 pm

Which country has the most innovative approach and successful production of new pharmaceuticals?

Prove that this results from the existence of the FDA and not from the lack of price controls that exist in Europe.

Sam Grove March 28, 2008 at 5:57 pm

There's not? Which country has the most innovative approach and successful production of new pharmaceuticals?

Correlation and causation are two distinct things.

Usually, you call for government to protect us from corporate power, now you seem to be calling for government to protect corporations from liability.

Tell us how the FDA was responsible for the successful development of aspirin.

Not to say that aspirin is entirely benign, but if it were to be brought to the market today, a pharm company would have to spend hundreds of millions of dollars to gain FDA approval, a cost which necessarily must be passed on to consumers.

Tell us why the 'morning after' pill, or even birth control isn't available over the counter.

Methinks March 28, 2008 at 6:23 pm

Tell us how the FDA was responsible for the successful development of aspirin.

Not a good example. Aspirin preceded the FDA.

Let's see how if Muirdiot will even attempt to provide proof that the existence of the FDA results in more pharmaceutical innovation. And let's see if this proof is anything more than the usual convoluted bullshit. Somehow, I doubt it.

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