In yesterday's Washington Post, Peter Wallison rightly
challenges the Obama administration's conclusion that ordinary
Americans lack the capacity to understand complex financial instruments
- an incapacity so overpowering that even full disclosure by sellers of
these instruments is insufficient to ensure that the typical person can
be trusted to choose whether or not to invest in such instruments.
But let's
accept, for argument's sake, the administration's judgment that
ordinary Americans can't adequately assess complexity. Doesn't it then
follow that Americans' election of Mr. Obama to high office deserves no
credit? After all, isn't the task of assessing the merit of one
person's ideas on economics, foreign affairs, ethics, law, and other
difficult topics extraordinarily complex? Given that Joe Six-Pack and
Jane Soap-Opera cannot be trusted with the relatively straightforward
task of sensibly investing their own money, how can they be trusted to
meet the far more complex challenge of choosing powerful national
leaders?
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Or anything for that matter.
Are people qualified to pick their doctor?
After all, half of all doctors graduated at the bottom half of their class.
Duke: Good, William. Now, some of our clients are speculating that the price of gold will rise in the future. We have other clients who are speculating that the price of gold is going to fall. They've placed their orders with us and we buy or sell their gold for them.
Duke: Tell him the good part.
Duke: The good part is that no matter whether our clients make money, or lose money, Duke & Duke get the commissions.
Well, what do you think, Valentine?
Valentine: Sounds to me like you guys are a couple of bookies.
Nah. We common people couldn't possibly understand it.
The "Wisdom of Crowds" argument is that as long as at least some voters have a tiny bit of signal to go with the rest of the random noise, the noise cancels out leaving a reasonable decision in aggregate.
The voters might also invest well in aggregate (and probably even do), but enough might do poorly that it could be argued that somebody ought to protect them from themselves.
So it's a single aggregate decision versus individual poor decisions.
Your buddy Caplan claims that the "noise" isn't random and that aggregate decision is faulty. I have two problems with his analysis. First, he assumes that people want to maximize economic well-being and libertarian style freedom. My observations tell me that, for the majority, neither of those is even remotely true. Second, there doesn't seem to be a path to a better alternative. The looters won't go away no matter how much you wish they would.
"The looters won't go away no matter how much you wish they would."
Not if you keep cooperating with them.
It's funny that both areas mentioned for making informed descisions – politics, and investing – are the two areas that go out of their way to be opaque to close scrutiny.
"It's funny that both areas mentioned for making informed decisions – politics, and investing – are the two areas that go out of their way to be opaque to close scrutiny."
It's not really funny.
Most investment fraud uses the church to avoid close scrutiny –
Most political fraud uses the church to avoid close scrutiny –
I think that our desire to believe is our greatest threat.
I've always loved economics because of what it taught me not to believe in … and that was "man" …
"It's funny that both areas mentioned for making informed descisions – politics, and investing – are the two areas that go out of their way to be opaque to close scrutiny."
Politics and investing = power and money.
Sheetwise:
"I've always loved economics because of what it taught me not to believe in … and that was "man" …"
I couldn't agree more.
"I couldn't agree more."
But I do believe in "men"
Ack ack,
You wrote,
"After all, half of all doctors graduated at the bottom half of their class."
How the hell do you know that?
"How the hell do you know that?"
Because the other half told them?
There is a quiz at the end — isn't there?
I think the OP is advocating for "enlightened monarchy". Honestly I think that would be better then mobocracy.
Don draws a false comparison between the average persons inability to understanding complex financial products (those that are specifically designed NOT to be understood by almost all other people so as to take money from their homes equity and their 401k's) with that of the averages persons ability to judge the character and beliefs of a potential political candidate. There's simply no comparison.
What is really interesting to me is that Don, in defending the actions of companies that create complex financial derivatives specifically to defraud massive amounts of money from the productive economy is defending a company that runs the Fed and owns the government to such a degree that Don will be paying taxes and taxes and hidden taxes as will his children to bail out these companies for years to come. So what are you defending Don? In defending fraud are you defending liberty? In defending opaque products and monopolies are you defending competition and market forces?
I pride myself in having put forward the idea of this stated regulation of financial products long ago on this blog.
Quite simply like requiring makers of food to document the ingredients of their product ( so peanut anaphylactoids don't die a preventable dearth) a financial product with the label "COMPLEX FINANCIAL PRODUCT" will never be bought by me or the general public again. Then they will go the way of the DoDo as the Wall Street scum-bags who push them will have no one to defraud except their fellow scum-bags. Then they can go and get real jobs and start contributing to the productive economy rather then parasitizing it.
OK now specifically on complex financial products I am glad the topic came up because I recently read/ heard testimony from Christopher Whalen (Managing Director Institutional Risk Analytics) at United States Senate Committee on Banking on June 22, 2009.
I implore anyone interested in the details of complex financial products to read his testimony.
Of note Peter Wallison will be giving his testimony to the same committee today. Might be interesting to compare their positions.
The big point is that Mr. Whalen puts the lie to the defenders of these products as we have seen some here do in a most nasty way deriding and belittling those who might question the utility of these products and of the people who trade them… profit from them.
Some key points;
"Perhaps the most important issue for the Committee to understand is that the structure of the OTC derivatives market today is a function of the flaws in the business models of the
largest dealer banks, including JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS). These flaws are structural, have been many decades in the making, and have been concealed from the Congress by the Fed and
other financial regulators."
The fact that today OTC derivatives trading is the leading source of profits and also risk for many large dealer banks should tell the Congress all that it needs to know about the areas of the markets requiring immediate reform. Many cash and other capital markets operations in these banks are marginal in terms of return on invested capital, suggesting that banks beyond a certain size are not only too risky to manage – but are net destroyers of value for shareholders and society even while pretending to be profitable.
" Most CDS contracts and complex structured financial instruments fall into this category of deliberately fraudulent instruments for which no cash basis exists."
"While an argument can be made that currency, interest rate and energy swaps are functionally interchangeable with existing forward instruments, the credit derivative market raises a troubling question about whether the activity creates value or helps manage risk on a systemic basis. It is my view and that of many other observers that the CDS market is a type of tax or lottery that actually creates net risk and is thus a drain on the resources of the economic system. Simply stated, CDS and CDO markets currently are parasitic."
Read the whole thing it's very good. And in that light consider the topic and premise of this post.
"Peter Wallison rightly challenges the Obama administration's conclusion that ordinary Americans lack the capacity to understand complex financial instruments"
He should; because this administration lacks the capacity to understand much of anything.
After all wasn't it this ship of fools, with mouthpiece slow Joe Biden at the bow, that said the current administration "misread the economy"?
I can think of several reasons why someone would exert the effort to vote for BHO. None of them suggest a particularly strong intellect.
dg lesvic
You didn't really!
"After all, half of all doctors graduated at the bottom half of their class."
How the hell do you know that?
Posted by: dg lesvic | Jul 14, 2009 3:19:07 AM"
What do you call the guy who graduates dead last in his medical class?
What do you call the guy who graduates dead last from a military academy?
Old jokes, my friend. But thanks, I needed the laugh today.
"After all, half of all doctors graduated at the bottom half of their class."
How the hell do you know that?
I can't believe you actually asked that question.
The elected officials and appointed bureaucrats in D.C. do what they do because "we" let them. That "we" are mostly ignorant about politics and intend to remain that way does not excuse us.
So muirduck,
You want the fu.kups that created the mess to write new regulations to fix the mess.
It is good to know that you are advancing your level of stupidity.
Criminal law is adequate to punish people (except for congress) who commit fraud or theft.
That clever people can bribe their way around, can find openings in regulations already on the book, is just solid proof of the incompetence of the boobs that are sitting in both houses of congress; and, you muirduck, put faith that those boobs can fix the mess, eliminate the openings, and find the honor to refuse the bribes?
It is simpletons like you that hang like dead weights around the necks of the productive.
This is one of the root problems I have with progressivism. While on the one hand they claim to care about people very much, if you listen to what they actually say you'll find that they don't think very highly of people at all. People are irrational, people are stupid, what have you.
Of course, they never include themselves in that evaluation. They're not irrational, just everybody else is.
A couple of comments for Mr. Progressive. 1) the people you long to have in power think that YOU, yes YOU Mr. Progressive, are stupid and irrational. 2) why on Earth would I want somebody in power over me who thinks so poorly of me?
So what is the solution? A libertarian dictatorship where a strong-man ensures that the people don't act collectively to improve society?
I'm not saying this is what you're implying at all… I'm just trying to conceive what a "liberty"-consistent alternative would be (and yes "liberty" is intentionally in quotes).
Democracy is an awful way to run a country, but it's the best system we have.
vidyohs -
RE: "You want the fu.kups that created the mess to write new regulations to fix the mess."
The glaring blindspot in your argument is that you instinctively assume this sentence to be true, and don't consider the possibility that there are natural instabilities in the market, or that the crisis is do to something that is at least partially exogenous, such as massive global imbalances.
"A libertarian dictatorship where a strong-man ensures that the people don't act collectively to improve society?"
There is nothing in libertarianism that prevents people from acting 'collectively to improve society'.
Act to improve society all you want. If, for example, you think society would be better if people didn't do hard drugs, then campaign for it. Organize with other people. Run commercials. Whatever. Just leave government coercion out of it.
Marcus–
It's the nature of a control creep to demand to have his life while denying to others theirs.
I half agree – Democracy sucks. The Constitutional Republic system is much better than democracy. Sure, the US Constitution is not perfect, but it's a hell of a lot better than what we have now.
The article reminds me of Rousseau
"This means nothing less than that he will be forced to be free; for this is the condition which, by giving each citizen to his country, secures him against all personal dependence."
I did not enter in to any social contract and there definitely is no general will here.
@muirgeo – "Don will be paying taxes and taxes and hidden taxes as will his children to bail out these companies for years to come"
I think this is the point both Wallison and Boudreaux are trying to make! Why should these companies be "bailed out" when they offered a service that deceived people and destroy "value for shareholders and society even while pretending to be profitable"? Let these companies fail because they offered a product that destroyed value of shareholders!!!
I don't think we'll have a problem with seeing that these types of investments are risky at any point in the future, why should a government agency be created and my tax money be spent to tell people what they already know? To quote the movie Thank You For Smoking: "I mean… show of hands here… how many of you need a warning label to tell you that cigarettes are dangerous?"
My ending point:
See Hayek's arbitrary law versus rule of law!
That depends on the definition of "Natural instabilities". Would you consider a Cat-5 storm that devastates some coastal region as a "natural instability" in nature? How about an earth quake measuring near 10 on richter? Or how about a volcanic eruption? How about a major flood or Tsunami? Do they play any constructive role in nature? at least, some fo them? Do they point to the stability of nature or instability?
Either muir doesn't get it ( too stupid ) or he just like to heckle people, or gets a sick entertainment from making strawman arguments.
Who doesn't enjoy a good strawman argument?!?
I wonder if the distinction is that in the case of the vote, the reason politicians trust it is that it is the mechanism that provides them power. But, in the other case, trusting the purchasers of financial instruments is a mechanism which diminishes that power.
Bret says:
"Your buddy Caplan claims that the "noise" isn't random and that aggregate decision is faulty."
I think that Caplan's analysis is specifically applied to voters. I think he's talking about the political process, exclusively. I don't recall his analysis including anything other than that.
"The voters might also invest well in aggregate (and probably even do), but enough might do poorly that it could be argued that somebody ought to protect them from themselves."
Again, I don't think Caplan would argue that the 4 biases that he identified applied to markets – investments being (of course) a market. I think he was exclusively talking about the voting process.
Please correct if this is wrong.
"don't consider the possibility that there are natural instabilities in the market"
There are no market instabilities that a little government intervention can't make systemic and severe.
And we shouldn't be surprised government interventions are invariably worse than the disease. Markets are immensely more knowledgeable and productively motivated than the interventionists (not that that's a very high bar).
The VERY best government market interventions can do and have done is to benefit a small proportion of people at the expense of everyone else, and then focus the limelight on that small group so that we don't know how we're being cheated.
I don't think average American's lack the capacity to understand complex financial instruments, it's just that they don't have the time to educate themselves about every single topic. I don't understand string theory, and I would hardly think of it as an insult if a physicist who told me so.
But you are also right. The average american cannot properly elect a leader because the issues are outside of his/her knowledge.
Maybe he distrusts the American people because he knows that he's manipulated his way into office? So he knows that they'd fall prey to other snake-oil salesmen.
"Don draws a false comparison between the average persons inability to understanding complex financial products (those that are specifically designed NOT to be understood by almost all other people so as to take money from their homes equity and their 401k's) with that of the averages persons ability to judge the character and beliefs of a potential political candidate. There's simply no comparison."
You're right, there is no comparison. Purchasing a financial instrument, no matter how complex or confusing, is a voluntary decision on the part of the buyer that does not directly affect me. If the buyer makes a mistake, he harms no one but himself. But, alas, I am stuck with a bad politician whether I voted for him or not.
Additionally, even if intentionally confusing, financial instruments are still governed by law. If I interpret an investment differently than the seller, I can sue and have a court settle our difference. Similarly if I believe I have been the victim of fraud. By contrast, if I vote for a politician because he promises not to raise taxes, or to get us out of an unpopular war, or to protect consumers from complex financial instruments, or any other reason, and he makes a complete 180 after being elected, I have no recourse whatsoever. Politicians are free to lie to get elected, with the only recourse being not to vote for them next time. Imagine if my only recourse for buying a lemon was to patronize a different car dealer next time!
Finally, as to the claim that people are better able to "judge the character and beliefs of a potential political candidate," I wonder what number is greater: people who have lost fortunes due to complex financial instruments, or people who voted for Mark Foley, Larry Craig, Duke Cunningham, Ted Stevens, Rod Blagojevich, Mark Sanford, Vito Fossella, etc.?
"So what is the solution? A libertarian dictatorship where a strong-man ensures that the people don't act collectively to improve society?"
No. Democracy works just fine — we simply need to fix it. The slogan of the next revolution will be "No Representation without Taxation". It really is that simple.
A new career: bonded personal interpreter for complex documents
Will provide client with verbal or written plain language interpretations of financial documents such as mortgages, investment agreements, all insurance policies, college tuition deferment plans, personal loans, car loans, trusts, and wills. Will also help interpret warranties and guarantees, contracts with carpenters, plumbers, mechanics, roofers, etc.
Democracy is an awful way to run a country, but it's the best system we have.
This country isn't run by the democracy. It's run by the ins at the expense of the outs.
Democracy is just a way to get the outs to think they are in.
Sheetwise,
I said the same thing today while driving with my wife. The problem is no longer "taxation without representation" it is "representation without taxation." The original voting requirement was that the person be a landowner. This was done – as I understand it – to make sure that voters had a stake in the country and thereby could be presumed to be in favor of its safety and economic success.
Alexis de Toqueville believed that the system would come unraveled as soon as the majority realized that it could vote itself the largesse of the treasury through the taxes on the most wealthy minority. Sadly, de Toqueville was correct and more sadly, that day has arrived.
Maybe the battle cry of the next revolution will be, "No representation without taxation!!"
Disingenious Kuehn.
"The glaring blindspot in your argument is that you instinctively assume this sentence to be true, and don't consider the possibility that there are natural instabilities in the market, or that the crisis is do to something that is at least partially exogenous, such as massive global imbalances.
Posted by: Daniel Kuehn | Jul 14, 2009 9:47:34 AM"
Son, , due to your obvious inexperience may I call you son? Or, Jr.?
The glaring blind spot in your response is that you are a leftist and therefore always willing to slough off responsibility onto factors other than one's self.
No one can control "factors", exogenous, intragenous, ultragenous, contragenous, or whatever….okay? What one can control is one's response to them.
But, even that does not explain the idiocy that comes out of congress as regulations and/or law.
So, my comment was specifically directed to muriduck's stupid idea that congress who created our regulatory mess that allows all the things he sees as wrong or evil to happen, can also be the congress that fixes it, capiche?
The reason muirduck is stupid on this subject is that he has the insane idea that all the things he bitches about somehow happened in a regulatory vacuum, and for some not so strange reason you seem to be on the same intellectual plane as muirduck……pity that, eh?
"Maybe the battle cry of the next revolution will be, 'No representation without taxation!!'" — T Rich
I can't think of a better way to re-declare independence. Carry it forward, share it, explain it, and embrace it!
muirgeo –
I want to agree with you on one level, but I wasn't able to identify with any of your arguments or quotes to find agreement with you. So I'll have to agree with you on a theoretical level — using an argument that you haven't really made, and probably won't agree with. Here goes — derivitives have an incredible negative-leverage over information markets. They resemble OTB parlors who honor track pools …
Most readers here will, or might, get these analogies. For those who don't, it would require quite a bit of background to make the case — but the case is, essentially, that if you separate investment from information you will always have malinvestment.
Sam -
RE: "This country isn't run by the democracy. It's run by the ins at the expense of the outs.
Democracy is just a way to get the outs to think they are in."
I know, I know. It's an old saying. I prefer a constitutional republic as well… although given the way the word "democracy" has mutated over the years, a constitutional republic qualifies as democratic now too – at least colloquially.
vidyohs -
If you're just going to be a jackass when you respond to an actual substantive disagreement that I had with you, please just ignore me and don't even respond to me.
I didn't call you any names when I chose to disagree with you.
Vidyohs is OK, but he often shoots from the hip.
RE: "Vidyohs is OK, but he often shoots from the hip."
Which for some reason is a quality that people find endearing in him but problematic in muirgeo.
Muirgeo doesn't shoot from the hip. He is an imbecile.
My difference with muirgeo is in our advocacy. I doubt I would mind his philosophical sloppiness so much if our advocacy where in harmony.
Disingenuous Kuehn,
You got the response you earn.
What was substantive about this?
"RE: "You want the fu.kups that created the mess to write new regulations to fix the mess."
The glaring blindspot in your argument is that you instinctively assume this sentence to be true, and don't consider the possibility that there are natural instabilities in the market, or that the crisis is do to something that is at least partially exogenous, such as massive global imbalances."
Tell where the substance is, please. Detail it, detail your exact reasons for thinking you wrote substance in response to my sentence. I'd like to see what you come up with.
BTW Disinguous Kuehn,
As S. Andrews said, "muirduck doesn't shoot from the hip, he is an imbecile."
You seem to be in accord with him most of the time, so where does that line recognition lead us, hmmmm?
[Kuehn] seem(s) to be in accord with [muirduck] most of the time, so where does that line recognition lead us, hmmmm?
To a conclusion?
I just know there's going to be a quiz
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