The real problem was that there wasn't enough data for the Ratings Agencies to make ANY determination for the credit worthiness of these securities. The Agencies had decades worth of data that allowed them to rate corporate and governmental bonds with at least some semblance of accuracy. However, the new stuff was too new to have enough data on.
A honest assessment would have been to say that no rating could be given on any of these new products since the data needed to make a fair rating did not exist. Instead, new models based on in-house theories were created just so that ratings could be generated. Of course these model, devoid of real data and real tests, failed.
Another honest assessment would blame the regulations ALREADY in place for making ratings such an important factor in firms' capital requirements. REGULATIONS treated AAA rated bonds differently for capital requirements, they also restricted purchases by certain institutions to only investment grade bonds and such. Furthermore, competition was essentially eliminated as only a few approved agencies were allowed to make these all important ratings.
For those who don't follow the capital markets, it should be noted that the market never treated the new AAA rated securities the same as the old school AAA rated bonds. The new AAA stuff always carried a higher interest rate, and the spread grew as the ratings dropped. An A rated security of the new type traded WELL below (it carried a higher interest rate) an A rated old-school bond.
The only people who didn't seem to get it were the regulators themselves, everyone else knew that the new securities weren't the same as the old securities. AAA did not equal AAA! However the regulators failed to pick up on the HUGE hint the markets were giving and continued to allow the new AAA stuff to be treated in the same manner as the old stuff for regulatory purposes. Had they been as wise as the "market", then they would have adjusted their regulatory requirements and we would not be in this mess today. Again, this was clearly a failure of existing REGULATIONS! REGULATIONS stated that AAA capital was to be treated differently, REGULATIONS gave banks the incentive to hold AAA securities, REGULATIONS gave monopoly power to a select group of favored agencies. Ratings agencies are able to play this game because there is no other competition, it doesn't matter if they are terrible or not as long as the good ol' boys are all equally terrible. They are also insured of business because banks and other institutions MUST get ratings for REGULATORY purposes.
Don't tell it's a lack of regulations when it was the poorly crafted regulations in place that caused this mess. And now you're telling me all we need are more of the same crappy regulations to solve the problem? Give me a break, when will you people realize that regulations hardly ever work in the manner they're supposed to? There are always unseen and unintended consequences! Yet you all pretend that government can craft a perfect regulatory system when it has never been able to in the past!
I will repeat, no matter what regulations get put into place, we will have another financial crisis sometime in the future. The government, nor any entity, has the ability to create a foolproof, perfectly working system. Are we still on the Aristotelian model of perfection that cannot possibly exist in the real world? How many thousands of years are needed for people to learn?
Friday, March 27, 2009
Monday, March 16, 2009
Globalization and the Loss of Manufacturing
Globalization leads to wage equalization, the process isn't always going to be smooth, but I believe it is unstoppable as industrialization was.
We still manufacture a huge amount of goods, it's just that these are post-modern goods and are not tangible. One of the biggest problems is that the rest of the world has not yet caught up in terms of legal protections and enforcement. In America, we already have all the material things we need, we no longer buy clothes to keep us warm or shoes to protect our feet. We buy stuff now to express ourselves and to show our social status. Even cars are bought for "style", not to mention Iphones. Especially if you're in the entertainment industry, you must have a "cool" phone like the Iphone or else you'll be looked down upon and snubbed.
Manufacturing generic tangible goods is yesteryear's industry. As the world gets richer, someday everyone will have enough tangible goods they need purely for functional means. But humans will always need more entertainment and goods that convey social status, which is what we're manufacturing today. What we should do is make sure these goods are protected, a worldwide framework has to be formed and implemented that will pay the manufacturers of these goods for their work. Pirating is a huge problem, as big as it was during the 1600-1800's. We have countries like India who outright steal what we produce, like our medicines. China does not take pirating very seriously, but even countries like Sweden don't either. The EU is a hotspot for well to do pirates to congregate and enjoy the spoils of their theft. That has to be stopped.
I suggest people focus on the future instead of the past. Fighting a battle to preserve an obsolete industry is foolish. We should all be fighting to establish a framework for the new post-modern manufacturing industry instead. That would create a lot more jobs and raise wages substantially NOW. Think what would happen if all the trillions that is being stolen were to flow back into this country, the crisis would be solved and the nation would prosper.
We still manufacture a huge amount of goods, it's just that these are post-modern goods and are not tangible. One of the biggest problems is that the rest of the world has not yet caught up in terms of legal protections and enforcement. In America, we already have all the material things we need, we no longer buy clothes to keep us warm or shoes to protect our feet. We buy stuff now to express ourselves and to show our social status. Even cars are bought for "style", not to mention Iphones. Especially if you're in the entertainment industry, you must have a "cool" phone like the Iphone or else you'll be looked down upon and snubbed.
Manufacturing generic tangible goods is yesteryear's industry. As the world gets richer, someday everyone will have enough tangible goods they need purely for functional means. But humans will always need more entertainment and goods that convey social status, which is what we're manufacturing today. What we should do is make sure these goods are protected, a worldwide framework has to be formed and implemented that will pay the manufacturers of these goods for their work. Pirating is a huge problem, as big as it was during the 1600-1800's. We have countries like India who outright steal what we produce, like our medicines. China does not take pirating very seriously, but even countries like Sweden don't either. The EU is a hotspot for well to do pirates to congregate and enjoy the spoils of their theft. That has to be stopped.
I suggest people focus on the future instead of the past. Fighting a battle to preserve an obsolete industry is foolish. We should all be fighting to establish a framework for the new post-modern manufacturing industry instead. That would create a lot more jobs and raise wages substantially NOW. Think what would happen if all the trillions that is being stolen were to flow back into this country, the crisis would be solved and the nation would prosper.
Saturday, March 14, 2009
Rich Are Paying Their Fair Share
Carpe Diem neatly summarizes, "...the income share of the top 1% increased by about .55% per year from 1986 to 2006, compared to the tax share of the top 1%, which increased by about .75% per year."
Bottom line is that the rich are paying more than their fair share.
CARPE DIEM: The Increasing Tax Share vs. Income Share Gap
On Immigration
As an immigrant myself, I find that there is very little opposition or hostility towards legal immigrants. This country is quite welcoming towards immigrants who want to stay here and are invited to.
As a legal immigrant, I also oppose illegal immigration and want the immigration laws to be enforced. Some of my family members recently immigrated legally into the United States after waiting 11 years. That is a long time to wait and I resent that those who unfairly cut in front of them are grouped into the same category. Both of my cousins who came with my aunts and uncles are now in the University of California system and will be productive members. All of my uncles and aunts are working legally and taking English classes, which they began well before they received permission to enter the country. None are on public assistance.
Yes there is a huge difference between legal and illegal immigrants and I resent being lumped into the same category. It makes no sense to do so, just like lumping in chronic drunk drivers with those who have had a sip of alcohol within the past year. Society's anger is directed towards drunk drivers who cause accidents, not all people who have had a drink at some point. The same applies to illegal immigrants.
As a legal immigrant, I also oppose illegal immigration and want the immigration laws to be enforced. Some of my family members recently immigrated legally into the United States after waiting 11 years. That is a long time to wait and I resent that those who unfairly cut in front of them are grouped into the same category. Both of my cousins who came with my aunts and uncles are now in the University of California system and will be productive members. All of my uncles and aunts are working legally and taking English classes, which they began well before they received permission to enter the country. None are on public assistance.
Yes there is a huge difference between legal and illegal immigrants and I resent being lumped into the same category. It makes no sense to do so, just like lumping in chronic drunk drivers with those who have had a sip of alcohol within the past year. Society's anger is directed towards drunk drivers who cause accidents, not all people who have had a drink at some point. The same applies to illegal immigrants.
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