October 26, 2009
Come Home John, We Need You!
John Stossel, who used to work for an Executive Branch Certified Media Organization (look for the Obama -- FairNews® label!) hits an important point today that needs to be made to his old audience. And he quoted Milton Friedman to boot:
There are people going to jail for insider trading and I think it has been a great mistake. You should want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that.
Only the government could think it's a good idea to chase information out of capital markets. The market is there to direct capital to its best uses. Media and Blogging Posted by John Kranz at October 26, 2009 12:11 PM
Gordon Gekko called to say he agreed with you.
Kidding aside (and yes, I was kidding, okay?), do you find there would be a need to distinguish among honest insider trading as described here, deceptive insider trading (Enron execs dumping their own shares while telling employees they ought to hold onto theirs) and market manipulation (rumormongering to drive a stock price up or down and then take advantage of the artificial price)? What strategies are allowable, and which ones should be forbidden, and why? Is all fair in love and war, or is there a need for rules of fair play beyond "caveat emptor"? I wonder what kind of different answers will be offered...
Posted by: Keith at October 26, 2009 1:02 PMMartha Stewart had some kind words for this post as well...
Nope. How many Enron investors were saved by insider trading rules? The sooner the knowledgeable can trade, the sooner the information can get out.
Again, Keith, my first principle response is that the market is for gathering and dispensing information, and getting capital to best uses. When you look at it from that side and not a playground for investors, I think all the scenarios you describe are shown to be better unrestrained.
A normal asset will bounce back after it has been rumormongered. The scary scenario you describe is only fatal in the world of high regulation. A bank stock can fall below its reserve requirements and be forced to raise capital. Others will bounce back.
Clearly, the answer is more regulation!
Posted by: jk at October 26, 2009 2:33 PM"... all the scenarios you describe are shown to be better unrestrained." Agreed, but there's a need for it to be articulated, especially when the other side, wanting to manacle the market with overregulation, gets away with portraying all capitalists as evil Gordon Gekkos.
"... the market is for gathering and dispensing information..." Agreed, and to be blunt, pricing itself in a free market is information, and results itself from information - information about scarcity, consumer demand, and costs of materials.
Information is the opposite of spin. For example, I read just this morning an interesting article about health insurance profits. The spin doctors favoring the government takeover of health insurance keep talking about the evil insurers and their greed for the filthy lucre of profit. The truth? Industry profit has been 2.2% recently.
http://apnews.myway.com/article/20091025/D9BI4D6O1.html
Same with a gallon of gas; I don't have the reference at my fingertips, but I recall reading that Big Oil's profit on a gallon of gas is a whopping nine cents - about one-sixth of government's take, and government does nothing to get me that gallon of gas.
Posted by: Keith at October 26, 2009 4:03 PMI can't begin to know what or how much regulation we should have because truth be told I just don't understand it enough. Unfortunately I think the same could be said for those in public office who are creating the regulations. Enron it seems to me (see caveat in first sentence) was more about simply keeping a fake set of books. Any insider trading may have profited the execs but had little effect on the overall loss of value.
Where I part ways with Gordon Gekko is the shift toward "greed is good". I may get hammered here for this, but I completely disagree. Greed tends to be a short term view, and here is where I see investors and the company they are investing in as not sharing the same goals. You can say that the investors are technically the company, but companies get swallowed up, sold off, and broken up, all of which can be very good for the investors and very bad for the company. The current mortgage mess has awoken people to the pyramid scheme style of complex market derivatives, but I contend that any time you make money without providing a good or a service it is deep down a house of cards just waiting to tumble. Is this where regulation steps in, or could you have prosecuted many in the industry with fraud if the right people had been paying attention? More regulators and less regulation, so we keep the regulation light and simple, but scrutinize the transactions closely for compliance with existing law? I think the complexity of the system overwhelmed not only the regulators, but many inside the system as well. But again with pressure for short term gains, long term prudence flies out the window.
Posted by: Silence Dogood at October 26, 2009 7:52 PMSilence, I would have to blame government meddling both for the short-term greed vs. long-term investment you oppose and the hypervolatility in derivatives.
Austrian Business Cycle Theory is based in large part upon the tradeoff of current production for future gains. Rational actors could make intelligent decisions about this but are forced to adapt to government regulation, GAAP accounting rules (and, let me say it for the others around here, fiat currency). I think you might agree that a good balance of short-term and long-term thinking is required. I think regulation forces short-term thinking more than evil ol' greed.
I may misread you, but I have to reject any suggestion that manufacturing a tire is fundamentally different from creating or investing in derivatives. Derivatives are useful for price discovery and invaluable for getting the risk in the hands of those best equipped to handle it. If you make cookies and sell them in Europe, you can hedge your positions on commodities and currency so that you are not wiped out when sugar rises or the dollar falls.
That has value and is no worse than betting your life insurance company that you're going to die. The derivatives you're concerned with were a problem because the asset behind them fell precipitously. Here I suggest mortgage backed securities and derivatives based on them were more volatile because of -- not in spire of -- government regulation.
Posted by: jk at October 26, 2009 8:52 PMBut somebody has to make cookies. It's not the folks buying the sugar derivatives.
"because the asset behind them fell precipitously." That I have to disagree with. It was not the drop in housing values that caused the crash, but the crash that caused a drop in housing values. The derivative market had run through so many levels that no one knew the value of what they were buying. Once they hit the point where there was no one farther down the pyramid willing to purchase the debt (or insure against its default) the notes came due and the paper mountain crumbled. Once this happened the state your income easy credit vanished in a heartbeat and the mortgage takers couldn't keep refinancing to stave off balloon payments and high interest. Those folks were just as complicit in the whole scam, but it was the collapse of the financing system that caused foreclosures and fire sales that resulted in the big drop in value. I chicken your egg!
I will readily agree that the government's belief that everyone should be a homeowner and that owning a home automatically built wealth was the first push that got the ball rolling. I will also contend though that the ability to bundle and sell a mortgage, then sell derivatives of those bundles and on down the line effectively created a pyramid whose only value lay in the ability to add a layer underneath you. A lot of money changed hands without any good produced or real value service provided, thus the bailout required to put money back in the system.
Posted by: Silence Dogood at October 27, 2009 12:55 AMYou should have voted for my Buddy, Senator John McCain, last year -- he sees the crisis exactly like you.
I cannot prove mine but will point out that you are omitting the 800 lb. gorilla from yours: Fan & Fred. Imagine either of our scenarios without a government backed purchaser/securitizer of the mortgages, and poof! no more crisis. The government push for home ownership you speak of, and a negative real interest rate.
All three have the common thread of government and I would rank all of them as being significantly more important that "greed and corruption on Wall Street" (Send McCain in because "he's faced tougher guys than this..." I have to stop now, I'm getting ill.)
More importantly, I am not giving ground on the derivative versus the cookie lady. No she makes the sumptuous morsels, but she cannot stay in business without hedging her commodities or currency risk -- just like a store cannot continue without fire insurance. I disagree madly with the mercantilist mentality. To hit home, it places the manufacturer above the engineer -- you don't make nothin', pal, it's those salt of the earth guys who bolt your designs together.
Posted by: jk at October 27, 2009 12:36 PMTrue enough JK, at least you can compile your own code, without someone to produce my designs they are worth the paper they're printed on. Heck, I am even a manager now so I am even more a drain on society.
I do have to give you the 800lb gorilla - I kinda fessed up and hinted at it already. But, (you just knew there was another but didn't you?) Mr. Banker could have kept his ethics high and required proof of ability to pay to secure a loan. The mortgage industry has a right to complain about Uncle Sam's heavy hand, but once the game was afoot they were more than happy to create a method to enrich themselves along the path to destruction.
Posted by: Silence Dogood at October 28, 2009 12:02 AMKumbaya, Silence, we are near complete agreement. AN economics professor offers an A to any student in his 101 class who can find a pro-business sentence in Adam Smith's Wealth of Nations.
I love freedom and free enterprise -- those louts who profit from it tend to be rent seekers and price fixers -- just as Smith told us in 1776. Look at them lining up to be the last eaten in ObamaCare.
No, I don't love the banker (except for Perry) but I love the idea of derivatives: getting risk in the hands of those who can best handle it.
Posted by: jk at October 28, 2009 12:53 PM | What do you think? [9]