Comments

Live within our means? - When I was a kid my late beloved Dad didn’t agree with Mom buying anything through a mail order company even though it was credit free. From memory she probably paid something like a pound a week. Dad always said you only buy something when you have the money to pay for it. Dad died never really understanding the concept of the mortgage I was burdened with. He was far too simple (not). Fourteen years after he died (without debt) I miss him and I miss his wisdom.

Posted by Trevor Gay at September 16, 2008 12:02 PM

My friend, a savvy businessman and contrarian investor, always says that people take a bear market for brains. I think he's got a point. What do you think?

Posted by Judith Ellis at September 16, 2008 12:50 PM

Did I say that this is a GREAT post!!! Now what? I would not consider this a Black Swan. We ALL saw this one coming!!! But not being accurately able to judge by history all the time, what's one to do? And speaking of Black Swans, NNT asserts that while we cannot prevent them from happening, we can lessen their impact, namely by how we chose to respond and how we chose to think about the event. But why are we even talking about Black Swans here when our financial situation is clearly NOT a Black Swan? But there is this notion of being Fooled by Randomness to consider here. And...yes..."shit happens!" But this "shit" could have been avoided!

Posted by Judith Ellis at September 16, 2008 1:01 PM

Trevor just your first 4 words is all that was needed still searching for brevity!

Judith, it is a great post.

Simply inspired common sense again!

Posted by patrick at September 16, 2008 2:46 PM

Just read the post again and what beauty--simply stated in a way that a two-year old could understand. Now to solutions. Maybe TP needs to take the helm, or at least give these guys a week-long sequesterd seminar on ethics, policy, finance, leadership, etc., with progress reports due daily. Well, that's excessive and probably would do very little good anyway. Such seminars are being held at one of the Big Three and it only annoys the VPs and Directors. But something has to be done about this mess right now! I guess from the post Paulson has some ideas. What are they?

Now, I'm not a big wig finance person or anything, and may not be able readily to even understand the math. But, hey, these guys were suppose to understand this stuff and look where we are. The general pubic needs to get really really mad! But I guess many of us are players in the game by living above our means as Trevor spoke of. And often times instead of getting mad and demanding change, where with these financial institutions are taxpaying dollars secure, we become lethargeic and more insecure about our right to demand change.

In crushing times like these we often feel as if we are not the experts and we get bullied around or become suckers of the same old same old. We may even want to be lead into oblivion, becoming unaccountable with thoughts like my credit's screwed up now anyway, I'm deserving of this bonus, everybody's filing bankruptcy, it will turn around eventually, nobody's honest, it's those big guy's fault, etc. WAKE UP! If our taxpaying dollars are being used to bailout these companies, we should have something to say through our senators and congresspersons and the turnaround efforts should be broken down to us as if we are two year olds. As a nation, many more of us,, me included, have to become more engaged, not just a few. I agree. If de-regulation is holy, we need more holiness!

Posted by Judith Ellis at September 16, 2008 3:17 PM

Some of my reactions-
--too little regulation is as bad as too much
--bailouts let the ineffective leaders off the hook
--the marketplace is still the judge--it rewards prudent risk takers and punishes inappropriate risks
--the formula R-E=profits is very real. If I can't collect my accouts receivables I'm in big trouble.
--systems thinking - there are many dots that need to be connected to fully understand why this happened.

Posted by Paul Thornton at September 16, 2008 5:44 PM

We can certainly write this off as a result of complexity of the markets. However, there are banks who chose not to get into mortgage backed banking. They are not going through this. Choices are not simply financial, but moral. What the bankers and the politicians realized was this was a way to make a lot of money, at the expense of those who really should never have been sold a mortgage. And their assumption was that the government would be there to back them up. Paulson, as Bush's proxy, has become the Black Swan. That is where I find hope in this debacle.

Posted by Ed Brenegar at September 16, 2008 7:40 PM

Black Swans are about the highly improbable. Paulson is probably our greatest hope. But Black Swans are not about hope; they are about the impact of the unlikely, the unexpected, the unthinkable. If Paulson gets us out of this mess he would simply be doing his job and well. (By the way, why do we depend on one savior in such cases?) Are we not even expecting Paulson to do well? Oh, I get it now - seriously. The Black Swan, the highly improbable, is that Paulson will in fact do well when the expectation is that he will not? But there is the element of the probable here; we have been here before. Paulson and Bernacke must be sweating bullets. This does not seem to be letting up. I read now that we're bailing AIG out with a loan of $85 billion.

Posted by Judith Ellis at September 16, 2008 9:42 PM

Mr. Thorton:

It's not about whether there is too little regulation or too much, but who that regulation was designed to protect and who that regulation exposes.

Our current legislation is not designed with the tax payer/citizen in mind. Until that happens (and I don't mean some sort of nitwit populist carp) you will continue to have these sorts of debacles.

Mr. Peters:
You wrote:
South Sea Bubble
Tulips
Etc.
Etc.
Etc.
S & L
Junk bonds
Dot-com
Sub-prime
TK
TK
TK

There is a distinct difference between these two sets of things:

Sub-prime
S & L

South Sea Bubble
Tulips
Dot-com
Junk Bonds

Government, greed, and stupidity drove the first set, while the second set were driven by pure greed and stupidity while the government (depending on your view of government) either didn't act fast enough, or just didn't act. (One could assert that the SSB was driven by the English Government changing the rules at the right time, I'm not versed enough in that bit of history).

Without government permission the actions that lead to the sub-prime melt down would be fraud.

Oh, and the government actually made money bailing out the S & Ls.

I don't remember enough about the Junk Bond dealio, but it appears to be the later category.

I really do wonder how much of this "crisis" is really a problem and how much is a chicken little press trying desperately to make this economy look bad.

I do realize that this is a major problem, but if handled right it's also a major opportunity. Right now there are about a dozen homes in my zipcode for less than 300k. Last year, none.

As to living within our means:
When your father was just starting out he wasn't having 1/8th his paycheck taken to support retirees and those unable to work. (Well, that's the rate here in the US, I don't know the rates in the rest of the world). And that's BEFORE he paid his income taxes, which weren't nearly as high back then. And sales tax, and excise tax, and etc. etc.

You stop stealing my means to pay for someone else's living and we can chat about that.

Posted by Billy Oblivion at September 17, 2008 12:40 AM

Judith: "...these guys were suppose to understand this stuff..." The problem is that we've known for a long while that most of them don't and that there's been this escalation of ever more complex deals. It looks to me like a classic case of "tiger by the tail:" any banker who did try to get a grip of the problem would find himself in an extremely difficult situation, so they all held on and prayed...

Billy: regulation? Any rule is only as good as its enforcement. In this case you had complex transactions that very, very few people understood being overseen by self-regulating Risk Managers who were colleagues of the Risk Takers.

We've known for a long while that companies have been making stupid loans (especially mortgages and credit cards) to NINJA borrowers: where was the regulatory resource, diligence or even inclination to deal with a large part of the problem early and at source?

Posted by Mark JF at September 17, 2008 2:23 AM

Spot on. My 10 year old, if presented with the question:

'Should we lend money to people who have no means to pay it back?'

would have said 'Don't do it Daddy'

So, it's a fascinating reflection on the herd instinct - 'if we all do it, none of us will get burned'

The only certain thing about markets is that they go up and down rather like the rise and fall of ladies hemlines. Trouble is, we've never been able to prdict that either!

This too will pass

Peter

Posted by Peter Cook at September 17, 2008 2:42 AM

I believe that just like energy can not be created or destroyed, it only changes its form; wealth can not be created or destroyed, it only changes it's state or place. If all those financial institutions lost it, where is it now and how can it be taken out legitimately?

Posted by Milind at September 17, 2008 4:39 AM

Is this the ultimate "I told you so" post from Dr. Tom or what?

Ridiculous sentiment. Black Swan may be an interesting theory, but it certainly isn't a basis upon which to build an economy.

It is easy to look at what is happening and tell others you could have prevented that. It is easy to cry no one listens to your genius. It is easy to cry "hubris!" whenever someone fails or something goes awry.

In the immortal words of Don Martin, "Blecchh!"

Posted by My Name is Mudd at September 17, 2008 7:44 AM

So, Billy Oblivion, are you suggesting there is no liquidity problem and we are really not in this collapse and those companies filing for bankruptcy are a part of a massive cynical ploy by a few to steal blind from the whole in the form of bailouts?

You comment about taxes is interesting in that it brought to my mind another very important point. We are always talking about big government in the form of social programs, you know that welfare mother in Detroit or that one in Appalachia (well we don't talk about the latter too much.) But what we spend on such programs are infinitely smaller than what we spend on these consecutive multi billon dollar bailouts. Who is the greater welfare participant here? Now, I AM NOT agreeing with all of the socialist idealogy espoused by many in that I am a firm believer in self-reliance, but as I have consistently said it's the hypocrisy that kills me.

Peter - I too believe that this too will pass and to be hopeful is indeed good. But there remains the outrage of the American people to unleash to better ensure that such things do not occur again. I am really concerned about our lethargy and simply being misinformed about so many things that affect our daily lives and the lives of our children's children's children. Democracy is good, but the necessity of involement equally so.

Milind - The only wealth that seems to be able not to be destroyed seems to be the wealth that comes from financial engineering where there is no hands on engineering proper, but the kind that is only in the mind of this specialized engineer. Perhaps this is the reason we are in such a mess.

But, of course, the question remains whether financial engineering is, in fact, a way to loot under complex statistical grids. I like your question about where is the loot. But perhaps it was not really properly there or perhaps it was siphoned out over time in the form of payouts, bonuses, stock options, and salaries based on book value cooked by financial engineering. I don't know.

MarkJF - Your general assessment is a bit softer than Billy's. Which is true? Oh, that's right we are not in a season of truth finding. We are in a season of continual shades of gray which allows for the kind of financial engineering that is merely in the mind of this specialized engineer that do not deal in product but often in bogus stats. I'm not too happy. Where is the obligatory accountability? We WILL be here again.

Last evening I heard Suzie Orman talk about the security of her personal decision to stick with the safe municpal bonds. But let me tell you after speaking with mayors, city councilpersons, and treasures of various cities in Michigan where we have bought foreclosed property and turned things around a bit, they are frightened.

While we are providing liquidity in a system badly in need of it and putting people back into homes, if MBIA and AMBAC blow up, which does not seem far-fetched in this shaky time, the security of municipal bonds becomes no longer secure. These bond insurers insured derivatives under an investment grade umbrella that appears to be in a tenuous state. There are thousands of homes in foreclosure in these cities and far less taxes paid to maintain roads, schools, etc.

Thank you for reading this comment. I know it's long. I'll indeed return the kindness.

Posted by Judith Ellis at September 17, 2008 8:38 AM

I am by no means an economist...my accountant who does my small business's books would attest to that! However, I have always advocated free market over government regulation. What sucks though is that we won't let the market work. These companies did a horrible job of running their business and the market punished them. Let them go bankrupt. Sure it will hurt the economy, but so does our local grociers bankruptcy hurt my local economy. Do we really need to bail out the big three? I am a Michigander who has benefited greatly from the automotive sector, but Wagoner, Ford (not blaming Mulaly yet), and assorted Chrysler leaders as well as UAW leaders made their bed...now lie in it. I always though divine right theory had to do with royalty, not capitalist businesses. By my math, each taxpayer has contributed $100 so far to these bailouts..not a lot, but would go a long way in most families budgets. So in our rampant disregard for market forces there is only one avenue left...regulate the hell out of them. Demand concessions for these bailouts including no pay increases or severance packages until the "loans" are repaid. This is nuts.

Posted by Mike Neiss at September 17, 2008 9:09 AM

My Name is Mudd - You are so off base. (Nice name, by the way!) The point of the Black Swan is the unpredictable. The fact that everyone saw this coming nullifies it as being a Black Swan indeed. This is perhaps what NNT would call a Gray Swan, a "near Black Swan," especially if this thing keeps rolling. They are probable but rare. They are still shocking, nonetheless.

It is apparant that you have not read The Black Swan, for had you done so you would have realized that Black Swans are the "highly improbable" that impacts many i.e, 911, google etc. While they can be good or bad, the premise is not to predict them or build a future on them but rather to prepare for them. Thus, your preparation could render profitable yieldings or not. what's essential is to avoid, as NNT says, being that turkey who never thought for a second that he would become Thanksgiving dinner. It's the not thinking of the improbable that gets us-- paranoia aside. :-)

I don't see TP here as predicting anything, nor arrogantly pointing out the obvious that many have known for some time. As a matter of fact he begins the post by saying "what follows is hardly new-news. Frankly, I'm in a bit of a state of shock. What follows is a slight extension of a list I scribbled on a piece of paper—as in, What's going on here?"

Does that sound like pomposity to you? What follows is simply truth as being borne out everyday.

Posted by Judith Ellis at September 17, 2008 9:12 AM

These times remind me of a line from 'The Big Chill' where Richard Bowens and William Hurt are talking about 'crossing the line' and Hurt's charcter pipes...."it's tough to do when they keep moving the little sucker."

A smiplistic post considering the content but it seems like today many full of said 'hubris' have no idea where the line was or is or will be.....

Posted by Greg at September 17, 2008 11:45 AM

Consistent with some of the earlier discussions and posts on this site about corporate CEO behavior, here is Mark Cuban's commentary about why we will see such meltdowns again:

http://blogmaverick.com/2008/09/15/stock-market-meltdowns-why-they-will-happen-again-and-again-and-again/

Posted by Vince Sandusky at September 17, 2008 1:10 PM

One comment for Judith and the detractors of the reference to The Black Swan. Dr. Ackoff (a good systems thinker by the way) pointed out that we all carry spare tires in our cars. Why do we do that? Do we predict that on the next trip we will have a flat tire? I forget how long ago I actually needed a spare tire.

The point is we are NOT predicting that we will get a flat tire when we carry a spare. We are acting upon the rational knowledge of what COULD happen. I'd say in the current lending crisis, no one carried a spare tire. No one asked what COULD happen if house prices turned down - if folks couldn't contintually refinance their homes to new "teaser" rates.

Posted by Steve Prevette at September 17, 2008 2:30 PM

And a comment for Tom - just 7 days after once again ranting against Systems Thinking, you show a pretty good knowledge of the interactions of the pieces/parts on a system in this post - and the effect of randomness on the system!

Posted by Steve Prevette at September 17, 2008 2:32 PM

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I think it's absolutely awful how your TV Media show, 24/7, is terrorizing
the US population with your reporting on how awful the investment banks are
doing. You are putting exclamation points on issues, and trying to stir up the
emotional sides of the US citizens. MS and GS have done very, very well in
their last report announced yesterday, but instead of focusing on that, you
people are torturing the world with strong reports on assumptions that they need
to merge to survive. Why would you do this to people? In my town on Long
Island, we are no longer talking about investment banks, we are questioning the
sanity of a news station that is trying to make gains on riding on people's
emotions that are already under stress because of a difficult economy. Who does
this? Who??!!!! I'm going to boycott your station for negative reporting
for the purpose of making advertising brownie points and trying to stir up
people for no good. I'm going to suggest to GS and MS that they
immediately get their own TV station going to compete against CNBC and advise
the public on what is really happening, i.e. the media is trying to torture the
emotions of the public with one-sided reporting. It's wrong what you are
doing, very wrong. These are my comments/complaints and feelings. I've
been as detailed as possible in a very short paragraph, but I think my
sentiments are clear. Help our country, don't try to hurt it. Report, yes,
but please don't spend 55 minutes of every hour looking for ways to say
we are failing, because the only way the US companies will fail is if you
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Posted by Mary T at September 17, 2008 5:32 PM

Steve - Can you please explain what you meant by "detractors" in reference to the Black Swan? I was obviously not clear. While I think I followed your comment, I couldn't think of the relevance to the thesis of the Black Swan. A flat tire is highly probable, not higly improbably and there is the question of impact to consider.

Regarding your questions, I think that they were probably asked and answered. This was bad decision-making pure and simple, some have suggested cynically so. These financial institutions took risks. Risks can be foolish and dangerous or well thought out and calculated. It's pretty obvious what kind of risks were taken here.

Posted by Judith Ellis at September 17, 2008 7:32 PM

Come on Tom, isn't all this what a "spontaneous discovery process" (Hayek) will sometimes look like - messy?

Posted by Rob at September 18, 2008 12:20 AM

Greed kills.

After the CreditCrunch there will be a TechCrunch.

Posted by Engago Team at September 18, 2008 8:15 AM

Judith - by detractors of the Black Swan, I was refering to statements in previous posts such as "Ridiculous sentiment. Black Swan may be an interesting theory, but it certainly isn't a basis upon which to build an economy." Perhaps "detractors" was too strong of a word as I go through a second reading of the comments.

I do agree with Tom on the issue of "quants". My background is Operations Reserach, and I run 3,000+ charts and data files at the Hanford Nuclear Site taking into account the difference between random noise and trends. I do like NNT's books on the subject of randomness. I do believe that too many MBA trained managers believe every result is deterministic and can be controled (and more importantly, good results are a result of their actions, while bad results are the result of bad luck), while there is always some random factor present. NNT does have some interesting ideas on "thick tails" and the highly improbably events coming from unforeseen mechanisms.

- Steve

Posted by Steve Prevette at September 18, 2008 8:43 AM

Steve - I'm a complete NNT fan! And, of course, I'm a big fan of TP! Thanks for your words.

Posted by Judith Ellis at September 18, 2008 10:25 AM

I am really upset about what happened. I am concerned. This is a worldwide inflection point of graveness. Headlines on Earth will ensue ubiquitously for a long time. Consequences will be unthinkable. Time, again, for deep reflections.

This affects the West as wars are fought and the World is increasingly plagued with predicaments like Poverty, Global Climate/Geological, Terrorism, Nuclear Weapons Proliferation, Overpopulation, Energy Insecurity, Public Confidence Shaken (since 9/11), a Whole Gamut of Geopolitical Problems everywhere, so forth.

Before proceeding any further, it’s timely to remember, “Everything is related to everything else.”

Probable and alleged, seemingly Causes, METAPHORICALLY SPEAKING (among others):

Lack of Regulation + Lack of Supervision + Lack of Transparency to Public + Minimal/Inconsequential Accountability + Corporate malfeasance + Values Rejection + Lack of Applied Science (with the omniscience perspective) + Across-the-Board Failure of Quantitative Analysis (so-called “analytics”) + When instituted, application of Suboptimal Risk Management for Financial Entities + Administration of ill-Risk Management to the Active Assets (for-a-profit organizations) + Global Failure As to Not Applying Most Stringent Systems Risk Management (“Transformative and Integrative Risk Management, with the omniscience perspective and way beyond/away from financials) + Zero Implementation of Thorough QUALITATIVE ANALYSIS (with the omniscience perspective) + Womb-to-Tomb Underestimation of Complexity (both in details and in its dynamics) + Deep Propensities to Bend the Rules (managerial, financial, concerning the disciplines applied) + Faulty Application of Systems and Approach + No Institution of Proper Scenario Methods + Do Incumbents Understand the Driving Forces (those subtle and dramatic) of this Terra Incognita? + Suboptimal Insurance, Reinsurance, Performance Bonds (among other bonds) + Resting On Laurels Because of Backing of Three or Four Nobel Prize Laureates in Economics + Price Elasticity Subject to Bold Volatility + Miserable Performance Reporting and Forecasting + The Incomprehension of Newest Factors Stemming From Economy’s Driving Forces in Intersection, Intertwining, and Superposition Were Not Considered + Over-Reliance on Information Technology + Crude Prices + Food Prices + Mortgage Meltdown + Fanny’ and Freddy’s + Federal Reserve System? + Other Developed Nations’ Central Banks Engaged in Passiveness + Business Model Obsolescence of Investment Banks + World’s Financial System + Over-Blown Brokerage’s Speculation + Challenging the Economics Pervasive Forces of Uncertainties and Fears.

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Posted by Andres Agostini (Andy) at September 18, 2008 11:32 AM

A good writeup on the Wharton School of Business site. I think it does provide confirmation that the system was at fault - from how fund managers are paid, to how short term gains are valued more than long term success.

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2048

Steve Prevette

Posted by Steve Prevette at September 18, 2008 12:00 PM

I’ve noticed in my adult life that when I’ve no money in the bank the offers of cheap loans or low interest rates on credit cards stop dropping through my letter box. When things have been a bit more comfortable financially the offers from financial institutions seem to drop through the letter box every other day throwing more ‘money’ at me. Not academic research and proving nothing of course but tells me a lot about encouragement of greed. We all KNOW the rational, logical, sensible and adult argument is to say ‘no thanks’ but since when were human beings rational, logical, sensible and adult?

Posted by Trevor Gay at September 18, 2008 12:53 PM

Tom, following on from Steve's post - I wonder why you don't want to admit that you often think like a Systems Thinker!

Posted by Chetan Dhruve at September 19, 2008 1:10 AM

Excellent post!

G R E E D is the root-cause of all this M E S S – If we go in search of things we don’t want & don’t need at the cost of things we already have & do need – you will pretty much end up in a "messy" situation like this – A BIG BLOODY FINANCIAL TSUNAMI! ALWAYS REMEMBER FRIENDS – “History DOES NOT tell us the probability of future events. Period.

Posted by Sriram K at September 19, 2008 2:26 AM

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buy cheap viagra online from india Posted by Trevor Gay at September 19, 2008 3:47 AM

Just a thought but here we go:

There's a lot of talk in this thread about greed. But there's a lot of talk in other threads on this blog about selling, marketing and Brand values, Brand awareness and creating a market. So here's my question: where's the line between someone selling a non-essential product or service and someone else being greedy for buying it? I probably don't need an iPod, a Krell amplifier, RayBan sunglasses, a MontBlanc pen, an Omega watch etc etc. Am I greedy for having them at all? Should I have purchased different, cheaper brands?

I've a feeling that the problem isn't simply greed and is as much about sellers and buyers attitudes to credit and our "gotta have it right now" culture.

Posted by Mark JF at September 19, 2008 4:16 AM

Hi Mark - hope you are well and that the sun is shining through the gloom in your part of our glorious, if broke, England - it is a gorgeous sunny Friday morning in Shakespeare's County and life is good.

Good that you have the RayBan Sunglasses I reckon :- )

I hear what you say but isn’t GREED just another way of saying "gotta have it right now"

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I think - just like me - you should continue to buy all the things you want – as long as it is within our means – I won’t be able to afford another Man United shirt at this rate!

Posted by Trevor Gay at September 19, 2008 4:26 AM

Mark

I have real mixed feeling about this topic.

I don't generally feel the need for lots of stuff of the latest trend or gadget etc.

Yet I am very aware that my personal prosperity in the UK is, in part, down to a lot of other people spending a lot of money on stuff they probably don't need and probably doesn't have a lot of lasting value.

Posted by PaulH at September 19, 2008 5:23 AM

What people spend their money on is simply NOT the business of another. Mark JF makes some great points. There seems to be a backlash against spending, as if there is no exchange in the market and no necessary value in various professions, including public relations, customer relations, etc.

Spending is not necessarily the problem. No Gestapo-like regulation on spending please and please no outcries on who takes the higher or lower road based on whether one has a Gucci bag or one from Walmart. This smacks of a snobbery in reverse. That Walmart shopper may buy the equivalent of a Gucci bag in other things, like those who shop at the Dollar Store. Those dollars add up. But I do advocate in general a sense of personal responsibility across the board.

There should be certain checks and balances in the overall system, one that includes the credit score system, which itself may need to be simplified here in the US, where if you over extend yourself there are consequences. (Debt forgiveness over a period of time is also important to include in the system.) The problem here on a large scale is the triple rate scoring systems of cities and even countries are in jeopardy. What we see on a small level is magnified on a national level. Or, is it vice verse?

Posted by Judith Ellis at September 19, 2008 8:00 AM

Is it by pure coincidence that the Fed Chairman Ben Bernanke is a scholar on The Great Depression? Many people saw this coming, including undoubtedly the longterm Fed Chairman, Alan Greenspan. Many have placed blame on Mr. Greenspan for what is currently occuring. Bill Flickenstein have written quite a few articles on this matter.

Posted by Judith Ellis at September 19, 2008 8:20 AM

Funny how the country with all the money
is communist.

Posted by zed at September 19, 2008 6:22 PM

Ed Brenegar posted:

"We can certainly write this off as a result of complexity of the markets. However, there are banks who chose not to get into mortgage backed banking."

YES. AND FURTHER
The ones that were driven by market economics but tried to stay out of the casino paid a terrible price. In an analogue to Gresham's Law, market-based organizations' bad money practices drove market-based and others' good money practices out of "circulation".

Banks that ordinarily offered mortgages couldn't compete with the Chaff-assed Countrywide crap artists, the Ameriquest parasites, and their cohort. My credit union, for example, made the decision to just stop offering mortgages -- they couldn't make money offering legit products because the market became so distorted there was little competitive use for legit mortgage products. And they made what Brenegar would call, I think, a "moral" one to not prey on their account-holders (owners).

That seems like a hard decision to make. But for a credit union, mostly removed from free market pressures, the moral decision was punishing but in the end not bitter. The challenge of a truly bitter decision is that of the publicly-traded financial corporation that would prefer to make the "moral" decision, but that is owned by many of the same stockholders who own the Ameriquest or Countrywide scammers. The true challenge, frequently faced, rarely overcome is the underregulated free-market based player who strives to be legit in a business driven by Gresham's.

All unregulated markets gravitate towards Commonsism.

http://tinyurl.com/Commons-ism

To be effective, any market critical enough to make or break an economy needs either perfectly moral behavior on the part of all participants all the time, or relentless, energetic regulation that prevents parasites nudging it towards a Commons.

Posted by jeff angus at September 20, 2008 4:13 PM

The Tragedy of Commons is a great article. Thanks, Jeff. While reading the article and Jeff’s comment I thought of two passages from the New Testament which refer to the perfect law of liberty and the law being for the lawless. Smith’s “natural liberty” seems to be this perfect law of liberty but one that is governed by internal laws of morality and decency that nullifies external laws. Smith was not naïve to think that the whole would be so inclined to ethics in free markets. Rather, he seems to espouse the gauntlet as both safety and insecurity in a continuum which causes us to forever look at things anew.

The invisible hand is a protective measure in the perfect law of liberty, fraught with the propensity of error. Abuses within the system of free markets were to be expected, but the “natural liberty” is akin to that perfect law of liberty governed by individual exchange based on self-interest out of which free markets flourish. As one who was opposed to slavery and colonialism, there was obviously something beyond self-interest he sought after. These were the ultimate mechanisms of self-interest where the individual was insignificant, labor exploited and exchange nonexistent.

Smith seems to have wanted to apply ethics to a system of exchange that would produce equality as opposed to a deceitful system of altruism in need of governance. How we intrepret these things to justfy exploitation and other unethical measures is altogether another matter. With regards to the commons, the perfect law of liberty and the internal ethical law of necessity nullify the need for governance.

Posted by Judith Ellis at September 21, 2008 7:33 AM

Tom Friedman has a column today where he asks his readers if this jem from Ronald Reagan is still funny.

“The nine most terrifying words in the English language are: ‘I’m from the government, and I’m here to help.’

Well, is it still funny?
Should it had ever have been funny?
For the past 25 years, the Republicans have been selling us a bunch of hockey mom poop.

Posted by zed at September 21, 2008 9:34 AM