For our friends across the pond

[AxeMental]

Werral: "But what I'm saying is not going to an extreme (as in the Communist block). I'm really saying is that rather than thinking of them as dogmas, market forces and state intervention should be seen as part of a tool box we use to create what we need (rather than always using a hammer for everything, or always using a drill)."

It is my belief that messing with a properly functioning free market is always going to produce a negative result (to the economic cycle) espl. long term. I don't see the government intervention as a tool but as an obstacle a wrench thrown in the system periodically. That said, I'm also not a libertarian. I wouldn't support letting people starve (or risk it) for instance. Though its not the govts. place to take care of people (thats the communities job) if they didn't then the govt. should.

I also believe manipulation of the money supply to soften extremes in the economic cycle (assuming they work, and I'm not sure they do) is kosher, just as long as its a last resort and evidence of pain exists.

As I see it the only intervention needed is to establish laws to 1. create a framework of trade and commerce and 2. create a means of monitoring for illegal activity (which of course has to keep up with new scams). Also transparancy needs to exist for the investors to see how their money is being spent. If they choose to take the risk thats their business, but they have to know its occuring. I suppose the govt. would need to regulate that. But once those things are done the govt. needs to go away (like a ref. at a football game, just make everythings played fare).

I doubt this would happen though, that would put alot in the govt. out of work. They have to create problems so they can come in and fix them.

BTW I agree with everything you say about Bush. And he's really screwed the Republican Party.

[The Icemaiden]

In your example, if you have 1 person willing to do that dangerous job (say delivering explosives) for x amount of pay and you have 30 positions to fill the employer simply has to up the pay your offering for the other 29 positions.

Well no, they pay the guy a decent wage related to the job requirements, he cant very well do the work of 29 people so its up to the company to either find or train the additional staff. If they want the original guy to train the new-starts then they give him an agreeable bonus for this service. Thats how we do it.

Anyhow, the increased cost of labor is either passed on to the customer (causing inflation eventually so the increased pay is washed) or the business goes out of existance (and new ones don't take their place as its deemed to expensive to mess with). Your basically penalizing the business owner for being profitable (kinda like the socialists). Thats just going to keep people from risking and working to start a business, afterall why risk everything and work 16+ hour days if theres not even a potential for reward if you are lucky enough to "make it").

If you follow the logic its very simple (natural really).

Everyone has the right to a decent liveable wage. Wages in the UK are quite low in many sectors (sometimes in the most profitable multi-national companies!) yet prices continue to rise, that has nothing to do with high wages,unions or the "socialist" bogey-man...in many cases its corporate greed, plain and simple. The practice of driving down wages to make business more "profitable" as costs of living soar is seen as a return to Victorian practices, in other words a regression of more than 100years.

From the dicussion overall its easy to conclude that we in the UK have no desire to follow a US model of government or to adopt all of its business practices.

[AxeMental]

Ice Maiden: "Well no, they pay the guy a decent wage related to the job requirements, he cant very well do the work of 29 people so its up to the company to either find or train the additional staff. If they want the original guy to train the new-starts then they give him an agreeable bonus for this service. Thats how we do it."

I wasn't meaning within one company, but rather one industry (lets say 6 companies need these positions filled).
With a union environment all six companies are forced to pay $50 an hour (the worked out wage) say to the high explosives driver (regardless of that drivers personal ability) and that driver doesn't get a raise for doing a good job, but rather chastised for it by his fellow union members (as he makes them look bad to the management making them have to work harder (boss man: "if Jim can drive 10 trips a day, you can certainly manage to drive more then 5 which is what your union claimed was the most that was humanly possible").

In a non-union environment Jim would be given a raise and the other bums told to do better or hit the road and we'll go find more Jims. That’s how it should be. And I agree, every person does have the right to a living where they can survive outside of poverty. But they also have the duty to fight for their salary (by shopping around). This is easier then ever with the internet.

Now to your observations:

The recent inflation in the costs of food and other goods does NOT have to do with rising salaries as you pointed out (you are right). In my examples thus far I was talking about the normal economic cycle in theory (as you approach the crest of the wave inflation normally occurs).

We weren't at the crest yet and prices suddenly sky rocketed (faster then they would in normal economic upturns). Why?

The sudden skyrocketing in the price of fuel (driven by the futures market, not a lack of supply as the media suggests) and the massive buying up of corn and other biofuels (on a monstrously huge scale) made certain products like milk and bread unaffordable *the costs are passed to the consumer* (ex. our milk had always been around $1.20 for many many years (this is the place where supply and demand have met); suddenly within 2 years (when the govt. (mostly the Democrats) started pushing biofuels and subsidizing it) it went to $4 a gallon. That has nothing to do with wage increases. Infact wages were likely reduced to try and keep the cost of the product down.

Also the increase in cost for goods was tied to increased costs in transportation and production costs due to the rising cost of fuel.

So why hasn't the price gone back down now that gas prices have dropped?

1. "Sticky prices" (which is a normal tendency for prices to stick in a free market (it takes time for competition to get back to normal, but you normally see companies start lowering prices quickly)

2. Continued gobbling up of corn and other biofuels by the heavily subsidized biofuel market.

3.but I also fear its more due to fewer competitors and price fixing between them (both are (or should be) illegal). If number 3 is the real reason we may be screwed this time.

I'm not much of a conspiracy theorists, but I strongly suspect that this has been allowed intentionally by the governments of the free world to create a situation where they can take more control and "social engineer" (people that go into govt. love power, they see themselves as smarter then you, never forget that). We are very close to existing in a world with basically one single government (with no real opposing parties (at least when it comes to economics).


Certainly the world governments (that support capitalism) should be stopping oligopolies from forming (giant mega corporations that are buying up all competitors and then basically price fixing) but I fear govt. administrators and politicians have finally figured out that that by allowing them to exist they can point there finger at them and say to the consumer "the free market has failed, let us take over with socialism (we'll call it Keyensian economics so its not so scary)". Scary times, and the press is in on it as well, don't expect any muck raking from them (as most believe in socialism for some reason or other and aren't about to investigate the instrument of its rise).

Anyhow, you can't compare whats going on now to "free market economics" (as the forces at work exist outside of it).

Personally I think you Brits don't like Adam Smith because he was a Scot. He not only loved personal freedom, and economic freedom (and it takes one who's been repressed to really appreciate it) he loved sticking it to the British (as his system flourished in the newly formed United States).

[PapersAndPaychecks]

Axe, mate, Scots ARE British. In the same way that Texans are American.

Scots aren't English, in the same way that Texans aren't Californian.

See the difference?

Also, Icemaiden is a Scot.

[AxeMental]

Oh cool, didn't realize that.

The sad thing is you guys are going to be right of us after Obama and the Libs take control (esp. if they manage a supermajority). Who knows, I may be fleeing to England in 10 years!

[Algolei]

Texans are American.

[taking notes] "Texans ... are ... Americans." [/taking notes] Huh! I must've missed that class. I thought they were mostly Mexicans and Puerto Ricans!

Texans aren't Californian.

[taking notes] "Texans ... aren't ... Californian." [/taking notes] No, of course not. Everyone knows they're from New Haven, Connecticut.

[AxeMental]

P&P: "Axe, mate, Scots ARE British. In the same way that Texans are American"

Some in Texas would beg to differ (you are familiar with why Texas is the "Lone Star State" right? I went to grad school at Texas A&M, kind of the heartland school (generational Texans). Lets just say they didn't lack in grit.

Anyhow, back in 1780 I suspect relations were a bit different (as in national identity being less global) a Scot probably felt Scottish more then he does today (just as a Virginian felt more a citizen of his state then nation. Actually Adam Smith's differences were more intellectual then nationality based (he didn't like the British stogginess or tendency toward class). A battle of ideas rather then identity. In the end I think Adam Smith won out, and deserves the title of "Father of Modern Economics".

[PapersAndPaychecks]

P&P: "Axe, mate, Scots ARE British. In the same way that Texans are American"

Some in Texas would beg to differ

I chose the analogy carefully, because so would some in Scotland!

[St_Steven]

I only got though page two tonight, and I'll read the rest later this weekend, but I have to say, and as new worlder, that his is a left/right debate, not a US/UK debate. It's wrong to say that all American's feel the same way as those posting on the first couple of pages. First off, to say that there isn't a "class" system in the US based on accent is plainly wrong. When the average American talks to someone from Appalachia, they think that they are stupid or ignorant based on their accent. That's plainly true and applies to more regions of America than that. Secondly, and as has been pointed out, to say that we don't step on peoples rights by regulating thing like alcohol ignores the blue laws and the misguided 'war on drugs' that has cost us probably trillions of dollars now just so people can't do things that other people feel are wrong. The right wing of this country talk a lot about personal freedoms, then trample them in the name of 'anti-terrorism' and 'protecting the family.' It's all very hypocritical. To address a direct quote from someone, ALL governments tell you how much of your $ you can keep. You'll have to draw the line between 36% and 39% that defines a tax system as socialism for me, because I don't see it. That's about as far as I want to go before reading the rest of the thread though.

EDIT: More reading...

P&P----the main reasn the U.S. Banks are falling is due to TOO MUCH GOVT REGULATION not too little.

The Carter and Clinton Admin. pushed socialist laws forcing American banks to make loans to people who they would otherwise never would have.

Surprise, a downturn occurs and someone making $21,000 a year living in a $300,000 home now cannot make payments.

No, the collapse of the banks here was due to socialism. Socialism is never the answer if one wants a thriving economy and individual initiative.

Now, the banks and other financial institutions did fail in their securitization of these bad loans. These deriviatives allowed the plague of bad loans to spread throughout the fianancial system.

This is patently false. The CRA, which is what you refer to, only effected regulated banks. Not the mortgage companies that made all these loony loans that are the root of all the problems. They then packaged these loans up and sold them as mortgaged back securities and sold them to all kinds of institutions. These institution, which included banks that would never have made the types of loans that underwrote these securities, wouldn't buy this paper without a way to mitigate the risk in these securities that no one knew anything about, because they are unregulated. They got this risk reduction in the form of totally unregulated default swaps, which is a fancy name for insurance against the loans going into default, except the didn't call it insurance because that would have resulted in the trades being regulate and assets being set aside to guarantee the ability to cover any of the losses if, for some reason, these securities hit the value that triggered the contracts. Of course, they did hit those values, and AIG had to be bailed out because of it. AIG couldn't be allowed to fail because its default swaps covered losses for everyone. Banks, pensions, investment funds, insurance companies, everyone. Now, the banks who hold these assets, whose value they relied upon to be able to loan money to businesses and people can't loan money because their assets are worth less, and their asset ratios must be brought into compliance with the regulations. Those that can't are the ones you hear about being taken over by the FDIC or smaller institution, like Citibank, who are just flat out sold to the US Treasury, to one degree or another. To call the issue too much regulation is to admit that there is too much right wing radio spreading a bad cover story for a corrupt government.

P&P: "Think of the Daily Telegraph as Britain's answer to Fox News".

And most of us see BBC and our own three networks as mouthpieces for the hard left. There's actually alot of hard evidence floating around for this (espl. if you look at the coverage of our last election).

So do you guys have "talk radio" or a Rush equiv.? If not I wonder why?

No, if MOST of us thought that, Obama would have lost the election. MOST of us see that this liberal media bias thing is a myth created by the right wing, who are in the minority in this now center-left county. The reason they have no Rush equivalent is because they do not have the level of pure ignorance that allows him to thrive in this country. He only has, what, 15 million listeners? That's about 0.5% of the population. I wouldn't sink my teeth into that as a sign of anything other than enough people find him entertaining that he can make a lot of money in radio as a hypocrite.

[AxeMental]

Steven, you are wrong about how class systems work in the United States. I know many people that have accents (doctors, lawyers, you name it) all with strong accents from places like West Virginia, Tennessee, Texas, etc. and despite having accents are not treated like second citizens, nor has it stopped their advancement. If anything, people take to them better then they would if they had neutral accents. Hell, my wife was from the sticks of West Virginia (as were her friends in highschool) and most of them did realy well (moving out of the state and going into all sorts of things). The key is to loose the slang thats so repulsive to people (nut'n instead of nothing, Ain't etc.) but that stuff is easy to drop. The accent itself is considered charming by most.

What your thinking of are geographical areas that are depressed due to lack of economy etc. thats why the young often move away to areas of growth.

Anyway, one only has to look at the last two presidents (Bill Clinton and Bush) as well as a slew of other high profile political leaders to see accents do not prevent people from rising to power positions in this nation. The USA has classes, sure. But those classes do not prevent a person from rising to the very top. Your just completely 100% wrong in this regard, sorry.

The banking crises had to do with people being allowed to take out loans on homes they couldn't afford. In the past these candidates wouldn't have passed screening (bad credit, small salary, etc.), but somehow they managed to get house loans (what BPoM and SKA are referring to, I too would like to see the laws and history surrounding this).

I remember seeing a story on this, where they interviewed a low level secretary living in Washington DC buying a $750,000 house with little money down. Likely she would've really only qualified for 100,000K home. So how did she get the loan? Thats the trillion dollar question. The answer will tell you who is to blame for this mess (either these companies were forced (by hook or by crook) and intimidated or something happened where the national standards of who qualifies and why were changed. As far as the bad loans being passed along in lumps, those companies should have known better.

[St_Steven]

That's how they work over there, accents that is. If you lose it, you can advance. You just said that you had to lose them. Folks in deep dark Kentucky have to vastly alter their accents to be accepted in the rest of the country. That's a fact. They are at least as discriminated against as folks over the pond with incomprehensible accents are. And if you've never heard someone from that part of the country talk 'native' so to speak, I could understand why you disagree with me.

As far as the loans go, you miss the point. That woman didn't get a loan from a bank, she got it from a mortgage company. Those are sub-prime loans. The law that you speak of applied to banks, not mortgage companies. It has nothing to do with sub-prime loans. It also didn't change lending standards. Banks and Mortgage companies set their lending criteria, anyway. Not the government.

[AxeMental]

No, I'm saying people in the USA that keep their accents are fine as long as they remove slang and make an effort speak cleraly (they don't have to loose it completely, a Southern draw for instance is considered charming by many if not most).

Plus what I'm talking about is class destinction by language (something that existed in England in the past that some Brits claim still exists). Also, there pockets of people that are speaking English that are impossible to understand in (even to other English, or at least there were when I visited) that has to stop social advancement.

As for the lending mess, I agree, those companies should be allowed to fail for taking undo risk. Thats called letting the market take care of itself (they will be more careful in the future).

As far as govt. guarenteed loans (which is what I think Freddie and Fannie managed) I think what happened was this: when the market was stable poor (with jobs) or people without cash to make downpayments on homes (but otherwise honest hardworking) qualifide for a low interest loan with small down payment. When the investors moved in (after the market crash and later instability following 911) prices sky rocketed (but salaries stayed the same). These people that used to be able to buy 100K homes suddenly found themselves without a supply (investors were scooping them up as was everyone else affraid they'd miss the chance to move).

The government at that point (and I'm not familiar with the laws related to this, but this is what I suspect) somehow convinced (or forced) lenders to give these same individuals (that had been buying the 100K homes) the chance to buy those same homes selling for 2x as much (despite the fact that they were still making the same income as before and really didn't qualify...afterall, if they didn't these poor folks couldn't afford any house and would be forced to rent).

This shell game worked by lowering interest rates (making the PITI) total payment smaller. This I suppose was ok for fixed loans, but those that balooned or were not fixed (and adjusted up) became to expensive (as those new home buyers could no longer afford their mortgage payments).

On top of that, home owners realized the amount they were paying after the crash was alot more then it would be if they simply walked away from their house and then purchased a new one (where they could buy an even larger home for half as much).

Anyhow, the Democrats are the ones that created this mess. But they've managed to put the blame on everyone else. Those that were forced into this situation aren't about to make a fuss, they want bail out money.

[jgbrowning]

There's been a lot of talk about lending in this thread. I recommend starting with the below subjects at Wiki. After that, moving on to other sites and other information would be beneficial before deciding who "the bad guys" are.

*a far from comprehensive list*
Community Reinvestment Act
Fannie Mae
Freddie Mac
Glass-Steagall Act
Gramm-Leach-Bliley Act
Mortgage-backed security
Collateralized debt obligation
Credit default swap
Credit derivatives
Derivative (finance)
Subprime mortgage crisis

joe b.

[St_Steven]

Axe...you are mistaken on Freddie and Fannie's problems. This issues that they ran into stem from the fact that they were public companies and needed to show growing profits like any other public company. They're government entities, as we all now know, but, in the rush to privatize (led by we all know who) they were traded on the stock exchange and reported quarterly profits like all other publicly traded companies. As such, they couldn't afford to miss out on all the fat cash and potential profits (reported as assets in the quarterly statements) of these great things called mortgage backed securities. We all know how great those things are, don't we. Congress, on both sides of the isle, wanted Fannie and Freddie to buy up these (basically unregulated) securities in order to free up more capitol for further lending. Greenspan was a big part of this problem and the fact that everyone, liberal and conservative, believed he knew what he was talking about when he spoke of "self regulating markets" really contributed to this mess. He (a solid fiscal conservative) is probably the biggest contribute to this meltdown. His belief that corporations would manage their risk responsibly in order to avoid the kind of mess that we are now in, and everyone else's belief that he knew what he was talking about was the thing that made this whole thing happen. Facts are that with a market that works from quarter to quarter, and fat cats that only care about reporting good numbers from quarter to quarter until they can cash out, you don't have a well functioning free market. You have a sham of a free market that looks like a free market until the real bill comes due. That is where we are now.

[AxeMental]

Look, I don't disagree with the points you listed above (well there's a few minor things, I do believe in the self corrective ability of the market, just let it occur...it may be painful, but thats the way the system works). What I'm saying is that at the root of the problem was this:

1. the market became grossly overvalued due to investors flooding in with cash (these yahoos (business men, professionals etc.) used to play with in the stock market which became far too unstable post 911, so needed something new to stick their money in (as banks weren't paying squat).

2. Qualifications for loan approval were changed. Those who couldn't afford the new inflated prices were granted loans. This was the first safety lock broken. (what SKA and BPoM are talking about I think).

3. Real estate appraisers valued investor to investor sales the same as if they were home buyer to home buyer sales. Investors (flippers) have a different "short term" motive then a home buyer (usually long term), and were likely bad comps to use in valuating the price of a home (espl. if these sales were with cash). In our area like 60% of home sales were investor to investor during the hotest growth. Yep, those are bad comps, and the second safety lock was broken.

4. When the investors jumped out of the market to take their profits, those who had actually planned on staying in their houses got stuck with a mortgage payment that was higher then it would be if they simply walked away from their home and purchased a new one (sitting with a 300K mortgage of a house thats actually worth 100K who could blame them).
This was made worse by loans maturing.

5. Next, the bad loans made on the street level were purchased by secondary buyers (actually the promise of this 2ndary purchase is usually secured before the initial loan is approved, the lender says "if we can find a buyer for your loan, we'll proceed"). This is the point you were making. These buyers (incl. Fred and Fran) should have looked at how safe these loans were (certainly they couldn't rely on the appraisal industry, which didn't have in their USPAP guidelines the tools to adjust for buyer type (only buyer relationships). If the secondary buyers had done there job, they'd have passed on the offer to buy these risky loans and the sales wouldn't have proceeded (this is were the govt. did catastrophic damage, by forcing these CEOs to make sure they did infact buy these packages). Thus the third safety lock was broken.

So, the system broke down on 3 levels (1. qualifying, 2. appraising, 3. 2ndary purchasing). Adam Smith would likely say, "the conditions for the free market to work were not in place, as a legal foundation is required"

Smith would likely oppose moves by the government to go in and start socializing the system he'd blame the govt. for creating the mess (they should have expected crooks to get involved (a given), minor laws and some enforcement would have provided the stable and legal foundation needed for a free market to flurish).

I strongly suspect politicians interested in growing government created this mess to then jump in and fix it. By making industries too expensive (like medicine) or broken to work, the govt. creates a justification to exist , have power and wealth. They are parasitic in nature, and have to be watched by an informed voting populace (thats one of the reasons freedom of the press was so important to the founding fathers).