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[BLOG] Misery loves company
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Author Topic: [BLOG] Misery loves company  (Read 9074 times)
purplecat
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« on: October 10, 2008, 15:45:40 EDT »

http://www.idrewthis.org/2008/10/misery-loves-company.html

So. Iceland.

A year ago, all that people thought when they heard that name was a combination of hot geysers, Hardy fishermen, the tuneful if incomprehensible and slightly melancholic songs of Sigur Rós, Björk, and a host of other artists with far too many accented letters in their names, and people who manage to party all night in a country where seeing the price of a round of drinks is likely to kill more brain cells than drinking said drinks.

Now, though it's the home of a collection of banks and investment vehicles who have failed spectacularly, taking the entire country with them.

One message in this is that "too big to fail" can quickly turn into "too big to save".

another is that the manufacture and supply of the essentials for human life is the basic function of any economy, and that the needs of people seem to have become suborned to the needs of this leviathan of our own creation. There's a whole level of irony there that I'm not even going to prod with a big stick.

and yet another is that it really isn't a good idea to have a small island nation that doesn't produce enough food to feed itself having its economy become over-reliant on financial services.

Oh.

...

Dammit.
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thomasdean
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« Reply #1 on: October 10, 2008, 17:40:07 EDT »

The other point in the blog is that in a transition to a service
based economy, you become more dependent on others for
basic goods.
As a minor counterpoint, one interesting topic I have seen raised
in other discussions is that the rising price of Oil (despite the temporary
drop this week) is dampening the enthusiasm for foreign manufacturing.
At $100 per barrel, transportation costs from China is approximately
equivalent to an 11% import tax (varies depending on value/weight ratio of
goods).  So ironically, the high cost of oil might move manufacturing
back to North America (at least for high weight goods).

In the case of Iceland, that turns into a no-win situation
as the high cost of transportation will just add to the burden
of importing the necessities of life.

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« Reply #2 on: October 13, 2008, 09:25:29 EDT »

Quote from: Liberal Seagull
Not so for smaller countries, which are more dependent on trade. And perhaps that's the real moral here — trade can bring great wealth, but it also creates vulnerability.
Now, though it's the home of a collection of banks and investment vehicles who have failed spectacularly, taking the entire country with them.

One message in this is that "too big to fail" can quickly turn into "too big to save".

another is that the manufacture and supply of the essentials for human life is the basic function of any economy, and that the needs of people seem to have become suborned to the needs of this leviathan of our own creation. There's a whole level of irony there that I'm not even going to prod with a big stick.

and yet another is that it really isn't a good idea to have a small island nation that doesn't produce enough food to feed itself having its economy become over-reliant on financial services.

Oh.

...

Dammit.

It is not trade itself that brings about the problems, it's decision making.  Limitations on trade do not bring with them automatic increases in security.

Purplecats says "manufacture and supply of the essentials for human life is the basic function of any economy".  By this I assume he means a national economy.  I don't agree.  What economic agents do is their own business and reducing their freedom doesn't necessarily increase collective security.

If we concern ourselves only with the risk that decisions about trade produce then we deprive ourselves of its benefits.  Consider Purplecat's suggestion more carefully.  What he is saying is that a particular national economy should produce the "essentials for human life" for the people of that nation.  I expect the thought behind this is that if trade is undertaken to buy these essentials from abroad then there is risk coupled with that trade.  It could collapse.  The same though is true of any particular trade within the country.  There are circumstances where trade between one sector and another could come to a halt.  This poses exactly the same sort of risk to areas within a country as it does between countries.  So the question becomes, if Britain should provide the essentials for human life for itself and France for itself, then what about the areas within them?  Surely Derbyshire should be self-sufficient in the necessities, just as Yorkshire should be?

There is little evidence that any of this really makes our economies safer.  A trade is undertaken because it is beneficial to both sides in their view.  An international trade, for example, may be undertaken knowing that it is more risky than a trade within a country, but more profitable.  On the other hand it may be done for the opposite reason, to mitigate risk.  What limitations really mean is not more security, but rather less choice in trade-offs.

This limitation of choice doesn't necessarily mean more security.  Not even if in general risky choices are prevented and safe choices are more often performed.  Since the limitation of choice prevents trade evolving and prevents economic growth.  Poor native businesses stay in business if they are protected, this prevents improvements in efficiency.  Less prosperity is a risk in itself and increases problems from outside shocks caused by changes in trade patterns or other things.

The Icelandic problems don't really point to any problem with allowing free trade.  Rather they point to the problems with attracting trade by dubious methods.  Iceland uses a fiat money system where the central bank agrees to be lender-of-last-resort to the commercial banks, like most countries these days.  This requires the central bank to layout rules to the commercial banks to prevent the crises that would lead to the central bank being called upon.  The Icelandic central bank have done this poorly.

Like the Bank of Japan in the 1980s they have structured things to allow their commercial banks a competitive advantage to other banks at the cost of extra risk.  The situation now is similar to that in Japan in the early 90s.  The problems with Icelandic banking have been known for quite a long time.

As a minor counterpoint, one interesting topic I have seen raised
in other discussions is that the rising price of Oil (despite the temporary
drop this week) is dampening the enthusiasm for foreign manufacturing.
At $100 per barrel, transportation costs from China is approximately
equivalent to an 11% import tax (varies depending on value/weight ratio of
goods).  So ironically, the high cost of oil might move manufacturing
back to North America (at least for high weight goods).
That's being going on for a while in places with high fuel cost.
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Blue Boy from Red Country
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« Reply #3 on: October 13, 2008, 10:15:43 EDT »

I expect the thought behind this is that if trade is undertaken to buy these essentials from abroad then there is risk coupled with that trade.  It could collapse.  The same though is true of any particular trade within the country.  There are circumstances where trade between one sector and another could come to a halt.  This poses exactly the same sort of risk to areas within a country as it does between countries.  So the question becomes, if Britain should provide the essentials for human life for itself and France for itself, then what about the areas within them?  Surely Derbyshire should be self-sufficient in the necessities, just as Yorkshire should be?

Though I agree with many of your points, there is something I do wish to point out about your example. I don't feel you've fully considered the differences between trade within a nation and international trade.

Derbyshire and Yorkshire fall under the same national government. They are also (presumably) connected by a relatively efficient infrastructure, including a common currency, without any substantial barriers. (A similar culture and a common identity as Britians also helps.) Under these circumstances, interdependence is almost inevitable but the issues that arise from such interdependence is also minimal.

This is not the case when trade occurs across governmental, economic, or major cultural borders. Differing government policies create advantages - often unfair ones - for corporations and industries on one end. Differing values in currencies can shift an equitable transaction into a hardship for one party. Shifting cultural values can make it more difficult to maintain amiacable relations and fair trades.

When the commodity in question is vital to the welfare of a nation, these problems are especially difficult. Iceland's dependence on imported food is one example. America's dependence on foreign oil is another.
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boring7
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« Reply #4 on: October 13, 2008, 16:28:34 EDT »

You know Current, Purplecat did not actually say most of the things you said purplecat said. 

But anyways, "the basic function of any economy" is not.  There is not function or purpose to a thing that only exists as a conceptual aid.  "The economy" (whichever one we're talking about) is simply a descriptive term or psychological category for all trades and transactions within it.  It, like the ecosystem of a jungle or the process of evolution, has no "plan" or "grand goal" in mind, it simply is.  Any structure within it is provide by outside forces, be they planned, accidental, public, or private. 

Government DOES have a purpose, however vague, and when government and economics intersect is when you can find troubles.  Governments are vital to most modern trades because money is so useful for "greasing the gears" of the chaotic mess we call "economics" and filling in the gaps and chinks between two barters.  "Money's what makes the world go 'round," they say, and "they" happen to have a point, money makes great big enterprises and large-scale trades possible. 

The free-marketeers are quick to point out the good parts of trade, they wax eloquent about how great it is for a nation as well as the individuals within it, they castigate all attempts at "controls" and "safeties" as horrible ideas that will kill your children and enslave your dog (or some such) and so on.  They will also, grudgingly, admit that free-markets and the inherent chaos/instability of them can destabilize a nation and/or a government. 

So what is my point?  The "good" aspects of an economy are helped by a stable government, and a market without "controls" or regulation can rapidly destabilize the government, thus making a market self-destructive. 

Or to put it more simply, any government that wants to live through the next crunch needs to have a back-up plan for when everything else goes south. 
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« Reply #5 on: October 14, 2008, 06:33:06 EDT »

You know Current, Purplecat did not actually say most of the things you said purplecat said. 
Well, I'm sure Purplecat will tell me if I misrepresented him.

But anyways, "the basic function of any economy" is not.  There is not function or purpose to a thing that only exists as a conceptual aid.  "The economy" (whichever one we're talking about) is simply a descriptive term or psychological category for all trades and transactions within it.  It, like the ecosystem of a jungle or the process of evolution, has no "plan" or "grand goal" in mind, it simply is.
You are absolutely right here.  I wish more people understood this.

Any structure within it is provide by outside forces, be they planned, accidental, public, or private. 
Well, not quite.  Structures may arise as the consequences of various actions, though there is no plan to create them.

Government DOES have a purpose, however vague, and when government and economics intersect is when you can find troubles.
Yes.

Governments are vital to most modern trades because money is so useful for "greasing the gears" of the chaotic mess we call "economics" and filling in the gaps and chinks between two barters.  "Money's what makes the world go 'round," they say, and "they" happen to have a point, money makes great big enterprises and large-scale trades possible. 
Well, money isn't something created by government.  Rather its something ratified and controlled by it.

Money is something that evolves.  There are certain commodities that are always in demand.  As a result it is more convenient to carry those commodities for exchange than others that may not be in demand.  As they are used more often in bartering they become more like money, people exchange for them because they know others will exchange them.  See Carl Menger's explanation.

Without government supplied money some sort of commodity comes to be used as money.  In 20th century US prisons that commodity was cigarettes.  Now with smoking bans in place it is tins of mackerel.

That said, government provide a valuable service by providing standard money.  They also provide valuable services by enforcing the law.

The free-marketeers are quick to point out the good parts of trade, they wax eloquent about how great it is for a nation as well as the individuals within it, they castigate all attempts at "controls" and "safeties" as horrible ideas that will kill your children and enslave your dog (or some such) and so on.
What a load of rubbish.  Where have I (or anyone else) said that controls would "will kill your children and enslave your dog (or some such)".  Have you actually read any of my recent posts?

They will also, grudgingly, admit that free-markets and the inherent chaos/instability of them can destabilize a nation and/or a government. 
What inherent instability?  There is no evidence that there is any such inherent instability in free markets.

So what is my point?  The "good" aspects of an economy are helped by a stable government, and a market without "controls" or regulation can rapidly destabilize the government, thus making a market self-destructive. 
How?

More to the point, if free markets are "inherently unstable" then how do regulations help?  In this most recent crisis the regulators foresaw none of the problems.  They were busy implementing regulations to force banks to lend more to low income borrowers.
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Ihlosi
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« Reply #6 on: October 14, 2008, 06:48:45 EDT »

More to the point, if free markets are "inherently unstable" then how do regulations help?

The science that deals with systems and their property is called cybernetics, and it is surprisingly universal, as it can be applied equally to technical, biological, economical and even social systems.

Unstable systems can be stabilized by various control schemes. A simple example would be an inverted pendulum. Left alone, it won't stay an inverted pendulum for long - it's not stable. It is fairly easy, however, to come up with a set of control rules and an implementation of them in a machine which will keep the pendulum inverted, even against outside force to tip it.

Quote
In this most recent crisis the regulators foresaw none of the problems.  They were busy implementing regulations to force banks to lend more to low income borrowers.

Did these regulations say that the banks have to talk everyone and their dog into taking out mortgages with terms that would be considered ridiculous in the rest of the world (no downpayment on a house, wth?) and keep them in the dark about what the term "ARM" really means (i.e. that your payment is going to jump by 50% or more after two or three years)?

And the crisis isn't just a matter of low-income borrowers, it's a matter of people being talked into mortgages that are too large for their income (even if that isn't considered "low" on an absolute scale). If someone makes $100k/yr and buys a $500k house with no downpayment, they're not exactly a low-income borrower, but in trouble nonetheless.
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boring7
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« Reply #7 on: October 14, 2008, 12:42:53 EDT »

Any structure within it is provide by outside forces, be they planned, accidental, public, or private. 
Well, not quite.  Structures may arise as the consequences of various actions, though there is no plan to create them.
In context, you have just said that nothing a government has done or will do EVER affected an intentional change to its economy.  Whether that means their plans always have unexpected results, their actions have no plans, or their actions have no effect at all; it seems to be untrue. 

Governments are vital to most modern trades because money is so useful for "greasing the gears" of the chaotic mess we call "economics" and filling in the gaps and chinks between two barters.  "Money's what makes the world go 'round," they say, and "they" happen to have a point, money makes great big enterprises and large-scale trades possible. 
Well, money isn't something created by government.  Rather its something ratified and controlled by it.

Money is something that evolves.  There are certain commodities that are always in demand.  As a result it is more convenient to carry those commodities for exchange than others that may not be in demand.  As they are used more often in bartering they become more like money, people exchange for them because they know others will exchange them.  See Carl Menger's explanation.

Without government supplied money some sort of commodity comes to be used as money.  In 20th century US prisons that commodity was cigarettes.  Now with smoking bans in place it is tins of mackerel.
I was hoping to avoid such trivialities, but it is a given that only minted money works for large-scale transactions and economic structures (paper and coins are easy to carry).  Gold and silver can sort of overcome this limitation since it doesn't matter whose face is printed on it, just that the coin is the right metal, but such metals are rapidly becoming so highly-valued that you cannot use them for much, and that would increase exponentially if they became the primary system of currency.  Other organizations can release currency, but there is no "Wildcat" currency that has stood the test of time or even (to my knowledge) lasted a whole generation. 
That said, government provide a valuable service by providing standard money.  They also provide valuable services by enforcing the law.
The law is also an artificially-imposed structure on the economy.  Selling water to a community in a desert is an economic transaction of "your money or you life."  Robbing a man with a gun is an economic transaction of, "your money or your life."  It is just as much a market regulation to outlaw theft as it is to outlaw bundling mortgages as stocks and lying about their relative stability. 

The free-marketeers are quick to point out the good parts of trade, they wax eloquent about how great it is for a nation as well as the individuals within it, they castigate all attempts at "controls" and "safeties" as horrible ideas that will kill your children and enslave your dog (or some such) and so on.
What a load of rubbish.  Where have I (or anyone else) said that controls would "will kill your children and enslave your dog (or some such)".  Have you actually read any of my recent posts?
I'm guessing you are not a fan of amusing hyperbole.  Not that I even had you in mind when I was speaking of the free-marketeers, I was trying to catch the "average tone" of the libertarians who range from, "we need a bit less regulation" to "we need to burn down the government and become yeoman farmers." 

Okay, that was another exaggeration, I don't remember a specific instance of a luddite libertarian. 
They will also, grudgingly, admit that free-markets and the inherent chaos/instability of them can destabilize a nation and/or a government. 
What inherent instability?  There is no evidence that there is any such inherent instability in free markets.
This is rather like calling gravity "just a theory"...Let me mine your own posts for a relevant comment.  Here we go, "competitive advantage to other banks at the cost of extra risk," and "The problems with Icelandic banking have been known for quite a long time."  Now unless you have a rather knotty rationalization, that suggests that you already recognize that the higher-risk economic activities will defeat the lower-risk ones in the short-term, a free market's competition will ensure that the winner marginalizes the low-risk loser, and in the long term the high-risk activities will collapse. 
So what is my point?  The "good" aspects of an economy are helped by a stable government, and a market without "controls" or regulation can rapidly destabilize the government, thus making a market self-destructive. 
How?
I thought it was obvious.  A healthy market means a healthy government via taxes on the transactions, new developments, and a populace that is fat and happy rather than starving and revolting. 

-A market without controls will rapidly be dominated by the "wildcats" and high-risk activities which will hedge out or at least force into dormancy all low-risk ventures. 

-The next wildfire comes through and the economy collapses, the high-risk ventures go up in flames.  All large economic structures are either burned to the ground or badly damaged. 

-Any low-risk ventures are either dead or still too small to do anything,

-The government is made unhealthy by a now-starving populace, no more new development, and low taxes from less transactions. 

-Unhealthy government means unhealthy (and/or worthless) government currency, lower-quality enforcement of laws, and a general increase of risk to business. 

-Any new attempts to make money in the now-unstable country will automatically be high-risk, and even if they are profitable they will collapse again before low-risk activities can get off the ground.

-No stable economic structures come into play and the government is never made stable either. 

-Communism often becomes attractive to these countries, and often the government ends up taking over most businesses thus destroying the market freedom. 

More to the point, if free markets are "inherently unstable" then how do regulations help?  In this most recent crisis the regulators foresaw none of the problems.  They were busy implementing regulations to force banks to lend more to low income borrowers.
"The regulators" who foresaw no problems were the ones breaking or removing existing regulations.  This crisis was not caused by regulations "forcing banks to lend more" (they did that on their own, the only thing different or "forced" was WHO they lent to) and NO ONE forced the banks to package and trade the bad mortgages as securities, no one forced them to con dumb people in to buying bigger houses than they could afford, no one forced them to lie about the actual security of the mortgages they were trading, and no one forced them to do, well, most everything they did. 

You have blamed the government for this in a lot of ways but rarely do those accusations make sense.  The government was at fault because of CRA.  When that gets shot down because CRA is decades old and worked fine before, the government was at fault for lowering interest rates.  When it is pointed out that lowering interest rates merely lowers the amount of regulation and restraint government is putting on loans, "the regulators" and CRA (again) were at fault for FORCING more bad loans to be made.  When it is pointed out that these "forced loans" were simply forcing WHO got the same-risk loans, it was...something. 

Private entities did this, not the government. 
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« Reply #8 on: October 15, 2008, 05:46:15 EDT »

Quote from: boring7
Quote from: Current
Quote from: boring7
Any structure within it is provide by outside forces, be they planned, accidental, public, or private.
Well, not quite.  Structures may arise as the consequences of various actions, though there is no plan to create them.
In context, you have just said that nothing a government has done or will do EVER affected an intentional change to its economy.  Whether that means their plans always have unexpected results, their actions have no plans, or their actions have no effect at all; it seems to be untrue.
No, what I said was structures _may_ arise without a plan.  That is one possibility, not the only one.

Quote from: boring7
Quote from: Current
Quote from: boring7
Governments are vital to most modern trades because money is so useful for "greasing the gears" of the chaotic mess we call "economics" and filling in the gaps and chinks between two barters.  "Money's what makes the world go 'round," they say, and "they" happen to have a point, money makes great big enterprises and large-scale trades possible.
Well, money isn't something created by government.  Rather its something ratified and controlled by it.

Money is something that evolves.  There are certain commodities that are always in demand.  As a result it is more convenient to carry those commodities for exchange than others that may not be in demand.  As they are used more often in bartering they become more like money, people exchange for them because they know others will exchange them.  See Carl Menger's explanation.

Without government supplied money some sort of commodity comes to be used as money.  In 20th century US prisons that commodity was cigarettes.  Now with smoking bans in place it is tins of mackerel.
I was hoping to avoid such trivialities, but it is a given that only minted money works for large-scale transactions and economic structures (paper and coins are easy to carry).  Gold and silver can sort of overcome this limitation since it doesn't matter whose face is printed on it, just that the coin is the right metal, but such metals are rapidly becoming so highly-valued that you cannot use them for much, and that would increase exponentially if they became the primary system of currency.  Other organizations can release currency, but there is no "Wildcat" currency that has stood the test of time or even (to my knowledge) lasted a whole generation.
Coined money that is minted by government is something that has been heavily used throughout history.  It isn't though the only form of money, private enterprises have coined money from time to time.  Also various commodities, such as gold and silver have been used as money, as you mention.

For large scale transactions government money has not been so important.  Different coins from different places have generally changed hands internationally for the price of their weight in gold.  If no coins had been available then they would have been able to have used bullion.

Where governments helped was in the provision of small coins.  By minting copper coinage they made small transactions easier.

What I was objecting to here was your implication that without government help people would have to rely on barter.  That is not true, but I see by reading your reply that you understand that.

Quote from: boring7
Quote from: Current
That said, government provide a valuable service by providing standard money.  They also provide valuable services by enforcing the law.
The law is also an artificially-imposed structure on the economy.
The economy, as you noted earlier, is a concept, an aide to understanding.  The concept of law is also an aide to understanding.  However both of those ideas must be understood together.  There can be no economy if there is no law.

As Heq points out these things and politics are all, in practice, interconnected.  Which is where the theory of that interaction comes in, public choice.

Quote from: boring7
Selling water to a community in a desert is an economic transaction of "your money or you life."  Robbing a man with a gun is an economic transaction of, "your money or your life."
I'm not sure I really understand what you mean here.  To economics trade is not the same as robbery.

Quote from: boring7
It is just as much a market regulation to outlaw theft as it is to outlaw bundling mortgages as stocks and lying about their relative stability.
I certainly agree that lying about the properties of investments is a crime.  The law in the US and every western country I know about already makes it so.

If you think that people who have committed fraud like this should be prosecuted then I agree with you entirely.  But this isn't a control or a regulation, and it isn't what those proposing regulations or controls want.

Quote from: Current
Quote from: boring7
The free-marketeers are quick to point out the good parts of trade, they wax eloquent about how great it is for a nation as well as the individuals within it, they castigate all attempts at "controls" and "safeties" as horrible ideas that will kill your children and enslave your dog (or some such) and so on.
I'm guessing you are not a fan of amusing hyperbole.  Not that I even had you in mind when I was speaking of the free-marketeers, I was trying to catch the "average tone" of the libertarians who range from, "we need a bit less regulation" to "we need to burn down the government and become yeoman farmers."

Okay, that was another exaggeration, I don't remember a specific instance of a luddite libertarian.
Ah, I see.  I'm English, I don't hear much amusing hyperbole (plenty of amusing understatement), so I'm not used to it.

Quote from: boring7
Quote from: Current
Quote from: boring7
They will also, grudgingly, admit that free-markets and the inherent chaos/instability of them can destabilize a nation and/or a government.
What inherent instability?  There is no evidence that there is any such inherent instability in free markets.
This is rather like calling gravity "just a theory"...Let me mine your own posts for a relevant comment.  Here we go, "competitive advantage to other banks at the cost of extra risk," and "The problems with Icelandic banking have been known for quite a long time."  Now unless you have a rather knotty rationalization, that suggests that you already recognize that the higher-risk economic activities will defeat the lower-risk ones in the short-term, a free market's competition will ensure that the winner marginalizes the low-risk loser, and in the long term the high-risk activities will collapse.
Your theory doesn't have many defenders amongst professional economists.

Businesses and individuals are in general risk averse.  They will not risk a high chance of their capital being destroyed, unless it is in exchange for great rewards.  The prices of shares and bonds demonstrate this clearly.  A risky share generally costs less than a blue-chip share if both have paid the same dividend in the previous year.  A blue-chip share costs less than a government bond if both pay the same dividend.

In Iceland the banks have got into the state they are in because they had guarantees.  Like other central banks the central bank of Iceland had promised to be their lender of last resort.  They behaved recklessly because they thought there was little cost in doing otherwise.

Quote from: boring7
Quote from: Current
Quote from: boring7
So what is my point?  The "good" aspects of an economy are helped by a stable government, and a market without "controls" or regulation can rapidly destabilize the government, thus making a market self-destructive.
How?
I thought it was obvious.  A healthy market means a healthy government via taxes on the transactions, new developments, and a populace that is fat and happy rather than starving and revolting.

-A market without controls will rapidly be dominated by the "wildcats" and high-risk activities which will hedge out or at least force into dormancy all low-risk ventures.

-The next wildfire comes through and the economy collapses, the high-risk ventures go up in flames.  All large economic structures are either burned to the ground or badly damaged.
Well, if by "controls" and "regulations" you mean laws, then I agree with you.  But this isn't what most people advocating "controls" and "regulations" mean.  What they mean is that they want an overseeing body that can act like a manager stopping whatever is thought to be bad.

As I mentioned above businesses and individuals are generally risk averse.  If you want evidence of that then you only have to observe the existence of the modern world.  As Hayek pointed out "If you want to explain how everything can go wrong then first you must explain how everything could go right".

For most of the past three hundred years there have been no agencies regulating risk taking.  Businesspeople have been free to invest in what they wanted.  If they took too much risk then they went out of business.  This has led to a vast increase in prosperity across the world.  Most of the crises have been attributable to wars, trade wars or government revaluing their currencies.  How would this have been possible if businesspeople are foolish and their action always lead to collapse?  The theoretical ideas about managing risk are only thirty years old.  If economies could not function without them then how have they functioned for hundreds of years?

Quote from: boring7
Quote from: Current
More to the point, if free markets are "inherently unstable" then how do regulations help?  In this most recent crisis the regulators foresaw none of the problems.  They were busy implementing regulations to force banks to lend more to low income borrowers.
"The regulators" who foresaw no problems were the ones breaking or removing existing regulations.
Which regulators would those be?

Quote from: boring7
NO ONE forced the banks to package and trade the bad mortgages as securities
No they didn't.  However, mortgages have been traded as securities in the US for many years.  There is no reason to think that the act of packaging mortgages as securities is damaging.  Lying about their contents is, as you said earlier.

Quote from: boring7
no one forced them to con dumb people in to buying bigger houses than they could afford
No they didn't, and when a bank or broker have done that they should be charged and jailed for fraud.  That is a matter of enforcing the law, not really one of regulation.

Quote from: boring7
no one forced them to lie about the actual security of the mortgages they were trading
No, and when that has happened those guilty should be charged and punished too.  Again, that is a matter of law enforcement not regulation.

Quote from: boring7
This crisis was not caused by regulations "forcing banks to lend more" (they did that on their own, the only thing different or "forced" was WHO they lent to)
Well, who they lent to wasn't forced in many cases.  It was more directed, some institutions, especially Freddie Mac and Fannie Mae had to lend to certain sectors.

The amount of the loans made though was controlled by government much more than you would think.  To understand this you need to understand the fractional reserve system.

In the US there is a fiat money system.  Money is not exchangeable for a commodity, it is money because the US government accept it and legal tender laws make it money.  The amount of paper money in circulation is small and controlled directly by the treasury.  However, much more is held in bank accounts.  Most money is the electronic form held in bank accounts.  What controls the amount of money held in bank accounts, the "M1", is the Federal reserve system.

Each Federal Reserve bank takes in deposits from customers.  Each bank may lend out those deposits.  A bank may not though lend out the full value of its deposits.  Let's say bank X had $40M in deposit accounts, it lends that to person Y who then deposits it in bank Z, which then has $40M in deposits.  That bank may then lend out that sum.  So the amount of money deposited would expand exponentially.  To prevent this the Federal Reserve require that each bank keep reserves.  Each bank must only lend out 95% of their deposits.  This means that if a person deposits $10 into a bank account, then once loans have been made on that amount there will be an additional $200 in all bank accounts.

The Federal Reserve use this system to change the interest rate.  They do this by means of the "discount window".  The Fed offer the commercial banks a loan at a certain rate.  This allows them to borrow more reserves and hence make more loans to others.

Through this means the Fed control the interest rate, money supply and amount of outstanding loans.  Let's say the interest rate charged to large customers is 6%.  The Fed want to cut it to 5%.  To do this they could cut the cost of the loans they offer to the commercial banks through the discount window.  The cut could be, for example, from 5% to 4%.  That would mean that the commercial banks would make a profit of 1% on each loan if they loaned out the money at 5%.  Except in exceptional circumstances the commercial banks will cut their rates to follow the Fed.  They have little choice in this.  Consider if bank A decided that it would not cut its rates, in that case bank B could borrow money from the fed and lend it to bank A's customers.  A few banks may stubbonly refuse to cut their rates or keep extra reserves, they are soon out-competed by others.  Banks try not to accumulate bad loans, but they don't have strong reasons to be careful, since they know the Fed will bail them out.

This process I've described above naturally requires making more loans.  If the money supply is increased the amount of outstanding loans must be increased accordingly.  If there is only a fairly fixed pool of good debtors then the consequences of cutting the interest rate are obvious.

It would be unfair of me to blame this entirely on the Federal Reserve.  The banks are to blame too, they have allowed themselves to become instruments of government policy in exchange for special protection.

Quote from: boring7
You have blamed the government for this in a lot of ways but rarely do those accusations make sense.  The government was at fault because of CRA.  When that gets shot down because CRA is decades old and worked fine before,
No, I haven't blamed the CRA.  I specifically said elsewhere that the CRA are not to blame.  The amount of loans influenced by them is very small.

I did say that government has encouraged lending to low income borrowers.  They have done this most through requiring Freddie Mac and Fannie Mae to do it, this is a recent event.  In 1996 the department of Housing and Urban Development required Fannie and Freddie to make 12% of their loan volume "special affordable" loans.  They increased this percentage to 20% in 2000 and 22% in 2005.  The goal for 2008 was 28%.

As you point out there are two side to the intervention.  The Fed intervened to reduce the interest rate which affected the amount of money loaned, the other agencies affected to whom that money was loaned.  I think overall the other agencies were much less important than the fed.

Quote from: boring7
the government was at fault for lowering interest rates.  When it is pointed out that lowering interest rates merely lowers the amount of regulation and restraint government is putting on loans,
Lowering the interest rate isn't reducing regulation or restraint any more than raising it is.  The whole system of interest rate manipulation is a system of regulation.  Without it the interest rate in the past few years would have been much higher than it was.  The fed intervened to reduce it from what it would otherwise have been.
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« Reply #9 on: October 15, 2008, 15:26:04 EDT »


No, what I said was structures _may_ arise without a plan.  That is one possibility, not the only one.
So you missed the word "accidental" in my post?  Or you were simply misrepresenting?

Coined money that is minted by government is something that has been heavily used throughout history.  It isn't though the only form of money, private enterprises have coined money from time to time.  Also various commodities, such as gold and silver have been used as money, as you mention.

For large scale transactions government money has not been so important.  Different coins from different places have generally changed hands internationally for the price of their weight in gold.  If no coins had been available then they would have been able to have used bullion.

Where governments helped was in the provision of small coins.  By minting copper coinage they made small transactions easier.

What I was objecting to here was your implication that without government help people would have to rely on barter.  That is not true, but I see by reading your reply that you understand that.
It is also more secure.  Commodities that have value on their own are easier to recycle when stolen and thus create a market demand for theft.  Gold melts down real easy, Ice cold-foties generally do not have serial numbers, but bills and bearer bonds have numbers that can be traced and if changed/removed, render the paper worthless.  At it's current value, gold is heavier than many large-scale transactions (200 tons for a mere 6 billion) can reasonably carry.  Of course it's value would shoot up if it became a primary currency again, but that would ultimately mean "small transactions, too small for gold" would likely be in the thousands of dollars range. 

The economy, as you noted earlier, is a concept, an aide to understanding.  The concept of law is also an aide to understanding.  However both of those ideas must be understood together.  There can be no economy if there is no law.

As Heq points out these things and politics are all, in practice, interconnected.  Which is where the theory of that interaction comes in, public choice.
Horse hockey.  Market transactions still occur when law ceases to be and "the law of the jungle" as it were.  It's how monarchies and feudalism and their precursors formed, certain enterprising young capitalists decided to corner the local market on "defense and protection from guys like me," and became king, or the local equivalent.  Then these delightful little venture entrepreneurs created laws to start enforcing the market structures they wanted, (like, "give me what I want, now'" or "stop keeping him from giving me what I want, now") so they could have things run without constantly making the transaction of, "I will stop waving this sword at you for X." 

I'm not sure I really understand what you mean here.  To economics trade is not the same as robbery.
Are you joking?  Of course it is.  People call exceptionally high prices "extortionate prices" or "highway robbery" for a reason.  Let's say I am a privately-owned utility, and the only source of water within 100 miles of a particular desert community.  If I refuse to sell water to that community they might die, they might just be really thirsty while they find a workaround (say, my nearest competitor from 100 miles away).  That's perfectly legal, and it is also trade.  Now let us say I am a thug, I tell someone I will beat them to a bloody pulp if they do not pay me money.  They might die, they might fight me off, they might just get injured.  This is quite illegal, and it is also "trade," in fact it is the basis of a number of "crappy economies" in certain third-world countries.  You say "robbery isn't trade" but that is only because you personally (well, most of us to be honest) consider it to be a morally wrong or improper activity.  But as we have already established the market and the economy does not have such value judgments or indeed, any judgments at all. 

And that is the point, the whole kit'n'kaboodle of regulation, ALL laws are a regulation on economic activity because as you said yourself: "these things (economics) and politics are all, in practice, interconnected."  Or as Nwabudike Morgan put it: ""Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant...the rewards of wealth still await those wise enough to recognize this deep thrumming of our common pulse."

I certainly agree that lying about the properties of investments is a crime.  The law in the US and every western country I know about already makes it so.

If you think that people who have committed fraud like this should be prosecuted then I agree with you entirely.  But this isn't a control or a regulation, and it isn't what those proposing regulations or controls want.
You're attempting to create a false dichotomy (as well as straw-men, but we'll get to that) where law is one thing but market regulation is another.  Law GOOD, regulation (and fire) BAD!  They're all still law which you so cheerfully proclaimed to be a "concept" and they are all law in the "passed into law" sense too.  Marijuana, guns, and "protection" (i.e. you pay person A so person A does not beat you savagely) are all illegal to sell without regulation, that is undeniably a regulation of transactions, but what makes Marijuana different from "protection" and do you think gun control is a law or a regulation? 

And at what point does "good marketing" become "fraud"? 

Your theory doesn't have many defenders amongst professional economists.
There's quite a few, but it's like the old Smith vs. Keynes, the camps cling to a theory like a religion and since economics never manages to isolate enough variables to be considered a science they just keep believing and denying evidence to the contrary. 
Businesses and individuals are in general risk averse.  They will not risk a high chance of their capital being destroyed, unless it is in exchange for great rewards.  The prices of shares and bonds demonstrate this clearly.  A risky share generally costs less than a blue-chip share if both have paid the same dividend in the previous year.  A blue-chip share costs less than a government bond if both pay the same dividend.

In Iceland the banks have got into the state they are in because they had guarantees.  Like other central banks the central bank of Iceland had promised to be their lender of last resort.  They behaved recklessly because they thought there was little cost in doing otherwise.
That was pretty much my point and what I already said.  Risky ventures pay more, they have to in order to attract customers.  Iceland chose to tell all it's private banks "we'll cover you, but don't worry about those pesky regulations."  Those pesky regulations went away and the banking ventures became risky, they made and paid a lot more money, right up until the whole house of cards came down.  Your implied assertion is that the only reason people joined those risky ventures was because they were still backed by the Central Bank of Iceland, which runs counter to, "everyone knew what was going on with Iceland."  If they knew, they would know that a venture that LARGE that the Central Bank of Iceland's "security" would not be enough. 

To get all allegorical again, if "they" knew what was going on they would know that Iceland's banks were giants, and when those giants came down they would squish the tiny government "net" that was supposed to catch them. 

Well, if by "controls" and "regulations" you mean laws, then I agree with you.  But this isn't what most people advocating "controls" and "regulations" mean.  What they mean is that they want an overseeing body that can act like a manager stopping whatever is thought to be bad.
I reject that assertion of "what the majority wants," primarily because we already have such an institution in the Federal Reserve.  We had regulations on mortgages and home loans, these were relaxed or removed with predictable (boom and then bust) results.  Us dirty regulators want those reinstated (or strengthened, or only partially reinstated, but we're getting too nuanced there)
As I mentioned above businesses and individuals are generally risk averse.  If you want evidence of that then you only have to observe the existence of the modern world.  As Hayek pointed out "If you want to explain how everything can go wrong then first you must explain how everything could go right".
"-unless the reward is greater."  There is a reason that Vegas and state lotteries are still profitable.  Businesses and individuals will never risk for nothing, (let's not get into the adrenaline junkies) but a whole lot of us humans will gamble against pretty bad odds for a chance at "the big time."  Whatever that "big time" happens to be.  (I'd like a pony)

For most of the past three hundred years there have been no agencies regulating risk taking.  Businesspeople have been free to invest in what they wanted.  If they took too much risk then they went out of business.  This has led to a vast increase in prosperity across the world.  Most of the crises have been attributable to wars, trade wars or government revaluing their currencies.  How would this have been possible if businesspeople are foolish and their action always lead to collapse?  The theoretical ideas about managing risk are only thirty years old.  If economies could not function without them then how have they functioned for hundreds of years?
The Federal Reserve, the Old Lady of Threadneedle Street, pretty much every country with a functioning stock market, and nearly any country that has dabbled in socialist politics, take issue with your first and second sentences.  There are ALWAYS agencies regulating investment.  The great depression, Savings and loans scandal, and most trade wars will point out that they were caused by (or simply WERE) risky business ventures that all failed at the same time.  The 6th sentence is my argument encased in straw and shaped like a man.  The last two sentences are redered irrelevant by earlier answers or their own nature. 

I'll get to the ACTUAL argument buried in straw later. 

paraphrased All that is a matter of law enforcement not regulation.
Except the laws were loosened so all those acts of almost-fraud were just "really good marketing."  Which brings us back to "where do you draw the lines of regulations." 

fractional reserve system.
I know all that, except you got it wrong.  The banks are not forced to increase the number of loans just because they are allowed to.  Which is really the point, the cut interest rates and reduced required reserve (too. man. Rs.) was not a, "you MUST loan more or else bad things will happen" it was a "you CAN loan more if you WANT, but to do so you may find the only extra customers are the risky ones."  This is a reduction of the existing regulation, a freeing up of currency that used to be locked up.  Reducing the fractional reserve is a reducing of regulation. 

And after that we get into economic theory and assertions that have little evidence but lots of faith.  I have to take a shower shortly.  Short answer, most of your blame on the government doesn't make any darned sense. 

Now, the chewy center of the straw-man. 

My point is not that there must be an overarching management keeping businesses from risking themselves and the possibility of losing their shirts, my point is that some regulation is necessary so that when a business venture gets HUGE and then decides to collapse (even low-risk has risk, and no-risk investments do not exist, that Mayo jar full of money my cousin hid in a cold dark hidden place was eaten by a hungry grue) there's a back-up plan to keep people from starving.  All business and economic activities wax and wane but such waxing and waning IS "instability" and the greater the wiggly Sine Wave of ups and downs the more uncomfortable the rollercoaster ride.  Ergo it is wise to have a force which does not think of profit first and only to try and slow things down, and keep the ups and downs from being too great.  The laws that determine what a bank cannot do stabilizes a currency, and a stable currency leads to more business and prosperity in the long term.  It is impossible to finish a 10 year project if the economic boom-bust cycle is once every 5 years. 

Or to put it more simply, regulations are not automatically bad, and the free market is still primarily to blame for this latest "crisis." 
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« Reply #10 on: October 15, 2008, 15:40:05 EDT »

A reply will take me some time.  Tune in again ~Friday.
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« Reply #11 on: October 17, 2008, 11:50:03 EDT »

No, what I said was structures _may_ arise without a plan.  That is one possibility, not the only one.
So you missed the word "accidental" in my post?  Or you were simply misrepresenting?
What you said was:
Quote from: boring7
It, like the ecosystem of a jungle or the process of evolution, has no "plan" or "grand goal" in mind, it simply is.  Any structure within it is provide by outside forces, be they planned, accidental, public, or private.
Now, I think what we're doing here is interpreting this differently, especially the word "structure" or "accidental".  In evolution structures evolve through mutation and natural selection.  This could be described as accidental, but that hardly covers what is happening.  The mutation part is accidental the natural selection part is not really accidental.

In economics the situation is more complicated.  A private company can make a plan to put in place some structure, to start a new office in another country for example.  Similarly, a government can make a plan to create a new department.  These are examples of deliberate action reaching deliberate ends.  Accident is also possible to a limited extent.  A mistake in the production of some product could produce another different product that is useful, for example.

There is another possibility though. Plans that are constructed deliberately can have effects that are not intended.  Like natural selection this is not really accidental.  A good example of this is the emergence of money which we've been talking about.  That could hardly be seen as accidental, it happened independently across the world.

Coined money that is minted by government is something that has been heavily used throughout history.  It isn't though the only form of money, private enterprises have coined money from time to time.  Also various commodities, such as gold and silver have been used as money, as you mention.

For large scale transactions government money has not been so important.  Different coins from different places have generally changed hands internationally for the price of their weight in gold.  If no coins had been available then they would have been able to have used bullion.

Where governments helped was in the provision of small coins.  By minting copper coinage they made small transactions easier.

What I was objecting to here was your implication that without government help people would have to rely on barter.  That is not true, but I see by reading your reply that you understand that.
It is also more secure.  Commodities that have value on their own are easier to recycle when stolen and thus create a market demand for theft.  Gold melts down real easy, Ice cold-foties generally do not have serial numbers, but bills and bearer bonds have numbers that can be traced and if changed/removed, render the paper worthless.
Yes.  This is one of the advantages of coined money.  It is also much easier to tell if a large quantity of coined money is genuine or not.  These are the advantages Ludvig Von Mises notes in The Theory of Money and credit, 1. the availability of small coins denumberable by a larger coin (that is "coppers") 2. Less potential for monetary fraud especially in large transactions.

At it's current value, gold is heavier than many large-scale transactions (200 tons for a mere 6 billion) can reasonably carry.  Of course it's value would shoot up if it became a primary currency again, but that would ultimately mean "small transactions, too small for gold" would likely be in the thousands of dollars range. 
Yes.  Notes could be made though and banking done, large values need not be transported around the world physically.  This is how things have been done for a long time.

To be clear, I wasn't advocating a return to an earlier physical type of money here.  What I was trying to do was to dispel a common myth.  Many people believe that government make money and that without the actions of government we would not have the obvious advantages of money.  This isn't true.  Money is something that came about from the processes of the economy.  Governments (and some private enterprise) later improved on it in various ways.

The economy, as you noted earlier, is a concept, an aide to understanding.  The concept of law is also an aide to understanding.  However both of those ideas must be understood together.  There can be no economy if there is no law.

As Heq points out these things and politics are all, in practice, interconnected.  Which is where the theory of that interaction comes in, public choice.
Horse hockey.  Market transactions still occur when law ceases to be and "the law of the jungle" as it were.
They certainly may.  However, most of economics does not apply to those situations.  Economics only really concerns itself with situations where there is a rule of law.  Some attempts have been made to extend it to Communist economies and Feudal ones though.

It's how monarchies and feudalism and their precursors formed, certain enterprising young capitalists decided to corner the local market on "defense and protection from guys like me," and became king, or the local equivalent.  Then these delightful little venture entrepreneurs created laws to start enforcing the market structures they wanted, (like, "give me what I want, now'" or "stop keeping him from giving me what I want, now") so they could have things run without constantly making the transaction of, "I will stop waving this sword at you for X."
I think labeling primitive warlords "capitalists" or "entrepreneurs" is inaccurate.  Capitalists conduct business "defense and protection from guys like me" is hardly business, however you like to cut it it is more like crime.

The transactions you describe are hardly market transactions if they are done by threat of force.  Neither is there any law.  Law is, by definition, a set of rules.  Arbitrary power of some individuals is not a set of rules.

I'm not sure I really understand what you mean here.  To economics trade is not the same as robbery.
Are you joking?  Of course it is.
In economic it isn't.  In your opinion it may be, that is a different thing.

People call exceptionally high prices "extortionate prices" or "highway robbery" for a reason.
What people think has nothing to do with it.

Let's say I am a privately-owned utility, and the only source of water within 100 miles of a particular desert community.  If I refuse to sell water to that community they might die, they might just be really thirsty while they find a workaround (say, my nearest competitor from 100 miles away).  That's perfectly legal, and it is also trade.
Yes.

Now let us say I am a thug, I tell someone I will beat them to a bloody pulp if they do not pay me money.  They might die, they might fight me off, they might just get injured.  This is quite illegal, and it is also "trade,"
No it isn't.  In the above case of water the business is offering a product and requesting a price for it.  In the case you give above the thug is not offering any sort of exchange, except the possibility of something not happening in the future.

The business owns the water that it is selling to the desert town.  The thug does not own the body of the person he is threatening to attack.  The thug is coercing his victim into parting with his money.  The business is not coercing the desert town at all, it is being threatened by nature, the desert.

This may be seen clearly if you think about what would happen if the offers of trade were never made.  If the business did nothing and didn't offer to sell water to the desert town then that town would have no water and therefore suffer.  If the thug did nothing to his victim then that victim would not suffer.

in fact it is the basis of a number of "crappy economies" in certain third-world countries.  You say "robbery isn't trade" but that is only because you personally (well, most of us to be honest) consider it to be a morally wrong or improper activity.
Well, I agree that what robbery and trade are are things that people have moral opinions about.  However that doesn't mean that robbery is a sort of trade given the normal definition of what trade is.  Trade is an exchange that neither party is being coerced into making.

I'll come back to the rest tomorrow or the day after.
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« Reply #12 on: October 17, 2008, 14:23:45 EDT »

You seem to draw arbitrary lines between trade and crime.  A threat of physical force is a crime, but a threat of depriving you of resources that will result in you starving to death isn't?  All trade has threats implicit in it, even if those threats aren't explicitly physical in nature, because failure of the trade or hostility from the trader can have all sorts of negative consequences.
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« Reply #13 on: October 17, 2008, 14:27:13 EDT »

I don't mean to derail the thread, but just to point a small nothing out:

Quote from: boring7
It's how monarchies and feudalism and their precursors formed, certain enterprising young capitalists decided to corner the local market on "defense and protection from guys like me," and became king, or the local equivalent.
That is an often repeated view of feudalism. I'm not certain it's accurate.

From what I know, social relations in western european feudalism developped out of pre-existing social relations in Imperial Rome rather than out of warlordism.

Noble-serf relations descended quite directly from master-slave relations in Imperial Rome (and among Germanic tribes), applied by the conquering Goths to the conquered populations. Notice the latin word "villa" in the modern french/english "village" (villa nowadays refers to a country house, but the roman term referred to a fairly large country estate - that would usually be slave-driven).

Liege-vassal relations descended from the foedus, a contract passed between the Roman state and various Germanic tribes allowing those tribes to settle in a region and entitling them to a share of the taxes levied in that region, in exchange for which the tribe assured the defense of the region. Notice the similarity between the words "foedus" and "feudal" ("foedus" itself came from "foederatus", which meant ally - more or less).

In fact, at least as far as european history goes (east or west), feudal-like relations typically appeared when one people conquered people, but were unable (or unwilling) to eradicate, displace or utterly enslave the conquered population.

- Vikings (mostly swedish) and Slavs in Russia
- Bulgars and Slavs in Bulgaria and on the Volga
- Various migrants and Valahs in Romania (which was never that feudal)
- Goths, later Arabs, in Spain and parts of Portugal
- Goths, later Vikings (mostly danish), and Celtic or Latin populations in most of western Europe
etc...

The only counter-example I can think of off the top of my head is the Byzantine Empire where a vaguely feudal organisation appeared as a system of Imperial officials (not unlike the apparition of counts and dukes from Charlemagne's "comites" and "duces"), and occasionally through warlordism.

To tie this with a recent discussion I had with Heq, this is why Sparta's hilotes were in some ways similar to medieval serfs, both groups had similar origins.

Okay, I'll butt out now...
« Last Edit: October 17, 2008, 14:57:32 EDT by Andrei » Logged

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« Reply #14 on: October 18, 2008, 17:48:17 EDT »

Length becomes tiresome, and quote trees are removed. 

-Your diatribe about "accidental" is as unnecessary as it is long-winded.  Incorrect or no, it is summarily ignored along with the deliberate misrepresentations built upon it. 

-Without government-backed money we would not have many of the obvious advantages of money.  Claims that this is a "myth" are unfounded as has already been explained. 

-Your arbitrary delineations between "law" and "regulation" are based on fundamentally flawed assumptions and contradictory arguments.  To whit:

Economics only really concerns itself with situations where there is a rule of law. 
This is wrong and directly contradicts your earlier position of "economics is just a fuzzy conceptual paradigm for transactions and trades."  You are applying artificial impositions of "property" and "ownership" while ignoring other artificial impositions. 

Another pair of contradictions is here:
Quote from: me
Let's say I am a privately-owned utility, and the only source of water within 100 miles of a particular desert community.  If I refuse to sell water to that community they might die, they might just be really thirsty while they find a workaround (say, my nearest competitor from 100 miles away).  That's perfectly legal, and it is also trade.
Yes.
Trade is an exchange that neither party is being coerced into making.
Your token defense of this is simply wrong.  The thug is being paid to offer security, a security that he owns just as surely as Mr. Water guy owns the water supply.  You pay him and he does not hit you, just as the town pays Mr. Water Guy and they do not die of dehydration.  The "Mr. Water Guy is not threatening them, the desert is" argument is as ridiculous as the thug explaining that it is not HE that is doing the hitting, but his fists.  Without payment the town dries up, and the thug beats people up. 

It can be seen clearly when you consider what would happen if the trade had never been offered.  The thug would beat you up (he likes beating people, he just enjoys money more), and the town would simply pump water out of the owned lake/aquifer/whatever without paying attention to the owner's artificially-enforced property rights.  Or did you forget that the concept of "property" is either an artificial construction of the government or "whatever you can defend with your guns/knives/teeth"? 

The problem is you keep asserting that the definition of "trade" follows one set, universal rule or another, but then ignore exceptions or contradictions to those very same rules.  You take property rights as set in stone, yet property rights are constantly in question.  You cannot steal my house, but what if you cut down trees on my property.  What if you are breathing my air?  What I am pumping pollution into your air?  I could tell you the long argument that still rolls about whether I am allowed to put electricity-generating windmills on my hillside property if that can ruin my neighbor's property values. 

Property itself is in question.  We used to have slavery, that was undeniably "trade" and it had laws governing it at many periods of history.  Slaves were just one more resource to be harvested, same as water pumped from an aquifer.  Somewhere along the way people decided that other people could not be property, and thus could not be harvested directly.  Some people today would like the same thing with animals, PETA is crazy and wrong but that hardly makes your idea of "property" any less arbitrary than theirs.  Wage slavery and indentured servitude are economic constructions as well (occasionally outlawed, but I am curious as to your position) which were created to replace the previous "human capital" of slavery. 

"Trade is an exchange that neither party is being coerced into making," you say.  So if a desert community has the choices "buy my water or die" that's not trade?  "Oh it's trade because MWG (Mr. Water Guy) is not the one doing the killing," you say.  Fine, so if the desert community pumped water out of a public lake and MWG bought it, does that still mean he's not the one doing the threatening?  If I set a fire and charge someone to put it out, it's the FIRE, not I, that is threatening to burn down their homes. 

You make these assertions that claim (implicitly or explicitly) to be objective and fundamental definitions or rules about economic behaviors/activities.  This is not true, every one of them is subjective and often not even held by a majority.  Theft is illegal, but from another point of view it is simply harvesting resources that happen to be in your wall-safe.  Beating people up is extortion, but so is demanding the Gross County Profit for a lifeline of water.  Demanding that the financial sector follow certain rules is a restrictive regulation, but it also frees us from other restrictions like a currency suddenly becoming worthless. 

So your stances on what is or is not property, extortion, law, or regulation are all subjective.  Why does that matter?  It matters because it blinds you from seeing that criminal activities and the defenses against them are economic activities and what that means for the bigger picture.  Even the worst atrocity exists in economic terms and any action or resistance to that action can be defined within the paradigm of Economics. 

In a truly free market there is no block on robbery, meaning that all the file sharing of Napster is legal, and so is breaking and entering.  Property rights become "what you can keep" so police and law are replaced with private security forces and "my home is my castle and these are my guns."  There are factions in this country which already seek to do this (or so it would seem) right now.  The law stops me from being profitable by grabbing what I want and it also means I do not have to spend time, money, and effort on private security because the government and the law do it for me. 

What is this to finance?  Government-backed currency and law provides a stable (usually) playing field for the game of economic activity.  Banks get to hold money, banks get to loan money, and they all follow the rules.  The regulations that keep banks from, say, lending all their money to failed institutions and then having no cash to cover the deposits of their customers are the same as the regulations that mean you can call the police and retrieve your property if I mine your garage for a rich vein of "Car" ore. 

Stable banking is like reliable police, it makes doing business less dangerous.  You needn't worry about someone robbing your home when you are out to buy groceries and you needn't fear the bank losing all your money. 

The problem is, as it has always been, complex, because it is so interconnected.  But it can be simplified for purposes of explanation.  There exist those who wish that the bank regulations were done away with, because like doing away with the police, it affords them opportunity for profit.  The analogy would be "anti-regulation banker is to regulation as Mafia Don is to police."  A businessman convinced that what he is doing is not all that bad, who will be very successful (if only for a time) once the restriction is removed, and who will eventually be destroyed and torn apart by other like-minded fellows who enjoy the cutthroat game of dog-eat-dog business.  The inherent instability that you refuse to see is that these anti-regulators and their analogous mafia bosses are generally VERY successful if they manage to get rid of the shackling laws that keep them down.  Then everyone else becomes able to do the same thing they did. 

When the industry titans clash and the mafia bosses attempt to rub each other out, great big fluctuations occur and the destruction in its wake can often outstrip any development that happens in the interim, rather like wartime production not being equal to peacetime growth. 

It continues, of course, as all trains of logic do, with socio-political arenas ranging from the nature of the "rebel without a cause" to the very nature of law and stagnation vs. chaos and creativity. 

But to reel it back in to a perspective that matters, "regulation is necessary" is a fact of life whose denial involves blatant lies about history.  "Regulation can be good or bad, and one must find the middle path" is as unsurprising as Iceland's banking collapse.  Iceland wanted the wild business upswing of free banking and the stability of a federal reserve, attempts to get the best of both worlds resulted in neither and now people are going to be very miserable for quite some time. 

But hey, at least they have Humvees, those things are excellent pieces of engineering. 

As for Andrei's post, yeah, I know.  Feudalism technically descended as a breakdown of the Roman Empire's previous greater level of control.  The point at which economic activity began and such is a question of how far back you want to go.  Labor division and the rest all go back further and further, beyond the kings, beyond the romans, beyond the greeks, beyond the phoenicians, assyrians, and Hammurabi himself.  Even the first tribes of cavemen were not the first creatures to give and take and occasionally steal.  But the point I was making is that he who controlled the most important resource had the power and made the decisions that affected how all the other resources were managed.  Usually the most important resource was thuggish "protection" which extended into defending the tribe (when necessary) but occasionally the one who knew how to find food and/or lose the big jerk with the big club in the wilderness was the boss.  This pattern grew with humanity throughout our history, where the power was with the guy with the most important resource and he usually claimed or controlled all the other resources with that power. 
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