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The system was trying to regulate itself. Thats why the economic crisis is happening. The companies that are in trouble are ones that can not be maintained that either need to restructure them selves or die. In the infinite wisdom of our leaders they decided to stray from the theory of capitalism and interfere.

Everyone likes to think that capitalism means that everything is happy daisy, but its not. If things go wrong in capitalism, then life can get hard but it will eventually self correct if you allow it.

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It's regulating itself like a poorly built skyscraper that is being regulated by gravity: collapsing. We have rules about how to build skyscrapers to keep people from getting hurt. Why not the economy? Take what works, throw out what hurts.

There has to be an incentive for people to make money, but it should be ok if it's required to be within a set of guidelines. Unfettered capitalism builds an unstable system. Unstable is bad (again, think skyscraper).

Certainly, economists must have a set of rules or principles that apply here. It would be some equation with a bunch of variable coefficients. Under some values of those coefficients, the equation would have an approximate solution that is unstable, like an exponential term with an exponent that can swing from being positive to negative and back. The job of "regulations" would be to limit these coefficients.

They must have that sort of thing, right? I mean, what the fuck do they do all day?

Yep, you would think so.

But the economy is mind-bogglingly complex and nuanced, full of billions of actors who act rationally and irrationally. Lately we have computer systems thrown into the mix that move billions of dollars around without a human decision involved.

The one thing economists can say is that people usually act in their own best interests. If there is a loophole to be found, people will find it. However smart the person coming up with the rules might be, those billions of people, due to the powers of chaos and sheer numbers, will always be smarter. You can't engineer billions of people like you would a skyscraper.

The logical conclusion here is to that simple systems that are easy to understand (and likewise easy to understand how to game) are better than complex systems that still get gamed but nobody can easily figure out why.

However there is a second camp that says that the economy is like a big science experiment: pull a rope here and see what happens over there. Sure -- things might not work as expected, but somebody has to be in charge and that's how science experiments work. After all, as you pointed out, just how difficult can it be? What do those guys do all day?

The problem is that the social engineering camp always seems to have the same problem as the laissez-faire camp -- there have been panics (recessions) for as far back as we have records. So policy doesn't seem to matter that much (or if it does, we haven't hit the magic combination yet). In fact, because of the points in the first two paragraphs here, there's good evidence that the more we muck around with the economy, the worse we actually make it. There is a large and growing faction of economists that believe that the actions of the Federal Reserve (and to some extent Hoover and FDR) made the panic of 1929 into a full-blown depression -- turned something that would have taken a year or three to recover from and turned it into the biggest panic the country has ever seen.

So no, economics are chaotic, not Newtonian. the laws that apply are myriad, complex, and currently non-understandable -- and they apply at the individual rather than system level. That's why economics are so much fun (or suck so much, depending on your viewpoint.)

Hey -- if it were easy, everybody would be doing it.

The one thing economists can say is that people usually act in their own best interests.

Actually, it appears that things are too complex for even this to be true. They may try, but it's entirely conceivable that they don't understand what is in their best interest and what endangers their future.

I think I prefer to think of what I am pondering as Economic engineering rather than social engineering. It seems like a very faith-based discipline, rather than one that formulates hypotheses based on evidence:

There is a large and growing faction of economists that believe that the actions of the Federal Reserve (and to some extent Hoover and FDR) made the panic of 1929 into a full-blown depression

But there is also emerging talk that Jimmy Carter prevented a global disaster like the one we are facing now. Neither claim is falsifiable, so not worth much mental energy to consider. Faith-based.

I think that is why I was so impressed with Greenspan's testimony before Congress where he basically said he felt like the underlying principles on which he based his understanding of the economy were incorrect (he specifically mentioned the one you did about acting in our best interest). Here was a guy in the field who was actually looking at evidence, and trying to learn. I don't know if he's correct or not, I'm no economist. I'm griping about the methods, not the principles themselves.

Anyway, thanks for reading my rant.

First, nice rant.

Second -- agreed. People act in what they perceive to be their best interests. We initially made the mistake of assuming this was what was actually in their best interests, but that seems more doubtful. (Unless acting strictly based on perception of best interests is the optimal condition. Then we're back to square one.)

Third -- agreed. It's to some degree faith-based. Climatology is faith-based as well, and for the same reasons. There are simply too many variables and the system is simply too huge and dynamic to be Newtonian. You get a bunch of smart guys, you make a bunch of models, and you take measurements, all the time having some "group consensus" that has as much to do with science as glow-in-the-dark watches have to do with nuclear propulsion.

I've slung some code for Greenspan and the FRB BOG (Board of Governors). The people there are all highly professional and tend to focus much more on facts than theories. But even then, in my opinion, there's no science going on. It's a lot of educated guesswork.

I wouldn't give up on the thought experiments such as what the Fed did during the Great Depression or what Carter might or might not have done. Thought experiments are powerful tools, and can lead to advances in science. To the degree that faith encourages creative explanations of what we don't know, it's a good thing. To the degree that it shuts out alternative answers, it's an obstacle. That's true in a lot of areas, not just economics.

"economics are chaotic, not Newtonian..." This is hugely important. First, there never will be a set of equations, that given a gazillion variables will pump out a usable long term economic forecast, but the reliance on faulty models will exacerbate the risk. Case in point: nearly all the players in the derivatives markets used the Value-at-risk model to price the riskd of their derivatives. Guess what, it was wrong, and it was so wrong that last year all the companies tanked, not just one. It was wrong because it couldn't handle the psychology of panic.

Second, the Newtonian fallacy that every effect has a direct cause, leads politicians and economists to rely on flawed models like VAR and misguided social programs where the belief is that, if you tweak the cause, the desired effect will follow.

>n fact, because of the points in the first two paragraphs here, there's good evidence that the more we muck around with the economy, the worse we actually make it. There is a large and growing faction of economists that believe that the actions of the Federal Reserve (and to some extent Hoover and FDR) made the panic of 1929 into a full-blown depression -- turned something that would have taken a year or three to recover from and turned it into the biggest panic the country has ever seen.

That's the Austrian school of economics my friend, and in terms of "growing field" there's a lot of internet libertarians and the like that are "growing" into the field, with Ron Paul as their champion of the anti-FED.

However, amongst actual economists, the field isn't taken very seriously, because of many of its adherents semantic arguments (re-defining "inflation" outside of the standard scope, to make their argument) and its ability to ignore lots of contradicting reality. (Like, the fact that no, the Great Depression wouldn't have ended quickly, because Deficit Spending != More taxes, and our debt ratio after WWII was MULTIPLE times our GDP, and yet, our industry was booming.)

A building is intrinsically stable. I mean that in the physics sense; if the building displaces itself one centimeter to the left, the forces in the building pull it back. No part of it is intrinsically unstable.

An economy has a large number of intrinsically unstable parts. As they displace from the "norm", they will displace even further. For example, the mere fact of a commodity's price going up can cause it to go up further as others react. This is intrinsically unstable.

An unstable system can not run like a stable system. Jerks are mathematically inevitable. The only way to prevent it is to do one of two things: Remove all such things from the system, or create an instantaneous counter force for each of these things. Neither is possible economically. The second sounds appealing, but the thing is that it has to be instantaneous to work, and completely (inhumanly!) accurate, or it becomes simply one more destabilizing force.

You can see this even in economies with no human interaction; this is the source of nature's constant ebb and flow.

The only thing you can do is make things worse by convincing people that you can stop the ebb and flow of the economy, so they don't prepare, then the storm comes anyhow and is all the worse for people not being prepared.

A building is intrinsically stable. [...] if the building displaces itself one centimeter to the left, the forces in the building pull it back. No part of it is intrinsically unstable.

http://query.nytimes.com/gst/abstract.html?res=9A03EFDA1F3BE...

January 4, 1914, Sunday [...]

Several of New York City's skyscrapers are away out of plumb and have a tendency to emulate the famous leaning tower of Pisa according to the engineering department of the Building Bureau.

The "out-of-plumb" is their set-point then. No law of nature says buildings have to be straight up. If what I described didn't happen, they'd fall over, so therefore it must happen.

To whomever thought they needed to downmod that, I recommend a study (or review) of elementary static Newtonian physics. I'm hardly making stuff up, this is Physics 101. My comment was deliberately drawn in parallel to the discussion of normal force that everyone should get when they first forget to include normal force in their force diagram, but remember gravity; if that was true, the object would fall through the table (or whatever surface), therefore clearly there is a normal force. If the forces on a building didn't stabilize it, it would therefore fall over. It sounds simple when you say it, but it's not so simple the first ten times you hand in your force diagram and get a big red mark on it, until you learn.

(Looking at the downmod pattern, though, there's someone who isn't liking the idea that regulation may not be perfect, and expressing that with downmods. Interestingly, my real point is that it can't be perfect for mathematical reasons, which is actually a completely different argument from whether or not it can improve things. But you do need to set out from a policy perspective with the goal of improving, not perfecting, because plans based on perfecting things always cause more trouble when they go wrong. The plan has no slack left over.)

But they are in fact stable. Just the equilibrium point isn't quite where the engineers intended.

> It's regulating itself like a poorly built skyscraper that is being regulated by gravity: collapsing. We have rules about how to build skyscrapers to keep people from getting hurt. Why not the economy? Take what works, throw out what hurts.

Since much of the problem was caused by regulation ("encouraging" bogus loans, tax preferences for fannie mae investments, "mark to market" on illiquid assets, etc), faith in regulation seems misplaced.

You don't get to assume "take what works, throw out what hurts" because regulatory capture always happens.

I note that the new treasury secretary didn't bother to pay SSI despite being reimbursed for it with a separate payment and signing an acknowledgement of same, the new HUD secretary didn't bother to pay taxes on "in kind" payments, and top members of the senate committee that regulates banks and mortgages still won't talk about the sweetheart mortgages that they got.

"Regulation" gives us bailouts. It results in socialized risk. (Which, in some sense, is only fair. If govt is going to impose rules, why shouldn't govt pay for the consequences.)

the new treasury secretary didn't bother to pay SSI [...] the new HUD secretary didn't bother to pay taxes on "in kind" payments

What would that have to do with economic policy?

The point is that regulators are human and humans don't have the properties assumed by the "regulation will protect us" theory. If a system only works when some of the components are made of unobtanium, the system doesn't work.

The current "stimulus" package is a great example. Well over half is just pumping up budgets for existing programs. Does anyone believe that those "enhanced" budgets will not become permanent?

Govt regulation also reduces diversity. It says that everyone pretty much has to behave the same way. We know how that works out.

Govt regulation is also political in the worst sense. Wells Fargo took a huge hit when it stayed out of the subprime mortgages. Regulators refused to let WF enage in unrelated activities (acquisitions, opening branches, etc.)because WF didn't "play ball", activities that said regulators let cooperative institutions do.

Note that regulators don't take the hit.

>Govt regulation also reduces diversity. It says that everyone pretty much has to behave the same way. We know how that works out.

Um, we get Food and Drugs that are safe? Drinking water that's actually drinkable and not full of stomach parasites and Cholera?

We get stable deposit banks? Notice that regional banks like BB&T, United Bank, and PNC -- non-investment banks, didn't engage in predatory lending. Their growth was stunted during the housing boom, but their customer's deposits are safe, the banks are stable, and they're in no need of a bail out. And again, due to regulation and FDIC, your money is much safer than pre-Depression era banks.

>Govt regulation is also political in the worst sense. Wells Fargo took a huge hit when it stayed out of the subprime mortgages. Regulators refused to let WF enage in unrelated activities (acquisitions, opening branches, etc.)because WF didn't "play ball", activities that said regulators let cooperative institutions do. Note that regulators don't take the hit.

I'd like to see some URLs, because (no offense) you're either being too concise or babbling non-sense. I'd like to read up more on it before concluding "regulation == ultra bad" simply from your paragraph.

we get [...] Drugs that are safe

Not unless one overcomes the barriers to pharmaceutical access.

> we get Food and Drugs that are safe?

Nope. We get blockbuster drugs, after a long delay, and that's about it. As to their safety....

We're not seeing new antibiotics.

Feel free to explain why Viagra is more profitable than a new antibiotic. (Profit = revenues - costs, so the argument should consider both revenues and costs.)

> Notice that regional banks like BB&T, United Bank, and PNC -- non-investment banks, didn't engage in predatory lending. Their growth was stunted during the housing boom

Their growth was stunted by govt action because they weren't meeting their "lend to folks who can't pay back" quota.

> And again, due to regulation and FDIC, your money is much safer than pre-Depression era banks.

Huh? Somewhere north of $2 Trillion is being pissed away because of govt regulatory failures and you think that my money is safe?

>>Govt regulation is also political in the worst sense. Wells Fargo took a huge hit when it stayed out of the subprime mortgages. Regulators refused to let WF enage in unrelated activities (acquisitions, opening branches, etc.)because WF didn't "play ball", activities that said regulators let cooperative institutions do. Note that regulators don't take the hit.

> I'd like to see some URLs, because (no offense) you're either being too concise or babbling non-sense.

http://www.tradingmarkets.com/.site/news/Stock%20News/192184...

The "Community Reinvestment Act" is code for "subprime loans".

>We're not seeing new antibiotics. Feel free to explain why Viagra is more profitable than a new antibiotic.

Because of the same market forces you're arguing for. And we are seeing new antibiotics. SARS, for example, didn't kill everyone. Although as a side-effect, the drug used to treat SARS killed all their living bone marrow.

So developing a curative anti-biotic that germs aren't already resistant to, that doesn't box liver/kidneys/bone endocytes is a largely complex, potentially intractable problem.

The two new techniques we're seeing is RNAi "wipes" to prevent transmission of the Herpes Simplex Virus (a potentially new anti-viral drug -- and a technique to develop more anti-viral drugs), and studying Alligator Blood. Alligator's "White Blood Cells" are extremely powerful, and we may be able to synthesize proteins that are safe for humans, and yet equally powerful.

So yes, new antibiotics are here, or they're coming. They just don't warrant commercials because you're not going out to ask your doctor about the new antibiotic the same way you're going to ask about Viagra. You could argue that "nothing new is happening with battery technology? Where are all the new battery technologies?" You'd be right (nothing new worth marketing about) but you'd also be wrong (plenty of incremental improvements over the last 20 years that've dramatically changed battery performance.)

>Their growth was stunted by govt action because they weren't meeting their "lend to folks who can't pay back" quota.

Again, wrong. BB&T's CEO has stated they didn't join in the Bubble for reasons other than government regulation. Their growth was stunted in the sense that you were getting a sensible 6% return instead of the 9% you'd get with BoA or Citi. Except now your investment is still around, your competitors isn't. Its one of those "When I'm excluded from the bubble I'm losing money, but now that its over I'm raking it in" things that just happens. Its also what fuels bubbles: If your competitor is shortchanging his customers, but delivering superior returns, your customers will seek him out. So you can lose business, or your engage in short term, unsustainable thinking just like everyone else. They choose the former.

>Huh? Somewhere north of $2 Trillion is being pissed away because of govt regulatory failures and you think that my money is safe?

Again, Investment Banks != Deposit Account Banks. If you were investing in a mutual fund, there was risk. That's what you were trading higher returns for -- the risk you might lose money. If you simply dumped your money in a depository account -- something FDIC and 0% risk, then no, you couldn't have lost money. Nobody has.

And again, that's one of the reason why depository banks have been incredibly stable since the last great depression: They can survive bank runs, and even if they become insolvent, the government has $44 million of insurance money to ensure you get your money back with little hassle.

Again, after reading the URL you gave me, I think you're babbling non-sense. Yes, I get the point: The CRA allows the bank to lend to people who otherwise couldn't get loans. But the claim "Wells Fargo took a huge hit when it stayed out of the subprime mortgages. Regulators refused to let WF enage in unrelated activities (acquisitions, opening branches, etc.)because WF didn't "play ball", activities that said regulators let cooperative institutions do." is NOT substantiated by the article you linked. More HOW and WHY, less WHAT, please.

we are seeing new antibiotics.

Largely because of the costs of FDA regulation compliance, it costs ~$1-2 billion to develop the average new drug. http://en.wikipedia.org/wiki/Pharmaceutical_industry#The_cos...

How many potential drugs, each year, have not been developed, because of the difference between that cost and the potential cost in a zero-regulation environment? Thousands? Millions?

A better question would be "How many potential drugs have not been developed because they cannot be patented?"

Oh, and a zero regulation environment? There's always going to be liability for "your drug killed people". In a zero regulation environment that cost is going to be incredibly high. Or your placebo drug is going to CAUSE economic damage by killing productive workers.

Your model of regulation/no-regulation is far too simple. As always, there is a sweet spot somewhere in the middle where both the public (consumer) and the corporation (producer) benefit.

And as always, if the cost of new drug (say an AIDS cure) is prohibitively high, a government may subsidize the process. Or even simply provide capital incentive (say a $2 billion winner take all prize, like an X-Prize for drugs).

> A better question would be "How many potential drugs have not been developed because they cannot be patented?"

It depends on why they couldn't be patented. There's a nasty interaction between regulatory delay and patent terms starting at application which means that drugs that don't have huge markets don't get developed, but I'm pretty sure that you're not referring to those.

Let me guess - you think that there are substances which are unpatentable because they fail the novelty test but have great utility as drugs. If said utility is newly discovered, that satisfies the novelty test. If said utility is "folk medicine", then the only thing stopping anyone from selling them as drugs is the regulatory testing costs.... (Drugs don't have to be patented.)

Well, yes, there are anti-cancer medications that have been used in clinical trials with great results, but fail the novelty test. If something is an OTC generic with an expired patent, its a little hard to get the genie out of the bottle. As long as they're not strictly encouraging the purpose of drug purchase to treat the "novel" discover, its legal, even if they copy your "applicator", dosage information, etc.

The big scramble to re-purpose drugs is while they're still patented by one manufacturer. Once someone like Mylan is manufacturing it as a generic, doing research for "novel" forms is only helping your competition.

> If something is an OTC generic with an expired patent, its a little hard to get the genie out of the bottle.

Umm, that's an argument against regulation. Regulation is imposing a cost that can't be recovered.

Note that the initial testing established "safe" (for some definition of "safe"), so any regulation-required testing is mostly for efficacy.

I agree. However, governments, who have a mandate for public welfare, can fund the medical/clinical trials for OTC generics. Countries with socialized medical systems are already doing that.

Combine that with the headstart of stem cell research the UK and Germany has, and we'll like see some cost-saving medical breakthroughs coming out of that part of the world in the next 3-5 years.

>>Huh? Somewhere north of $2 Trillion is being pissed away because of govt regulatory failures and you think that my money is safe?

> Again, Investment Banks != Deposit Account Banks. If you were investing in a mutual fund, there was risk.

Who said anything about mutual funds and investments? The financial mess was in regulated institutions. We've pissed about $1 trillion into them so far and are about to pass a $1 trillion "stimulus" package.

It was the regulators who put tax incentives on banks holding Fannie and Freddie stock, which put many of them under when that govt created house of cards collapsed.

> The CRA allows the bank to lend to people who otherwise couldn't get loans.

No, that's not what the CRA does. The CRA "encourages" banks to make certain kinds of loans. Banks were free to make those loans without the encouragement but weren't, hence the "need" for a law.

The article that I linked to is one example of how the CRA is used to "encourage" banks to play ball. It gave "activists" a tool for blocking unrelated banking activity.

Still waiting on a URL detailing how...

And meanwhile, what happens to the people who are bankrupted, ruined, cannot eat or get health care, while the system self-corrects?

Reasonably happy, non-malnourished people make better employees, you'll have to admit.

The system doesn't self-correct everywhere at the same time (unless there is a central bank point of failure, if you see where I'm going...), so if your company is bankrupt you can find a job elsewhere.

Mind you, people who were careful with their money and didn't believe in the pipe dream of ever increasing home equity need not worry about what's going on (well, they need to worry about what the government is doing, but that's another matter).

Um, we didn't have a central bank point of failure. We had 5 large investment banks, most of which had the intelligence to survive the first great depression.

The major problem is that the American economy had become entirely dependent on consumer spending, which, because of a lack of real wage growth among the bottom 80% led to a massive expansion and dependence on credit. When the housing bubble burst, credit went cold turkey, and many defaulted on their debt because of their inflated lifestyle.

As a result, everyone suffered. Consumers stopped spending, which lead to businesses credit lines being downgraded, leading to a halt in manufacturing and importing. The global ripples of having a force (like credit) simply disappear are obvious, just as they were right before the first great depression.

Exactly; The system, left completely unregulated, will find the most efficient/optimal path, but at what cost? The optimal path may involve ruining the lives of 100 million people. The optimal path may bankrupt many countries, causing its citizens to starve to death. There is nothing wrong with reasonable regulation to ensure a certain amount of stability in life.

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