This blog entry describes how and why opaqueness is a must on Wall Street and notes the obvious — that a drive to maintain informational advantage frustrated attempts to regulate (and continues to do so) dangerous practices of asymmetry.
Transparency is the enemy of information advantages, and opacity is the friend of high margin investment products. In the wake of unprecedented regulation after the dot-com bubble and the Worldcom and Enron scandals, Wall Street turned transparency and disclosure on its head by layering so many documents onto each other, few people ever bothered to read them. This obfuscation of otherwise transparent information recreated new informational asymmetries leading to new high margin businesses. Informational advantages are what drive Wall Street profits.
A drive to maximize informational advantage defeats market mechanisms and public regulatory efforts leading to both market and public value failure.
a search using the terms “is recession market failure” referred someone to this site.
It is a question to study — and to discuss whether public values failure contributed to the market failure.
Friedman thinks we hit the trifecta of failures with regards to the financial crisis.
This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.
No time to do it now – -but need to find the Michael Lewis piece he mentions.
When you have a program, such as the one described in this NYT article on private Medicare insurance, that relies on the market to solve a public value problem, and that program fails — you end up in the total failure quadrant.
(need a picture here)
Private health insurance plans, which serve nearly a fourth of all Medicare beneficiaries, have increased the cost and complexity of the program without any evidence of improving care, researchers say in studies to be published Monday.
Websites that dig for news as watchdogs
As newspapers fade away, their business model is no longer viable, a new model is appearing to provide news about your governments. The article mentions several websites that display the work of these “watchdogs” :
There is one in Atlanta, not mentioned, voic.us.
The article does frame the market failure surrounding the demise of traditional news organizations. I call it a market failure because the market has yet to provide a substitute mechanism to keep citizens informed. Thought, I could be persuaded to say this is also a public value failure as the public does not seem inclined to invest time (to read and contemplate information on their government and society) nor resources (money to pay for subscriptions). I guess this is similar to the argument over who is to blame for the demise of American auto companies — the companies for failing to adapt to new types of autos or the public for not demanding American automakers make more fuel efficient and compact vehicles.
From the article:
Mr. Woolley says he has become convinced that the nonprofit model has the best chance of survival. “Information is now a public service as much as it’s a commodity,” he said. “It should be thought of the same way as education, health care. It’s one of the things you need to operate a civil society, and the market isn’t doing it very well.”
Interestingly, Rupert Murdoch says that the news of the death of newspapers is premature:
“The newspaper, or a very close electronic cousin, will always be around,” he said. “It may not be thrown on your front doorstep the way it is today. But the thud it makes as it lands will continue to echo around society and the world.”
So, will the newspaper morph to an electronic cousin?
Friedman rightfully pops a cork over Nardelli’s spin that Detroit is asking for $25 billion to innovate, not as a bailout:
It wasn’t a bailout, he said. It was a way to enable the car companies to retool for innovation. I could not help but shout back at the TV screen: “We have to subsidize Detroit so that it will innovate? What business were you people in other than innovation?” If we give you another $25 billion, will you also do accounting?
The budget of US DOE basic research is $4.7 billion — and that IS for innovation. Total NSF budget is less than $7 billion. Total NIH budget is approx. $28 billion. Who knows how much DOD is spending. Nonetheless… Why do we need to subsidize the private sector to innovate?
A term no one wants to hear from economists. Especially when the comparison is to the burst of the Japanese economy in the 1980’s or the Great Depression.
Banks and other financial institutions are reckoning with hundreds of billions of dollars worth of disastrous investments. As they struggle to rebuild their capital, they are halting loans to many customers, demanding swift repayment from others and dumping assets — homes sold out of foreclosure, investments linked to mortgages and corporate loans. Selling is pushing prices down further, making the assets left on balance sheets worth less, in some cases prompting another round of sales. “You get this adverse feedback loop where assets keep falling in value,” Mr. Barbera said. “You’re essentially putting big downward pressure on the global economy.”
Aug. 8, 2005 — Oil hit a record high of $64. Gasoline hit a record high as well at $1.86 per gallon.
Oct. 27, 2008 — Oil falls below $64. Gasoline is currently priced at national average pf $2.66.
Remember when the price at the pump reacted to the mere news of an increase in spot prices? (Yeah, just last month). That kind of responsiveness is missing today… wonder why?
[Source of data is AAA]
That is what Alan Greenspan thinks:
But Mr. Greenspan, who was first appointed by President Ronald Reagan, placed far more blame on the Wall Street companies that bundled subprime mortgages into pools and sold them as mortgage-backed securities. Global demand for the securities was so high, he said, that Wall Street companies pressuredlenders to lower their standards and produce more “paper.”
“The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of the crisis) would have been far smaller and defaults accordingly far lower,” he said.
Greenspan admits he has found a flaw in the theory many believe to be immutable law:
“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said.
Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”
Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.
“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”
When evidence (fact) is presented that contradicts one’s belief system, one ignores the evidence.