The average investor would have no access to these statistical models and even if they did, would not likely grasp their meaning. This creates two classes of investors, the powerful minority in the know and all the others.

I don't think the this is necessarily true. There are some huge investment firms that have crashed with well trained financial experts on staff, I think the problem comes from the decision makers wanting to believe only the advice that points to growth and success (look at Enron). As you said here:

Firms in the financial industry are competing for investors business and so they are driven to seek out ever higher returns if they can rationalize them with appropriate risk calculations and justify the investment. Firms that fail to compete successfully will lose market share and slide into unprofitability. This is a systemic factor in a capitalist economy that drives firms to operate at the edge of the legal/regulatory framework

giselle wrote:This is a systemic factor in a capitalist economy that drives firms to operate at the edge of the legal/regulatory framework. Competition is generally perceived as a positive factor but there is a flip side to the impact of competition if the regulatory environment gives just a bit too much free reign.

Yes. Phillips notes that:
"Corporations facing Darwinian markets and globalization pressures have spared few efforts to curb defined-benefit pension obligations, minimize wages, and reduce employee and retiree health costs."
An excellent example of the modern corporate response: cost-cutting.

However, competition does not describe blindness or greed. I don't see how competition is related to deregulation as you describe it. You are forgetting that those involved in the system are in no position to judge. I don't feel that competition in a market sense can be an attributable factor to what we are describing when those involved would essentially be in competition with everything about what they were doing. To compete in a sense that Phillips would include in the book would mean an individuals or a corporations competition with the very financial system. An event I lack example for.

As Phillips says:
"Unfortunately, it is entirely relevant to note the greed factor."
An explanation for why things are they way they are.

Competition - uncomfortable changes you are forced into making to survive
Greed - accumulation of a surplus for no other apparent reason than to reinforce the intensity of the surplus, wholly unmindful of present or future consequences to others or, in extreme examples, to yourself

Welcome to the club?

thanks, its a wonderful club, isn't it? I really liked "so opaque and complex that only a coterie of elite mathematicians understood it" ... between the high stakes gamblers (with someone else's money) and the mathematicians, what hope does the little guy have?

giselle wrote:thanks, its a wonderful club, isn't it? I really liked "so opaque and complex that only a coterie of elite mathematicians understood it" ... between the high stakes gamblers (with someone else's money) and the mathematicians, what hope does the little guy have?

And what hope does the little guy have of understanding the advice that continues to pour out from the economists? It's mystifying. We have a crisis, one of whose causes was our tolerance of incurring debt. Just now, though, we're being told that our recent penchant for saving money, incurring less debt, is causing the economy to tank. Thrift is a good practice for the individual, they tell us, but it's bad for the whole economy. Egads! So what I must do now is to go out and ensure that goods continue to fly off the retailers' shelves (spending money that I don't have or that I should spend on other things such as college tuitions)? We talk about rationality a lot on these forums. Isn't there someone who can recommend a rational approach to us?

You're right. We've been taught to spend our way out of recessions or contractions but now we're an asset backed nation that's had it's largest asset seriously devalued, our homes. We've racked up debt and don't have the money to spend and nothing to borrow against to get more.

The only solution is to devalue the currency and shift wealth from the nation's wealthiest to the middle class consumer. That's my rational approach.

The next step would be to explain larger problems. How we should all live within our means, how we should keep a close eye on income inequalities, and how we should only borrow when we need to buy a house or when we think that we'll be able to invest the money in some way as to make more money than the original amount plus interest owed (aka: productivity).

In my opinion - something did our country a great disservice and it should be eradicated immediately. Whatever frame of mind led to this needs to be found and shown for what it can lead to.

What good is this disaster if the American people can't learn from it. We all need to learn that some type of behavior led to this. We all need to agree on it, acknowledge it, validate it, agree with the consequences, and grow. I think we're all still confused on why it happened and what needs to be fixed. Once the vast majority of us - 95% can agree that certain causes were responsible - will this disaster be worth it. We need to be united and confident.

Anything that can bring the country closer would be a good thing right now.

We all need to learn that some type of behavior led to this. We all need to agree on it, acknowledge it, validate it, agree with the consequences, and grow. I think we're all still confused on why it happened and what needs to be fixed.

I think this makes good sense and I think we must look deeply into the causal factors and not accept superficial explanations or rest at blaming a few individuals. I also think we (the public) can expect obfuscation from those who have the most to lose from investigation. The vested interest in protecting the system and the private gains that have been made arising from many quarters will conspire to limit the depth of investigation.

Refering to the item I posted yesterday as an example of how not to conduct an investigation, one can see that this investigation or questioning is half hearted, for appearances sake and set up to fail. It's a typical sound byte driven gong show that allows politicians to say that they have taken action.

I think looking at the historical perspective and contexts given more than ever a lack of absolutes should become apparent.

Reducing the influence of poor thinkers (in some cases through blame in failings) is imperative to the growth of thought in all areas of human society not least the economy. In this sense there is no right way to find the perfect market just as there is no such thing as the perfect market, there is merely the evolution of the idea of it in perspective of what has been proven untenable.

http://www.amazon.com/GREENSPANS-BUBBLE ... 0071591583

Americas strong foundation in capitalist mentality will not be so easily abandoned, or even debated seriously. In reality I think that a stiff mix of Liberalism via Obama is fine wine right now, considering the last 30 years of Conservative pickles that have been passed for peaches. Just don't expect anything revolutionary.

http://www.bbc.co.uk/worldservice/docum ... risk.shtml

The market has been shaken badly, toxic security mixed in with the creamy assets leaving the world with few practical techniques for distilling the broth. What is needed more than ever is the strength of an idea that will return confidence to the west and restore function to a poorly conceived market idealism. This idea may be radical only in its rejection of neo-liberalism, a rejection in my mind which appeals to common sense more than anything.

If you want to talk about a serious shift in mentalities peak oil is your subject. The relative wealth of the American should be proof enough of the power of the capitalist system in spite of its severe social inequalities and frequent failings. While both vital resource depletion and the capitalist system are obviously related, and should not be ignored as in anything but a highly meaningful relationship, this chapter does not relate the two in any relevant way.

Comacho and Grim, the new president could stand to hear what you've had to say above.

I do worry that Obama will find himself captive of the system he's been criticizing. Already it seems that his party is trying to press an advantage with the so-called stimulus package, instead of showing the bi-partisan spirit Obama promised. He needs to be very tough with the Democrats. Their party, by the way, is surely as involved in the financial mess--if not more so--as the Republicans.

Grim wrote:What is needed more than ever is the strength of an idea that will return confidence to the west and restore function to a poorly conceived market idealism. This idea may be radical only in its rejection of neo-liberalism, a rejection in my mind which appeals to common sense more than anything.

Rejection of neoliberalism may look like common sense, but it is not good sense. Neoliberalism is an analytical evidence-based approach to economic policy. Its foundations in the work of Adam Smith provide the only successful and sustainable model for economic growth. It was only when China enbraced neoliberalism under Deng Xiao Ping that it found the secret of economic growth. The alternative to neoliberalism is socialist planning, which distorts the allocation of resources on political grounds. Some socialist distortion is necessary for social equity, but such distortions tend to undermine performance incentives. The real problem is how to regulate a free market. Clearly, the USA New Deal-type incentives for home ownership have gone spectacularly bust, and Greenspan was asleep at the wheel while the economy ran off the road, but you can't blame neoliberalism for these problems. In most of the world the problem is not enough capitalism rather than too much. Attacking neo-liberalism runs the high risk of putting economic policy onto a political rather than a scientific footing.

One thing that struck me in Phillips' book was Bernanke's decision to stop publishing M3 in 2006. At http://www.huffingtonpost.com/kevin-phi ... t_13452450 Phillips asks

Bernanke, Inflation and the Suppression of M3 Money Supply Data: In November 2005, several weeks after Bernanke was named as chairman, the Fed announced that publication of the broad "M3" money supply data would be discontinued in March 2006 because it was "duplicative." It wasn't, because the M3 measurement is much broader than the other two yardsticks (M1 and M2). More importantly, over the last two years, M3 has ballooned to a 15-16 percent annual growth rate. These no longer official computations mocked Bernanke's pretenses that inflation was low and under control. Indeed, the investment firm of Stifel Nicolaus just published charts showing how closely the 2001-2008 oil price surge has related to the galloping growth in M3. Here, too, the legal question becomes: What did Bernanke know about inflation and the suppression of M3 and what was his personal involvement?