What you missed was that banks can lie about what reserves they need. So the requirement is unenforceable.
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- Thread starter Cheezy the Wiz
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What you missed was that banks can lie about what reserves they need. So the requirement is unenforceable.
Lehman's had been doing it since 2001. BOA was also caught out.
The point being that reserve ratios are manipulable and should therefore only form part of the regulatory apparatus of any modern state.
The point being that reserve ratios are manipulable and should therefore only form part of the regulatory apparatus of any modern state.
Tahuti
Writing Deity
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It is true that complete enforcement is impossible, but that's true for nearly anything. However, you can make sure the enforcement is good enough, and thus reach the goal of preventing banks from going beyond their capacity.
Hygro
soundcloud.com/hygro/
And thus losing control of the interest rate.
The other thing that you don't seem to understand is that the purpose of business is to make money. And more is better. Further, making money for the people in the business running it is a different thing from making money for the owners of the company, when those groups of people are not the same people. So the larger the publicly traded company, the less the owners are in charge, and the more the managers are running it for their own benefit. For this reason, the people actually running a big bank can make a rational decision to risk the ruin of the bank, on the basis that they personally will still walk away better off.
So the solution I think is only in part reserves, but more importantly is hard and fast rules on actions, and even more important than that, massive penalties when the others don't work. Penalties so massive the capital markets cannot ignore the actions of management.
Cheezy the Wiz
Socialist In A Hurry
So why not push decision-making and control down still further? Say, all the way to the bottom? This would maximize your desired effect, and minimize the capacity for the managerial class to collectively abuse the firm for their personal benefit.
The question with that is, can the people making the decision make a profit personally without taking a risk personally. The failure of the banking system in 2008 was that for several previous years all the people making the decisions were pocketing the salaries and bonuses, but then leaving other people saddled with the risk. The low level people you mention, in this case the actual loan officers who met face to face with the mortgage applicants, they got paid based on the loans they made. They did not get penalized based on the loans that later went bad. So they were the bottom of the decision ladder, but bore no responsibility for bad decisions that they made.
The incentive was to be careless with decisions.
And the same was true with their managers, and their mangers, and their managers, right up to the CEO. Only the stockholders really had an incentive to manage risks, and not all that much of one at that, because most of the stockholders were transient. So really, everyone in the management hierarchy had an inventive to recklessness. You can't point to any level where caution was rewarded.
Except government.
The incentive was to be careless with decisions.
And the same was true with their managers, and their mangers, and their managers, right up to the CEO. Only the stockholders really had an incentive to manage risks, and not all that much of one at that, because most of the stockholders were transient. So really, everyone in the management hierarchy had an inventive to recklessness. You can't point to any level where caution was rewarded.
Except government.
Hygro
soundcloud.com/hygro/
Yeah, this. Have you read "The Best Way to Rob a Bank is to Own One" by William Black? He actually models the entire process you describe, and named it "Control Fraud". He's the S&L Crisis prosecutor or something similar who brought tons of finance dudes to jail for fraud.
He blogs a lot on www.neweconomicperspectives.com which I find resourceful when the economists on it make a post.
Then it all becomes politics, and becomes as failing and corrupt as modern-day politics.
Specialization is what has fueled our society to great triumphs. It is much more efficient for people to be specialists in their fields. As such, it makes little sense that the "bottom" would have the managerial understanding and expertise to determine what decisions are best and how to implement them. That's what managers and leaders are for.
So then the potential leaders have to pander to the masses. As we know from democracy, that's not going to result in anything close to "lack of abuse", "lack of corruption" or "efficiency". Now instead of managers just managing intrinsically, we'll have leaders tricking followers into choosing their brand of reality and proceeding as such.
Thinking further on it, I recalled something else. Back when I was working in the auto business, auto dealers often times arrange financing for the car buyer. The finance manager of the dealer in effect acts as an agent of the banks. (As an aside, the higher the interest rate/payment he talks you into, the more money he himself pockets, same with sales of extended warranty or other add ons.) But as he is an external agent of the bank, the banks have a program, not certain I recall the name, I'm thinking it was called 'clawbacks', where if the loan went bad, then the guy who wrote the loan had to refund the commission he earned on it. That was to encourage caution on the part of the loan originator.
The mortgage industry didn't do that. The loans were made, the originator was paid, the bank sold the loans to an investment bank, so the bank was paid, the investment bank rolled the loans into mortgage backed securities, and so the investment bank was paid. At this point the loan officer, the originating bank, and the investment bank, they are out of it. They have been paid, they cannot be unpaid, and they have no legal connection to the loan.
So that loan goes bad, only the people holding the MBS bond are on the hook for losses. And since each level of sale of that loan has an incentive to lie, and no penalty for lying, the final owner of that bond has no real way to evaluate the risk of that bond. And so no way to evaluate the level of risk that they took in buying it. It's a game of hot potato, and whoever is holding it when it blows is out. In 2008, that was largely Fannie Mae and Freddie Mac and various pension funds. That's why those organizations took the biggest losses. But it was not Goldman Sachs, because they knew it was dangerous, and so were the first to get themselves clear of it before it all blew up.
So contrary to the political narrative you often hear that Fannie and Freddie were major players in causing the crisis, not true in the least. They were the late entries into the market that got caught holding what everyone else was trying desperately to get rid of.
So part of the solution for that might be that the originator is the one on the hook for any loss. So that even if the loan is sold, only the originating bank is on the hook for any default. Because, ultimately, it's the banks responsibility to say no to unsafe loan applications. But instead, by selling the loan, and the risk of the loan, the banks could maximize their own profits by maximizing the risk of the loans that they originated.
The mortgage industry didn't do that. The loans were made, the originator was paid, the bank sold the loans to an investment bank, so the bank was paid, the investment bank rolled the loans into mortgage backed securities, and so the investment bank was paid. At this point the loan officer, the originating bank, and the investment bank, they are out of it. They have been paid, they cannot be unpaid, and they have no legal connection to the loan.
So that loan goes bad, only the people holding the MBS bond are on the hook for losses. And since each level of sale of that loan has an incentive to lie, and no penalty for lying, the final owner of that bond has no real way to evaluate the risk of that bond. And so no way to evaluate the level of risk that they took in buying it. It's a game of hot potato, and whoever is holding it when it blows is out. In 2008, that was largely Fannie Mae and Freddie Mac and various pension funds. That's why those organizations took the biggest losses. But it was not Goldman Sachs, because they knew it was dangerous, and so were the first to get themselves clear of it before it all blew up.
So contrary to the political narrative you often hear that Fannie and Freddie were major players in causing the crisis, not true in the least. They were the late entries into the market that got caught holding what everyone else was trying desperately to get rid of.
So part of the solution for that might be that the originator is the one on the hook for any loss. So that even if the loan is sold, only the originating bank is on the hook for any default. Because, ultimately, it's the banks responsibility to say no to unsafe loan applications. But instead, by selling the loan, and the risk of the loan, the banks could maximize their own profits by maximizing the risk of the loans that they originated.
Cheezy the Wiz
Socialist In A Hurry
If you begin with the assumption that democracy is self-corrupting, then yeah, you'll arrive at this conclusion. But I don't think that's true, so I don't agree.
You're upset that it's all politics? Guess what? It's already politics. Its autocracy. What I'm saying is that it should be democratic. That involves people making decisions and consulting other people and trying to convince them of things. That's called being empowered. Right now workers cannot do that. At all. Their voice means nothing, it's the capitalist's way or the highway.
Your defense of this "managerial aristocracy" is identical to the defense of the political aristocracy: the masses are just too stupid and unspecialized to be able to run things. I take the classic democratic answer: if they're fit for the job, then that will be made clear. If they're not, then they're not. People who care will elect people who are capable. And before you go on about demagoguery and "leading the masses astray" (something else which assumes that regular everyday people are just too stupid to make their own decisions or know what's best for them), remember that there is no way for these supposed tyrants to gain undue power and influence, because there is no money or private property. They have the power of their individual persona, nothing more than that.
With great power comes great responsibility. It is better for that power to be spread amongst the most number of people possible.
Now, can we abandon the 18th century arguments?
I begin with the assumption that democracy in the present-state of education and awareness is self-corrupting.
And my issue is that it might not present a monumental improvement over the present state.
They can vote for a political party to enact social and political reforms that are in the voters' best interests.
Oh wait, that doesn't happen. What would make a workplace democracy any different? The politically-superior candidate will take leadership run a similarly-corrupt process. Granted, the democracy will make things a bit better on average, but the "politics" problem persists.
In such a less-diplomatic fashion of putting it, essentially yes. Leadership and management is no less a skill than bridge construction or software engineering. You can't have people vote on how to build a bridge; you can't have people vote on how to best run things. And if you do, you'll need someone to "explain things", which provides the ripe opportunity for politics, which would just be handing over power to the politically-suave individuals.
My point is that the people would be just as "stupid" as right now when it comes to things. Do we currently elect people who are capable? Not to the degree you're implying would happen with this.
Workplace democracy won't solve things. Well-educated and socially-aware workers AND/WITH workplace democracy will solve things.
Money is power. The point of money is to get your own way and to get to do things that you want. Which these people, having obtained power, can do. The leader doesn't need to own the mansion he lives in.
So they may not have the money or property that a capitalist exploiter would have, but they could engage in the same activities and leisure as the same exploiter would.
And power is diluted in many ways in a democratic system. First through voter misdirection and manipulation. Second through voter apathy. Third through limitation of voter choices. And so on.
Look, I'm not saying it would make things worse. I'm saying that it would barely make things better. It is a requisite for improving things in the future, but it is not the solution in and of itself.
In a poor attempt at an analogy, building a space shuttle isn't enough to get us into space. We also need rocket fuel. Building the space shuttle is an essential step in the process, but having built it will not get us any kilometres closer to being in space.
Hygro
soundcloud.com/hygro/
Can you explain your analogy at the end, specifically how you feel the analogy might not actually represent your point accurately? That is, unless you think it's a good enough analogy upon which for me to base my response.
The more I've read it and thought about it, the more I think about it as a good analogy. So go to town.
I guess what I'm primarily opposing in this conversation is the idea that such a workplace democracy will result in an effective solution. It is part of the solution. Do not pretend like enacting workplace democracy will result in an equitable apportionment of money/wealth/worth to each labourer based on the true value of his contribution. Just like you wouldn't pretend like simply building the space shuttle will get you into space.
Personally, I find the "enlightened populace" missing portion of the equation a bit more difficult to field. Mainly because power begets power begets corruption to maintain that power. However, education does continue increasing around the world. The question is whether the consolidation of power and increasing capabilities to maintain such power will outrun the increasing education and social awareness and activity.
Hygro
soundcloud.com/hygro/
I just had a dream about this argument (I'm on this super early schedule).
In the dream the argument was that if we brought political control all the way down to the individuals of the firms you'd end up having hyper-involved, hyper-competitive firms that would either be wildly successful or go bust right away. It was that in fact it was necessary to achieve maximum market efficiency, democratizing workplaces.
I'll get to the space shuttle argument later.
In the dream the argument was that if we brought political control all the way down to the individuals of the firms you'd end up having hyper-involved, hyper-competitive firms that would either be wildly successful or go bust right away. It was that in fact it was necessary to achieve maximum market efficiency, democratizing workplaces.
I'll get to the space shuttle argument later.
Tahuti
Writing Deity
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The purpose of business in itself is indeed to make money, but in reality the very largest corporations do NOT have this goal. You pointed out yourself that the larger the business becomes, the less its owners are in charge. And businesses make no money for the sake of making money, but to deliver these profits to its shareholders, who are however largely powerless in large corporations.
Large corporations are fundamentally bureaucratic entities where top-managers are in charge. And top managers have an interest to plunder corporations at the expense of shareholders and employees since businesses do not have to make profits in order for their benefits (salaries and bonuses) and can shift the downsides of failing business practices on to shareholders and employees while taking the benefits. This especially applies to banks.
So indeed, reserve requirements are only a part of the story, but indeed an important one. Antitrust regulators should more aggressively target banks and business regulation should be more focused on keeping shareholders in control over their corporate property, as shareholders have an interest in a good running business.
Nothing in your post actually refutes the idea that large corporations exist to make money. Whether the managers are trying to siphon off as much of possible of that for themselves is irrelevant to the fact that they have to try to make money before they can do so.
My thought is that the social consciousness of the population necessary to rocket to a more equitable society, would also make a capitalist society much more bearable and equitable. But I begin worrying whether it will be possible to dethrone power now that technological and psychological advances that facilitate it continue.
Hygro
soundcloud.com/hygro/
I almost agree, but people rise to the occasion pretty fast. If you ask someone to play the role of a subject, they will stay subjects. If you ask someone to be a leader, they'll be a leader. And by "you" and "ask" I might very well mean structure of society and creating the position.
There's too much in the world to research to research first and act second. Instead if we commit to the action first, we research in a motivated and engaged fashion as we also begin acting.
I will tie it into your space shuttle model later, because it's an apt metaphor for making the counter case to yours.
Gary Childress
Student for and of life
I'm wondering, what exactly is communism? Communists often speak of democratizing the workplace. What does that mean? What does that entail?
As an American I often hear words and quotes from my fellow Americans about how we should all distrust government. The political landscape is more or less represented as you are either for government control over social institutions or else you are for private control over social institutions. Neither option really seems all that appealing. Are you for government tyranny or are you for private tyranny. Either way it is tyranny. How does communism differ in the management of social institutions from say government control over things? And what exactly was the USSR? Was it a communist society or was it just a government tyranny?
It seems to me like the world is split between two options: either have bureaucrats run our society or else have wealthy capitalists run society.
I'm a Federal Student Aid administrator at a small "not-for profit" college and I attended one of the large training conference/seminars put together by the Department of education last year. They have yearly conventions. Basically the whole layout of the convention was that, after the officials spend a few hours explaining rule changes to us, we ask the government representatives how we are supposed to do our jobs. They tell us, you can do X but not Y, or what not. I didn't come away feeling like it was a very democratic process. The bureaucrats were in charge and we just follow directions. How are these rules for Federal Student Aid created? They seem to be created by politicians elected by people who don't really know what their politicians will do on their behalf. We don't vote for rule X or rule Y in the disbursement of FSA. The politicians do that and they do it largely without a great deal of public oversight. I mean, how many people, when it comes down to it, follow how Senator X has voted on FSA issues? Or how many people follow what Senator Y did to change how a particular process is implemented.
Sometimes I wonder if "democracy" isn't a complete illusion, something that is realistically impossible for a large group of people the size of a country to achieve. And if democracy is an illusion, what does that make communism?
Sorry to be the pessimist today but this is just the way I see things right now.
As an American I often hear words and quotes from my fellow Americans about how we should all distrust government. The political landscape is more or less represented as you are either for government control over social institutions or else you are for private control over social institutions. Neither option really seems all that appealing. Are you for government tyranny or are you for private tyranny. Either way it is tyranny. How does communism differ in the management of social institutions from say government control over things? And what exactly was the USSR? Was it a communist society or was it just a government tyranny?
It seems to me like the world is split between two options: either have bureaucrats run our society or else have wealthy capitalists run society.
I'm a Federal Student Aid administrator at a small "not-for profit" college and I attended one of the large training conference/seminars put together by the Department of education last year. They have yearly conventions. Basically the whole layout of the convention was that, after the officials spend a few hours explaining rule changes to us, we ask the government representatives how we are supposed to do our jobs. They tell us, you can do X but not Y, or what not. I didn't come away feeling like it was a very democratic process. The bureaucrats were in charge and we just follow directions. How are these rules for Federal Student Aid created? They seem to be created by politicians elected by people who don't really know what their politicians will do on their behalf. We don't vote for rule X or rule Y in the disbursement of FSA. The politicians do that and they do it largely without a great deal of public oversight. I mean, how many people, when it comes down to it, follow how Senator X has voted on FSA issues? Or how many people follow what Senator Y did to change how a particular process is implemented.
Sometimes I wonder if "democracy" isn't a complete illusion, something that is realistically impossible for a large group of people the size of a country to achieve. And if democracy is an illusion, what does that make communism?
Sorry to be the pessimist today but this is just the way I see things right now.
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