Spectacularly Bad Ideas In Response To The Financial Crisis

from the wow dept

The financial crisis is certainly the result of a series of rather complex situations, and with many people rushing to try to understand what happened, plenty of totally incorrect, but very simplified, explanations are being proffered: it was the Republicans fault! It was the Democrats fault! Free market economics doesn’t work! Poor people are to blame! None of these are even close to accurate, but it leads people to come up with positively nutty suggestions for how we should react — and what’s more troubling is that some of these suggestions come from well-respected individuals who should know better. In the past few days, we’ve seen two absolutely ridiculous suggestions, which would make problems much, much worse, but are apparently suggested in all seriousness.

The first is apparently in the latest issue of the Harvard Business Review, where two business school professors suggest that business managers should be licensed, similar to doctors and lawyers. That’s a fantastic idea if you want to basically destroy business growth. In fact, we’ve already examined how these sorts of “professional unions” often are really designed to simply inflate prices for services by limiting the supply of service providers. These sorts of licensing systems often do little to actually “protect” consumers, but do plenty to make them pay more. If you added the same situation to business managers, you’d make running any kind of business significantly more expensive, while removing from the pool of potential managers plenty of people who would excel at the job. While you can at least understand some of the reasoning for licensing some professions, management is one where it’s hard to see any rationale, as creativity and out-of-the-box thinking is often what managers need the most.

The second also seems to come from the medical profession, and it would be to purposely slow down innovation by forcing all new financial instruments to go through a complex approval process similar to what it takes for drugs to be approved. I can’t think of a better way to kill the economy than that. I’ve been meaning to dig into some of the problems with the health care system for a few months (though, the whole financial crisis has pushed that back), and one of the biggest problems with it right now is the process for approving drugs, which often does more harm than good. Extending that broken process to other businesses, such as the financial industry, would basically ensure that money would quickly flow out of the US and into other countries that have more reasonable financial systems.

I can understand the desire to come up with big solutions to “fix” the problems that created this financial mess, but suggestions like these are simply scary overreactions by people who don’t seem to understand what really caused the problems. Both of these suggestions would make things significantly worse, based on the false belief that you can somehow have some body (government or licensing body) that can decide what’s “good” and what’s “bad” for business.

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Comments on “Spectacularly Bad Ideas In Response To The Financial Crisis”

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Anonymous Coward says:

Let me see:People live ...

Let me see:

People live over and above their means via credit that is only too happily extended by financial institutions. Eventually the scheme falls down, the piper has to be paid, and now all of a sudden people scream "crisis" and "Where is the government?". This is surprising? Hardly.

What next? Shall we declare credit card debt is likewise in "crisis"?

Teilo (profile) says:

The weakest link fails first . . .

… but that doesn’t mean the weakest link was to blame.

There are but a few voices with any mainstream coverage, who have nailed this issue: It’s the Monetary System, stupid.

Get this through your thick heads (if the shoe fits . . .): Money = Debt. Debts are paid with interest. This has consequences. The consequences are now playing out. (And for he who has ears to hear: the game began in 1913.)

In other words, the problem is not IN the Monetary System. The problem IS the Monetary System. It ultimately MUST fail, because it is built upon the principle of ever-increasing debt. In order to keep pace with the amount of interest that must be paid, the number of loans which are created must continue to increase. Otherwise the money all goes poof, back into /dev/null from whence it came.

Every dollar in your pocket, your bank account, your 401k is a dollar that somebody owes a bank. There is not enough money in the entire system to pay off all the debts that are owed. This is by design. This means that the interest that you pay on a loan is also created by debt — somebody else’s debt. Some people are smart. They put their money into fixed assets, thus turning a debt-based instrument into an asset. But all this really does is take more money out of the system – less with which to pay the interest on all those loans out there, and more cash that must be created by making yet more loans.

Picture in your head two curves: One is the rate at which capital increases. The other is the rate at which debt+interest increases. The latter curve, after a while, is steeper. In other words, it does not matter what happens. The debt will finally outpace the capital that backs it, and the result will be: No More Money Anywhere. This is what the news media has been euphemistically describing as “the credit pipes getting clogged”.

The weakest link in the Monetary System were the sub-prime mortgages, amplified in the extreme by securitization of the same. Don’t get confused or mired in the details. You can spend years trying to understand how this part of the game is played, but it doesn’t matter. It’s a distraction. Even if the whole sub-prime bubble never happened, even if every bank was a careful lender and all of their customers were responsible borrowers, the crisis would not have been averted. It would simply have taken longer to play out.

(And so the question you must ask yourself is: If the game began in 1913, what does the end game look like?)

Anonymous Coward says:

Joe's idea

So recently I’ve been learning about the economy, something which previously I didn’t seem to care that much about. (One good thing about the current economy).

I found it interesting that in 1998 Congress voted to not regulate the Credit Default Swap market because the only people involved were from very large corporations (such as AIG) that were considered “sophisticated.” The thought was that they knew what they are doing, and so didn’t need to be regulated. Years later they failed (pretty good evidence either they didn’t know what they are doing, or didn’t care). Now they need to be bailed out or they will go under.

My initial reaction was: Great, let the companies that were “sophisticated” enough to take these huge unregulated risks suffer the consequences and go out of business.

The problem is how many companies were doing this, and the fact that they are linked together in an “unholy chain.” No one knows the extent of the CDSes because they weren’t regulated, so they weren’t reported. The personal fear I have is that people I know and care about may have investments in these large corporations, that would lose their retirement money if these large corporations go under.

The problem with the “let the market decide” seems to keep coming back to the issue of the availability of information. When people don’t know, they make bad decisions.

The problem is that there are people intentionally spreading mis-information because it could mean a huge financial gain for them. Examples in the past include pyramid schemes, and mortgage fraud. The methods of doing this are getting more and more sophisticated such as Credit Default Swaps, and harder and harder to see as the big rip-offs that they are.

The best way to defeat them is helping people stay informed. The problem is that there is a lag time between the new way to rip people off being invented, and people becoming informed about it.

I’m not a big fan of having the government getting involved, but I fear that the “let the market correct itself” concept is being promoted the strongest by those that would use that freedom to continue to take advantage of others.

Sadly, therefore, some regulation is needed. It isn’t ideal, but it is a requirement any time there are people with less than honorable intentions. Such regulation does slow down the economy, but that slowing down helps solve the lag time problem. Thieves are slowed down too, and so can be spotted before they have a chance to do as much damage.

jonnyq says:

I completely agree that making our financial system more like our medical system would destroy it.

I disagree that the underlying causes of the financial crisis are mystical voodoo. I can agree that the effects are mystical voodoo, and so are some of the solutions, but not the underlying cause. You can probably guess where I stand on that.

In fact, we should be making our medical system more like the financial system was before the government slowly broke it over the past 30 years.

Michael Long (user link) says:

complex approval process

“…and it would be to purposely slow down innovation by forcing all new financial instruments to go through a complex approval process similar to what it takes for drugs to be approved.”

I’m not so sure that this would “kill” the economy to the point you suggest. First, how can it be considered “bad” to have an outside explanation of just what investors are supposed to be buying? Or an independent evaluation of the risks?

Second, just how many “new financial instruments” are designed and created per year? Two? Five? A dozen? Considering just how much mess computerized models of fancy derivatives got us into in the first place, I’m not too sure that slowing down the creation of “new financial instruments” is that bad of an idea either.

Fundamentally, I’m for anything that allows more transparency into the process.

Matt says:

Re: complex approval process

in all honesty, slowing down the economy to prevent errors is something we’ve needed for a long time.

Plenty of politicians don’t research the things they sign or try to look for where people are injecting horrible bills into existing ones just to force stuff through.

I’d say the whole lot of congress is probably the laziest group I can imagine. Other bills that get passed in less than a minute, with no review? If we had their kind of quality control implemented in any other system, it’d be fatal. Like “oh, this is good enough, let’s just put it through” for things like safety would kill millions. As is, the stuff they do kills millions subvertly.

another mike says:


I am not a psychologist so your mileage may vary. But I think this need to solve complex problems with simple (even simplistic) solutions is a holdover from when we only had simple problems. When a sabre-tooth tiger is attacking your buddy, you hit it over the head with a rock. The tiger that is, but your buddy probably deserves a rock to the head too. Simple problem, simple solution.
The next part of this, trying to apply solutions from one field to different, is another ancient holdover. If your buddy is now being attacked by a wolf, hit the wolf with a rock. This still doesn’t take into account the increased complexity of the modern world, though, or whether the solution even worked against the first problem.

Anonymous Coward says:

I can understand the desire to come up with big solutions to “fix” the problems that created this financial mess, but suggestions like these are simply scary overreactions by people who don’t seem to understand what really caused the problems.


I had no idea you were smarter than HARVARD Business professors. Apparently, compared to you those guys are clueless. LOL

Tony (user link) says:

okay, forget licensing, what about tagging...?

“how about just a formalized certification, such as the way that the IT industry use for various specialities: A+, CISSP, PMP, etc.”

How about we make it even MORE impossible for the little guy to actually start and grow a business.

It’s hard enough, with all the regulation out there already, to start and grow a business. Requiring licensing or certification would only make it harder, ensuring that only those with money and connections would have any chance at all.

anonymous says:

Re: Back to basic?

Straight from Mr. I didn’t see this coming’s mouth:

“As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue,” Greenspan said. That would give the companies an incentive to ensure the assets are properly priced for their risk, advocates say.

As much as I want to villianize him for this mess, this sounds like a reasonable requirement to the free market.

Teilo says:

Re: The weakest link fails first . . .

Umm, no. Not even close. Move system designed to fail from managment team A to management team B. Oh, and by the way, management team B has the worst record of fiscal responsibility in the world.

Neeeah…. Don’t think so.

The answer is hard money, coined by Congress, and outlawing fractional reserve banking. The only money that can be loaned by banks are time deposit monies (ala CDs) where you, the depositor, agree up front to have your money loaned out for a set period of time, and collect interest on the loan. No bank runs ever. Private lenders will then fill in the gaps. Business will grow at an organic rate, vs. an economy running around like its on crystal meth. Slow steady growth, without the bull-bear business cycle. This is a good thing.

It works. Always has. Always will. It provides its own evaluation. It prevents scams like “securitization” from even starting. It short-circuits the inevitable rush to fiat money during governmental funding crises.

A. L. Flanagan (profile) says:

How about...

malpractice suits against the people who evaluated the risk on things? And the suits who pressured them to assign ratings to things they didn’t understand? And the guys who pressured assessors to over-value homes so they could make loans? A lot of this goes back to a basic lack of ethics.

Oh, and Teilo, you obviously have no idea what the heck you’re talking about.

Evil Mike says:

Re: How about...

The fact that you have read Telio’s comment and claim he’s clueless gives a HUGE clue as to your naivete.

Do you know what the “National Debt” is?

Do you KNOW what the “NATIONAL DEBT” is?!?
(and how it correlates with the Federal Reserve…)

Look it up, and after you’ve educated yourself, come back and opine some more–once you’ve apologized for your blatant lack of awareness.

Is It Over Yet says:

complex approval process

“Transparency is good. Regulation is not.”

I’ve had the economics classes; these companies (banks, etc…) need regulation. How can a CEO of a company (Countrywide) walk away with $361,000,000 (yes, that’s $361 MILLION) in pay and bonuses and the company falls into bankruptcy and has to be “saved?”

How can the mortgage writers get away with using Libor to jack up interest rates on home buyers that raise their rates to higher than 15% interest? The homeowner has no control over who keeps or sells his mortgage. No regulation, no oversight. It’s not just the sub-prime market falling down. There are also people who’ve owned their homes for many years falling into this fiasco. These lenders are and have been predatory, thus the FBI investigates even now, attempting to find something or someone at the root cause.

No, there is no all encompassing solution. There are many different areas of the economy failing, unemployment rising, goods not being bought. I think letting those companies fall into the abyss would have been a good lesson for future insurance, investment and other securities firms.
Not many have “publicly” fallen yet in the mortgage industry, (except the big banks), but there are more heading that way, outfits like Homecomings Financial, Greentree Mortgage, etc… will feel it soon enough, (if not already), they just haven’t been closed yet.

There are 10,000 foreclosures happening every single day in this country. No exaggeration, no joke. Where are these people going?
They need to be refinanced into the long-term mortgages they gave up for the short-term adjustable rate mortgages, ARMs. Why should this be done to these people that did it to themselves? To begin the stabilization process of course. Why help all these banks when Joe the Plumber doesn’t even know where he’s going to be living next month.
Start at the root of the crisis…the people, not the top of the tree…the banks!

Sorry for the rant…just my 2 cents.

Stimulus, Schmimulus says:


This is slightly off topic, but somewhat related. The whole idea of these stimulus packages is ridiculous. The biggest factor in this mess we’ve gotten ourselves into is the fact that too many people weren’t smart with their credit and spent way more money than they had the means to cover. Regardless of who’s to blame, that’s what happened. As a result of this mess, credit goes bye-bye, causing people to lose purchasing power, and people are actually starting to get smart about how they spend their money. That means all of a sudden there’s a lot less people buying stuff, and the economy starts to slow down, eventually shutting down if it gets bad enough.

So, the government wants to “stimulate” the economy, to get people to spend money again. Their million dollar idea? “Oh, let’s give everybody a tiny little tax refund that will barely cover a few tanks of gas or a couple trips to eh grocery store, and they’ll start spending money like crazy again.” WRONG!!! Either people blew the “free money” on yet more frivolous junk, and still stopped spending their main income, or they just put it in savings and aren’t spending it. It didn’t do diddly squat, because it wasn’t nearly enough to allow people to pay off their massive debts.

Now the government is proposing yet another stimulus package, and I got to thinking, how exactly is this supposed to work? The government is over $10 trillion in debt, so they’re proposal is to give us money they don’t have. In order to get that money, they have to borrow money from China or some other place that hates the USA. Also, the idea in giving away that money is to entice the American people to spend money that THEY don’t have either, because they’re deep in debt, and many no longer have the option of getting lines of credit to spend with anyway. Not only that, but the people spending too much money is what got us into this meltdown in the first place. So, just how the HECK are these stimulus handouts supposed to help anything?

What should have happened is that instead of bailing out all the big Wall Street operations (and CEOs) that helped cause the problem, that $700 billion should have been distributed to each tax-paying American as a “stimulus” package. That would mean that each tax-paying American would be entitled to somewhere around $200,000. With that kind of cash, students could pay off their ridiculously high college loans (or save for college), families could pay off mortgages, car loans, etc., older and wiser folks would have retirement money, and so on. That would get a pretty fair share of the people in this country out of debt, which would get them to spend money again, thus stimulating the economy. And the evil CEOs of these big lenders that are swimming in cash can go sit in the corner and suck on a lemon for all I care, because there’s no way we should be rewarding the people who helped destroy our financial system.

The bottom line: the government is trying to spend money they don’t have to get us to spend money we don’t have, which is what started the whole problem to begin with. The stimulus package not only doesn’t work, but is contributing to the problem. Next bright idea please?

Clueby4 says:

Screw new

New “financial instruments”? Seriously? Given that the monetary system, with little or no reserve requirements is flawed environment to begin with how anyone can perceive any new “financial instruments” as anything but a scam in breathtaking.

Yep just what we need less regulation and more fairly tale “free market” babblings.

Critter (profile) says:

The weakest link fails first . . .

Well… that is fine if you are prepared to return to a simple agrarian economy (Why not? The Amish do it). However, new technology requires raising large sums of money from people capable of assaying its value and more from people willing to share the risks. This is made much more difficult without a banking system.

I do find it ironic however, that we have become a society of managers (paper capital and human capital). We like technology and want technology, but we don’t value the engineers and technologists who create it. Outsource that to some poor shlep in India: “I’ll own the *Intellectual* property and be rich”. Paagh. Lazyness. I think the tech boom created not only tremendous wealth, but tremendous greed and envy. The *managers* envied not what the creators were creating (they could copy that!), they envied what they were earning for creating it. This set in motion the copiers and fraudsters. This latest crisis is a repercussion of failing to better manage our technology economy.

We do need regulations. No doubt about it. Punishments are called for too. This includes reforming the cult of the MBA and the culture of elitism (yes you too mainstream media/politician/etc).

We better get our act together or the system really will fail.

Twinrova says:

Give the media some credit, please

One thing I enjoy about Mike’s replies to mine is he often makes a point to which I need to research so as to understand it.

After the bailout plan starting taking effect, his economic series has been pretty much on par with what the “experts” say, which is a damn good thing. In this, I’ve actually learned what commercial paper was (although I still truly don’t understand its purpose) in my trail to discover what actually caused the need for the bailout.

What amazes me is then tuning in to big media newscenters and watching how they deliberately spin the truth in order to get a rise out of its viewers.

The whole “It’s the president’s fault” (for not introducing regulation back “then”) seems to be a common theme. My favorites are those who point fingers at CEOs as “to blame”, again missing the whole point.

So to see a blog like this doesn’t surprise me. To watch the media fearmonger the public while Techdirt stays on course is something to take away.

Maybe Techdirt should start moving toward a video on demand service through cable providers to teach the truth instead of letting Fox News, CNN, or even Bloomberg give out the “truth”.

Gene Cavanaugh (profile) says:

Spectacularly Bad Ideas In Response To The Financial Crisis

What is disturbing is the present tendency to “peg” at one extreme or the other. It has been pointed out that any organization that has a capability beyond what we understand will be made out to be villains. As an attorney I know that is true. It is also true that if such a group really has such power, some of them will abuse it, so they really are villains, and the myth is perpetuated.
But the real problem is always with “extremists”, whether violent, or simply unwilling to compromise.
There are possibly some benefits to the suggestions; such as revoking a license for malpractice, etc.
There may also be problems, and overall it may not make sense.
But in every case, “pegging” on one or the other extreme without even trying to see both sides is very unhelpful.

colorless.blue.ideas says:

Article of the Month

One of the best Techdirt articles I’ve read in awhile. Much of congress and neither presidential candidate do very well in this area—although some are much worse than others. There is a lot of speculation that the government will do some of the things you fear, and pull a 1933 again, turning a sharp economic recession into a long-term economic depression. We will see.
But thank you for your article. Alas, it seems to be mainly preaching to the choir.

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