RoR: Forum

I don't really think they failed because of socialism - not that I think it helped in any way, but it had to do with over-leveraging their banks, which seems to me to have nothing to do with socialism. You don't cite any evidence.

Post 1

Thursday, February 26, 2009 - 6:44am

Kurt,

The primary point I brought up is that of the discrepancy in financial outcomes between Iceland and the U.S. -- i.e., the 6th and the 4th richest nations on the planet. How could the 6th richest nation go under like that, while the 4th richest nation survives? It's not because of a wealth threshold somewhere between the 4th and the 6th place, because then every nation poorer than Iceland would be under the water by now.

You say it likely has to do with over-leveraged banks, but then you would have to show how we didn't have many over-leveraged banks in the U.S. -- in order to explain the discrepancy in outcomes. I don't think that you can show this. I don't think that you can find a big discrepancy in over-leveraged banks, when comparing the U.S. to Iceland. I could be wrong about that, but I don't think I am.

You say I don't cite evidence for my theory (a big difference in socialism) explaining the discrepancy in outcomes. Well, neither do you for your theory (a big difference in over-leveraged banks). Now, I could cite evidence for a difference in socialism between the U.S. and Iceland. I could also cite evidence for a difference in financial outcomes between socialism and capitalism. However, I didn't feel it necessary -- until now.

What kind of evidence would sway your opinion?

Ed

(Edited by Ed Thompson on 2/26, 6:47am)

Post 2

Thursday, February 26, 2009 - 7:25am

Ed wrote:

You say it likely has to do with over-leveraged banks, but then you would have to show how we didn't have many over-leveraged banks in the U.S. -- in order to explain the discrepancy in outcomes. I don't think that you can show this. I don't think that you can find a big discrepancy in over-leveraged banks, when comparing the U.S. to Iceland. I could be wrong about that, but I don't think I am.

"In the United States, the banks have total short-term debt that is equal to 15 percent of G.D.P. But in some countries where banking systems have grown to international proportions, the debt exceeds G.D.P. That is true in Switzerland, Belgium, Iceland and Britain." (link)

Click on the multimedia at the link to see a visual comparison.

"Iceland is especially hard hit by the ongoing 2008 economic crisis, because the debts of its banks are around six times its annual gross domestic product of �14 billion ($19 billion)." (link)

"The Icelanders decided a few years ago that their economic future lay in banking. They privatised and deregulated their banking system, and with strong government support, the banks grew to 10 times the size of the economy.
The bankers and government effectively turned Iceland into a gigantic hedge fund sitting in the middle of the North Atlantic." (link)

It wouldn't surpise me to hear the Icelandic banks were borrowing short-term in order to invest in CMOs created in the U.S.A.

Post 3

Thursday, February 26, 2009 - 9:02am

Alright, Merlin.

Now, that's good info. However, an ongoing issue here is whether robust finance is tied to something deal-breaking. Take over-leveraged banks, for instance. What if the root source of over-leveraged banks is socialism? Did you ever think about that? If it is, then I'm still right.

As it stands and on the face of it, your provided info is an argument for central command and control of the economy (for statism). When "the problem" is said to come from something that has been "privatised and deregulated" -- then the solution, naturally, is nationalization and more regulation of that thing (in this case, the banks).

Would you agree?

Ed

Post 4

Thursday, February 26, 2009 - 9:42am

Ed wrote:

What if the root source of over-leveraged banks is socialism? Did you ever think about that? If it is, then I'm still right.

I considered saying in post #2 that both you and Kurt were partly correct and partly incorrect, but decided not to. So I affirm that now. Regarding your position, note that my last quote in #2 says the over-leveraging of Icelandic banks was a joint venture between the banks and the government.

As it stands and on the face of it, your provided info is an argument for central command and control of the economy (for statism). When "the problem" is said to come from something that has been "privatised and deregulated" -- then the solution, naturally, is nationalization and more regulation of that thing (in this case, the banks).

Partly so, but substitute "banks" for "economy." I support rational control of banks with fiat-based money. Banks have the power to create money equivalents at will, subject to little more than their ability to leverage, absent legal constraint. So government or the central bank limiting their ability to leverage seems proper to me given a fiat-based money. In such a context "deregulation" can be more like "license" (consider Iceland). The banks have a privileged position granted by government, including the government or central bank providing guarantees against bank failure. With a commodity-based money, my position would be very different.

(Edited by Merlin Jetton on 2/26, 9:45am)

Post 5

Thursday, February 26, 2009 - 10:52am

Okay, Merlin, fine.

To sum you up then, I'd say that "controls" (fiat control of currency) breed further "controls" (central control of banks).

Ed

Post 6

Thursday, February 26, 2009 - 11:37am

Ed, I wouldn't call that a summary of my position, but I agree and it is relevant.

The Fed imposes reserve requirements on commercial banks, to prevent over-leveraging, but they were effectively getting around them in two ways. One was the cooperation of investment banks, who were repackaging mortgages, were extremely leveraged, and beyond the Fed's jurisdiction. The other was creating structured investment vehicles (SIV; link). A bank could bundle mortgages and put them in SIVs. The liabilities of the SIV, mainly commercial paper, were not required to be on the bank's balance sheet. (Some were restored to bank balance sheets in early 2008, per the Wikipedia article.) So to limit these new ways of commercial bank leveraging, new controls would have been needed.

The SEC might have intervened, but that sort of intervention would have been a new and quite different kind for the SEC as well. Its perview is disclosure and fraud, not liquidity and solvency.

Post 7

Thursday, February 26, 2009 - 12:36pm

Merlin you bring up some interesting points. I supposed it's similar to the Republicans about 4 years ago wanting to impose regulations on Fannie Mae and Freddie Mac, quasi-government banking institutions. I told this to my liberal brother who was astonished and replied to me "usually Republicans don't want regulations". In this case, I believe they wanted specifically regulations on Fannie Mae and Freddy Mac that imposed restrictions on purchasing risky mortgages from private banks. The idea is that a private enterprise has it's own self-interests in mind when they impose private regulations on themselves to protect against failure. A government run enterprise on the other hand, will most likely fail because politicians don't impose rational restrictions on the government enterprise, if any at all. I think this point is lost on many Americans and need to be made more clear to them. Clearly if we accept a bad premise of fiat money, we have to have regulations to protect against over-leveraging. It's not the ideal solution, as the ideal is just to eliminate the restriction of fiat money as the legal basis for currency to begin with. But I can't see that happening any time soon.

Post 8

Thursday, February 26, 2009 - 1:22pm

Thanks, John.

Yes, when some Republican wanted to clamp down on Fannie and Freddie, Democrats wouldn't allow it. See here for example. The Dems didn't want to slow down the mortgage making machine and refused to see the cliff ahead.

People in government are very poor at self-policing.

Post 9

Thursday, February 26, 2009 - 7:02am

I think you are wrong to write that Ireland for instance is socialist and US is not. There are differences, but they are not very important.

Iceland had a government dedicated to the free market. They made neverthelesss a big mistake. They followed in monetary matters the Monetary school of economics (The chicagoeans- Milton FRIEDMAN). They thought you can manipulate money at will. They leveraged reckellesly their economy. I mean they take loans and loans and loans to buy assets. When the value of these assets collapsed, they were naked.

Further more, US has a huge economy and a past of respect of property rights. With the Obama administration and the last Bush administration, the manipulation of the value of the dollar, will conduct also to a collapse, but they had a good reputation as a debtor. So they can get loans until now ..

All the western countries are going down to the toilet. The level of freedom from the sixties to nowadays is spiralling downwards to a rate you can't imagine, but not only in Western europe but also in US.

I love New-York. I spent a week there on holidays with fa friend living there. You live really there in the People Republic of New-York. As a Belgian, citizen of an over-taxed and an over-regulated country, I can tell you it means a lot.

Post 10

Thursday, February 26, 2009 - 2:24pm

Mr. Hermkens,

Wherever the Icelanders got their ideas about money supply, it wasn't from Milton Friedman. He did not advocate "manipulating money at will." Indeed, he advocated the exact opposite.
http://en.wikipedia.org/wiki/Friedman%27s_k-percent_rule
http://www.rocw.raifoundation.org/management/bba/BusinessEconomics-II/lecture-notes/lecture-14.pdf

(Edited by Merlin Jetton on 2/26, 2:30pm)

Post 11

Friday, February 27, 2009 - 3:06am

To manipulate money at will means to manipulate money without rules. The 3 % percent rule means that you manipulate money. What is money ? MO, M 1, M2 or M 3 ? The monetarists could not agree which agregate was relevant. So, they (monetarists who were in power at the helm of central banks, for instance) decided, in fact, not to pursue this venue. It is three percent on a normal basis. but, what you must do in case of a recession or of a depression ? Manipulate money at will

So, I was short on specifics, but Friedman and the monetarists were all against the abolition of central banks, the institution of a gold standard.

Milton Friedman was certainly a very nice fellow and a staunch defencer of political and economic freedom. Unfortunately, his visions on monetary matters have conducted us intelectually to this mess. Ideas rule the world

Post 12

Friday, February 27, 2009 - 9:11am