has summarized an interesting proposal from one of the forgotten Republicans, Ambassador Huntsmen (R-UT) that would prevent too big to fail from ever happening again and do so by mostly relying on existing market forces. A combination of sound regulations built into the rules government financial markets, taxes and fines to big banks that get too big or start spending erratically. End to all corporate welfare for the tbtf banks, and extending more corporate welfare to shore up small banks and businesses. Anyway its an interesting idea and fruitful for discussion. Enjoy!
A Radical Approach to Ending Too Big to fail-from a Republican
jconway
| Mon, Dec 5, 2011
2:57 AM EST
Recommended by seascraper.
Discuss
15 Comments . Leave a comment below.My guess is that you can put all the rules you want in place, but the politicians will never allow them to be enforced, mostly because absent fast growth, the retirees need the returns that come from reckless and borderline money management, and secondarily because the lower-middle class wants in on the game (Fannie Freddie etc).
One big problem, ultimately, is that these mortgage-backed securities were high-risk investments were being sold as if they were low-risk investments.
Especially in a low-interest environment, risk is a requirement for an attractive return. Financial trickery obscured but did not eliminate the inherent risks involved.
Hindisght is 20/20. Very few people ever walked away from their mortgages — it was the roof over their heads!
Two things happened to make that not the case:
1. Lending institutions lowered lending standards and passed them onto purchasers of securitized mortgage packages who did not know what they were getting.
2. Many of these loans were obtained by investors attempting to “flip” houses who would be far more willing to walk away from what was to them a bad investment rather than a roof over their head.
In the 80′s you could get double digit interest on safe investments.
In the 90′s you could get high single digit.
In the 00′s low single digit.
Now- keeping your principal is your return.
The underlying causes for this are too much for here, but as long as people have money to invest they are going to go looking for returns. If no product exists to satisfy that need, then one will be invented. It’s as simple as that.
It doesn’t have to be from a big WS bank, any entity (even your credit union) could create something.
My credit union is running monthly raffles. $20 to win $20,000. 3,000 tickets. $20 deducted automatically from my account. If they came to me with a scheme to earn 10%, I would probably look at it.
The return on “safe” investments is a function of interest rates. They were high in the 80s because inflation was high.
In 2011, a little inflation certainly would be a help, but it isn’t going to increase the rate of return on safe investments.
You’re credit union is offering you a 1/3000 chance of winning 1000 times your bet.
Looking at it slightly differently, you have a 1 in 3 chance of winning your money back. Contrastingly, if you buy a $20 scratch ticket which have some of the best odds, your odds of *at least* winning your money back are about the same (1 in 3). But that also includes very long shot odds of winning $1 or $10 million. You would be better off “investing” your money in scratch tickets than this monthly raffle.
If they come to you with a scheme to earn 10%, you should think very carefully about if you really understand the risks involved.
Interest rates on CD’s etc was far in excess of inflation by the mid-80′s, and inflation was almost gone by the 90′s.. One of the underlying causes right now is the lack of productive places to invest, so the supply of money is high, deamnd is low, and therefore interest rates drop. As an example if the bank was looking for funds to lend out to home buyers, they would be offering me a higher rate for my savings. Inflation is a factor in the process, but not a direct cause.
The CU lottery make sense because the number of players is capped. Technically it is for a charity. The chance of winning $20,000 in the MA lottery is lower than 1000:1 (even buying 10 $1 tickets), and the chances of winning the jackpot are in the tens of millions, so not a factor.
and PS I’m a financial professional and stock market speculator (no investors anymore), so I certainly would understand the risks involved. Thanks for the condescending remark, though.
The number of players is capped in any lottery. There are only so many scratch tickets printed and sold for each game. Capping the number of players (and amount of prizes awarded) is essentially the essence of setting the odds of a particular game (to favor the house).
In the CU’s case, it’s capped at a very low number (3000) but they also offer only a single winning prize. Making the odds of “winning your money back” in the long run very easy to calculate (1 in 3). Imagine, if you will, that you immediately bought up 1000 of the 3000 available $20 tickets for a total cost of $20,000. Your odds of winning the $20,000 prize for that month (and “winning your money back”) would be 1 in 3 Whether you win or someone who only bought 1 ticket beats the 1 in 3000 odds wins, the CU rakes in $40,000. Each month and every month.
In contrast, the $20 new scratch ticket offers a 1 in 2.98 chance of winning at least $20. True, your odds of winning $20,000 are pathetic at 1:296,000 and your odds of winning the $10 million top prize are a ridiculous at 1 in 5.5 million. But still, if you bought 1000 $20 scratch tickets instead of raffle tickets, your odds of winning *at least* your $20,000 back are slightly better than the CU’s lottery.
All that being said, it’s perfectly reasonable to donate money to a charity via the pretense of a raffle. I’ve done it many times myself. I’d personally pick a “better” charity than my local Credit Union but to each their own.
What I can’t let pass is the impression I think your original post left that the Credit Union is offering you some sort of opportunity to bet that is more favorable than you could find elsewhere. Your odds of winning a scratch ticket are better. But they are much better if you spent your money playing well and conservatively at roulette, blackjack or craps. Or most bets you might make on sports.
In other words, there is too much money in the “capital” economy and not enough money in the “consumer” economy.
Seems like this should be an easy solution: raise taxes on the wealthy to decrease the flow of money into the “capital” economy and either give the wealthy incentive to create more expenses (i.e. tax deductions) in their companies (by either hiring more people or by physically expanding), or if they refuse to do that, by the government using the money they pay in taxes to do this on public projects.
I think that we should probably not give incentives to purchase labor-saving equipment, because this doesn’t do anything for demand.
What makes conservatives think that putting more money in capital markets that aren’t doing much of anything with the money that have is a good idea? Those investments are increasingly going overseas anyway.
Consumer demand creates investment opportunity like nothing else.
Take steps to stabilize the housing market so that consumer demand might actually come back.
maybe not so much for everyone else
People trust their CU enough to participate in a lottery run by it.
Therefore they would trust their CU when they offered other products, even if they seemed too good to be true. My point was that everyone jumps up and down about regulating Wall Street, but the opportunities for entities to offer high risk products is everwhere.
I don’t see how buying 1000 $20 scratch tickets proves me wrong, but I get the BMG schtick that some people here have to always be right, so I will concede you are are a first class genius. I hope your friend appreciate your greatness when you are in their presence
At one point in time money was invested in domestic productive capacity. We produced a lot of value added stuff which meant good wages and our ecoonmy prospered. We exported. Investments came to the US from elsewhere.
At some point (1975-80) things began to change. Long discussion.
It became a better move for investments to go overseas to create productive capacity. Good jobs became more scarce (excepting the tech bubble) and we imported (but the stuff was cheap).
In 2011 it doesn’t make sense to invest anywhere (except energy production, maybe, which is still strong), so money sits. How does increasing taxes on the rich and lowering taxes on the rest who pay to increase consumer demand does anything to solve the problem that we lack decent jobs, which is the real problem? We will buy more imported stuff. Great. If we are increaing taxes it should be to get our government on a firmer financial footing, in conjunction with polices that encourage creation of productive assets again (this is hard, I realize that).
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