Coming global economic collapse?

[KendallJ]

I disagree. Lehman, for example, started in 1844. The company survived over 150 years of various economic and political conditions, including The Civil War and The Great Depression. These are supposed to be the experts of the American finanicial world (and they sure were - that kind of success does not happen by accident but via a stream of sound business decisions.).

This is not a small error at all.

Your observation is simply circumtantial.

No it actually is a small error. When new instruments are packaged, (i.e. when new products are offered) it is prudent to take small risks early on and see how they turn out before deciding to increase a position. When monetary policy essentially keeps bad debt expense low, the insruments look less risky than they are, and so a rational decision maker thinks that they are properly valued and is willing to take on more risk.

It is as if the govt specifically hid the nature of these instruments from people, even if they are making sound judgements. They were duped! What nobody gets here is the magnitude of what is essentially fraud committed by the govt in regulation of these markets. One does not fault rational decision makers making decisions where cause and effect are masked. And one should not assume that they should have known better, without understanding on what basis a priori they should have made their decision.

You should be FAR, FAR, FAR more angry at our govts intervention in the market, than you should at these managers. That was what my original statement's point was.

Edited September 17, 2008 by KendallJ

[KevinDW78]

Lehman, for example, started in 1844. The company survived over 150 years of various economic and political conditions, including The Civil War and The Great Depression. These are supposed to be the experts of the American finanicial world (and they sure were - that kind of success does not happen by accident but via a stream of sound business decisions.).

But, a business does not have intrinsic intelligence. The people who were managing Lehman during the Civil War and Great Depression are dead and rotting, so that has no relevence to the managers running it today.

Edited September 17, 2008 by KevinDW78

[gags]

This is not a small error at all.

I think that when you consider how widely these bundled mortgage securities were held, it becomes clear that this really was a case of government policies obscuring the true risk associated with these financial instruments. Many smart business people were fooled by the government created illusion that these were relatively safe investments.

[softwareNerd]

I don't think it's the primary factor either. Other factors such as the mismatch between risk and return caused by the government's implicit guarantee of the debt generated by Fannie and Freddie, lax underwriting standards, artificially low interest rates, etc.. all played a big role in this mess. Nevertheless, one can't ignore the fact that Washington made it official policy to promote home ownership for everyone, whether they could afford it or not.

Yes, I agree. The CRA said "lend to these poor risks", but the other government actions actually made such lending appear attractive. This latter: the various incentives -- from the existence of Freddy/Fannie to Greenspans attempt to get out of the dot.com bust by letting people take money out of their home-values -- created the environment for today's problems.

I think that when you consider how widely these bundled mortgage securities were held, it becomes clear that this really was a case of government policies obscuring the true risk associated with these financial instruments. Many smart business people were fooled by the government created illusion that these were relatively safe investments.

I think this is an extremely important point. There is some point at which the players find it difficult to account for the impact of the various incentives the government has put in place.

Still, there are some more conservative businesses who don't dabble too deeply if they don't quite understand; and, there are others that say (as Chuck Prince did) "when the music's playing, we have to dance".

[KendallJ]

Still, there are some more conservative businesses who don't dabble too deeply if they don't quite understand; and, there are others that say (as Chuck Prince did) "when the music's playing, we have to dance".

And both are potentially moral actions, and a market that allows for both is what we want.

I think (and I realize you aren't the one doing this) that condemming some level of risk taking in the face of incomplete information for no other reason than the outcome was failure is a misunderstanding of the moral implications of what one does, when one accepts risk.

I just finished a great book called "Why Most Things Fail" that goes in depth into how one should look at risk and business failure.The basic fact is that the conservative investor, content to seek lower returns and accept lower risks as well as the more aggressive investor who is willing to take a higher risk if he sees empirical evidence of the possiblity of a higher return can both be moral. Both are making decisions where there is far more unknown information than there is known.

In this case, the reason that there are so many failures around is not because a whole swath of business executives suddenly became rabidly irrational. It's because our govt hid the nature of reality by meddling in the economy.

[~Sophia~]

Your observation is simply circumtantial.

I was placing it back in the context of what the company went through from it's inception (far worse political and economic conditions).

You should be FAR, FAR, FAR more angry at our govts intervention in the market, than you should at these managers. That was what my original statement's point was.

I am not denying the negative influence of the government but I am not going to completely excuse their failure on a government either. I believe in personal responsibility for all voluntary actions. If I take too much risk I pay for it and I am responsible for my decision and so are others.

But, a business does not have intrinsic intelligence. The people who were managing Lehman during the Civil War and Great Depression are dead and rotting, so that has no relevence to the managers running it today.

I don't disagree.

I think (and I realize you aren't the one doing this) that condemming some level of risk taking in the face of incomplete information

If you are operating on an incomplete information - that is also one of the facts which you are taking into consideration in your decision making.

One of the characteristics which I always loved about Readen was the fact that he never blamed anybody else for the outcome of his decisions. It was never: I could not help it... X created such circumstances. I was duped!

Edited September 17, 2008 by ~Sophia~

[softwareNerd]

And both are potentially moral actions, and a market that allows for both is what we want.

The problem is not that some people take risks, but that they pretend they have an understanding of risks that in fact they do not understand. Our economy has wheels-within-wheels of government incentives (e.g. 401ks adding a layer between people and their investments) that have corrupted some parts of it.

However, some part of the blame falls to professors of finance for rationalistic theorizing.

[KendallJ]

I was placing it back in the context of what the company went through from it's inception (far worse political and economic conditions).

The context is irrelevant. If you look at the data, and the book I referenced does this, the size or prior success of a company in no way determines or influences whether or not it will weather any new stress. Every new stress could be a different set of circumstances and past decision making sucess does not in any way indicate that future errors are the result of some sort of new failure or moral failing. You would have to have some detail about this particular circumstance to imply this. You have not provided it. Your "context" is circumstantial and irrelevant. You should not use it for any moral basis.

I am not denying the negative influence of the government but I am not going to completely excuse their failure on a government either. I believe in personal responsibility for all voluntary actions. If I take too much risk I pay for it and I am responsible for my decision and so are others.

I think we're talking past each other here, and I think you are equivocating between incidents that simply occur because of unforseen but possible circumstances, and incidents that arise because of fraud.

Why do you think I'm not suggesting that they shouldn't have to deal with the consequences of their decisions? The moral issue here however, assuming they weren't in some way complicit, leaves them clean. If this were one company dealing with another, then someone would get hauled into court on fraud charges, but since it's the govt dealing with you, there's no such connection.

I'm not denying that they now have to deal with their lot. However, I am suggesting that the far greater moral error is the govts. I have yet to see you make that moral determination.

If I agree that they should deal wiht their decisions as they were made, do you not agree that the FAR, FAR, FAR greater blame in this situation belongs on the govt?

If you are operating on an incomplete information - that is also one of the facts which you are taking into consideration in your decision making.

One of the characteristics which I always loved about Readen was the fact that he never blamed anybody else for the outcome of his decisions. It was never: I could not help it... X created such circumstances. I was duped!

Again this is an equivocation. If Rearden had been defrauded and he said this, then he would be accepting unearned guilt. If one doesn't see all of the possiblities in reality and makes a bad decision, then it is his responsibility. If one doesn't see all of the possiblities because some volitional agent is hiding such possiblities from him when he would have otherwise been able to see them, then the volitional agent bears the responsibility.

You are acting as if monetary policy is no different than a rock or a boulder that one doesn't see and stubs his toe on. That is the equivocation.

[01503]

The problem is not that some people take risks, but that they pretend they have an understanding of risks that in fact they do not understand. Our economy has wheels-within-wheels of government incentives (e.g. 401ks adding a layer between people and their investments) that have corrupted some parts of it.

However, some part of the blame falls to professors of finance for rationalistic theorizing.

Not only the ignorance of the risks, but the fact that they know, if they make a stupid mistake, that someone will bail them out. Because they're a 'victim'. So they're free to make dumb decisions all they want, because someone will pay for it. Somehow. It's their "right" to have money. Ask FDR, the majority of politicians, or most college professors. They'll tell you that. Where does the money come from? Somewhere. How do you get it? Somehow.

[ers]

Not only the ignorance of the risks, but the fact that they know, if they make a stupid mistake, that someone will bail them out. Because they're a 'victim'. So they're free to make dumb decisions all they want, because someone will pay for it. Somehow. It's their "right" to have money. Ask FDR, the majority of politicians, or most college professors. They'll tell you that. Where does the money come from? Somewhere. How do you get it? Somehow.

Sadly, I think the majority of Americans tend to believe this as well. Just ask the average person about health care. Most of them think it's an entitlement and their mouths drop open when you tell them that no, health care is not a right, it is an innovation of man. That's what decades of government run public education will get.

Everything is very discouraging. Sometimes I wonder why I even bother voting anymore.

[softwareNerd]

Not only the ignorance of the risks, but the fact that they know, if they make a stupid mistake, that someone will bail them out. Because they're a 'victim'. So they're free to make dumb decisions all they want, because someone will pay for it.

And, some "businessmen" are cheerleaders for various forms of government intervention. Consider this quote in an article from "National Mortgage News" (Feb 17, 2003) quoting the then CEO of Countrywide:

Angelo Mozilo would eliminate downpayments to reach deeper into emerging housing markets.

To eliminate what he calls "the enormous and very dangerous gap' between the housing haves and have-nots, [he] ...would also lower the bar on credit scores.

"The only way we can have a better society", he said...,"is to make sure those who don;t have a house have an opportunity to get one".

...[he] labeled downpayments as "nonsense", and said credit score requirements are "still much too high".

he also said it was "wrong" to focus on delinquencies.

(HT: The Big Picture blog)

[KendallJ]

Yikes Snerd. That's a quote right out of Atlas. What kind of altruistic gobbledeegook is that?

[softwareNerd]

By and large, American businessmen are good folk. These Orren Boyle (excuse me, Angelo Mozzilo) types should be exposed for the scum they are, by showing that they are not paragons of the free-market system. [This is analogous to anarchists not being for liberty.]

[~Sophia~]

The context is irrelevant.

I wanted to illustrate that today's conditions, in comparison to the various past economic and political uncertainties, are nothing that would grant an excuse out of personal responsibility (surely there are banks which are doing just fine). Over the span of 150 years, there were many challenges, I am sure - many situations in which risk had to be assessed and thus a volume of a particular investment correctly chosen. Risk can be correctly managed, to the extend that would prevent a total collapse of a big business.

----------------

I have read (supposedly the consensus of most of the world's risk managers) that the fundamental problem has been the underpricing of risk worldwide. I have read that, for example, the yields of CCC-rated junk bonds in US had shrunk to little over 4% points over yields on ten-year US treasuries (June 2007), even though treasuries are safer (that spread was usually much greater). The spreads between developing-country sovereign debt and that of the most stable developed nations had declined to record lows. Equity premiums - the added returns that investors expect on stocks over the yield of "risk free" investments, like US treasuries, had also contracted significantly. Investors started to accept much greater risk. They started to relay on risky and volatile short-term borrowing to finance longer-term higher-yielding assets.

I think we're talking past each other here, and I think you are equivocating between incidents that simply occur because of unforseen but possible circumstances, and incidents that arise because of fraud.

Fraud, to my knowledge, has not been the cause of current upheaval in the world financial markets. Large losses suffered on securitized American subprime mortgages triggered the current situation but if it had not, I read that, problems with some other financial product or market would have done so.

Why do you think I'm not suggesting that they shouldn't have to deal with the consequences of their decisions?

Because you are rational.

If I agree that they should deal wiht their decisions as they were made, do you not agree that the FAR, FAR, FAR greater blame in this situation belongs on the govt?

Would you trust a government product? No? How come you don't think that others and specialists in a financial field should know better? It is their business to know.

If Rearden had been defrauded and he said this, then he would be accepting unearned guilt. If one doesn't see all of the possiblities in reality and makes a bad decision, then it is his responsibility. If one doesn't see all of the possiblities because some volitional agent is hiding such possiblities from him when he would have otherwise been able to see them, then the volitional agent bears the responsibility.

One reason why Rearden was not defrauded is because he did not evade the fact that some people, or some institutions are not competent and can not be trusted.

Edited September 18, 2008 by ~Sophia~

[Maarten]

I wanted to illustrate that today's conditions, in comparison to the various past economic and political uncertainties, are nothing that would grant an excuse out of personal responsibility (surely there are banks which are doing just fine).

Yeah, for example BB&T's stock rose quite a bit in the last few days. I think it went from about 30 dollars per share to almost 36 in the same time as most financial institutions had huge losses. Go BB&T!

[KendallJ]

I wanted to illustrate that today's conditions, in comparison to the various past economic and political uncertainties, are nothing that would grant an excuse out of personal responsibility (surely there are banks which are doing just fine). Over the span of 150 years, there were many challenges, I am sure - many situations in which risk had to be assessed and thus a volume of a particular investment correctly chosen. Risk can be correctly managed, to the extend that would prevent a total collapse of a big business.

I think you really need to check this premise. The idea of risk as "managable," is derived from those who advocate things like equilibrium theory. Risk, is the one thing that will forever take us by surprise, because it represents unkonwns about the future. The only people who can say that risk has been "underpriced" are those who are looking at the actual occurences in retrospect. Whether risk is underpriced or properly managed is a much more difficult thing to determine a priori.

This is what makes any historical, "well they managed to survive everything before" context irrelevant.

Anyone who claims the underpricing of risk and in any way shape or form knew about it a priori, should be a mega trillionaire by now. IF they aren't then you really ought to be careful about applying their insight to someone who was making decisions a priori.

Again, we seem to be talking past each other because the context you won't acknowledge the relative blame shared by those who mask risk for altruistic purposes. I have not claimed that these men should be bailed out, that their companies should remain theirs or that they should be at the helm. What I have claimed is this error is far far far far far less at the root of this problem, than those who would mask risk effects for altruistic gains by manipulating the levers of the economy. You act from your very first statement as though I somehow dismiss them. I haven't. I'm simply putting the ethical implications here into the correct context.

We all live in such an economy. When governments create entities that look like private companies, and attempt to function like them. When they manipulate monetary policy. It is the belief the government can engineer "market incentives" and market forces to the betterment of its own arbitrary, ends. Part of that is driven by the equivocation of the arbitrary imposed by others and the actual cause and effect of markets. To blame capitalists because they recognized something as causal which was potentially arbitrary and at any moment could change for no other reason than a policy decision is to place the majority of the blame at the wrong doorstep. I'm not talking here about a particular secruity, I'm talking about the wide scale economic manipulation that gives this whole economy an aspect of the arbitrary. Every instrument, every purchase you and I make has the arbitrary behind it. It isn't a single lever pulled that caused this whole mess, it is a combination of multiple moves a monetary policy and to not place the majority of hte blame on the policy makers is really a poor analysis of the situation.

[gags]

Fraud, to my knowledge, has not been the cause of current upheaval in the world financial markets. Large losses suffered on securitized American subprime mortgages triggered the current situation but if it had not, I read that, problems with some other financial product or market would have done so.

I have done some work in the mortgage industry and I can tell you from personal experience that fraud is a major issue. There was fraud on the part of borrowers in that many of them misrepresented their income and their ability to repay these loans. Due to lax underwriting standards encouraged by the leading securitizers (i.e. Fannie & Freddie) applying for and obtaining a mortgage became absurdly easy. There was also fraud on the part of mortgage originators/brokers who frequently knew that borrowers could not service these loans and that documentation on the loans was fraudulent. There was even fraud on the part of Fannie and Freddie in reporting their financial results. Their accounting scandals were the result of management's attempts to conceal the consequences of their reckless actions made possible by the Federal Government’s policies. Finally, I believe that the biggest purveyors of fraud are the government itself and the politicians in Washington. They created these GSEs and allowed the taxpayers to absorb the risk, while private investors reaped the rewards. That is a sure-fire recipe for disaster. Additionally, politicians like Barney Frank (Chairman of the House Financial Services Committee) promoted Fannie & Freddie as stable and safe, while refusing to reign in their bad practices through the regulation that becomes necessary in a mixed economy arrangement like the one we have currently.

[gags]

I wanted to illustrate that today's conditions, in comparison to the various past economic and political uncertainties, are nothing that would grant an excuse out of personal responsibility (surely there are banks which are doing just fine).

We all live in such an economy. When governments create entities that look like private companies, and attempt to function like them. When they manipulate monetary policy. It is the belief the government can engineer "market incentives" and market forces to the betterment of its own arbitrary, ends…….

Sophia and Kendal, of course I don’t think anyone should be absolved of personal responsibility for their actions. However, given that we live under a mixed economy, I wonder if the philosophical principle at play here with these government bailouts is the same as with someone who loses their job and can choose to obtain government-paid unemployment compensation. I know that if I became unemployed in this economy, I wouldn’t hesitate for a second to apply for unemployment compensation from the government. They have taxed me at confiscatory rates for years and forced me and my employers to pay unemployment insurance. While I would prefer to live under a laissez faire system where government unemployment compensation doesn’t exist and where I still had the money that was taxed away from me, that is not our current situation. I would certainly try to find a job as quickly as possible so as to get off of unemployment, but I would not hesitate to accept it because of the current system I live and work under.

Similarly here, we have debt instruments that have been made possible by government monetary (and other) policies as well as the many distortions introduced into the market place by politicians who wanted to make it easier for their constituents to get loans. The government has also concealed the risk associated with these securities and promoted their widespread acceptance as safe investments for businesses, individuals, and financial institutions spread throughout the world. Now that this government sponsored party is coming to an end, why shouldn’t we make those who are responsible for it pick up at least part of the tab? If these bail-outs are done properly, they will resemble orderly liquidations of the businesses in question. The upper management of these companies has been fired (they are suffering the consequences of their decisions) and the equity holders have lost virtually everything (more consequences). Given the size and importance of these businesses, I think that orderly dissolutions make more sense than simply shutting them down and causing extensive long-term damage to the entire financial system.

If we were operating under laissez faire, I’d say let the companies go under. The problem is that we don’t have a free economy. We have a mixed economy with a very active government that screws things up right and left. That is the less than ideal context in which we all have to operate.

[KendallJ]

Sophia and Kendal, of course I don’t think anyone should be absolved of personal responsibility for their actions. However, given that we live under a mixed economy, I wonder if the philosophical principle at play here with these government bailouts is the same as with someone who loses their job and can choose to obtain government-paid unemployment compensation. I know that if I became unemployed in this economy, I wouldn’t hesitate for a second to apply for unemployment compensation from the government.

I know you wouldn't hesitate, but the question is should you or shouldn't you.

Your logic posits a certain meaning on the act, namely that it is a from of justice, or that the government took your money, and so the government should rightly help you get it back. But that meaning I think posits some sort of intrinsicism to the wealth. As if your money is still there, and you're just getting it back. I think this is the wrong way of thinking about it.

The real problem is that the government destroys value. People made decisions based upon what they thought things were worth, when the reality is that govt policy was being set in such a way that the price of those assets was really higher than they were in reality. They perpetuated that bubble for years, and now that it's popped, the reality is the value was never there. Your money is gone! All we do by asking for the govt to bail out, is simply let them mortgage the american people. They don't have something of value; they are simply issuing debt on the promise that the American people can pay. This is as useless. It is confiscatory. It perpetuates the taxation myth. It perpetuates the myth the govt is the lender of last resort, because it can lend off the future backs of the American people. In essence by accepting your unemployment check you are helping to perpetuate the confiscatory taxaion scheme that led you to think you deserved it in the first place. See the cycle? The distinction you're making is so subtle that the American people simply see that the Govt can bail out the industry when no one else can, without realizing that they've simply enslaved themselves to get that "feeling of reassurance".

Weathering the crisis is not a problem that we're risking all the asset value in the country will suddenly disappear. It is an issue of liquidity. A banks assets (not invested in the real estate issue) are mostly whole. But it's not generating enough revenue to fund operations. It must either sell off assets or cease lending (i.e. cause more lack of liquidity). Assets can be sold. And if the govt were doing it's job it would pressure for private deals to clean up the mess. Disregard anti-trust concerns, allow anyone with liquidity to buy up assets and break apart companies to generate the needed stability.

The contraction must occur. Govt cannot stop it. They cannot make it more efficient. When they slow the market down or hinder it with regulations, it cannot respond, and then govt claims it is the only one who can respond fast enough. The best thing to do here is push for as much of the free market to deal with this as possible. Have the govt IGNORE anti-trust and all the other regulations that hamper the market, and let anyone who has the liquity in to fix this mess. The acitons they are taking now essentially let the american people bear the burden of the contraction, without structurally fixing anything (that's tonight blog post by the way).

Honestly, today, it feels like I'm the only one who sees this trap. Instead of being tempted to let the govt swoop in, we should be actively asking govt to step aside. Not just be passive but to clear away legal impediments to let the market function as it should. This is the time when we should be shouting Lasseiz-faire the loudest!!!

By the way, this is the lesson of the Great Depression, and of the Arab Oil Crisis. I'm also starting to come to the conclusion that the policy of hoping that when govt acts like a free market (as it did through most of the Greenspan years) that we somehow think that this is the path back to captialism, of convincing everyone the free market works - is the most sinister trap I can think of. Notice that no one is listening to Greenspan now. Notice who is getting blamed for the situation. Hoping that one can engineer "free market mechanisms" from within govt is no path to freedom. I'm convinced of that now.

Edited September 18, 2008 by KendallJ

[~Sophia~]

I think you really need to check this premise. The idea of risk as "managable," is derived from those who advocate things like equilibrium theory. Risk, is the one thing that will forever take us by surprise, because it represents unkonwns about the future.

What risk represents is a part of the decision making (and so is the condition you operate in - like mixed economy). Every successfull in the long term investor (individual or a bank) is a real life proof that risk can be managed.

The pursuit of maximum return (or profit) is not always the most rational approach (Rand understood that clearly having Roark turning down commisions or thrugh Rearden not doing business with everyone. Her moral characters did not have an intrinsic apprach to profit. Not that I think that you disagree...).

The only people who can say that risk has been "underpriced" are those who are looking at the actual occurences in retrospect. Whether risk is underpriced or properly managed is a much more difficult thing to determine a priori.

Not necessarily in retrospect. Small yield differences between investments of significantly different risk factors (between which the spread was orders of magnitude greater before) is not something which becomes noticable after the fact. And again we are talking here about experts in the field.

This is what makes any historical, "well they managed to survive everything before" context irrelevant.

It is not. Everyone is operating within the context of mixed economy (and not since yesterday) and some financial world institutions even in the context of much less free conditions. Decisions are being made within the context which exist today the way it is and not some ideal economic state.

Again, we seem to be talking past each other because the context you won't acknowledge the relative blame shared by those who mask risk for altruistic purposes.

This is not true. I acknowledge the negative influence of the government on the economy. I acknowledge the less than ideas conditions in which today's business operates. I acknowledge the challenges associated with that state. But those are the conditions within which the decisions were and are being made. These businesses have never operated within anything different. Government incentives (which is not force - like taxation) can not be used as an excuse because you have a choice not to take advantage of it. Yes, failure is normal and mistakes in judgment are going to be made in any conditions. But it is the voluntarily acting body which is responsible and not the person who provides an opportunity which is not a good idea.

I do not agree that the government is preventing people from judging reality for what it is. I think some people engage in wishful thinking - that the government can actually somehow alter the reality into something different but the fact is that if you go against reality in the long term you will fail and bring down with you everyone who followed your lead.

What I have claimed is this error is far far far far far less at the root of this problem, than those who would mask risk effects for altruistic gains by manipulating the levers of the economy.

You said that their error was small. That is what I disagree with. I don't see a dichotomy between 1) holding business accountable for their failures in judgment (in the context of today's economic and political conditions - and not some ideal state which never existed (aside from maybe arround the time of Industrial Revolution) and at the same time 2) exposing the government for their negative influence in the economy.

It is the belief the government can engineer "market incentives" and market forces to the betterment of its own arbitrary, ends. Part of that is driven by the equivocation of the arbitrary imposed by others and the actual cause and effect of markets.

I completely agree. Thus my wishful thinking comment. This is an error in thinking and judgment about reality (and they are sure paying for it).

To blame capitalists because they recognized something as causal which was potentially arbitrary and at any moment could change for no other reason than a policy decision is to place the majority of the blame at the wrong doorstep.

And yet you and me and most others here understands this clearly for what it is and any of us would have been able to give them the right advice about what happens when you get involved with government's products (just by the nature of things).

I'm not talking here about a particular secruity, I'm talking about the wide scale economic manipulation that gives this whole economy an aspect of the arbitrary.

Long term the government can't alter reality. It can only alter cause and effect relationship short term which is not without an effect - in time someone (like, for example the taxpayer - which here the blame lays fully on the government since force is involved) will pay for this short term distortion. But when choice is involved one does not have to take advantage of "incentives" (short term scams) which do not work (should not) under normal conditions (like sub-prime loans - it does not take a genius to know where that leads). You don't have to take advantage of artificially created short term abnormal situations - or at least when you do - you treat it as playing a lottery and take on a volume which you will be ok with loosing. That is a rational approach.

[~Sophia~]

In essence by accepting your unemployment check you are helping to perpetuate the confiscatory taxaion scheme that led you to think you deserved it in the first place. See the cycle? The distinction you're making is so subtle that the American people simply see that the Govt can bail out the industry when no one else can, without realizing that they've simply enslaved themselves to get that "feeling of reassurance".

I agree. It is never letting go of that mental child like state (which often influences decision making and how much risk you are willing to take on) of having someone (God or government) take care of you, especially in times of struggle.

The appropriate attitude is that nobody is there or will be there to pick you up. You have to understand that today and plan for it.

[KendallJ]

What risk represents is a part of the decision making (and so is the condition you operate in - like mixed economy). Every successfull in the long term investor (individual or a bank) is a real life proof that risk can be managed.

At this point we're done Sophia. Your second statment is completely false, and it indicates a deep misunderstanding about what risk actually is. Nor does it then say that becuase a company fail that they failed to "manage" risk. Even in the presence of "rationally managed risk" companies fail. The primary reason that so many companies are fialing these days has more to do with the arbitrary manipulations of the market, than the failure of bank managers to be rational.

You will find many, many people who will echo your sentiments about business executives, and only a few who will echo mine about the evils of the government. I choose to not debate this issue with you one step farther and hope that you see that in society today, your persepctive has won. I hope you remain satisfied with it. If your are less satisfied with society's mistaken view than mine, then please spend your effort somewhere else.

This debate has no value for me.

The appropriate attitude is that nobody is there or will be there to pick you up. You have to understand that today and plan for it.

The real question for you today is who do you really think understands this better? The CEO of AIG, or Ben Bernanke and Hank Paulson? The answer to that ought to determine where you spend your effort.

Here's a little perspective for you. From a Wall Street Journal article detailing the final minutes of hte AIG deal offer...

At 4 p.m., the proposal was hand-delivered to AIG. It was a draconian three-page term sheet, setting forth a steep interest rate and the right to own almost 80% of the company.

Mr. Willumstad was surprised but not shocked. An AIG adviser told the management team: "Paulson is handling this the same way he did Fannie, Freddie and Bear Stearns -- if the government steps in, the shareholders will pay for it."

Mr. Willumstad called a board meeting for 5 p.m. Ten minutes before the meeting was to start, he received a phone call from Messrs. Paulson and Geithner. Mr. Geithner precluded any negotiation by saying: "This is the only proposal you're going to get." Then he added, "And there's one condition -- we'll replace you as CEO."

Mr. Willumstad, who had earned a solid reputation after four decades in the financial-services sector, didn't flinch. Tuesday was his three-month anniversary as AIG's chief. He knew he hadn't caused AIG's mess and he knew that heads had to roll in these circumstances.

After the AIG board approved the offer, Messrs. Bernanke and Paulson attended a hastily arranged meeting Tuesday night with top lawmakers, many of whom were stunned by the magnitude of the problem and the response.

The men who helped create this problem, in a move of incredible dramatic irony, took control of a private company, and served the CEO (of only 3 months) his hat, and that was his reponse. You really want me to believe that these guys should be accorded a minutes breath of my advocacy when the men who heped make it happen have yet to even acknowledge their complicity. Who's handing Bernanke and Paulson their hats, and will they behave the same way. Or will they snivel along like Greenspan who wined and wined about how nobody was there when he made is poor decisions.

Edited September 18, 2008 by KendallJ

[~Sophia~]

I understand diversification as one of those ways in which risk can be "managed". Maybe we mean something different because I agree that when you look at a single investment you can't manage playing the odds - you just make the best informed decision you can.

You will find many, many people who will echo your sentiments about business executives, and only a few who will echo mine about the evils of the government. I choose to not debate this issue with you one step farther and hope that you see that in society today, your persepctive has won. I hope you remain satisfied with it.

Not sure why you would think that. Since when is the validity of an idea determined by it's popularity (or it's lack)? And since when there is satisfaction in other's opinions being similar?

Most of my views, as you know, are drastically radical.

And I am not denying the evils of the government but I will not be praising business blindly either just because we do not live in a free society. Fact is - we never have.

[KendallJ]

I will not be praising business blindly either

Who for one second suggested that you do this? When did I do it? You're fighting with a ghost.

[~Sophia~]

You really want me to believe that these guys should be accorded a minutes breath of my advocacy when the men who heped make it happen have yet to even acknowledge their complicity. Who's handing Bernanke and Paulson their hats, and will they behave the same way.

I am not sure what is that you mean. Where did I say that you (or I) should support government's actions (or that they had no role in this mess)?

Who for one second suggested that you do this? When did I do it? You're fighting with a ghost.

Maybe this is an overstatement. However, our view point deviations always happen arround the same issue, when I think that you make excuses for business I think they don't deserve.