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29 September 2008 @ 03:34 pm
More Economic BS - Markets Should Be Free... Sometimes  
I am and have always been a proponent of the free-market economy. I believe wholeheartedly that most of the time, it results in the best distribution of resources and wealth (surplus resources).

However, like all economic systems, it has its flaws. The discussion always comes in trying to determine how to correct or ameliorate those flaws so as to (at least) harm few and (at best) ensure some minimum standard of living for everyone.

Recent events make me think that perhaps the farther from tangible goods or services some "product" is, the less it should be subjected to free market and the more it should be subjected to regulation.

Take for example real estate. Sale of property via cash between people - clearly a free-market event which should have minimal regulation.

Loaning of money to facilitate the sale of property - one step removed, as the mortgage is based not only on the market value of the property but also the current and future assets of the buyer. Needs more regulation.

Sale of a mortgage - another step removed, now the value depends not just on the property and the mortgagee but also on the correct assessment of those things by the original lender.

Securities based on value of mortgages, bundled or separately - so, who in a real market can value these things? The whole thing is based on perception of a perception of a perception, as well as the combinations of mortgages in the bundle.

The reasoning behind this is that the more abstract the derivative product, the fewer people there are to ensure that there is enough "mass" for the market to move at a proper speed.

This seems logical to me, possibly because it has an analogue in mathematics. Consider a line on a graph. The higher level the derivative of that line, the smaller change needed in order to drastically affect the resulting shape/direction of the original line. When smaller changes have disproportionate effects, something needs to be done to even out the devastating swings that can occur while that market corrects itself.
Current Mood: contemplativecontemplative
Keriskeristor on September 29th, 2008 08:49 pm (UTC)
Note that we (I think anywhere) don't actually have a free market. It is hedged around with regulations and subsidies and (promises) of bailouts, so it is actually distorted by those things. I don't know whether a free market, with full responsibilities (i.e. if you lose money you go bust), in such things would actually work, I've never seen one.
Bill Suttonbedlamhouse on September 29th, 2008 09:02 pm (UTC)
I've noticed that all these bailouts and lack of regulations seem to circle around the derivatives that stand some number of steps away from the actual.

Essentially, if you bought property for cash and it turned out to be a pig-in-a-poke, you're the only one who suffers.

But, when the economy starts depending on those first and second derivatives, the damage due to problems is so wide-ranging that a bailout - no matter how uncomfortable it is - has to take place.

Of course, my premise is that if the damage in such circumstances is so wide-ranging as to require intervention by a Higher Order Entity, then it needs proportionally more regulation in the first place.

It's a simplistic view, but it is my own *grin*
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Shannachieshannachie on September 30th, 2008 08:00 am (UTC)
"In an ideal world" - exactly. I do not believe in regulation-free economy just as I do not believe in regulation-free society. Just as I believe in personal freedom on a socio-political scale I would not advocate abolishing all laws because the "ultimate freedom" evolving from a lawless society would be self-regulatory and thus necessarily good. Of course, it would be "self-regulatory" if one wanted to accept that after long phase of fighting, the greedy people with lots of firepower and no conscience would rule and the rest would be without rights. Freedom is a product of civilisation - and thus defined rules and rights. The one does not go without the other.
This goes equally well for economy. The current crisis is the result of believing in economical anarchy as a value as such.
As Bedlamhouse says: the primary level is easy to maintain without extra regulation. but where commodities are turned into hot air balloons a pin prick will eventually set the whole thing to explode. And if there are no regulations whatsoever the entire set of dominoes will - excuse my mixed metaphore - just run its cause.

Human beings tend to be greedy and without scruples. They will always go too far if no limit is set.
kizoku42kizoku42 on September 30th, 2008 12:37 pm (UTC)
This is similar to a thought I've had for a while. The whole reason a free market works is that the _collective_ wisdom of the market is better, on average, than any one entity. One, two, or three groups get it wrong and the others do better. On average, everything goes up. One of our problems nowadays is that power is getting too concentrated. When one really, really big player gets it wrong the effect is too big to ignore or let the market correct. The swings are too violent.

And, as you say, it's harder to figure out what the derivative of a derivative of a derivative is going to do. But still, if we had a few hundred equal players we could let five or six of them go to the wall and get what they deserve.
carolfcarolf on September 30th, 2008 03:24 pm (UTC)
Even in spherical chicken terms, a free market will self-correct over time. The problem is that "time" bit. Time could be very long indeed, and conditions can be very ugly during that time.

Also, the group that does badly may not be the only ones hurt by their mistakes. The more we've moved as a society away from subsidized (and tightly regulated)pensions to individual investment, the more widespread the harm from failed investments.

I notice that those who talk loudest about "free market" are the ones who have the most cushion against risk.

Mind you, I am in no way any better inclined towards unchecked socialism. I firmly believe in the collective wisdom of checks and balances.