Thoughts on Something Milton Friedman Said

[The once and future king]

I love how these arguements allways break down in to its side A or Side Bs fault.

Its always more complex than that. There is over inflation, then unregulated markets exacerbate the effect of that inflation by engaging in leveraging.

I made a post about this which was ignored probably due to its complexity. The current situation in sub prime is classic example.

Inflation = rising house prices, rising house prices = who cares who we lend to, the liability is secured against an appreciating asset + any way we can sell the risk on = we bought the risk and we can now create a financial instrument called a CDO (collaterised debt obligation)out of it and sell it to investors as a bond + even though the bonds value is in relation to a bunch of fraudulent sub prime toxic waste, the value of it (which is non transparent) will be determined by an "independent ratings agency" = oh look the nice independent ratings agency has given our toxic waste a nice value, coz house prices can only go up right? = The markets have created a mechanism that has a massive effect on the price of credit through bond yields and the availability of credit through risk hedging that is totally independent of the Gov or the fed reserve.

Edited to add:

On reflection the statement totally independent is false. There is obviously a relation of some kind.

However the real point is that I dont see how the State benefits the most from fiat money, it would seem to me that is the markets created in and of fiat money that benefit most.

The UK owes 94£ for every year the universe has existed, over 1 trillion pounds of personal debt, which has been given out like candy. However interest rates are going up,as is inflation, credit is tightening and if the UK has any kind of housing collapse (which is inevitable imo)this will utterly fook people as most of this debt is secured against real estate.

When this [censored] storm finally hits, the State will carry the can and most likely the sitting political class will be replaced, and I cant see how they really benefit from a debt induced meltdown that crushes everyones
(unsustainable)standard of living.

However the banking system will be laughing all the way to its own doorstep. "Yea we lost some funny money that we printed anyway, but now we repossessed some actual stuff that has an objective value and our share of real wealth has risen exponentially and no one is even blaming us for on of the biggest cons ever perpetrated."

[The once and future king]

Also whilst we are on this subject.

If the State is only interested in its maintenance of power over civil society, then creating fiat money and then saying, there you go boys get on with it, seems like the dumbest move ever. If I was the state I would regulate that fiat money fooking hard as fook in every possible way. No way would I allow present levels of leveraging. No way would I allow derivatives to be as unregulated as they are.

Ok the sheeple may be made happy by buying much more than their actual wages can afford, but that chicken comes home to roost and then [censored] all over the porch. Then the sheeple will get angry and blame the politicians, when it was in fact the banking system that fooked them and will now benefit.

It seems to me like there has been a shift in power since the last depression with the Banking system learning its lesson. They dont want to be the ones jumping out the window next time. They stand poised to take complete ownership of UKplc.

[adios]

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...No way would I allow present levels of leveraging. No way would I allow derivatives to be as unregulated as they are.

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Glad you brought this up. I was thinking about making a post regarding the unregulated nature (not totally unregulated in the States) of the derivatives market and whether or not this was a point in favor of less regulation. There's always the concerns about a derivitives market meltdown but it hasn't happened yet. The potential is probably there though I will admit (as there are with other markets both capital and equity). In the derivitives that we see used in CDOs for example, there are two sides of the transaction i.e. a buyer and seller of the derivitive. The derivitive markets appear to function smoothly and I would say that the market functions well (at least to this point) because all interested parties have a vested interest in seeing it do so. Put another way, the market players follow a set of rules because it's in their best interest to do so. I think it's fair to say that the vast majority of market participants would say they don't want or need government regulation. The idea of no government regulation seems to be very extreme to me but to be fair government regulation isn't a one way street so to speak. The government has and can screw things up royally through mismanaged government regulation too.

[adios]

[ QUOTE ]
[ QUOTE ]
let's just say that Sarbanes-Oxley is one of the worst examples you could have come up with to support your position.

natedogg

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Parts of Sarbanes-Oxley
Public company oversight board-
• Register all public accounting firms that provide audits for public companies.
• Establish standards relating to the preparation of audit reports for public companies.
• Conduct inspections (reviews) of accounting firms.
• Conduct investigations and disciplinary proceedings and impose appropriate sanctions on pubic accounting firms whose performance is inadequate.
• Enforce compliance with the Sarbanes-Oxley Act

Constraints on Auditors – Designed to ensure that auditors remain independent.
-Accounting firms are prohibited from providing non-accounting services to clients.
- Auditors rotated every five years
- Reports to company’s audit committee and not the management

Constraints on Management – designed to ensure validity of financial statements.
-Management makes statements asserting the accuracy of data.
- Public companies must develop and enforce an officer code of ethics.
- Loans to company officers are prohibited.
-Support of an audit committee. Not part of management & reports to board of directors.

One assumption that the government must reinforce to promote trust is that of ethical action on the part of the participants in the market. Ethics is a very confusing subject, however, and means many different things to many different people. While certain universal ethical principles exist that transcend culture and religion, many people act on cultural or religious premises believing they are ethical. The government cannot mandate a particular code of ethics to market participants. The best approach that can be taken is to set laws such as those the SEC enforces that are supposed measures of ethical action. In the case of Sarbanes-Oxley, the law is in place to foster a situation in publicly traded firms where ethical action on the part of all parties is the best course of action. Of course, the old way of doing things where the board, accounting firms, bankers, stockholders, etc got together assumed the best course of all parties was ethical until Enron happened.

Through the establishment of laws, the government promotes the perception of ethical behavior through the assumption that to obey the law is to act ethically. The actions taken by many corporations involved in scandals in 2001-2002 were not technically illegal, however. Although unethical in context, certain actions can be considered legal. But the shortcomings of law in this regard are unimportant in the face of establishing trust in the market.

Arguably, the economy, businesses, consumers and government are better off today after the passage of Sarbanes-Oxley. The market has recovered from a 10 year low in the early 2000’s to record levels. As of today, five years after Sarbanes-Oxley, the economy is booming, unemployment is at a record low, and tax revenues are surging in decreasing the deficit. The approach of the government to the ebb and flow of trust in the capital markets is clearly effective when action is taken.

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To be fair a lot of companies are being taken private precisely because they would prefer not to have the scrutiny and possible penalties that Sarbanes-Oxley brings about. Companies claim that Sarbanes-Oxley has added expenses to operations and in reality the prospect of CEOs going to jail for signing off on bogus 10-Qs and 10-Ks has a lot to do with that. Corporate profits seem to be very high to me so the carping that companies do about Sarbanes-Oxley is probably disingenuous in some cases. For smaller market cap companies I'm willing to believe that Sarbanes-Oxley is an encumberance that makes it harder for them to compete.

[The once and future king]

Yea of course the players have a vested interest in keeping the game going, this has knock on effects in the wider economy e.g. availability of credit to those that have no realistic hope of paying it back, which is what happened in sup prime.

Their interests are not analogous with those of the State. As the State I would not be regulating in hope of the most efficient outcomes, but I would be regulating much more to protect my interests which are not the same as the market.

Australian report on CDOs etc

Just so know one misses it. A hedge finds buys the option on some toxic debt, which is then (over) valued by an "independent" ratings agency, the hedge fund then borrows money using its holding of the toxic waste as collateral.

We know the debt is toxic now, but when the hedge fund was borrowing against its ownership of the debt (Credit default swaps)the independent ratings agencies gave the toxic debt a nice value (the debt had been packaged in such a complex way that real values were totally invisible) so the hedge funds looked much more healthy than they really were.

Is it just me or does this seem like madness to anyone else?