Sunday, March 01, 2009

Objectivism & Economics, Part 21

Uncertainty. Central to the Objectivist philosophy is the notion that certainy is possible. Rand went so far as to suggest that the denial of certainty “means that no knowledge of any kind is possible to man, i.e., that man is not conscious.” It is also generally believed among the Objectivist faithful uncertainty, or “skepticism,” is a morally deplorable philosophical position, an epistemology that paves the way for dictatorship and tyranny.

Despite these rather eccentric views of uncertainty, Objectivists nevertheless recognize that not all knowledge claims are certain. They tend to assume that most knowledge claims made by Rand or by the denizens of ARI are “certain” and therefore can’t be wrong. But Peikoff does admit the existence of a class of claims that are merely “probable” or “possible.”

How does one distinguish between a claim that can be regarded as certain and one that is probable or possible? Peikoff explains: 

Idea X is “certain” if, in a given context of knowledge, the evidence for X is conclusive. In such a context, all the evidence supports X and there is no evidence to support any alternative.
The problem with this “solution” to the issue of certainty is that it evades the “hidden data” problem. When Peikoff talks about “all the evidence,” what does he mean? All the evidence available to one person? to group of people? to all mankind? The most likely interpretation is that he means the single individual. But individuals are limited in the amount of knowledge they know. Worse, they are not aware of what they don’t know, which means they have no way of knowing whether they are in command of all the evidence or not. As Thomas Gilovich points out in How We Know What Isn’t So:
It should be clear that the problem of hidden or absent data ... affects the kinds of inferences we draw and the beliefs we have about everyday life. Oftentimes, the lifestyles we lead, the roles we play, and the positions we occupy in a social network deny us access to important classes of information and thus distort our view of the world.
Another source of hidden data relates to all estimates dealing with the possible outcomes that arise from choices made by human beings. Since human beings exercise volition, it is impossible to know for certain how they are going to behave. Action within a social context magnifies this uncertainty. How, for example, will Obama’s “stimulus” package affect the economy? Since our estimate depends on attempting to figure out how the stimulus will affect thousands of people whom we don’t even know, to regard any such estimate as “certain,” even in the odd Objectivist sense of the word, would be ludicrous. Yet nearly all non-trivial judgments about economics and business are tainted with this uncertainty, since they all involve guessing how people will behave in general situations that are assumed to arise from a given policy.

The businessman is also afflicted by this kind of uncertainty, as the economist Frank Knight has shown:
Take as an illustration any typical business decision. A manufacturer is considering the advisability of making a large commitment in increasing the capacity of his works. He "figures" more or less on the proposition, taking account as well as possible of the various factors more or less susceptible of measurement, but the final result is an "estimate" of the probable outcome of any proposed course of action. What is the "probability" of error (strictly, of any assigned degree of error) in the judgment? It is manifestly meaningless to speak of either calculating such a probability a priori or of determining it empirically by studying a large number of instances. The essential and outstanding fact is that the "instance" in question is so entirely unique that there are no others or not a sufficient number to make it possible to tabulate enough like it to form a basis for any inference of value about any real probability in the case we are interested in. The same obviously applies to the most of conduct and not to business decisions alone.
Knight’s point about the uniqueness of a given situation is an important insight: each instance is unique because (1) of the inordinate complexity of any given social situation and (2) because the outcome of a given decision or policy must depend on how a great many individuals react to it, and it is impossible to have certain foreknowledge about those reactions, because people have volition.

Now Rand believed that innate tendencies don’t exist. If she were right about this, it would be impossible to make any kind of rational estimate about human behavior, and social science would be a futile exercise. Fortunately, Rand was wrong on this issue: human beings do have innate tendencies, and from these innate tendencies one can fashion estimates or guesses as to what is likely to happen under a specific set of conditions. But these estimates are only guesses. Even when such estimates enjoy a high degree of “probability,” it would be gratuitous to regard them as certain. So when Objectivists declare that the current crisis was caused solely by government interference, they are at best making only a guess. They can’t know such a thing for certain. Nor would such a claim constitute a particularly good or even probable guess, since some of the worst financial dysfunction occurred in the least regulated markets.

To sum up: even if certainty were possible, it would hardly matter, because most of things people argue about in economics and pubic policy are not capable of meeting even Objectivism's standard of certainty. Most of the things people argue about can never be known with certainty. If certainty could be attained, there would exist a consensus among the intelligent and the rational. Where no such consensus exists (as on most issues relating to social and economic policy), certainty is also, in all likelihood, impossible.


27 comments:

Anonymous said...

When I was still sympathetic to Rand and a special foundations guy with regards to epistemology, I used to support Bonjour and mock this essay:

http://www.princeton.edu/~harman/Papers/BonJour.html

Now, I read it, and I find it fascinating how much I agree with Harman now and disagree with Bonjour.

Hopefully, Objectivists too may find their "Road to Damascus" experience (mine was studying evolutionary psychology and neuroscience) and end up learning the difference between true cutting edge empiricism (which tries hard to deal with uncertainty at the frontiers of knowledge) and their fake empiricism (which mostly asserts statements as certain while making enough distinctions to end up becoming empirically useless - for example, "Capitalism is the best economic system, but what the US practices is not capitalism...")

Damien said...

Greg,

you wrote,
------------------------------------------------------------------
It is also generally believed among the Objectivist faithful uncertainty, or “skepticism,” is a morally deplorable philosophical position, an epistemology that paves the way for dictatorship and tyranny.
------------------------------------------------------------------

Actually you could argue that the opposite is largely true. The biggest supports of Nazism, Communism and Islam-o-Fascism and all certain that their ideology is correct. Any real doubt would make it harder to follow those totalitarian ideologies. Dictators never want want people to doubt them or the official state ideology. If you live in a totalitarian dictatorship and you show any doubt in the fundamental tenets of the state ideology, it could lead the authorities imprisoning you, torturing you, and or kill you, in the name of the greater good. Totalitarian dictators, don't demand uncertainty, they demand the opposite, they demand absolute certainty.

Daniel Barnes said...

Damien:
>Actually you could argue that the opposite is largely true. The biggest supporters of Nazism, Communism and Islam-o-Fascism and all certain that their ideology is correct.

Yes! Objectivists have it completely backwards. It's like their claim that in totalitarian dictatorships, words have no meaning. Actually, totalitarians tend to insist on exact, official meanings of key terms, and dislike the subversive fluidity of language. Remind you of anyone?

Damien said...

Daniel Barnes,

Yeah, sometimes Rand did get mad at people for just disagreeing with her definition of a particular term.

But what makes Rand's idea that uncertainty leads to dictatorship really strange, is that uncertainty is a threat to the goals of a totalitarian dictator and even a threat to the dictator's power.

Just look at the three examples I mentioned earlier.

Imagine if the Nazis were actually uncertain that Jews and Gypsies were subhuman. What if they also doubted that Hitler was the right leader for Germany, or just that the Versailles treaty was unfair.

Imagine if the Communists were actually uncertain that Marxism would work.

Imagine if Islam-o-Fascists were actually uncertain that Infidels deserved to die, and were evil for not embracing Islam. Imagine if the nine eleven hijackers were uncertain that their actions would get them a tick to paradise. Imagine if they doubted that Mohammad was even a prophet.

Yes doubting certain things might be desirable for Totalitarian ideologies, such as man's ability to make rational decisions without the guidance of the state. Theocratic despots might like people to be uncertain that morality is possible without religion or that a secular society can survive. However, when it comes to their own ideology, all tyrants want absolute certainty.

Anonymous said...

Dan wrote:

"Yes doubting certain things might be desirable for Totalitarian ideologies, such as man's ability to make rational decisions without the guidance of the state. Theocratic despots might like people to be uncertain that morality is possible without religion or that a secular society can survive. However, when it comes to their own ideology, all tyrants want absolute certainty."


It's fairly obvious that when you are empirically motivated, you are more interested in getting the particular point in question right in the context it matters than framing some principle which might be obviated by changing circumstances.

Objectivists don't have a real problem with dictatorship - it's just they want their particular brand of dictatorship. Of course, put it to them that way and you get heaped with all kinds of insults. But it's plainly true. It's interesting to see how they rail against the democratic process on principle because it doesn't lead to results they don't like. The idea of subtle critique, measuring the pros and cons and arriving at "reflective equilibrium", like the Harman paper I posted above, often seems way above their pay grade.

Laj

JayCross said...

Objectivists don't have a real problem with dictatorship - it's just they want their particular brand of dictatorship.

I don't see how you could equate the society desired by Ayn Rand with a dictatorship in any serious sense of the word. First, it should go without saying that a dictatorship requires a dictator.

Who is the dictator in a society of individual rights and free markets? There is none.

No dictator = not a dictatorship.

Damien said...

JayCross,

I couldn't have put it better myself. There maybe things Objectivism gets wrong, but its not a totalitarian or statist ideology, in fact objectivists tend to oppose any form of government intervention, with very few exceptions Rand's philosophy is hardly pro government control.

Anonymous said...

Nyquist: Now Rand believed that innate tendencies don’t exist. If she were right about this, it would be impossible to make any kind of rational estimate about human behavior, and social science would be a futile exercise.

You write this like you know it with certainty. You give no evidence. In fact she did not write such a thing. She wrote in The Objectivist Ethics that humans have no innate ideas nor innate value judgments but they do have an innate physical pleasure-pain mechanism. Except the last, whether or not those are "innate tendencies" is highly questionable. What are "innate tendencies" anyway? Is my tendency to want to eat when my stomach growls an innate tendency? Is a baby's crying when hungry or uncomfortable an innate tendency? If they are, why do you believe Rand believed they don't exist?

You make no attempt to say what they are. Yet that doesn't stop you from making an inane innuendo about Rand like "it would be impossible to make any kind of rational estimate about human behavior" without them. What this has to with the uncertainty business people face is beyond my grasp. Indeed, business people's actions rely on non-innate ideas and non-innate value judgments, which certainly are in Rand's system of thought.

Nyquist: So when Objectivists declare that the current crisis was caused solely by government interference, they are at best making only a guess. They can’t know such a thing for certain. Nor would such a claim constitute a particularly good or even probable guess, since some of the worst financial dysfunction occurred in the least regulated markets.

What about your claim about the cause of the current crisis? Isn't your claim also at best a guess and not a particularly good or even probable one? Or are you exempt from you own accusations? What "worst financial dysfunction" is that? Is it worse than the heavily regulated banking system, the heavily regulated mortgage origination market, and the government-made mortgage default insurance fiasco in partnership with Fannie Mae and Freddie Mac?

gregnyquist said...

Anon: "You write this like you know it with certainty."

This is the stock objection that Objectivists make to all criticisms of certainty. People write or speak as if they are certain, therefore they are being hypocritical and self-contradictory when they deny certainty. Really, this is a rather tiresome mode of argumentation, one that completely misses the point at issue. Would Anon feel better if we began every statement with proviso "In all likelihood"? That would become wearisome very quickly.

I rather doubt that Anon understands what is troublesome with claims to certainty. The most critical issue has to do with openness to evidence. People who are certain believe, like Al Gore, that the debate is over, and that they never have to bother themselves with examining new evidence again. It's a rhetorical ploy to avoid ever having to confront disagreeable evidence.

"You give no evidence. In fact she did not write such a thing."

As a matter of fact, she did. She denied that human beings were "saddled with tendencies" in Galt's Speech. Indeed, her denial of innate "ideas" and innate "value judgments" amounts to the same thing, since these concepts are interpreted by Rand very broadly to include emotions. So if a person feels a strong need for approval from others, Rand considers that just a "value" judgment and not an innate tendency.

"You make no attempt to say what [innate tendencies] are."

Since innate tendencies have been discussed repeatedly in previous posts, I saw no reason to get into them here. Innate tendencies can be defined as the degree to which genes influence behavior. See my post on behavioral genetics for more details.

"Isn't your claim also at best a guess and not a particularly good or even probable one? "

Of course it is a guess, but that doesn't mean it can't be a good or even probable guess. What evidence, after all, do you have that it isn't a good guess? Or is your statements that the banking system and mortgage industries are "heavily regulated" supposed to constitute evidence? If so, it's not very good evidence. It is not clear that banks and mortgage industries are "heavily regulated" (what is that supposed to mean, anyway?) Indeed, many of the regulations afflicting these industries have been removed in the last 30 years, and many others are irregularly enforced or not enforced at all. Moreover, the most serious dysfunction existed in the securities markets, particularly in the markets for derivatives, which were pretty much allowed to do as they pleased. How else could we get a notional value for derivatives of nearly $600 trillion if the market had been regulated sensibly? They were not sensibly regulated (how about some reserve requirements on derivates issuance, for example?), which meant that leveraged positions could be used to fuel the very credit bubble that got us into this mess. All of this is explicable if we allow for innate tendencies. If human behavior is influenced by innate tendencies (such as all those tendencies studied by behavioral economists which help fuel speculative manias), then rational self-interest can't be relied upon to regulate behavior in markets. We need a few sensible rules to prevent speculators from going overboard and brining ruin on our country.

Now while all that I have written may be merely an estimate or a "guess," it at least is based on a wide swath of evidence and is not influenced by any personal preferences, which gives a strong presumption in its favor, particularly when compared to the educated guesses of Objectivist ideologues whose minds are made up ahead of time and who don't give a fig for the evidence.

Anonymous said...

"I don't see how you could equate the society desired by Ayn Rand with a dictatorship in any serious sense of the word. First, it should go without saying that a dictatorship requires a dictator.

Who is the dictator in a society of individual rights and free markets? There is none."

My point is not about the "dictator" in dictatorship, but the desire for a certain kind of conformity. The characters in Rand's novels were not really that varied. You could tell that she wanted people to behave a certain way and that was about it. The tension is in the combination of a leftist view of human nature with a right-wing politics.

In summary: I have no problem with the claim that Rand did not support dictatorship explicitly. However, the kind of free market she argued for could only exist in imagination and is based on similar views of human beings that led to totalitarianism.

Red Grant said...

___________________________________

First, it should go without saying that a dictatorship requires

a dictator. - Jay on 3/02/2009 09:38:00 AM
_________________________________




Not necessarily.

Below is an article from Capitalism Mag....no less.



http://www.capmag.com/category.asp?action=cat&catID=99




___________________________________

I don't see how you could equate

the society desired by Ayn Rand

with a dictatorship in any serious sense of the word. First, it should go without saying that a dictatorship requires a dictator.

Who is the dictator in a society of


individual rights and free markets? - Jay on 3/02/2009 09:38:00 AM
__________________________________




Does this mean you believe that in

a society desired by Ayn Rand, is

a society of individual rights and free market?



If so, then

who would decide what are individual rights in such a society?

and

what is the definition of free market in such a socity?

and

does this mean to qualify as a free market, it has to meet the standard set by Ayn Rand?




Btw, Jay, are you finally ready to answer the questions from "Objectivism & Economics, Part 19 and some of the other questions you had promised to answer from the previous thread?

Jay said...

Red,

Please check recent comments, I just replied!

Jay said...

Red,

"Not necessarily.

Below is an article from Capitalism Mag....no less."


Ah, yes! I suppose I was too quick to overlook dictatorship by majority. Fortunately, this too was condemned by Rand.

Red Grant said...

___________________________________

Ah, yes! I suppose I was too quick to overlook dictatorship by majority. Fortunately, this too was condemned by Rand. - Jay on 3/02/2009 06:23:00 PM
___________________________________






Does this mean then you will oppose democracy if majority decide to abuse the individual rights (however defined by Rand, and/or you) of the minorities?

Anonymous said...

Nyquist: As a matter of fact, she did. She denied that human beings were "saddled with tendencies" in Galt's Speech.

Denying that human beings are "saddled with tendencies" is far from equivalent to no innate tendencies, which is what you first said. "Saddled with tendencies" suggests they control behavior a lot. Innate tendencies controlling behavior some, but far less than "saddled with", is quite consistent with Rand saying the pain-pleasure mechanism is innate.

Nyquist: Moreover, the most serious dysfunction existed in the securities markets, particularly in the markets for derivatives, which were pretty much allowed to do as they pleased. How else could we get a notional value for derivatives of nearly $600 trillion if the market had been regulated sensibly?

It's simply your opinion that the most serious dysfunction was derivatives. Since you used "notional amount", I assume you meant credit default swaps (CDS). I note you said nothing in response to my putting Fannie Mae and Freddie Mac as a major cause and arguably the major cause. These government-made entities insure about half the residential mortgages in the U.S. and in effect run a CDS operation. CDS insure against default of bonds or mortgages. Not only that, many CDS were written on Fannie Mae and Freddie Mac paper. So to blame CDS and ignore government's role in CDS is absurd.

Moreover, notional amount by itself is very misleading. It can include a lot of double-counting. One party might have $N notional amount as buyer and $N notional amount as seller, with a net position of $0. But if notional amounts are simply summed, the sum is $2N. Cash flows are only a small fraction of the notional amount. If you were to look at statistics on a life insurance company or the industry, would you look only at the face amount of insurance and completely ignore premiums and claims?

Nyquist: Now while all that I have written may be merely an estimate or a "guess," it at least is based on a wide swath of evidence and is not influenced by any personal preferences, which gives a strong presumption in its favor, particularly when compared to the educated guesses of Objectivist ideologues whose minds are made up ahead of time and who don't give a fig for the evidence.

Wide swath and don't give a fig for the evidence? LOL. It seems to me you have a strong personal preference to minimize the blame on government's role, and you use
very misleading numbers for evidence.

gregnyquist said...

Anon: "Wide swath and don't give a fig for the evidence? LOL. It seems to me you have a strong personal preference to minimize the blame on government's role, and you use
very misleading numbers for evidence."

This remark makes me suspect that you haven't really grasped the point of this post, that your commitment to the view that government is entirely responsible renders it impossible for you to do justice to other positions, or even to understand them. The main point of my post is not minimize the government's role in the crisis, but to deny that one can know with certainty that the crisis was caused entirely by government intervention. In short, my commitment is not to specific ideology or preference, but merely to go where evidence leads. If one does so impartially, without caring ahead of time where one is led or what conclusions the evidence appears to support, I believe one would find that the major factor behind the crisis is the distorting affects produced by various moral hazards, which caused speculators and investors to take on far more risk than would otherwise have been the case. Some of these moral hazards are the responsibility of the government (e.g., FDIC, the To Big To Fail doctrine, and Fannie Mae (which I have discussed elsewhere on this blog). But other moral hazards arose spontaneously in the market, the most serious being the insurance component of derivatives, which, by giving investors a false sense of confidence in the securities they invested in, made it much easier to use risky securities as leverage for additional credit creation, which in turn fueled the credit bubble that grossly inflated first asset prices and later home prices. The notional value of derivatives merely gives us a rough indication of how widely these instruments were used (and therefore of their importance); the issues you raise about notional value are otherwise irrelevant to my argument. Investors and speculators, following their short-term self interest (many of these people were making huge amounts of money), were using both government and free market devices to run up a dangerous credit bubble. So we have failure on many levels. Government failed (by providing safety nets without regulation, thus, in effect, socializing losses) and markets failed by allowing investors to make huge short-term gains by following trading strategies that were seriously flawed (e.g., strategies based on derivatives as insurance). Now if these are the main sources of the crisis, wouldn't the sensible, rational thing be to fix those problems, to remove the moral hazards (assuming that's politically possible) caused by the government and the market? It probably would be especially easy to fix the causes of market failure. Just require reserve requirements for derivative insurance. That's it. No "heavy" regulation: just one simple regulation. But the tendency of laissez-faire fundamentalists is to frown on any "interference" in the market, irrespective of probable consequences. Ideology trumps results—which can hardly be described as either sensible or rational.

Daniel Barnes said...

Anon:
>These government-made entities...So to blame CDS and ignore government's role in CDS is absurd.

Anon is stressing the GSE's origins, but doesn't mention the way they functioned in reality. In fact Freddie and Fannie were private corporations, with shareholders, and had been since the late '60s/early '70s. So to ignore the private sector's role in CDS and solely blame da gummint is absurd too.

The reality is rather like the GSEs themselves; an odd beast with a complex history and a mixture of government and private interests, of blunders and outright wrongdoing. This is Greg's point.There's plenty to blame all round, yet Objectivists only want to see the government side. Besides, the housing bubble is just one sub-bubble that's popped a much larger, longer term series of bubbles worldwide.

>...Rand saying the pain-pleasure mechanism is innate.

Well the fact is that, as usual, Rand actually makes entirely contradictory remarks about this in the ITOE - as I recall in this case on the very next page! So no, it's not clear what Rand thinks at all. I will cite chapter and verse shortly when I get a moment.

Red Grant said...

___________________________________

Wide swath and don't give a fig for the evidence? LOL. It seems to me you have a strong personal preference to minimize the blame on

government's role,

and you use
very misleading numbers for evidence. - anon from Dubious Parrell

3/03/2009 05:25:00 AM
-----------------------------------

Soros is a great investor and a lousy economist. His Quantum Fund co-founder Jim Rogers puts him to shame. Soros is a political leftist.

As Rogers knows well the cause of the current crisis is not a free market, but government controls.

In your link Soros says regulators are to blame only because they didn't control enough. - anon from Dubious Parrell
___________________________________





and here's what Rogers had to say about China!





___________________________________

Jim Rogers: China’s Economic Advance is All But Unstoppable
By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

SINGAPORE - China’s long-term prospects are so strong that even a civil war, an economic collapse or political assassinations would only temporarily delay its emergence as a worldwide economic powerhouse, global investing guru Jim Rogers told Money Morning during an exclusive interview in this Southeast Asia city-state.

"Civil war would be a terrible thing in China, but it’d be a temporary setback, as would epidemics, as would economic setbacks, [and as would a] depression," Rogers said. "But China will come out of all that and keep going forward. Now, I don’t anticipate war in China - even civil war - but I’m suggesting that if it happened, I don’t see it as the end of the story any more than [the U.S. Civil War] was the end of the story in the United States."

With an economy that’s advancing at an average annual clip of better than 11%, $1.7 trillion in currency reserves, and an emerging middle class that will soon be the world’s largest, China represents the future to globally focused investors and businesses alike. But there’s always been a concern about just how resilient China’s economy actually would prove to be.

Rogers urged investors to dump such concerns.



http://www.moneymorning.com/2008/04/15/jim-rogers-chinas-economic-advance-is-all-but-unstoppable/
___________________________________





anon from Dubious, Is Rogers so bullish about China

because China is a Randian Free Market

or

because China's economy is powerfully dynamic even though it is most definitely not a Randian Free Market?



Now, let's hear from that fraud/crook, Yaron Brook about China.




___________________________________

Fairfax, VA: Mr. Brook, what is your opinion on China's relation with the US? China is becoming one of the largest economies and is predicted to over take the US by 2010 according to some. With the recent news on the block of hi-tech military trade with Israel among other issues by the US, how will this affect company's there now and in the future, if any.

Yaron Brook: China is a totalitarian, ruthless regime. It is immoral for the US to support such a regime and by doing so condones China's horrendous actions. In addition China has missiles pointed at US cities; by helping China we sacrifice our national security, making their threat more real.

http://www.washingtonpost.com/wp-srv/liveonline/00/business/specials/brook0719.htm
___________________________________







So who's right?

Yaron, whom you have defended in Dubious Parrell thread,

and claims that China is a ruthless totalitarian regime, most definitely not a free market

and certainly for government control oriented?

or

Jim Rogers, whom you also pointed out how brilliant economic mind he possessed and stands for free market

not

for government control?
























.

Anonymous said...

Nyquist: This remark makes me suspect that you haven't really grasped the point of this post, that your commitment to the view that government is entirely responsible renders it impossible for you to do justice to other positions, or even to understand them.

Your suspicion is wrong. I did not say the government is entirely responsible, nor have I ever held that. I hold that the major causes are government controls. Of course, people in the private sector played a role. People in the private sector (government, too) respond to incentives, including incentives put in place by government (including ones that create moral hazard).

Nyquist: In short, my commitment is not to specific ideology or preference, but merely to go where evidence leads.

Yeah, and the evidence you chose to recognize and ignore led you to put derivatives as the "most serious dysfuntion" with no contenders, omit Fannie and Freddie, and to pooh-pooh government controls on banking and mortgage origination. Finally, in the rest of your latest post you acknowledge some government failures.

Nyquist: Just require reserve requirements for derivative insurance. That's it. No "heavy" regulation: just one simple regulation.

Just one simple regulation? Do you have any idea of the volume of regulations on reserves for insurance companies? They are voluminous with many calculation details. Also, such regulations are imposed by state governments, not the federal government. How competent do you think federal government regulation would be, lacking the expertise? Anyway, I agree with the goal, but "insurance regulation" isn't the means.

Barnes: Anon is stressing the GSE's origins, but doesn't mention the way they functioned in reality. In fact Freddie and Fannie were private corporations, with shareholders, and had been since the late '60s/early '70s.
So to ignore the private sector's role in CDS and solely blame da gummint is absurd too.


I did not "ignore the private sector's role" and "solely blame da gummint." Regarding Freddie and Fannie, ownership and control are two different things. The federal government has maintained extensive control, now complete.

Red Grant said...

___________________________________

As Rogers knows well

the cause of the current crisis is not a free market,

but government controls. - anon from Dubious on 3/01/2009 05:52:00 AM from Dubious Parallels Thread
-----------------------------------
Your suspicion is wrong.

I did not say the government is entirely responsible, nor have I ever held that. - anon from Dubious on 3/03/2009 02:52:00 PM
___________________________________






Anon, are you outright lying now?



following the example of that fraud/crook Yaron?





___________________________________

I hold that the major causes are government controls. Of course,


people in the private sector played a role.

People in the private sector (government, too) respond to incentives, including incentives put in place by government (including ones that create moral hazard). - anon from Dubious on 3/03/2009 02:52:00 PM
-----------------------------------
As Rogers knows well

the cause of the current crisis is not a free market,

but government controls. - anon on 3/01/2009 05:52:00 AM from Dubious Parallels
___________________________________




Is anon lying and performing a switchroo at the same time?


Talk about multi-tasking!

Anonymous said...

As an empirical point in support of Greg's point about reserve requirements, some of the best performing companies in this age are health insurance companies, in part because their investment theses and regulatory requirements are pretty strict on how much they should reserve for their expenses. This is a mixture of good management and regulation leading to a good outcome - the health insurance companies try to make sure that they are adequately capitalized to cover their expenses, and the government puts in place regulation to make sure that the healthcare companies are working within pricing limits.

As with all things, there are benefits and costs. But in this time where people were taking on too much risk, most healthcare companies have remained well capitalized because of their conservative approach to investment.

gregnyquist said...

Anon: "I did not say the government is entirely responsible, nor have I ever held that. I hold that the major causes are government controls."

Then we don't really disagree—unless what you're really upset about is the implication that we should be open to the government addressing that portion of the problem related to market failure. I've been stressing that part, not because its the major part, but because this blog criticizes Rand, including Rand's uncompromising insistence on laissez-faire, which I've criticized for being too dogmatic, inflexible, and unrealistic. There is ample evidence from 19th Century America that financial markets can implode on their own, without government help or mismanagement. So why not be open to the government devising a few laws to limit the sort wildcat leveraging that could lead financial disaster that will hurt many many people and empower anti-market demagogues?

"Just one simple regulation? Do you have any idea of the volume of regulations on reserves for insurance companies?"

I don't know enough about the health insurance business to know whether it is over-regulated or not. Let us suppose it over-regulated. Does this mean the only viable alternative is no regulation? The alternative to too much regulation is not no regulation, but less regulation—perhaps even a great deal less.

Let's be honest about the risk of no regulation: it increases the odds that an insurance company won't have funds to pay for claims. Now while the market will drive such firms out of business, in the meantime you may have thousands of people who can't pay their medical bills.

Examples like this are what has made laissez-faire such a marginalized position. The over-whelming majority of people don't want to live in a society where their lives are potentially put in danger by short-run market failures. So convincing them to accept laissez-faire is a hopeless endeavor. But as to lightening the regulatory burden—that's an easier sell. And it may help us reach a point that, from the standpoint of economic output and efficiency, places us in a better position than laissez-faire would.

JayCross said...

Greg,

You said:

Let's be honest about the risk of no regulation: it increases the odds that an insurance company won't have funds to pay for claims. Now while the market will drive such firms out of business, in the meantime you may have thousands of people who can't pay their medical bills.

This makes sense. But - if you've figured this out, as someone who admits not knowing enough about the health insurance business to know if it's over-regulated...

Don't you think health insurance executives (who devote their lives to that field) know it? Don't they have a selfish interest in not going bankrupt, and all the incentive in the world to have enough funds to pay its claims?

Do you know of any examples where unregulated companies actually did this?

Kelly said...

JayCross said: "Don't you think health insurance executives (who devote their lives to that field) know it? Don't they have a selfish interest in not going bankrupt, and all the incentive in the world to have enough funds to pay its claims?"

This may be right in some instances, but one of the biggest problems with corporations today is they don't have executives that devote their lives to the field, or even have a vested interest in the company's future. They have managers that are evaluated, in many cases, by stock prices in the short term.

Anonymous said...

This is to remark briefly about the notion of applying insurance regulation to CDS.

As I said earlier insurance regulation is by the states. Financial audits by the states are infrequent, like maybe every three years and even less. The companies file financial information with the state annually, maybe quarterly in some cases.

Given the infrequent financial monitoring, it's obviously way too slow for CDS, where a party can get into big trouble really quick. An exchange could require a losing party add enough collateral to cover the growing losses or have his position closed. Collateral monitoring is very frequent, like daily.

Most regulation of health insurance is about underwriting, coverage, and claims practices. Health insurance for the most part is not very risky, with pretty predictable claims and adjustable premiums. It's about the risk level of auto insurance or a big grocery store.

Anonymous said...

This is the anonymous who made the comment about health insurance in support of Nyquist's first point.

No insurance is risky if you have sufficient collateral. In other words, the key to pricing risk properly is to be adequately reserved. The reason why health insurance is not risky is because even though it is not always insurance, people are not taking on excessive risks. An example of the kind of regulation that protects health insurance companies (and some general insurance companies too) is that they have to justify the risk level and maturity of the investment vehicles into which they put the premiums they collect.

The people who were selling all these derivatives were obviously not adequately reserved, but this is in hindsight. The real question is how to have told in advance that they were taking on large risks without being adequately reserved. And therein lies the bias towards conservatism that supports government regulation on some level - many of us would rather embrace the inconvenience of having the government license drivers than have drivers decide on their own when they are ready to take to the road without a uniform system for addressing bad drivers etc.

One problem caused by the free market is the tragedy of the commons - each individual can act in his self interest without realizing that there is a systematic result of such behavior that hurts the community. So Lehman is trying to outcompete Goldman Sachs in getting a healthy return and enters the subprime securitization business. So if Goldman is making money and Lehman doesn't follow suit, Lehman looks like a loser. If Lehman doesn't follow suit, it's rarely because Lehman was much wiser. And if they are all doing it, they are all exposed to the losses of engaging in such. Who takes the bird eye view and realizes that all this stuff has social consequences that go beyond just making more money?

Anonymous said...

JayCross said: "Don't you think health insurance executives (who devote their lives to that field) know it? Don't they have a selfish interest in not going bankrupt, and all the incentive in the world to have enough funds to pay its claims?"
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They do have that interest. They may also have the interest of making a quick short term buck and damn the long term consequences of the business like Kelly said. Some may do it to different degrees (think Al "Chainsaw" Dunlap, who was initially thought to be a turnaround artist, but was really someone who cut his company's important discretionary investment costs like advertising in order to make the company more profitable in the short term, while gutting it in the long term).

Moreover, the whole point of rational interests is that these interest are regulated by incentives. People will react differently to different incentive structures. Unfortunately, not everyone is equally intelligent, and even intelligence is not a guarantee that someone will not be stupid/irrational in some endeavor. And there are even slight underhand tactics (backdating options was an example) that an otherwise respectable and successful executive might engage in just to get an edge. Never underestimate the competitive nature of most of the people that run the best corporations.