Comments on: Let the Foxes Guard the Henhouse http://alephblog.com/2009/05/07/let-the-foxes-guard-the-henhouse/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Sun, 12 Feb 2012 22:02:53 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: rapierhttp://alephblog.com/2009/05/07/let-the-foxes-guard-the-henhouse/comment-page-1/#comment-21716 rapier Sun, 10 May 2009 04:21:40 +0000 http://alephblog.com/?p=1688#comment-21716 Is the Fed the government? It is and it isn't. Everybody wanted easy credit and easy money. I blame the Fed as much as anyone possibly could but they were just playing the part given to them in the great drama. Fed-Government-the Governed, it's all chicken and egg stuff to me. Besides, nothing has really happened yet. Is the Fed the government? It is and it isn’t.

Everybody wanted easy credit and easy money. I blame the Fed as much as anyone possibly could but they were just playing the part given to them in the great drama.

Fed-Government-the Governed, it’s all chicken and egg stuff to me. Besides, nothing has really happened yet.

]]> By: Lordhttp://alephblog.com/2009/05/07/let-the-foxes-guard-the-henhouse/comment-page-1/#comment-21713 Lord Fri, 08 May 2009 19:59:39 +0000 http://alephblog.com/?p=1688#comment-21713 That's why AIG did such a great job right, no one to protect them? That’s why AIG did such a great job right, no one to protect them?

]]> By: matthttp://alephblog.com/2009/05/07/let-the-foxes-guard-the-henhouse/comment-page-1/#comment-21700 matt Fri, 08 May 2009 02:52:46 +0000 http://alephblog.com/?p=1688#comment-21700 PS: I should note that I am not of the camp that believes letting the big banks fail would be without consequences. We have a capital markets system that relies heavily on the primary dealers and mega-banks for capital market liquidity. Surely, it would take time for a decentralized system to replace what is in place now. The point is that it would be healthy, if we were willing to adjust instead of kick the can down the road. PS: I should note that I am not of the camp that believes letting the big banks fail would be without consequences. We have a capital markets system that relies heavily on the primary dealers and mega-banks for capital market liquidity. Surely, it would take time for a decentralized system to replace what is in place now.

The point is that it would be healthy, if we were willing to adjust instead of kick the can down the road.

]]> By: matthttp://alephblog.com/2009/05/07/let-the-foxes-guard-the-henhouse/comment-page-1/#comment-21699 matt Fri, 08 May 2009 02:49:49 +0000 http://alephblog.com/?p=1688#comment-21699 This economic dislocation was the free market attempting to reduce systemic risk. System risk comes from too-big-to fails (both private and public institutions). Several of the big banks would have failed. Smaller, more dynamic, better-managed banks would have taken over the assets at prices that would result in an economic profit, and the investors who capitalized these banks would have experienced one of the probabilistic outcomes of investing in risky assets (i.e., loss of principal). Risk would have been decentralized. Similarly, having a gigantic government presents a systemic risk. The tenth ammendment was ratified with the Constitution, notably to define the scope of government. A lot of people don't seem to get it -- ignoring the 10th ammendment has created the mother of all system risk--the Federal government. It's such a systemic risk that it creates a global systemic risk. Imagine if decentralization occured, as the 10th ammendment mandates... It makes perfect sense to diversify power much like one diversifies to mean-variance optimize an investment portfolio. If a State has a horrible system of governance/economic policy, the scope of the problems caused by that State will be much smaller than centralizing economic planning at the Federal level where, if policy is misguided (e.g., the contemporary economic paradigm is wrong), the entire system is subject to the same error. This economic dislocation was the free market attempting to reduce systemic risk. System risk comes from too-big-to fails (both private and public institutions). Several of the big banks would have failed. Smaller, more dynamic, better-managed banks would have taken over the assets at prices that would result in an economic profit, and the investors who capitalized these banks would have experienced one of the probabilistic outcomes of investing in risky assets (i.e., loss of principal). Risk would have been decentralized.

Similarly, having a gigantic government presents a systemic risk. The tenth ammendment was ratified with the Constitution, notably to define the scope of government. A lot of people don’t seem to get it — ignoring the 10th ammendment has created the mother of all system risk–the Federal government. It’s such a systemic risk that it creates a global systemic risk. Imagine if decentralization occured, as the 10th ammendment mandates…

It makes perfect sense to diversify power much like one diversifies to mean-variance optimize an investment portfolio. If a State has a horrible system of governance/economic policy, the scope of the problems caused by that State will be much smaller than centralizing economic planning at the Federal level where, if policy is misguided (e.g., the contemporary economic paradigm is wrong), the entire system is subject to the same error.

]]> By: But What do I Know?http://alephblog.com/2009/05/07/let-the-foxes-guard-the-henhouse/comment-page-1/#comment-21695 But What do I Know? Thu, 07 May 2009 13:26:09 +0000 http://alephblog.com/?p=1688#comment-21695 Isn't monitoring systemic risk essentially what the Fed is supposed to be doing now--engaging in counter-cyclical policies? Isn't that why it is "independent" and not subject to political pressure, at least in theory? We need a Fed chairman who doesn't mind being hated--and all we have gotten since Volcker is one who wants to be loved. This is what all bureaucracies do--when one department fails to fulfill its mission, another one is created to oversee it. Ecrasez l'infame!!! Isn’t monitoring systemic risk essentially what the Fed is supposed to be doing now–engaging in counter-cyclical policies? Isn’t that why it is “independent” and not subject to political pressure, at least in theory? We need a Fed chairman who doesn’t mind being hated–and all we have gotten since Volcker is one who wants to be loved.

This is what all bureaucracies do–when one department fails to fulfill its mission, another one is created to oversee it. Ecrasez l’infame!!!

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