I'd like to here Jesse's thoughts on the current economic sitch, and the changes that should/shouldn't be made in the context of the debate about the role of government. I don't understand enough to have a real opinion here
I'd be interested in Jesse's opinion too. I really haven't had too much time to think about it, but surprisingly the bailout just doesn't seem right to me. The "liberal" inside of me (i.e. the part of me that hears jabs on Fox news about Obama's "socialism" and says what's wrong with that) understands the necessity behind the bailout, but I don't like absolving Wall Street of responsibility for bad practices.
I do think that, in a way, the whole fiasco is one big "I told you so" on deregulation, but that's oversimplifying things a bit.
Hey guys, I'll throw in a third request to hear from Jesse on this topic. Its been interesting being at Wharton these days-- the school is a major feeder for Investment Banks/ Hedge Funds, etc. Alot of people here are wondering what they're going to end up doing.
The following is an amusing and reasonably enlightening description of the factors that led to the subprime explosion. The language is pretty bad, so consider how much poop you tolerate in your brownies before opening it. http://www.businesspundit.com/sub-prime/
To respond to Karl, I'm open to regulation generally, but I'm wary because the details are REALLY hard to get right, and the cost of screwing up is very high- as we've seen in this sub-prime thing. The only thing for-profit enterprise consistently excels at is adapting its practices to maximize its short-to-medium term reward under the given set of rules. Those of you who took Dr Kearl's Econ 110 class (best class I've EVER taken) will remember how, by changing the rules of an open auction, he ended up getting bids of $10 and $15 for a $5 bill (he made it so that the top 3 bidders had to pay, but only the top bidder got the bill). The lesson really stuck with me: you can get crazy outcomes if your system has bad rules. For this reason, I personally think there's blame to go around. I'm no fan of investment bankers and have little sympathy for their plight, but I probably don't blame them even as much as that slide show. They were doing what the government was giving them incentive to do - which was increase liquidity to facilitate loans and therefore encourage home ownership. This worked, except the side effects are turning out to be pretty heavy. I also think the bankers were idiots—so consumed by the how intelligent they felt trading exotic securities that they ignored fundamentally screwy things about the deals they were making. For context, thought, remember people were throwing money at them to invest, and they were probably doing what they thought was best. In the end, things go badly when a huge chunk of the economy is invested in outguessing others and taking on investments not because they make sense fundamentally, but hoping to sell them to the greater fool. My friends (perhaps some in the present company) will not appreciate that characterization of I-Banks and Hedge Funds but that's what I sense is true for many of these operations. For example, this article is not surprising: http://www.portfolio.com/views/blogs/daily-brief/2008/10/17/hedge-fund-manager-goodbye-and-f-you
OK, I'm meandering- I'll wrap up: Might the government have, while seeking to increase home ownership by making it cheap, inadvertently driven money into investments that weren't solid? Its hard to argue otherwise, since it would not have been profitable for banks or brokers to do what they did had it not been for this influence. However, I don't take that to mean that the govmt's original goal was wrong or should not be pursued. There's a role for progressive government in business, but man, is it expensive to experiment...
2 comments:
I'd be interested in Jesse's opinion too. I really haven't had too much time to think about it, but surprisingly the bailout just doesn't seem right to me. The "liberal" inside of me (i.e. the part of me that hears jabs on Fox news about Obama's "socialism" and says what's wrong with that) understands the necessity behind the bailout, but I don't like absolving Wall Street of responsibility for bad practices.
I do think that, in a way, the whole fiasco is one big "I told you so" on deregulation, but that's oversimplifying things a bit.
Hey guys,
I'll throw in a third request to hear from Jesse on this topic. Its been interesting being at Wharton these days-- the school is a major feeder for Investment Banks/ Hedge Funds, etc. Alot of people here are wondering what they're going to end up doing.
The following is an amusing and reasonably enlightening description of the factors that led to the subprime explosion. The language is pretty bad, so consider how much poop you tolerate in your brownies before opening it.
http://www.businesspundit.com/sub-prime/
To respond to Karl, I'm open to regulation generally, but I'm wary because the details are REALLY hard to get right, and the cost of screwing up is very high- as we've seen in this sub-prime thing.
The only thing for-profit enterprise consistently excels at is adapting its practices to maximize its short-to-medium term reward under the given set of rules. Those of you who took Dr Kearl's Econ 110 class (best class I've EVER taken) will remember how, by changing the rules of an open auction, he ended up getting bids of $10 and $15 for a $5 bill (he made it so that the top 3 bidders had to pay, but only the top bidder got the bill). The lesson really stuck with me: you can get crazy outcomes if your system has bad rules.
For this reason, I personally think there's blame to go around. I'm no fan of investment bankers and have little sympathy for their plight, but I probably don't blame them even as much as that slide show. They were doing what the government was giving them incentive to do - which was increase liquidity to facilitate loans and therefore encourage home ownership. This worked, except the side effects are turning out to be pretty heavy. I also think the bankers were idiots—so consumed by the how intelligent they felt trading exotic securities that they ignored fundamentally screwy things about the deals they were making. For context, thought, remember people were throwing money at them to invest, and they were probably doing what they thought was best.
In the end, things go badly when a huge chunk of the economy is invested in outguessing others and taking on investments not because they make sense fundamentally, but hoping to sell them to the greater fool. My friends (perhaps some in the present company) will not appreciate that characterization of I-Banks and Hedge Funds but that's what I sense is true for many of these operations. For example, this article is not surprising: http://www.portfolio.com/views/blogs/daily-brief/2008/10/17/hedge-fund-manager-goodbye-and-f-you
OK, I'm meandering- I'll wrap up:
Might the government have, while seeking to increase home ownership by making it cheap, inadvertently driven money into investments that weren't solid? Its hard to argue otherwise, since it would not have been profitable for banks or brokers to do what they did had it not been for this influence. However, I don't take that to mean that the govmt's original goal was wrong or should not be pursued. There's a role for progressive government in business, but man, is it expensive to experiment...
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