What Market Failure?

According to John Allison, the market system did not fail in 2008 and did not need governmental intervention, as this sort of intrusion was responsible for the panic in the first place.

http://bigthink.com/johnallison

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• financial
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• bailout

[ObjectivistAesthetic]

@zeitgeistGO : Well you are supporting an enormous, American corporation (Google) by using YouTube. So, either accept that you LIKE it or cancel your account and stop being a hypocrite that no one can possibly agree with in reality.

[PortfolioManager1987]

There's no question the SEC's FAS 157 mark-to-market accounting rule revalued an entire market in such a way that made the secondary mortgage market collapse.

The market was coming out of a recession after the bailout of Bear Stearns, only to be royally fucked by a massive swing from billions in earnings to billions in losses thanks to FAS 157.

FAS 157 was instituted in November 2007 and relaxed in March 2009. Banks since have been marking to fair value, and the stock market has surged 60%.

[Scientisticsoviet]

@residentzombie It really depends on the market in question. The more capital intensive, the less likely another firm will bother. Of course what is worse is when there are too many firms in a given industry, and so can't exploit scale and scope as effectively as possible (the example I often give is that of the electricity market in Quebec prior to merging of all smaller firms under our nationalized hydro-quebec).

[residentzombie]

@Scientisticsoviet Onvisously what you stated is true; however, you are missing the point that once these businesses merge or buy each other out, new competitiors enter the marketplace especially if these mergers are a bad deal for consumers. If the merger is that of ethical means and not monopolistic means competition will take longer to form. Eventually this larger business will get lazy and competitiors will come in to offer better quality, better prices, and/or better customer service.

[Scientisticsoviet]

@residentzombie Expansion is one of the key things a business focuses o nonce it's revenues and expenditures become stable (As a personal anecdote, when I worked in my fathers pastry manufacturing plant he was the process of a merger with a slightly larger firm in Winnipeg, such that they could gain each others products, market share, suppliers, diminish financial risk, etc.)

[Scientisticsoviet]

@residentzombie Eventually perhaps; The problem is that you get a very large deadweight loss in the short run which carries over to the long run (as investment slows down).

Also, many smaller already existing financial firms are often dependent on larger ones.

---

Aside, mergers and acquisitions do happen, and businesses grow. Saying that it is not the case shows not only academic ignorance of historical trends, but also never having actually work in a firm at any higher position (cont.)

[Scientisticsoviet]

@residentzombie It would have, as a large financial institutions are interdependent. They each make loans to each other, as well as to the rest of firms and individuals in the economy at large.

They bare similar risks to for instance a electric transmission system failing. The failure is not local and isolated, it spread to a very wide geographic region.

[residentzombie]

@Scientisticsoviet Smaller, more well run financial firms would have picked up the pieces after the big boys went under. That is what happens all the time. Bankruptcy is a healthy thing. It rids us of poorly run businesses. The big businesses gobbling up smaller business is a myth, myth maker. Competition will always happen. That is unless their buddies in government try to help those big businesses keep the competition out of the marketplace.

[residentzombie]

@Scientisticsoviet The entire market would not have crashed had these firms went bankrupt. The system will crash because of hyperinflation, the Federal Reserve printing and expanding the money supply, but not because a few large financial institutions failed. That's what capitalism is - a profit and a LOSS system. Now when the politicians in bed with these finantional institutions gives them stolen money from taxpayers to pay off their bad bets, that is FASCISM.

[Scientisticsoviet]

@residentzombie Another aside, the bailout is a result the growth and consolidation of financial institutions into large interdependent firms, which not only gives them capital to lobby the government with, but also creates the problem of crashing entire economy should they fail (thus a guaranteed implicit subsidy, assuming the government has an interest on the economy of which it is dependent).

[Scientisticsoviet]

@residentzombie Again though, you are avoiding the elephant of derivatives and other financial "innovations" which have nothing to do with the government.

[residentzombie]

@Scientisticsoviet The only government sponsored invention need be freedom and upholding the natural law. Greenspan created the housing bubble along with Congress and Clinton enacting the Affordable Housing Act, giving creedence for the Fed to do what it did. Interest rates are a signal to savers and investors as to what credit is available. Credit is not unlimited, it is a product of the people saving and forgoing their wealth now for later consumption.