Lies, Damn Lies and LIBOR

You're operating from a premise that misunderstands the nature of money in a market. Money is just a measure of value, a metric of human endeavor, and so it's traded on that basis. Publicly traded for-profit corporations have a fiduciary duty to maximize shareholder value. It only happens that we measure value in, say, Dollars or Yen. We could measure it in ounces of gold or bushels of oranges. For-profit companies transcend currency, and could exist in a barter economy.

So it's not that money (as used to mean currency) is a defining characteristic of for-profit business, it's that value is. If a for-profit business existed to "maximize shareholder value in terms of cows", they would try to maximize shareholder NPV as measured in cows. The reason that for-profit companies exist is because the economics-theoretic ideal point for production in an economy (the point that benefits all consumers the most) is at supply-demand equilibrium, which is where profits are maximized for an individual company. The fact that there are non-profit companies is simply indicative of market inefficiency--in a "perfect" market, all companies would be for-profit. That doesn't mean that nonprofits shouldn't exist right now; in fact, it means that they have to.

So let's change "money" to "value" to be more specific. And then yes, value is indeed a defining characteristic of business, no matter how you measure it: currency accumulated via industry, children vaccinated, or political points spread. That's because humans tend to take action to maximize what they value most, humanitarian or self-serving, and business is the systematic application of human action.

Alright. The re bubble was not big enough to create the crisis - firstly.

It's was the cdo industry which leveraged those mortgages, and the other derivatives which made the whole crisis exponentially larger and exponentially more complex.

An issue during the crisis was not that people were broke, but that they didn't even know what their exposure was.

Now if, like under glass steagal, the investment banks were the only ones holding onto the CDOs, they would only be the ones exposed, and the ones who may need recapitalization / bankruptcy.

It would also have limited the size of the final leverage being taken on the bubble.

Also it's not political, my dyed in the wool republican finance teacher/boss spoke about how glass steagal was grudgingly useful, before the crisis hit. It isn't a theory propagated during the crisis, it's a theory substantiated by the crisis.

So, I'm not defending anybody.

Like most people who actually pay some attention to what happened in finance, I trace much of the problem back to deregulation and poor enforcement.

The parties who successfully rolled back regulation made a grave mistake, and should bear the consequences of their terrible judgement.

Similarly, the people who today suggest that regulation isn't the answer, but rather that we should simply let failed banks fails, those people are making today's grave mistake. The people who argued that systemic vulnerability would prevent any failed bank from actually failing were, as I see it, obviously correct. As it turns out, we can't even let a single auto company crash, let alone a nationwide megabank.

Having said all that:

It does us no good to pretend that the other side of this debate isn't a "side", but rather a bought- and- paid- for theater role occupied by those lucky enough to receive lobbying dollars.

The reality is that it's an animating principle of roughly half the American political establishment that regulation is bad, and that its unintended consequences will tend to harm the economy more than crashes will. A pretty large subset of those people also believe that however painful a megabank failure is, it's survivable, and one or two of them will suffice to teach CEOs not to allow their companies to gamble to the brink of failure.

It's no surprise that this half of the establishment receives truckloads of money from financiers; their principles align with the lobbyist's interests. But attributing those principles to the lobbying contributions is an instance of the post-hoc fallacy, unless you genuinely think that finance subcommittee legislators, Republicans, and pro-business "new Democrats" really don't believe in deregulation.

I can separate the bad principle from the "influence" here, is all I'm saying, and having done so have started to conclude that maybe the influence is a red herring in this case.

Lobbying "influence" is bad for all sorts of other reasons! Most importantly: because it consumes gigantic amounts of time, time that could be spent grooming a staff that could have some hope of understanding the issues they're dealing with.

We seem pretty close on the issues but I am more (or is that less?) skeptical about the corrupting influence of money. There is a ton of evidence that people's beliefs are malleable and that money is just the thing to malleate them. No doubt our massaged beliefs are just as sincere as their predecessors; we're terrible judges of ourselves.

It's a bit tangential but Dan Ariely had a brilliant post the other day about how, in conflict-of-interest situations, disclosure not only isn't a solution but actually makes the problem worse. Outsiders have little idea how to interpret what's being disclosed, and insiders feel that they've fulfilled their entire duty by disclosing and proceed to do as they please.

Your steps to the Crisis are off a bit. You see the re bubble was and is still being deflated. That would have only hit American banks primarily, and it would have been a slowdown only - if that was all that happened.

What you are forgetting ignoring, is that the mortgages were only fuel for the CDO market. That market was powers bigger, completely levered and so the smallest misstep meant outsized failures.

On top of this you had yet more instruments piled on, where people made just plain betson market outcomes.

Oh yeah, the swaps were also insuring far more than what the underlings were worth too.

So the real estate bubble wasn't big enough to create a crisis - for that we needed CDOs and CDSs to lever the bubble.

And a lot of those write downs have happened, the banks has their PE ratios and the rest crushed in 08. They took most of their hits.

All they have now is shadow inventory, which they can't afford to let onto the market because it would depress housing prices further.

This when some Americans are too broke to live in tents :)

For the glass steagal bit, sorry but right now your aim to be above the debate is making you take a stand based on what you think is a talking point.

It's your perception that it's a talking point, but in that case why my example was someone who was on the other side of the evil banker discussion, who was saying that glass steagal was good.

And this was even before the predicted outcome - rapacious irresponsibility, was proven. While you may want to be above the debate, it's not a talking point. It's more like a strongly substantiated theory.