An unregulated market will spawn entities that provide the services it needs. This includes security and trust. Insurance companies, for example, are entities that people trust to protect them against loss. Rating agencies are entities that people trust to provide risk assessment.
The difference between non-coercive (private) entities and government is that non-coercive entities adapt better. So, for example, if you're planning to transfer billions over many years with one bank, you'd want the bank to have all kinds of security. But if you just want a quick, cheap way to transfer 25 cents in a micro payment over the web, you probably don't care if the startup "bank" you use has a $500K bond.
The mortgage crisis says hi. The problem with free-market ideologies isn't that the market won't adjust to consumer need, it's that it causes considerable pain in doing so and will only provide a counterbalance if there's a monetary incentive.
Free market capitalism is, at it's core, evolution. It leads to amazing responsiveness, complexity, and, arguably, beauty. It also has made 99.99% of all species that have ever existed extinct. There are homeostatic forces that keep the aggregate more or less balanced, but evolution isn't good for the species involved, it simply is true.
There's no mechanism in non-random selection with random mutation to prevent Asian Carp from taking over the Great Lakes, Pine Beetles from destroying forests in BC, invasive kelp in the Mediterranean, etc. Similarly, the free market has no mechanism to prevent credit fraud, market collapse, rampant speculation, or any of the other mechanisms of economic calamity we've seen. Your "coercive" government regulation plays the same role that we play in attempting to prevent environmental disasters through the spread of invasive species. Would a global ecosystem entirely managed by direct human intervention be desirable? No. Would be be well-advised to ignore threats to ecosystems and "let nature take its course"? Of course not.
Free market supremacists seem to fail to see the forest for the trees when arguing against regulations. The Free Market isn't an end unto itself, it's an effective means to the ultimate end, which is the improvement of the human condition. It isn't the only means, and it isn't the most effective means in all cases. The role of effective, well-considered government regulation is to harness the benefits of the free market while mitigating its risks. This can only be described as a Good Thing.
Rather than rail against all regulation, we should be trying to ensure that the regulations that are created are wise and impartial. Our energies would be much better spent ensuring that legislative bodies are free from undue influence than by trying to remove their power to regulate in the first case.
The Community Reinvestment Act seems to be a pretty likely stimulus for the mortgage crisis - incentivizing "anti-racist" behavior rather than good lending practices. Worse yet, the "considerable pain" you're trying to avoid gets worse over time -- as central bankers reduce interest rates (read: print money) to jack up growth until it gets too fast then pull money from the market (read: increase interest rates) to slow down a "bubble", the yo-yo effect amplifies until pop.
Pine beetles in BC are an interesting point, as it seems like it is precisely the lack of ownership over valuable forest land that is preventing the type of extensive research we would need to protect that resource. While research outcomes are entirely uncertain, it seems that ownership and the forecast loss of value is a pretty solid motivator for solving problems.
"The difference between non-coercive (private) entities and government is that non-coercive entities adapt better."
it's not clear if you are equating non-coercive with private entities. If so you are very much wrong.
Private companies have killed, enslaved, tortured, kidnapped, etc. There are a tremendous amount of examples of private companies being coercive.
As to ratings agencies, some spectacularly demonstrated 3 years ago that they can fail and be captured (akin to regulatory capture) by other private entities.
In the short run private entities may do horrible things, it takes time for information to travel through the system. But if we're comparing private to government - government definitely takes the cake on environmental destruction and causing human misery.
> Private companies have killed, enslaved, tortured, kidnapped, etc. There are a tremendous amount of examples of private companies being coercive.
These are instances of private companies acting like governments. What characterizes private companies is that they do not use coercion (except of course when it's justified as in enforcing voluntary agreements and protecting property.)
So for example, the original post was about banking regulation. Private bank regulators could not force banks to operate according to their standards. Instead, they would rely on banks' cooperation. If a bank did not cooperate it would run the risk of being rated badly and shunned by customers relying on regulator's rating. In no case would a non-cooperating, non-conforming bank be subject to being "killed, enslaved, tortured, kidnapped, etc" by a private regulator. On the other hand, a bank which does not conform to government regulation is in danger of killed (dissolved) and its officers "enslaved, tortured, kidnapped, etc." (arrested and imprisoned.)
I like the argument that says that when things are good, they are acting like private companies, but when they're bad, they're acting like governments; ergo, private companies good, governments bad.
Can we officially acknowledge that this part of the thread --- which is notionally about bonding requirements for money transfer companies, but is now discussing torture --- has officially gone off the rails?
dpatru might be using definitions you don't agree with but he/she is still positively contributing to the discussion. Seems on topic to me, just highly abstracted: what are possible systemic solutions to the article's issue? So I've upvoted dpatru's comments that were in the negative.
How are ideologically-pure statements -- extracted from a fantasyland where abstruse notions matter and all lines are perfectly straight -- considered a positive contribution? Particularly when they are made in willful defiance of all facts.
The whole point of this thread is about whether bonding should be required by threat of force (or torture) by government. Advocates of government regulation claim yes. Opponents claim that there are better, non-violent ways in which consumers are protected. The issue is precisely the use of force. Nobody is saying that bonding is bad or that private rating agencies could not require bonding as a condition of endorsement.
An unregulated market will spawn entities that provide the services it needs.
Information and resource asymmetry are not easily overcome; how is your argument any different than a naive assessment of economics that fails to take into account the impact of information asymmetry on the decisions of otherwise rational actors?
> Information and resource asymmetry are not easily overcome;
The best way to "overcome" information and resource asymmetry is through a free market. In particular prices and word-of-mouth/"the Internet" do this work as well as possible. If a company does a good job for a good price, its fame will quickly spread. If it rips off customers, its infamy will quickly spread. No need for government to get involved a priori, although government can get involved in fraud prosecutions and to help defrauded victims get their money back.
> how is your argument any different than a naive assessment of economics that fails to take into account the impact of information asymmetry on the decisions of otherwise rational actors?
Not sure what you mean by this, but free market competition and innovation through new/better services is a way rich societies increase wealth. Government regulation just slows down the process.
If a company does a good job for a good price, its fame will quickly spread.
So what happens when that company is bought out by new owners, starts skimping on product safety, and 1,000 people die before the market notices?
If 1,000 people die, is the company held liable by the government?
If people band together to enforce preventative measures in the community (even through private means), such that such a thing doesn't happen again, have they created a regulatory government?
> If 1,000 people die, is the company held liable by the government?
Intentional or negligent killing is prosecutable. I doubt, though, that not requiring bonding for a money-transfer startup will cause the deaths of 1000 people. As to businesses generally, tort lawyers as a class make a pretty good living holding businesses accountable. The Ford/Firestone controversy comes to mind. (http://en.wikipedia.org/wiki/Firestone_and_Ford_tire_controv...) In that controversy plaintiffs suing Firestone and Ford alleged that people died because tire failure caused rollover accidents in Ford Explorer SUVs. As a result, both Ford (maker of the vehicle with the defective tires) and Firestone (maker of the tires) had to pay a lot money and their stock price suffered. Also, one of Firestone's tire manufacturing plants was closed and Ford and Firestone no longer do business together. So there are consequences when private companies screw up.
On the other hand, when government screws up and thousands of lives are lost, like when it holds up the sale of a new drug, fails to defend the airspace against terrorist attacks, or goes to war on bad intelligence, there don't seem to be consequences.
I can always tell when a site has gone past the point of no return when comments like this are simply downvoted to oblivion. If you disagree state why.
but whatever, I always call these things. Internet communities refuse to be elitist about quality because they 1. believe in democracy and 2. are made up people who like to be inclusive because they were excluded as kids.
You're right. Governments have gained the power they have because they offered people a better alternative. I read somewhere that Napoleon was welcomed as a conquerer into parts of Italy because his government was a lot better than the local government. The problem with governments, though, is that they are fairly easy to establish, but, because they claim a monopoly on coercion, they are hard to replace when a better alternative appears.
For example, all of a city's private garbage collectors may do a poor job, so a very capable mayor may convince residents to allow the city to do the collecting. Years later, when situation is reversed and the city is doing a poor job in comparison with private collectors, it will be a lot harder to replace the government collectors with private ones. The correct response to poor private-sector service is not to bring in the government, but to bring in more private competition.
The ratings were issued by companies that had been given a monopoly by govt. Securitized mortgages were a creation of govt.
The idea that you're missing is regulatory capture combined with govt encouraging transactions that didn't make economic sense otherwise. (One of the underappreciated consequences of RC is that it amplifies "private" bad behavior and shuts out good behavior.)
That's not fair. The major ratings agencies were unregulated, all were founded privately, and were only designated NRSRO's after they had captured the market. Meanwhile, companies can apply to be designated NRSRO's, and many companies have been so designated.
The government didn't corrupt Moody's. Commerce did. The government supplied no oversight, and Moody's sold its ratings to the highest bidder.
"govt encouraging transactions that didn't make economic sense otherwise"
More like the companies selling mortgages were desperate to get the loans off their balance sheets so that they could release the capital for new mortgages. As they didn't keep the mortgages for very long the level of risk they were accepting was low so they didn't do much checking on whether people could actually pay or not - they really didn't care.
I remember comparing my experiences of first getting a mortgage 20+ years ago where it was a difficult thing to do with how younger colleagues described things immediately before 2008 and things were totally different - they were giving mortgages to pretty much anyone who asked not because the government made them (I'm not in the US) but because it made them a lot of money!
> More like the companies selling mortgages were desperate to get the loans off their balance sheets so that they could release the capital for new mortgages.
Selling them to GSEs. You do know what the "G" stands for, right?
And speaking of the GSEs, they lied about how many of the loans in their portfolio were subprime. As a result, no one knew that those loans were as common as they were, which threw off everyone's risk calculation.
"An unregulated market will spawn entities that provide the services it needs. This includes security and trust. Insurance companies, for example, are entities that people trust to protect them against loss. Rating agencies are entities that people trust to provide risk assessment."
Do you have any examples from reality where this has happened? Are insurance companies and ratings agencies really trusted agencies that would function even better in an unregulated market?
I posit that with no regulation, these entities would become even more unscrupulous than they are now.
Furthermore, magazines, blogs and retail store all act as rating agencies in some ways. Magazines have a strong incentive to only recommend quality products since their reputation is at stake. The same goes with retail store. They make sure they sell quality product because their reputation is at stake and they don't want to lose business.
Of course, the incentive for building those kind of companies is very low given the uncertainty that the government might decide to assume your role, putting you out of business.
> CAs suck and are unaccountable. Any of them can (and many of them have) issue a certificate for a site to an attacker.
> eBay feedbacks can be gamed and I generally don't trust them.
Do you think the government would do a better job at providing CAs or rating eBay sellers? Do you think the government is somehow immune to fraud?
> Your retail store example is laughable. I'm sure Walmart really cares about the quality of its products.
"I'm sure Walmart customers really care about the quality of products they buy at Walmart."
Walmart offers what customers want: cheap prices at the cost of lesser quality. Luckily we are still free to buy low quality products, because the government might "fix that" someday.
The question was not whether unregulated markets spawn "trusted rating services". It's whether society could function with private rating services in lieu of regulation.
Actually, he is not moving goal-posts, he is just asking for the second half of his originally stated question to be answered. I know it is silly, and probably sounds like nitpicking to you, but please, don't make false claims, particularly when they are just veiled ad-hominem.
Why? The regulations erect great barriers to entry for would-be competitors, solidifying profits of the current market players and allowing them great latitude for slacking off and sub-par performance.
We're seeing the same thing now with the money transmitters.
The difference between non-coercive (private) entities and government is that non-coercive entities adapt better. So, for example, if you're planning to transfer billions over many years with one bank, you'd want the bank to have all kinds of security. But if you just want a quick, cheap way to transfer 25 cents in a micro payment over the web, you probably don't care if the startup "bank" you use has a $500K bond.