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[Maurile Tremblay]

I was hoping MT would re-post that article on why there shouldn't be intellectual property. I've been looking for that. MT?

This one?

 

[whoknew]

I was hoping MT would re-post that article on why there shouldn't be intellectual property. I've been looking for that. MT?

This one?

Thanks.

 

[Maurile Tremblay]

I'm not sure where either one of you are going with respect to pharmaceuticals. I agree the the FDA is absolutely necessary. And I don't buy MT's statement that the FDA costs more lives than it saves. I think that would be very difficult to prove definitively either way. Altough MT doesn't usually pull stuff out of his rear, so he's probably got some link somewhere. Although I'm still calling bs.

This might be a good place to start. I'd never seen that site before. My economics professor, Kip Viscusi (a Democrat for what that's worth), was doing research on this issue back when I was taking a class from him. I remember that his conclusion was that the FDA kills more people than it saves; and he struck me as one of the more intellectually honest people I'd ever met. I also had no reason to doubt his competence in doing research or analysis.So anyway, I just Googled his name on this topic and it took me to this quote from him on the FDAReview.org site: "There is a widespread consensus in the literature that the current FDA drug approval process establishes safety incentives that are excessive. The stringency of the process and the meticulous review of new pharmaceutical drugs is reflected in the substantial delays that U.S. consumers have experienced with respect to the introduction of new pharmaceutical products. . . . Studies have also shown that because of these delays Americans have been prevented from having access to new drugs with beneficial effects, as the agency places a greater weight on errors of commission rather than errors of omission. This imbalance in the emphasis for these two types of errors has led to excessive deterrence of new risks that may be created by pharmaceutical products and inadequate weight on reducing existing risks that patients now experience."

 

[adonis]

The free market left to its own devices would stifle competition and cripple consumers.

I can't imagine how that would work. Are you sure you're talking about a free market (i.e., voluntary transactions), rather than something more like mafia-style threats of violence?

I imagine it like this.Companies are driven by their bottom line. If they can stifle competition in order to increase their bottom line, they will do it. They will make deals that rule out competitors. They will drive away competition, making their product the only one available, and many times, they could do this in America if it were just a free market, free of any regulation, government or otherwise.

So, imagine company A selling product X, against competitors Y and Z. It makes deals with companies to provide X for a lower price if they exclude Y and Z, and effectively, through their market position push out all competition. As a result, with no competition, they increase their prices as consumers become more reliant on their products. This effectively stifles competition (unfair business practices) and cripples consumers, because they are now at the mercy of the one company providing the service who can control the costs as they choose.

It requires regulation to be a good thing for people and business. Sure, sometimes it gets out of balance on regulation side, and sometimes on the free side, but it certainly requires regulation.

I think on issues like this, where good empirical evidence is scant (since there have been only a few, relatively short-lived anarchistic societies), certainty is harder to come by than you're giving it credit for.

Again, if companies weren't regulated, we would see many more companies acting to decrease competition unfairly, and strangle the market on certain goods. That's the goal of almost ANY company if restrictions didn't exist. That's how you maximize the business power, while minimizing consumer power, which is what businesses shoot for. Once they do that, they can gouge the customers for as much money as they can get.In my opinion, regulation is necessary to prevent unfair practices from taking place that effectively and unfairly cut out competition.

Also, there are other things that the free market isn't so good at.

True, but the relevant inquiry isn't whether the free market is good at something. It's whether the free market is likely to fare better than any of the realistic alternatives. There may be situations where the free market sucks, but not as much as real-world politicians do.

Alternatives don't have to rule out the free market. I prefer a system where it's 95+% free market, with as little government regulation as possible. But unlike some other people I talk to, I readily admit that regulation and oversight is necessary to protect consumers, and to balance the system.

 

[Maurile Tremblay]

I can't imagine how that would work. Are you sure you're talking about a free market (i.e., voluntary transactions), rather than something more like mafia-style threats of violence?

I imagine it like this.Companies are driven by their bottom line. If they can stifle competition in order to increase their bottom line, they will do it. They will make deals that rule out competitors. They will drive away competition, making their product the only one available, and many times, they could do this in America if it were just a free market, free of any regulation, government or otherwise.

So, imagine company A selling product X, against competitors Y and Z. It makes deals with companies to provide X for a lower price if they exclude Y and Z, and effectively, through their market position push out all competition. As a result, with no competition, they increase their prices as consumers become more reliant on their products. This effectively stifles competition (unfair business practices) and cripples consumers, because they are now at the mercy of the one company providing the service who can control the costs as they choose.

Thanks for providing an example, albeit a hypothetical one. But I don't think it works. For one thing, I think if you put some actual numbers on those variables (What are each company's costs of production? How much does company A have to pay in bribes to each buyer to exclude companies Y and Z? Etc.) things may not make sense. In addition, your third sentence (last paragraph) contradicts your second. If they made deals to sell at a lower price, they can't sell at a higher price. Contracts are enforceable, no?

It requires regulation to be a good thing for people and business. Sure, sometimes it gets out of balance on regulation side, and sometimes on the free side, but it certainly requires regulation.

I think on issues like this, where good empirical evidence is scant (since there have been only a few, relatively short-lived anarchistic societies), certainty is harder to come by than you're giving it credit for.

Again, if companies weren't regulated, we would see many more companies acting to decrease competition unfairly, and strangle the market on certain goods.

By your very phrasing, you are offering a counterfactual scenario. That's not evidence; it's just an unevidenced assertion. You may well be right (although I don't think you are), but that's not the point. The point is that, lacking evidence, whether you are right or wrong is impossible to know with any certainty. It's the certainty that I'm challenging.

 

[IvanKaramazov]

Also, there are other things that the free market isn't so good at.

In your opinion, what are these?

At a minimum doing anything that serves the overall public good, but where a financial incentive doesn’t exist.Some of these include:

Occupying third world countries, providing traffic signals, regulation of pharmaceuticals, policing large areas, protecting the food supply, regulating air traffic, building of infrastructure in under developed areas, providing fire services (fire, energy) to rural areas, funding of museums, libraries, providing education in poor areas.

I realize this is nit-picking, but many other developed countries privatized their air traffic control systems years ago.

 

[Fennis]

Also, there are other things that the free market isn't so good at.

In your opinion, what are these?

At a minimum doing anything that serves the overall public good, but where a financial incentive doesn’t exist.Some of these include:

Occupying third world countries, providing traffic signals, regulation of pharmaceuticals, policing large areas, protecting the food supply, regulating air traffic, building of infrastructure in under developed areas, providing fire services (fire, energy) to rural areas, funding of museums, libraries, providing education in poor areas.

I realize this is nit-picking, but many other developed countries privatized their air traffic control systems years ago.

Can you provide some examples and/or links? Im sure there are, but Im curious to see how it has worked out.

 

[fightingduck]

I'm not sure where either one of you are going with respect to pharmaceuticals. I agree the the FDA is absolutely necessary. And I don't buy MT's statement that the FDA costs more lives than it saves. I think that would be very difficult to prove definitively either way. Altough MT doesn't usually pull stuff out of his rear, so he's probably got some link somewhere. Although I'm still calling bs.

This might be a good place to start. I'd never seen that site before. My economics professor, Kip Viscusi (a Democrat for what that's worth), was doing research on this issue back when I was taking a class from him. I remember that his conclusion was that the FDA kills more people than it saves; and he struck me as one of the more intellectually honest people I'd ever met. I also had no reason to doubt his competence in doing research or analysis.So anyway, I just Googled his name on this topic and it took me to this quote from him on the FDAReview.org site: "There is a widespread consensus in the literature that the current FDA drug approval process establishes safety incentives that are excessive. The stringency of the process and the meticulous review of new pharmaceutical drugs is reflected in the substantial delays that U.S. consumers have experienced with respect to the introduction of new pharmaceutical products. . . . Studies have also shown that because of these delays Americans have been prevented from having access to new drugs with beneficial effects, as the agency places a greater weight on errors of commission rather than errors of omission. This imbalance in the emphasis for these two types of errors has led to excessive deterrence of new risks that may be created by pharmaceutical products and inadequate weight on reducing existing risks that patients now experience."

Completely agree, and I'd go further. The FDA's decisions are based more on politics, power, and ego. Where science is used for their decisions its only as a CYA measure.Google politics and the FDA. You'll see the criticism from all angles.

The WSJ has been on them forever for not approving drugs based more on their own speculation than any science. In these examples we see them relishing their simple, but absolute, power over companies trying to follow their arcane rules.

The NYT thinks their slow approval of the abortion pill was politics.

Many have claimed they've banned certain drugs because those drugs compete with the FDA's favored companies. Or, they've refused to give a drug over-the counter status as a favor to a company, allowing them to charge more.

It's just naive to think that the FDA is free from politics or the allure of power, and they act only in the best interest of the consumer. They are a government created monopoly over life and death decisions.

 

[fightingduck]

So, imagine company A selling product X, against competitors Y and Z. It makes deals with companies to provide X for a lower price if they exclude Y and Z, and effectively, through their market position push out all competition.

I agree with what MT pointed out as the problems with your scenerio. I'd add that your example here is a bit static. For one thing, companies do something similar to this all the time. Ford motor company (company A) allows a Ford dealership exclusive rights (not Y and Z) to sell its SUVs (product X) in a certain geographic area. But that doesn't stop GM from putting up a dealership next door where its Surburban can compete with the Explorer.Another example: You can't walk into any sporting goods store (Y&Z) and pick up a pair of Nikes (X). They (A) simply refuse to use some channels to distribute thier products and it keeps the prices of their shoes high. But, do you have any problem finding a cheap pair of sneakers at Wal-Mart if you wanted? Are you suggesting that Nike should be forced to sell their shoes through any store that wants them?I'm not sure you realize how dynamic and diverse our economy is.

 

[IvanKaramazov]

Also, there are other things that the free market isn't so good at.

In your opinion, what are these?

At a minimum doing anything that serves the overall public good, but where a financial incentive doesn’t exist.Some of these include:

Occupying third world countries, providing traffic signals, regulation of pharmaceuticals, policing large areas, protecting the food supply, regulating air traffic, building of infrastructure in under developed areas, providing fire services (fire, energy) to rural areas, funding of museums, libraries, providing education in poor areas.

I realize this is nit-picking, but many other developed countries privatized their air traffic control systems years ago.

Can you provide some examples and/or links? Im sure there are, but Im curious to see how it has worked out.

This isn't a topic that I'm very familiar with, but here's a link that at least gives a little information about how some countries have tried to move toward private ATC services. I was thinking about this after I posted, and it seems to me that the airline industry in general might make for a good example of what MT was talking about in terms of a basis for comparison. It's very easy to point to disfunctional aspects of the current deregulated airline industry (fortress hubs and extreme market concentration, for example). But we know from CAB-era that the government did an abysmal job of running this industry, so it's not as simple as saying "Oh well there are problems with the free market so let's have the government fix everything." In some cases, the government does even worse than the market. I'm not saying that's necessarily the case all the time, but it gets at what Maurile was saying.

 

[Arsenal of Doom]

Also, there are other things that the free market isn't so good at.

In your opinion, what are these?

At a minimum doing anything that serves the overall public good, but where a financial incentive doesn’t exist.Some of these include:

Occupying third world countries, providing traffic signals, regulation of pharmaceuticals, policing large areas, protecting the food supply, regulating air traffic, building of infrastructure in under developed areas, providing fire services (fire, energy) to rural areas, funding of museums, libraries, providing education in poor areas.

I realize this is nit-picking, but many other developed countries privatized their air traffic control systems years ago.

Can you provide some examples and/or links? Im sure there are, but Im curious to see how it has worked out.

This isn't a topic that I'm very familiar with, but here's a link that at least gives a little information about how some countries have tried to move toward private ATC services. I was thinking about this after I posted, and it seems to me that the airline industry in general might make for a good example of what MT was talking about in terms of a basis for comparison. It's very easy to point to disfunctional aspects of the current deregulated airline industry (fortress hubs and extreme market concentration, for example). But we know from CAB-era that the government did an abysmal job of running this industry, so it's not as simple as saying "Oh well there are problems with the free market so let's have the government fix everything." In some cases, the government does even worse than the market. I'm not saying that's necessarily the case all the time, but it gets at what Maurile was saying.

Fortunately what we have been able to acheive is an economy that doesn't rely exclusively on the government or the free market, but allows the two forces to work in conjucture (or sometimes in opposition) to provide the correct balance depending on the current economic dynamics. As a result, we are probably under-regulated at times and over-regulated at others, but overall still within a framework that provides adequate stability and flexibility. The success should be self-evident since by virtually any measure the American economy is most powerful in history, and, more importantly, has more or less sustained that distinction for over a century. Even with the rate China is expanding right now (and has been for 30 year), it will still be decades before they rival our GPD in raw size and even then they will lag well behind us in GDP per capita.

 

[NCCommish]

The reason we have these regulatory devices is the market has already proven unwilling to do it itself and it undermines what we have every chance it gets.

"The market is unwilling . . ." is a metaphor. What's the literal translation?

Which part of that post was unclear as to it's meaning? Been taking lessons from Christo in your spare time?

Sorry, I just think phrasing the point literally will help clarify the issues involved.Here's what I think you mean:

(1) Many companies care less about their customers' health than they do about their own profits.

(2) As a result, such companies will market potentially unsafe drugs to the public if doing so is likely to be profitable.

(3) There is a trade-off between (a) getting life-saving drugs to patients who need them, and (b) withholding life-threatening drugs from patients who may be harmed by them.

(4) The tort system by itself is insufficient to provide the right incentives for companies to make the trade-off in a socially responsible manner; in the absence of some additional restraint (such as regulatory oversight, or something like Consumer Reports, or any number of thousands of other possibilities somebody might think of) companies are likely to inappropriately err on the side of getting life-saving drugs to patients who need them.

(5) Of all the potential restraints hinted at in number (4), regulatory oversight or some other government-mandated solution will necessarily be closer to optimal than any of the other thousands of possibilities anyone might think of. Specifically, realistic market-based solutions will necessarily produce worse results than realistic government-based solutions.

If that's what you were getting at, I'm with you on numbers 1-3, and possibly number 4. I'd like to see some good evidence for numbers 4 and especially 5.

The reason there is even an FDA is that rampant mislabeling and adulteration of both food and drugs were all to commonplace in this country. Things like adding alum to quinine or clay to wheat. The people in those markets that didn't play these dirty little games lost to those that did.The tort system is the province of the rich and powerful. Companies play the "string them out until they die or are broke" game everyday. Consumer Reports is certainly a nice magazine but how many people do you know that read it, buy it or have a subscription? I don't know anyone. And once it becomes a press game then the companie again have the bigger ball bat. Just look at all the silly science that Big Tobacco bought and paid for for years.

So yes I think federal oversight of the countries food chain and drug supply is the best answer. Companies had their chance they failed. States had their chance they failed. That leaves one entity left. Not a perfect answer but far better than leaving it to an already convicted market.

 

[kaa]

The reason we have these regulatory devices is the market has already proven unwilling to do it itself and it undermines what we have every chance it gets.

"The market is unwilling . . ." is a metaphor. What's the literal translation?

Which part of that post was unclear as to it's meaning? Been taking lessons from Christo in your spare time?

Sorry, I just think phrasing the point literally will help clarify the issues involved.Here's what I think you mean:

(1) Many companies care less about their customers' health than they do about their own profits.

(2) As a result, such companies will market potentially unsafe drugs to the public if doing so is likely to be profitable.

(3) There is a trade-off between (a) getting life-saving drugs to patients who need them, and (b) withholding life-threatening drugs from patients who may be harmed by them.

(4) The tort system by itself is insufficient to provide the right incentives for companies to make the trade-off in a socially responsible manner; in the absence of some additional restraint (such as regulatory oversight, or something like Consumer Reports, or any number of thousands of other possibilities somebody might think of) companies are likely to inappropriately err on the side of getting life-saving drugs to patients who need them.

(5) Of all the potential restraints hinted at in number (4), regulatory oversight or some other government-mandated solution will necessarily be closer to optimal than any of the other thousands of possibilities anyone might think of. Specifically, realistic market-based solutions will necessarily produce worse results than realistic government-based solutions.

If that's what you were getting at, I'm with you on numbers 1-3, and possibly number 4. I'd like to see some good evidence for numbers 4 and especially 5.

The reason there is even an FDA is that rampant mislabeling and adulteration of both food and drugs were all to commonplace in this country. Things like adding alum to quinine or clay to wheat. The people in those markets that didn't play these dirty little games lost to those that did.The tort system is the province of the rich and powerful. Companies play the "string them out until they die or are broke" game everyday. Consumer Reports is certainly a nice magazine but how many people do you know that read it, buy it or have a subscription? I don't know anyone. And once it becomes a press game then the companie again have the bigger ball bat. Just look at all the silly science that Big Tobacco bought and paid for for years.

So yes I think federal oversight of the countries food chain and drug supply is the best answer. Companies had their chance they failed. States had their chance they failed. That leaves one entity left. Not a perfect answer but far better than leaving it to an already convicted market.

This is a perfect illustration of why we need to trust free markets. This poster went through a tirade about past abuses of the private sector. But the glaring omission is the abuses of government. Look at China. China's government has FAR MORE control over industry than we do here. Does that equal better working conditions? No. Does that equal less pollution? No. Hell no. In fact, China has the MOST polluted cities in the world. And its on display in these olympics.And that gets back to why the free market is the BEST solution. NCC set up the classic straw man, that someone in this thread claimed the free market was PERFECT and then argued against that point. It is not perfect and no-one said it was. But we KNOW that when government gets increasing control over the system, you wind up with something FAR worse than the free market. You get a system where there is so much government control you have ZERO accountability.

And that is why the problem is the controls put on the system, and why we need to reform them by paring them back to fix things.

 

[NCCommish]

The reason we have these regulatory devices is the market has already proven unwilling to do it itself and it undermines what we have every chance it gets.

"The market is unwilling . . ." is a metaphor. What's the literal translation?

Which part of that post was unclear as to it's meaning? Been taking lessons from Christo in your spare time?

Sorry, I just think phrasing the point literally will help clarify the issues involved.Here's what I think you mean:

(1) Many companies care less about their customers' health than they do about their own profits.

(2) As a result, such companies will market potentially unsafe drugs to the public if doing so is likely to be profitable.

(3) There is a trade-off between (a) getting life-saving drugs to patients who need them, and (b) withholding life-threatening drugs from patients who may be harmed by them.

(4) The tort system by itself is insufficient to provide the right incentives for companies to make the trade-off in a socially responsible manner; in the absence of some additional restraint (such as regulatory oversight, or something like Consumer Reports, or any number of thousands of other possibilities somebody might think of) companies are likely to inappropriately err on the side of getting life-saving drugs to patients who need them.

(5) Of all the potential restraints hinted at in number (4), regulatory oversight or some other government-mandated solution will necessarily be closer to optimal than any of the other thousands of possibilities anyone might think of. Specifically, realistic market-based solutions will necessarily produce worse results than realistic government-based solutions.

If that's what you were getting at, I'm with you on numbers 1-3, and possibly number 4. I'd like to see some good evidence for numbers 4 and especially 5.

The reason there is even an FDA is that rampant mislabeling and adulteration of both food and drugs were all to commonplace in this country. Things like adding alum to quinine or clay to wheat. The people in those markets that didn't play these dirty little games lost to those that did.The tort system is the province of the rich and powerful. Companies play the "string them out until they die or are broke" game everyday. Consumer Reports is certainly a nice magazine but how many people do you know that read it, buy it or have a subscription? I don't know anyone. And once it becomes a press game then the companie again have the bigger ball bat. Just look at all the silly science that Big Tobacco bought and paid for for years.

So yes I think federal oversight of the countries food chain and drug supply is the best answer. Companies had their chance they failed. States had their chance they failed. That leaves one entity left. Not a perfect answer but far better than leaving it to an already convicted market.

This is a perfect illustration of why we need to trust free markets. This poster went through a tirade about past abuses of the private sector. But the glaring omission is the abuses of government. Look at China. China's government has FAR MORE control over industry than we do here. Does that equal better working conditions? No. Does that equal less pollution? No. Hell no. In fact, China has the MOST polluted cities in the world. And its on display in these olympics.And that gets back to why the free market is the BEST solution. NCC set up the classic straw man, that someone in this thread claimed the free market was PERFECT and then argued against that point. It is not perfect and no-one said it was. But we KNOW that when government gets increasing control over the system, you wind up with something FAR worse than the free market. You get a system where there is so much government control you have ZERO accountability.

And that is why the problem is the controls put on the system, and why we need to reform them by paring them back to fix things.

No I said the market can't be trusted to police itself. It has proven this on it's own time and again. Our current mortage fiasco is just one more piece of evidence of how all the people calling for less regulation aren't paying attention. But nice spin attempt.

 

[adonis]

I can't imagine how that would work. Are you sure you're talking about a free market (i.e., voluntary transactions), rather than something more like mafia-style threats of violence?

I imagine it like this.Companies are driven by their bottom line. If they can stifle competition in order to increase their bottom line, they will do it. They will make deals that rule out competitors. They will drive away competition, making their product the only one available, and many times, they could do this in America if it were just a free market, free of any regulation, government or otherwise.

So, imagine company A selling product X, against competitors Y and Z. It makes deals with companies to provide X for a lower price if they exclude Y and Z, and effectively, through their market position push out all competition. As a result, with no competition, they increase their prices as consumers become more reliant on their products. This effectively stifles competition (unfair business practices) and cripples consumers, because they are now at the mercy of the one company providing the service who can control the costs as they choose.

Thanks for providing an example, albeit a hypothetical one. But I don't think it works. For one thing, I think if you put some actual numbers on those variables (What are each company's costs of production? How much does company A have to pay in bribes to each buyer to exclude companies Y and Z? Etc.) things may not make sense. In addition, your third sentence (last paragraph) contradicts your second. If they made deals to sell at a lower price, they can't sell at a higher price. Contracts are enforceable, no?

It requires regulation to be a good thing for people and business. Sure, sometimes it gets out of balance on regulation side, and sometimes on the free side, but it certainly requires regulation.

I think on issues like this, where good empirical evidence is scant (since there have been only a few, relatively short-lived anarchistic societies), certainty is harder to come by than you're giving it credit for.

Again, if companies weren't regulated, we would see many more companies acting to decrease competition unfairly, and strangle the market on certain goods.

By your very phrasing, you are offering a counterfactual scenario. That's not evidence; it's just an unevidenced assertion. You may well be right (although I don't think you are), but that's not the point. The point is that, lacking evidence, whether you are right or wrong is impossible to know with any certainty. It's the certainty that I'm challenging.

I'm not sure why you point to an undescribed contract as being evidence that prices will remain low indefinitely.Sure, a company might sign a contract with a distributor for a lower price, to drive off the competition, but once the competition is run out of business, and the main company gains market share, they can renegotiate their contracts at a higher price. What's stopping them? Assuming of course the people need their products.

And I understand the certainty angle that bothers you in my comments, and while I'm not as certain as my words might make me sound, I'm still quite sure that if there were no regulations, the negative effects on consumers and competition would be easy to see. It might not be rampant, because not all industries lend themselves towards monopolies, but in those that do, the types of practices that should be prevented would, imo, be bad for consumers and competition.

 

[Maurile Tremblay]

Sure, a company might sign a contract with a distributor for a lower price, to drive off the competition, but once the competition is run out of business, and the main company gains market share, they can renegotiate their contracts at a higher price. What's stopping them? Assuming of course the people need their products.

The kind of predatory pricing you're describing has been refuted in theory (originally by Aaron Director, I believe), and has never been observed in practice. The simplest theoretical argument against predatory pricing is the observation that, if both large and small firm have the same costs and the large firm drives the price below cost, then the large firm, with its larger sales, is losing money much faster than the small firm. (If the large firm has lower costs it can drive out the smaller without predatory pricing by charging a price above its cost but below its rival's cost.)Indeed, if the large firm has 95% of the market and the small firm 5%, the large firm is losing more than 19 times as fast as the small, both because the large has to sell even more to accommodate the larger demand due to the lower price (if it doesn't the price goes back up) and because the small firm can, and the larger cannot, reduce losses by temporary output cuts. So the big firm goes broke first.

 

[ffldrew]

Sure, a company might sign a contract with a distributor for a lower price, to drive off the competition, but once the competition is run out of business, and the main company gains market share, they can renegotiate their contracts at a higher price. What's stopping them? Assuming of course the people need their products.

The kind of predatory pricing you're describing has been refuted in theory (originally by Aaron Director, I believe), and has never been observed in practice. The simplest theoretical argument against predatory pricing is the observation that, if both large and small firm have the same costs and the large firm drives the price below cost, then the large firm, with its larger sales, is losing money much faster than the small firm. (If the large firm has lower costs it can drive out the smaller without predatory pricing by charging a price above its cost but below its rival's cost.)Indeed, if the large firm has 95% of the market and the small firm 5%, the large firm is losing more than 19 times as fast as the small, both because the large has to sell even more to accommodate the larger demand due to the lower price (if it doesn't the price goes back up) and because the small firm can, and the larger cannot, reduce losses by temporary output cuts. So the big firm goes broke first.

IF they keep up this practice, if the practice drives out the competition and then they can resume more monopolistic pricing, they can possibly recoup their costs and more. Especially when the startup cost for new competitors to rejoin that market is very prohibitive.

 

[IvanKaramazov]

Sure, a company might sign a contract with a distributor for a lower price, to drive off the competition, but once the competition is run out of business, and the main company gains market share, they can renegotiate their contracts at a higher price. What's stopping them? Assuming of course the people need their products.

The kind of predatory pricing you're describing has been refuted in theory (originally by Aaron Director, I believe), and has never been observed in practice. The simplest theoretical argument against predatory pricing is the observation that, if both large and small firm have the same costs and the large firm drives the price below cost, then the large firm, with its larger sales, is losing money much faster than the small firm. (If the large firm has lower costs it can drive out the smaller without predatory pricing by charging a price above its cost but below its rival's cost.)Indeed, if the large firm has 95% of the market and the small firm 5%, the large firm is losing more than 19 times as fast as the small, both because the large has to sell even more to accommodate the larger demand due to the lower price (if it doesn't the price goes back up) and because the small firm can, and the larger cannot, reduce losses by temporary output cuts. So the big firm goes broke first.

Here are a few other theoretical arguments as to why predatory pricing isn't really that big a deal:

1. If the "prey" would be profitable in the absence of predatory pricing, why don't people loan it funds to keep it afloat until the "predator" is tired of losing money hand over fist? Lenders should be able to make a nice rate of return by loaning funds to a profitable enterprise.

2. Even if the predator succeeds in driving one particular competitor out of the market, what's to stop that firm from re-entering once the incumbent raises its price? For example, let's say I own a firm that produces oak dinette sets. My competitor starts selling his product below cost, making it impossible for me to compete. No problem. I just switch over to making oak office furniture. Once my former competitor raises his price, I start making dinette sets again. Or some other firm that makes dinette sets enters the market. It's not like the predator gets the market all to itself for all eternity just because it ran off one potential competitor.

3. If big firms can successfully drive small competitors (who would be otherwise-profitable) out of business through predatory pricing, then how come big firms don't enter those markets to grab those profits instead? For example, many people accuse WalMart of driving mom-and-pop hardware stores out of business through predation. I don't think that's what's going on, but let's grant that just for the sake of argument. Mom & Pop Co. may not have enough funds to survive WalMart's predatory pricing, but Lowes and Home Depot certainly do. Predatory pricing doesn't make any sense if WalMart just swaps a big competitor for a small competitor.

 

[adonis]

Sure, a company might sign a contract with a distributor for a lower price, to drive off the competition, but once the competition is run out of business, and the main company gains market share, they can renegotiate their contracts at a higher price. What's stopping them? Assuming of course the people need their products.

The kind of predatory pricing you're describing has been refuted in theory (originally by Aaron Director, I believe), and has never been observed in practice. The simplest theoretical argument against predatory pricing is the observation that, if both large and small firm have the same costs and the large firm drives the price below cost, then the large firm, with its larger sales, is losing money much faster than the small firm. (If the large firm has lower costs it can drive out the smaller without predatory pricing by charging a price above its cost but below its rival's cost.)Indeed, if the large firm has 95% of the market and the small firm 5%, the large firm is losing more than 19 times as fast as the small, both because the large has to sell even more to accommodate the larger demand due to the lower price (if it doesn't the price goes back up) and because the small firm can, and the larger cannot, reduce losses by temporary output cuts. So the big firm goes broke first.

But big firms with other profitable products can afford to take losses for a certain duration in order to effectively crush the competition. If it's a one product company, I could see your point, but if it's a huge company with hands in many dishes, it can get hurt in one area while making up for it in others, biding its time until the competition is beaten, at which point it will be the sole player in the area.

 

[adonis]

Sure, a company might sign a contract with a distributor for a lower price, to drive off the competition, but once the competition is run out of business, and the main company gains market share, they can renegotiate their contracts at a higher price. What's stopping them? Assuming of course the people need their products.

The kind of predatory pricing you're describing has been refuted in theory (originally by Aaron Director, I believe), and has never been observed in practice. The simplest theoretical argument against predatory pricing is the observation that, if both large and small firm have the same costs and the large firm drives the price below cost, then the large firm, with its larger sales, is losing money much faster than the small firm. (If the large firm has lower costs it can drive out the smaller without predatory pricing by charging a price above its cost but below its rival's cost.)Indeed, if the large firm has 95% of the market and the small firm 5%, the large firm is losing more than 19 times as fast as the small, both because the large has to sell even more to accommodate the larger demand due to the lower price (if it doesn't the price goes back up) and because the small firm can, and the larger cannot, reduce losses by temporary output cuts. So the big firm goes broke first.

Here are a few other theoretical arguments as to why predatory pricing isn't really that big a deal:

1. If the "prey" would be profitable in the absence of predatory pricing, why don't people loan it funds to keep it afloat until the "predator" is tired of losing money hand over fist? Lenders should be able to make a nice rate of return by loaning funds to a profitable enterprise.

It's possible that this could happen, but it reminds me of a market saying: "The market can stay irrational longer than you can stay liquid." If we're talking huge companies here, I'm not sure it'd be a worthwhile gamble to continue to loan money to a smaller company, with fewer resources, being pushed out of business due to shady deals and artificially lower prices on the hope that the loaned money will keep you afloat long enough to run through the deep pockets of the huge business.

In other words, the big business can likely outlast infusions of cash to the small company, and even having more cash won't necessarily help due to exclusive deals, and other monopolistic practices. There's no guarantee their product will end up being superior either, although in some cases I could see how this might work.

2. Even if the predator succeeds in driving one particular competitor out of the market, what's to stop that firm from re-entering once the incumbent raises its price? For example, let's say I own a firm that produces oak dinette sets. My competitor starts selling his product below cost, making it impossible for me to compete. No problem. I just switch over to making oak office furniture. Once my former competitor raises his price, I start making dinette sets again. Or some other firm that makes dinette sets enters the market. It's not like the predator gets the market all to itself for all eternity just because it ran off one potential competitor.

There are significant barriers to entry in quite a few markets. Many, like you suggest, won't apply to my example because like you said, they could just come back in. But things like operating systems, or high-tech security software/hardware, or other things that get well-established in a system, or have terribly high R&D costs to develop a product would be particularly vulnerable.

3. If big firms can successfully drive small competitors (who would be otherwise-profitable) out of business through predatory pricing, then how come big firms don't enter those markets to grab those profits instead? For example, many people accuse WalMart of driving mom-and-pop hardware stores out of business through predation. I don't think that's what's going on, but let's grant that just for the sake of argument. Mom & Pop Co. may not have enough funds to survive WalMart's predatory pricing, but Lowes and Home Depot certainly do. Predatory pricing doesn't make any sense if WalMart just swaps a big competitor for a small competitor.

I don't think Walmart is guilty of predatory pricing. They have efficient systems, and pay their workers little with few benefits. Their efficiency, IT infrastructure, and pay structure where few if any are full time and receive benefits, allow them to sell for lower prices. I think it'd be hard for mom & pop stores to match their efficiency, but I wouldn't say that it is a bad tactic they're using. They're just beating their competitors, but others, like you mentioned, other bigger stores can compete, but the margins become smaller and smaller for them as they compete on volume, or try to find some other niche other than being the lowest price.

 

[Maurile Tremblay]

I don't think Walmart is guilty of predatory pricing. They have efficient systems, and pay their workers little with few benefits.

Walmart pays its employees more than their mom and pop competitors do, which is why it always supports increases in the minimum wage -- to make things harder for its competition (since Walmart itself is already above the minimum).

 

[adonis]

I don't think Walmart is guilty of predatory pricing. They have efficient systems, and pay their workers little with few benefits.

Walmart pays its employees more than their mom and pop competitors do, which is why it always supports increases in the minimum wage -- to make things harder for its competition (since Walmart itself is already above the minimum).

From the same article:

As the world's largest retailer and largest U.S. non-union private sector employer with more than 1.3 million "associates" in its U.S. stores, Wal-Mart has been a lightning rod for criticism about its wage and benefits policy as well as lawsuits alleging gender discrimination. It continues to draw fire for allegedly stifling small businesses and squeezing its vendors.

Wal-Mart maintains that it pays above the current $5.15 an hour minimum wage to its employees.

Scott also discussed a new health-care package with lower premiums for Wal-Mart workers.

The new "Value option" plan, which will be introduced Jan. 1 2006, offers insurance coverage of $23 a month "and kids covered for less than 50 cents per day ... no matter how many children," Scott said.

It may pay more than mom and pop stores, but compared to some of its competitors, it underpays its employees, and that's including benefits. Lower wages/benefits isn't the only way they keep prices low, I mentioned super-efficient IT.

 

[NCCommish]

Sure, a company might sign a contract with a distributor for a lower price, to drive off the competition, but once the competition is run out of business, and the main company gains market share, they can renegotiate their contracts at a higher price. What's stopping them? Assuming of course the people need their products.

The kind of predatory pricing you're describing has been refuted in theory (originally by Aaron Director, I believe), and has never been observed in practice. The simplest theoretical argument against predatory pricing is the observation that, if both large and small firm have the same costs and the large firm drives the price below cost, then the large firm, with its larger sales, is losing money much faster than the small firm. (If the large firm has lower costs it can drive out the smaller without predatory pricing by charging a price above its cost but below its rival's cost.)Indeed, if the large firm has 95% of the market and the small firm 5%, the large firm is losing more than 19 times as fast as the small, both because the large has to sell even more to accommodate the larger demand due to the lower price (if it doesn't the price goes back up) and because the small firm can, and the larger cannot, reduce losses by temporary output cuts. So the big firm goes broke first.

Here are a few other theoretical arguments as to why predatory pricing isn't really that big a deal:

1. If the "prey" would be profitable in the absence of predatory pricing, why don't people loan it funds to keep it afloat until the "predator" is tired of losing money hand over fist? Lenders should be able to make a nice rate of return by loaning funds to a profitable enterprise.

It's possible that this could happen, but it reminds me of a market saying: "The market can stay irrational longer than you can stay liquid." If we're talking huge companies here, I'm not sure it'd be a worthwhile gamble to continue to loan money to a smaller company, with fewer resources, being pushed out of business due to shady deals and artificially lower prices on the hope that the loaned money will keep you afloat long enough to run through the deep pockets of the huge business.

In other words, the big business can likely outlast infusions of cash to the small company, and even having more cash won't necessarily help due to exclusive deals, and other monopolistic practices. There's no guarantee their product will end up being superior either, although in some cases I could see how this might work.

2. Even if the predator succeeds in driving one particular competitor out of the market, what's to stop that firm from re-entering once the incumbent raises its price? For example, let's say I own a firm that produces oak dinette sets. My competitor starts selling his product below cost, making it impossible for me to compete. No problem. I just switch over to making oak office furniture. Once my former competitor raises his price, I start making dinette sets again. Or some other firm that makes dinette sets enters the market. It's not like the predator gets the market all to itself for all eternity just because it ran off one potential competitor.

There are significant barriers to entry in quite a few markets. Many, like you suggest, won't apply to my example because like you said, they could just come back in. But things like operating systems, or high-tech security software/hardware, or other things that get well-established in a system, or have terribly high R&D costs to develop a product would be particularly vulnerable.

3. If big firms can successfully drive small competitors (who would be otherwise-profitable) out of business through predatory pricing, then how come big firms don't enter those markets to grab those profits instead? For example, many people accuse WalMart of driving mom-and-pop hardware stores out of business through predation. I don't think that's what's going on, but let's grant that just for the sake of argument. Mom & Pop Co. may not have enough funds to survive WalMart's predatory pricing, but Lowes and Home Depot certainly do. Predatory pricing doesn't make any sense if WalMart just swaps a big competitor for a small competitor.

I don't think Walmart is guilty of predatory pricing. They have efficient systems, and pay their workers little with few benefits. Their efficiency, IT infrastructure, and pay structure where few if any are full time and receive benefits, allow them to sell for lower prices. I think it'd be hard for mom & pop stores to match their efficiency, but I wouldn't say that it is a bad tactic they're using. They're just beating their competitors, but others, like you mentioned, other bigger stores can compete, but the margins become smaller and smaller for them as they compete on volume, or try to find some other niche other than being the lowest price.

Actually Wal-Marts market position allow it to charge less. It forces price cuts on it's suppliers via threatening their shelf space. And they get them to cut some things below cost so they can keep everything else in the store. This is the way they work. And the way they do it it isn't them taking the big loss it is the manufacturer. It isn't just about efficiency. Although that is part of the story. The rest of it is simple brute buying power and control of a siginificant part of the market.

 

[ConstruxBoy]

By the way, I love how people will ignore BGP's new iteration, just like they learned to ignore the last one.

There should be some sort of Amber Alert whenever he gets a new one.

 

[Maurile Tremblay]

The reason there is even an FDA is that rampant mislabeling and adulteration of both food and drugs were all to commonplace in this country.

The reason there is even a War on Drugs is yadda yadda.Just because there's a purported reason for something doesn't mean that it was a good idea or that it has done (or continues to do) more harm than good.

 

[QUEZILLA]

 

[flufhed]

 

[RCon]

No I said the market can't be trusted to police itself. It has proven this on it's own time and again. Our current mortage fiasco is just one more piece of evidence of how all the people calling for less regulation aren't paying attention. But nice spin attempt.

There is a good argument to be made that the current mortgage mess was caused by too much government intervention in the first place, and that a free market would have prevented, or at least minimized, the current problems. In particular, the fact that Fannie Mae and Freddie Mac were "private" companies but implicity backed by the government, allowed them to grow without normal free market restrictions on capital and lending practices.Again, you seem to be missing the point. The debate isn't whether a truly free market is perfect. Even free market proponents stipulate that it isn't. The debate is whether the truly free market is better than the alternatives. In the case of the FDA, there is an argument to be made that the FDA's foot dragging on some new drugs causes more health issues for more people than the free market would cause by "releasing" some drugs too soon.

 

[fightingduck]

No I said the market can't be trusted to police itself. It has proven this on it's own time and again. Our current mortage fiasco is just one more piece of evidence of how all the people calling for less regulation aren't paying attention. But nice spin attempt.

Neither can Congress (police itself). Since you brought up the mortgage fiasco, you need to look no further than the politically protected Fannie and Fred to see the roots of the mortgage problem. If there was ever a man that could say "I told you so," it's Paul Gigot and his long running crusade against these government sponsered entities. Article where he gets to say I told you soCompound the implicit government guarantee of Fred/Fran with cheap money from the fed, and you can see the real roots of the mortgage crisis start as a government creation. The mortgage industry was still heavily regulated (I'm guessing you've signed the 300,000 forms). When no one follows them any more, what is more regulation going to do?

I agree that many took advantage of this gravy train while it lasted (both borrower and lender, alike), but producers and consumers check the pricing signals. When the government messes with those pricing signals, it's hardly surprising that you have massive misallocation of resources (in this case to mortgages).

 

[fightingduck]

No I said the market can't be trusted to police itself. It has proven this on it's own time and again. Our current mortage fiasco is just one more piece of evidence of how all the people calling for less regulation aren't paying attention. But nice spin attempt.

There is a good argument to be made that the current mortgage mess was caused by too much government intervention in the first place, and that a free market would have prevented, or at least minimized, the current problems. In particular, the fact that Fannie Mae and Freddie Mac were "private" companies but implicity backed by the government, allowed them to grow without normal free market restrictions on capital and lending practices.Again, you seem to be missing the point. The debate isn't whether a truly free market is perfect. Even free market proponents stipulate that it isn't. The debate is whether the truly free market is better than the alternatives. In the case of the FDA, there is an argument to be made that the FDA's foot dragging on some new drugs causes more health issues for more people than the free market would cause by "releasing" some drugs too soon.

I didn't see your post first. I'd like to add to your main point here that debate isn't about perfection at this point. In many of these cases we are talking about now, there isn't really a free market at all. NCC makes the point that the free market failed in the mortgage crisis. I'm saying (and I think you make the point better in your first paragraph) that there was no free market in the mortgage business. Competition for capital was non-existant based on government actions. Thus, no incentive to be responsible with that capital. I'm not excusing the players, I'm just saying this was a government-directed misallocation of resources.

 

[fightingduck]

The reason we have these regulatory devices is the market has already proven unwilling to do it itself and it undermines what we have every chance it gets.

"The market is unwilling . . ." is a metaphor. What's the literal translation?

Which part of that post was unclear as to it's meaning? Been taking lessons from Christo in your spare time?

Sorry, I just think phrasing the point literally will help clarify the issues involved.Here's what I think you mean:

(1) Many companies care less about their customers' health than they do about their own profits.

(2) As a result, such companies will market potentially unsafe drugs to the public if doing so is likely to be profitable.

(3) There is a trade-off between (a) getting life-saving drugs to patients who need them, and (b) withholding life-threatening drugs from patients who may be harmed by them.

(4) The tort system by itself is insufficient to provide the right incentives for companies to make the trade-off in a socially responsible manner; in the absence of some additional restraint (such as regulatory oversight, or something like Consumer Reports, or any number of thousands of other possibilities somebody might think of) companies are likely to inappropriately err on the side of getting life-saving drugs to patients who need them.

(5) Of all the potential restraints hinted at in number (4), regulatory oversight or some other government-mandated solution will necessarily be closer to optimal than any of the other thousands of possibilities anyone might think of. Specifically, realistic market-based solutions will necessarily produce worse results than realistic government-based solutions.

If that's what you were getting at, I'm with you on numbers 1-3, and possibly number 4. I'd like to see some good evidence for numbers 4 and especially 5.

The reason there is even an FDA is that rampant mislabeling and adulteration of both food and drugs were all to commonplace in this country. Things like adding alum to quinine or clay to wheat. The people in those markets that didn't play these dirty little games lost to those that did.The tort system is the province of the rich and powerful. Companies play the "string them out until they die or are broke" game everyday. Consumer Reports is certainly a nice magazine but how many people do you know that read it, buy it or have a subscription? I don't know anyone. And once it becomes a press game then the companie again have the bigger ball bat. Just look at all the silly science that Big Tobacco bought and paid for for years.

So yes I think federal oversight of the countries food chain and drug supply is the best answer. Companies had their chance they failed. States had their chance they failed. That leaves one entity left. Not a perfect answer but far better than leaving it to an already convicted market.

I would like to point out that this is a well-stated post for your side. I just disagree that the market failed. A market failure is when nothing trades hands, not when bad apples find ways to game a system (whether in a free market or not). The problem with government regulation is that it always creates winners and losers and it always creates a new system to game. Fraud is fraud, no matter how many words the government uses to call it that.Back to the FDA. I know you feel comfortable with USDA inspections of food plants and whatnot, but most of the industry knows these are pretty easy to game. The hardest inspections to pass are when McDonalds comes through your chicken plants to check on the status of its mcnuggets. Counter-party surveillance is still the toughest screen. (Unless the counter-party is a government-sponsored entity like Fran/Fred).

 

[fightingduck]

..... McDonalds comes through your chicken plants to check on the status of its mcnuggets.

I just wanted to be the first to chuckle at my own assertion that there's actually chicken in a McNugget. That's what the guys at the chicken plants told me anyway.

 

[adonis]

..... McDonalds comes through your chicken plants to check on the status of its mcnuggets.

I just wanted to be the first to chuckle at my own assertion that there's actually chicken in a McNugget. That's what the guys at the chicken plants told me anyway.

McNuggets come from irish chickens.

 

[NorvilleBarnes]

There is a good argument to be made that the current mortgage mess was caused by too much government intervention in the first place, and that a free market would have prevented, or at least minimized, the current problems. In particular, the fact that Fannie Mae and Freddie Mac were "private" companies but implicity backed by the government, allowed them to grow without normal free market restrictions on capital and lending practices.

What are the "normal free market restrictions"?

 

[bigbottom]

There is a good argument to be made that the current mortgage mess was caused by too much government intervention in the first place, and that a free market would have prevented, or at least minimized, the current problems. In particular, the fact that Fannie Mae and Freddie Mac were "private" companies but implicity backed by the government, allowed them to grow without normal free market restrictions on capital and lending practices.

What are the "normal free market restrictions"?

Risk, I'm guessing.

 

[NorvilleBarnes]

There is a good argument to be made that the current mortgage mess was caused by too much government intervention in the first place, and that a free market would have prevented, or at least minimized, the current problems. In particular, the fact that Fannie Mae and Freddie Mac were "private" companies but implicity backed by the government, allowed them to grow without normal free market restrictions on capital and lending practices.

What are the "normal free market restrictions"?

Risk, I'm guessing.

Govt regulations removed risk?

 

[RCon]

There is a good argument to be made that the current mortgage mess was caused by too much government intervention in the first place, and that a free market would have prevented, or at least minimized, the current problems. In particular, the fact that Fannie Mae and Freddie Mac were "private" companies but implicity backed by the government, allowed them to grow without normal free market restrictions on capital and lending practices.

What are the "normal free market restrictions"?

In this particular case, although Fannie and Freddie are/were purportedly private companies, they had an implicit backing of the government for their debts (i.e. if they went bankrupt, the govt would cover the debts). This allowed them to borrow and lend at lower rates than competitors, thus growing at a rate much larger than if they had been subject to the same free market rates as other firms.To answer your question above, yes, government backing removed risk for those companies.

 

[bigbottom]

There is a good argument to be made that the current mortgage mess was caused by too much government intervention in the first place, and that a free market would have prevented, or at least minimized, the current problems. In particular, the fact that Fannie Mae and Freddie Mac were "private" companies but implicity backed by the government, allowed them to grow without normal free market restrictions on capital and lending practices.

What are the "normal free market restrictions"?

Risk, I'm guessing.

Govt regulations removed risk?

I think he was referring specifically to the government backing, which removes some amount of risk, which in turn encourages more aggressive lending practices. But I really don't understand the nuances of this industry, so I could be way off.

 

[fatguyinalittlecoat]

For the "no regulation" folks like Ivan, Maurile and Rich -- do you think that governments should do away with the corporate form?

 

[RCon]

I'm guessing you already know my answer to that one. Fair Tax!

 

[fatguyinalittlecoat]

I'm guessing you already know my answer to that one. Fair Tax!

No, I mean the whole existence of corporations.

 

[NorvilleBarnes]

There is a good argument to be made that the current mortgage mess was caused by too much government intervention in the first place, and that a free market would have prevented, or at least minimized, the current problems. In particular, the fact that Fannie Mae and Freddie Mac were "private" companies but implicity backed by the government, allowed them to grow without normal free market restrictions on capital and lending practices.

What are the "normal free market restrictions"?

In this particular case, although Fannie and Freddie are/were purportedly private companies, they had an implicit backing of the government for their debts (i.e. if they went bankrupt, the govt would cover the debts). This allowed them to borrow and lend at lower rates than competitors, thus growing at a rate much larger than if they had been subject to the same free market rates as other firms.To answer your question above, yes, government backing removed risk for those companies.

I can sse that - but I guess I'm just not connecting that to the argument against regulation. The "cause" seems too far removed for me. Poor lending practices caused it, imho. Now if the govt backing of Fannie Mae contributed to the environment in which these poor decisions were made - ok. Streets don't cause car wrecks.

 

[RCon]

I don't think anyone here is saying that no regulation of any kind is always the most preferable solution. However, we are saying that the certainty of government regulation always being a good thing is a very dubious position to take. Truth is that there are going to be some situations where some oversight is a good thing, but in many cases, too much oversight creates more problems than none at all. It's mostly a matter of degree, but personally I would rather err on the side of fewer regulations and less government in general.

 

[Sammy3469]

No I said the market can't be trusted to police itself. It has proven this on it's own time and again. Our current mortage fiasco is just one more piece of evidence of how all the people calling for less regulation aren't paying attention. But nice spin attempt.

There is a good argument to be made that the current mortgage mess was caused by too much government intervention in the first place, and that a free market would have prevented, or at least minimized, the current problems. In particular, the fact that Fannie Mae and Freddie Mac were "private" companies but implicity backed by the government, allowed them to grow without normal free market restrictions on capital and lending practices.Again, you seem to be missing the point. The debate isn't whether a truly free market is perfect. Even free market proponents stipulate that it isn't. The debate is whether the truly free market is better than the alternatives. In the case of the FDA, there is an argument to be made that the FDA's foot dragging on some new drugs causes more health issues for more people than the free market would cause by "releasing" some drugs too soon.

I didn't see your post first. I'd like to add to your main point here that debate isn't about perfection at this point. In many of these cases we are talking about now, there isn't really a free market at all. NCC makes the point that the free market failed in the mortgage crisis. I'm saying (and I think you make the point better in your first paragraph) that there was no free market in the mortgage business. Competition for capital was non-existant based on government actions. Thus, no incentive to be responsible with that capital. I'm not excusing the players, I'm just saying this was a government-directed misallocation of resources.

I just have to say that I almost totally disagree with this statement....yes FNM and FRE got capital at below free market rates, but almost all those mortgages were fixed rate instruments of less than $435K (or whatever the figure is). At the margin we a quarter point difference (ior whatever it is) doesn't create the bubble.The vast majority of the mortgage problems occurred in the free market realm (where there is basically no regulation) as firms like CFC created these exotic mortgages, home equity lines, etc that they then immediately sold on to I-banks to package in CDOs. The system broke-down b/c the no one in the system cared about individual credit quality, but instead made mathematical inferences based on history on how different pools would perform over time. That's where the "free market" brokedown as no one cared what they were doing.

I'd also say that there are a decent number of instances where govenment regulation may be needed. That includes any product group that has large network externalities (think Microsoft or transportation systems) or any product that has large selection bias (think insurance).

 

[RCon]

There is a good argument to be made that the current mortgage mess was caused by too much government intervention in the first place, and that a free market would have prevented, or at least minimized, the current problems. In particular, the fact that Fannie Mae and Freddie Mac were "private" companies but implicity backed by the government, allowed them to grow without normal free market restrictions on capital and lending practices.

What are the "normal free market restrictions"?

In this particular case, although Fannie and Freddie are/were purportedly private companies, they had an implicit backing of the government for their debts (i.e. if they went bankrupt, the govt would cover the debts). This allowed them to borrow and lend at lower rates than competitors, thus growing at a rate much larger than if they had been subject to the same free market rates as other firms.To answer your question above, yes, government backing removed risk for those companies.

I can sse that - but I guess I'm just not connecting that to the argument against regulation. The "cause" seems too far removed for me. Poor lending practices caused it, imho. Now if the govt backing of Fannie Mae contributed to the environment in which these poor decisions were made - ok. Streets don't cause car wrecks.

Government backing wasn't the only cause, obviously, but it was a significant factor. Fannie and Freddie made loans that a truly private firm wouldn't have, ergo, poor lending practices.

 

[bigbottom]

I'm guessing you already know my answer to that one. Fair Tax!

No, I mean the whole existence of corporations.

 

[RCon]

The vast majority of the mortgage problems occurred in the free market realm (where there is basically no regulation) as firms like CFC created these exotic mortgages, home equity lines, etc that they then immediately sold on to I-banks to package in CDOs. The system broke-down b/c the no one in the system cared about individual credit quality, but instead made mathematical inferences based on history on how different pools would perform over time. That's where the "free market" brokedown as no one cared what they were doing.

See, I don't consider that a "breakdown". The free market worked exactly as intended. People took risks, and some wound up succeeding and some got bitten. Sucks that some people lost their houses, but they should have read their mortgage more carefully before signing.The breakdown that I see if the federal bailout of Fannie and Freddie with taxpayer money.

 

[RCon]

I'm guessing you already know my answer to that one. Fair Tax!

No, I mean the whole existence of corporations.

Interesting question, if overly broad. I'm not going to pretend to be an expert by any stretch. However, I'd guess that absent the SEC and government intervention, the market would step in and create solutions.I'm not suggesting total anarchy. Laws, contract enforcement, the Constitution... all good things. Our current government just overdoes the regulation and nanny state by a longshot.

 

[bigbottom]

I'm guessing you already know my answer to that one. Fair Tax!

No, I mean the whole existence of corporations.

Interesting question, if overly broad. I'm not going to pretend to be an expert by any stretch. However, I'd guess that absent the SEC and government intervention, the market would step in and create solutions.I'm not suggesting total anarchy. Laws, contract enforcement, the Constitution... all good things. Our current government just overdoes the regulation and nanny state by a longshot.

The corporate form provides protection for investors and business owners. This, in turn, encourages investment and business formation.

 

[Homer J Simpson]

What happened to the Obama thread? I could have sworn it was around here somewhere.