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information being symmetrical means being perfectly complete for both parties - this is impossible. when making an economic decision, i can never know the exact ramifications of that actions and of the product or service i may be purchasing. government regulation has helped a little bit on the demand side, but it has still not solved the problem entirely. likewise, insurance companies (or the like) can never know all of the information about me, and subsequently offer me the simple market clearing price for service even if i am a shitty driver or a chain smoker. in this case, if i get in multiple car crashes or if i contract lung cancer, the insurance company pays for it; which means every other buyer of that insurance company pays for it. asymmetric information leads to generally inefficient market outcomes.
http://en.wikipedia.org/wiki/Information_asymmetry
http://en.wikipedia.org/wiki/Adverse_selection
I think you are leaving an important part behind: Market "forces" that compensate for that information assymetry. Rating businesses, magazines, internet forums, websites, etc all can delivery very important information that can re-balance the amount of information a consumer gets before he decides to buy a product. And all of them can make a greater profit the more their information is accurate.
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my analysis is a purely economic one. i am not addressing ethical or philosophical issues, and i have not proposed any totalitarian alternative to market economics.
If your analysis is purely economic, then i take it you expect the best system to bring more wealth to everyone, raise the standard of living, education, health and freedom. So i think it is best to see how those things have been going over time, at a "largely free" market system.
Infant mortality USA
Life expectancy at birth vs Income per person (animated graph, choose date then press play)
Literacy rate per country
Educational attainment in the USA
Literacy rates and educational attainment can be argued that are not a result from the free market, which i partly agree, since the funding for public schools, which are mandatory, is through tax.
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systemic risk means "the risk of collapse for an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system."
basically if there is a collapse in one market (or cost push inflation or a monopoly), then it will affect numerous other markets. basically if a single market (the market for carrots for example) drifts away from "market equilibrium" for whatever reason, then that will have a negative effect on other markets and the economy as a whole. so when you make simplistic statements like "when there's too much supply, the demand readjusts" you're ignoring systemic risk.
and if you don't believe in systemic risk, how's the world economy doing right now? oh yeah how did that start?
I never intended to make simplistic statements as "when there's too much supply, demand readjusts". The truth is, when there is too much supply, prices go down in an attempt to increase demand.
And on the matter of the current crisis, i've adressed the issue
here
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FACTS
-2000+: housing prices rose enormously
-Second quarter 2006: steep decline in prices
-Third quarter 2006: mortgage defaults shoot up
-mid 2007: financial system, which had heavily invested in securitized mortgages, began to collapse.
-Foreign economic systems, which had also bought many of these products began to experience unprecedented losses
-government bailouts, nationalizations, etc
can't post links yet, so look up graphs on the price evolution since 1980s to current days to see how it progressed
Mortgage Failures: Occurred in a strong economy and before housing prices have fallen signifficantly
foreclosures occured at same time and at the same pace in both prime and subprime markets.
Anyway, to what really matters:
Market Failure?
4 central causes of financial crisis (which have nothing to do with free market):
-Fiat money
-Low interest rates
-forced loans to high risk borrowers
-government loan guarantees
Fiat money: in 1971 us dollar was taken off the gold standard, which means the dollars isn't backed up by nothing except government saying so. you cannot redeem it by gold or silver like it was once, and is essentially a piece of paper.
Low interest rates:
high housing prices+ artificially low interest rates (by the Fed) = rampant speculation (25% of house purchases were for "flipping")
Forced loans: if you're a banker you are conservative to whom you lend money, because if that person doesn't pay back, your business WILL collapse. So why have these high risk lendings occured?
In 1934, after the great depression, government created the Federal Housing Administration, which guaranteed mortgages and thus eliminated the bank's risk for high risk lendings.
in 1938 Fannie Mae was created to purchase these mortgages
then in the 70s, you have the Community reinvestment act, which "is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining." This means they had to do business without taking into consideration of the geography, whether it was downtown, suburbs, etc
then you have the Home Mortgage Disclosure Act of 1975, where they had to reveal private information to whom they were lending this, and then the government would score that information on CRA compliance.
and in 1991 you have government requiring banks to submit racial statistics and then accusing banks of prejudice in case (and im in no way trying to collectivize people here) they were discriminating against blacks whom they thought might not be able to pay back the lending.
Anyway, how did the government force the banks to go by these new regulations?
"Liability for punitive damages can be as much as $10 000 in individual actions and the lesser of $500 000 or 1% of the creditors network in class actions"
So banks are no longer allowed to use credit history, ratios of income to mortgage payments, and have to accept "credit counseling" as proof of financial ability, as well as unverified income statements. They also have to accept gifts, welfare and unemployment benefits, and other one-time for short term "incomes" as collateral.
Speculation
As prices kept low, defaults stay low, because no one defaults when he can sell the house at a profit.
But as i've already explained, as soon as prices decline, defaults rise, and interest rates begin to increase, as well as variable mortgage payments.
When demand is artificially stimulated, resource allocators get the wrong price signals, and then labor and capital are invested in those sectors of housing and building.
I think this is a more detailed way of explaining how this happened instead of just saying: GREED CAUSED THIS, because if that were the case, wouldn't we be in perpetual crisis?
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1) it's not always that simple. you can't just "take someone to court" because they made bad business decisions and destroyed a financial market or because they're a smoker and they drive up health insurance. also, externalities can be positive.
2) in your example, now court costs have to be paid, and the victim loses the money for paying the defense agency and he loses the utility (time) from the whole ordeal.
1)Trying to resolve a dispute peacefully is surely better than to use violence. If bad business decisions affect my life (health), liberty (condition my liberty, eg: enslavement) or property (damage my property) then it's ok? should they not at least pay the amount necessary to put me back in the condition before any harm was done to me?
If passive smoking is indeed harmful, then smokers can no longer smoke in areas where the smoke can harm people unwillingly. However, they could smoke in establishments that allowed smoking (instead of the current method where everywhere is forbidden to smoke).
2) in the latter example courts are not payed directly by victims, but by the protection agencies whom the people contracted with, which in turn had already contracted with the courts:
people->protection agency->courts
<the victim is only putting time and money into the effort so he/she can resolve the dispute which has either harmed his/her life, liberty or property. The victim pays the protection agency in the first place to protect him/her in situations like these.
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i don't really. do you deny that people do dumb things in the financial markets? and do you deny that these decisions have ramifications for those who weren't even a part of that decision?
People do dumb things everywhere. Markets prove a better way for not letting other people's stupid deccisions harm other people more, unlike the current voting system. Every decision has ramifications as well, so if a decision ends up affecting someone negatively, that person now has the right to be supplied with what is necessary for he/she to go back to the earlier state where the decision didn' affect her.