Actually, the idea is that conflicts of interest are resolved through the free market process (voluntary association), and it is the only effective way to check outright fraud.

Worldcom, as I’ve said before, was an accounting scandal. Again, the closest thing you’ll find to an accounting scandal on a nationwide basis is currency inflation causing a boom/bust.

Looking forward, I think that hard assets are going to outperform the broader market, just as they did in the 1970s. It’s too late to invest in gold, it’s already risen too much. But opportunities still exist in other commodities.

In this case, the rating agencies were paid to rate securities, NOT by investors, but by the issuers of those securities. That meant their job was to help sell those securities.

When you’re looking to buy a house, you’re escorted around by a realtor. But you should NEVER forget that the realtor is NOT working for you. She’s working for the seller. And hence NOTHING she says about the quality of a house should be trusted.

That lesson was forgotten by stupid investors. I remember the time WorldCom went bankrupt. These rating agencies rated the stock a “HOLD” almost down to the time WorldCom filed for bankruptcy.

But it gets worse.

When some issuers of securities didn’t want to pay Moody’s to rate their securities, Moody’s took revenge by doing their own rating and deliberately downrating those securities. That’s extortion, and it’s blackmail, and it should be illegal in any free market.

What you’re talking about is referred to as asymmetric information. Why did the ratings agencies rate these things so well? It’s a good question, but it has nothing to do with a fault of the free market. If anything, the party that got roasted the most from the collapse of subprime loans were the banks. I do not know why the ratings agencies failed, but it may have something to do with the fact that there are only two – Moody’s and S&P – and I believe they are legally protected monopolies (although that may be incorrect). Other guesses would be that they were pressured somehow by Fannie/Freddie through political channels.

Still, my points remain – the bubble is impossible without the inflation from the Fed. And, without a Fed to bail out the banks, they would have paid the price for poor investments. I do not see how your wise purchase of gold from 2002-2004 proves any point except that you made a good decision, though it also shows how much the dollar has eroded against a fixed quantity of gold.

The question is: What do you do with your dollars after you’ve exchanged your euros for them?

Who told all these investors to invest in securitized mortgages???

In that same period (2002-2004), I had some spare cash lying around. I didn’t purchase securitized mortgages. I bought gold and gold stocks. (In 2003, gold was around $350 per ounce. Now it’s over $1,000 per ounce.)

Now if I, I’m no economist, I’m just your Average Joe, could figure out that gold was a better buy than securitized mortgages, then WHY DIDN’T EVERYBODY ELSE???

WHAT’S THEIR EXCUSE???

A simple example will illustrate why this view is demonstrably fallacious.

I live in the U.K. I want to buy some American goods. As I am conducting my day to day affairs in British Pounds, I do not carry a balance in USD. To purchase the American goods, therefore, I must first purchase USD (unless a specific arrangement has been made that allowed payment in pounds, an unlikely scenario).

Under the system of floating exchange rates which is in place today throughout much of the world, there is a supply and demand for USD. In my purchase of USD, I must pay the market price, and find someone who is willing to exchange their dollars for my pounds.

Note: there is no influx of dollars, only a reallocation. Likewise, sovereign investment funds cannot cause asset bubbles because they cannot create dollars – only the Federal Reserve can accomplish that dubious task.

http://americaspeaksink.com/2009/09/911-truthers-a-view-from-the-right/

As I just tried to explain to you,

When there’s a lot of loose money lying around (whether from Fed liquidity or from foreign sovereign wealth funds), there are a lot of places you can invest it. You can buy commodities. You can buy shares of stock in the stock market.

You don’t normally put that money into securitized mortages, because you know how highly leveraged real estate is. UNLESS the rating agencies have assured you that those mortgages are high quality and are safe.

You’re such a gold bug. If all those investors had plowed all those loose money into investing in precious metals, or investing in blue-chip companies like Coca-Cola, then NONE of this crisis would have occurred.

It was the responsibility of the rating agencies to warn prospective investors that these securities were packaged subprime mortgages issued to homeowners who would have difficulty repaying.

They didn’t. They deliberately overrated those securities in return for fees from those securities’ issuers–what used to be called “payola.”

We’ve had periods of loose money before this. But we never had a global blowout like this one–because we never had corruption like this. And because foreign sovereign wealth funds jumped into the secondary mortgage market, causing the disaster to spread worldwide.

It’s very hard to discuss the topic rationally when the person you are trying to communicate with does not even grasp the import of a controlling and manipulative monetary authority.

Think about this: where did the funds come from to leverage out 30x? You should realize that with honest money these sort of leverages would be far, far too risky. On the other hand, when you’re putting up fake money and know that you’re essentially insured by the Federal Reserve and its ability to “print money,” 30x seems, contra idiotic, smart.

“What we had was a collapse of credit. It was NOT caused by central banks and reserve banking. (Because we didn’t have such a collapse of credit in the prior 50 years of the Fed’s existence.) Rather, it was caused by highly leveraged (30 to 1!) securitization of real estate, which is traditionally illiquid.”

No! The central bank created an asset bubble by lowering interest rates, facilitated by “printing money.” This IS what happened. It crippled our price mechanism, distorting our capital structure and investments. We need to recover from this lost period of economic illusion, and the only way to do that is to let prices readjust. Flooding the country with more money, as a matter of irrefutable logic, will make things WORSE.

What is a collapse in credit anyway? It means that people are unwilling to loan. Why would they be unwilling to loan? Because they need to save more. Why would be they loaning all along when they were depleting their savings? Because the prosperity was illusory. What did we do when this illusion was lifted, and people increased their demand for cash holdings? We undermined them by printing trillions of dollars and throwing it at banks to loan out. To me, a clear way to muck up the currency and eventually country. Yet somehow this passes for enlightened policy.

bm says “That assumption was a lot closer to reality in the 18th century than it is today, when, with much stickier prices and wages, the impact of monetary fluctuations is first felt on output and employment.”

So prices are more sticky today than they were back then and this is why we don’t use gold anymore? And Ron Paul is a crank, right …this is sheer idiocy.

I have gone through examples that relate the theory back to accounting and finance, and tried to tie it all in to make it very clear that the asset bubble was a direct result of the Federal Reserve. What more do you people want? All I hear from the deniers is that people are stupid and thought real estate was going to keep appreciating forever, and they offer no illustrative theory. When convenient, the deniers throw out their support and belief in the infallibility of supply and demand. They would do well to remember that it is true at all times and for all cases for purposeful action.

I feel like a chemist among alchemists.

We don’t have high inflation today. We don’t have supply shortages today. You can go to any auto dealer and see all the unsold cars. You can go to any gasoline station and pump as much gas as you want.

What we had was a collapse of credit. It was NOT caused by central banks and reserve banking. (Because we didn’t have such a collapse of credit in the prior 50 years of the Fed’s existence.) Rather, it was caused by highly leveraged (30 to 1!) securitization of real estate, which is traditionally illiquid.

This securitization was done by idiots who decided that real estate is ALWAYS a good long-term investment. It involved outright fraud, in which rating agencies like Moody’s were paid by the underwriters to give false “safe” ratings to those securities.

So when the real estate boom finally went bust, those idiots were left owing far more money than they had on hand.

It doesn’t matter what the Fed says or does. We’ve had tight money, loose money, high interest rates, low interest rates. But to leverage real estate 30 to 1 is stupid in any economy.