Views from Phanfare CEO and Co-founder Andrew Erlichson

Link Tinkering with market forces is rarely a good idea

In economics 101 you learn that when you interfere with market forces, you disturb the delicate balance of the market. Rent price control creates shortages and diminishes the incentives to renovation apartments; the careful control of the number of medallion taxes and the prices they can charge creates imbalances where there are sometimes a slew of taxis and other times insufficient numbers.

It is not hard to reason that our creation of Freddie Mac and Fannie Mae, with their implied government guarantees, created an incentive to originate loans that were more risky than what the market would normally tolerate. The result was an increase in asset prices (more money chasing real estate) and an eventual collapse.

In a sense, we got what we designed. Our goal was lofty enough: to enable widespread home ownership. Nobody can argue with the social goal. But the price to pay is exactly what is happening here.

Our solution is to bail out all parties involved. The risk is that we are once again changing the incentive structures to the market-based system. If I know that I when I win I win and when I lose, I win, then I play a different game. We got the current disaster when the investment banks did not know that the federal government would bail them out. Imagine how they would play the game if the knew it was impossible to lose.

Only in cases where the social consequences are clearly undesirable should we impose regulation. Labor working conditions, environmental laws, are areas were regulation is desirable. But even there, it is better to use a market based approach. For example, polluting the environment has a societal cost and to do it, you should pay a high price that reflects your overall consumption of global resources. A market for carbon credits can work.

In addition, I like to pay along the way for my regulation versus all at once. While a minimum wage law certainly has economic consequences, but we can see them along the way. The implied guarantee of a the federal government on trillions of dollars of mortgage assets is exactly the type of ticking time bomb that creates increased volatility and occasional castotrophic collapses.

I agree that we should think very carefully before we use taxpayer money to bail out private companies from their bad decisions.

  • http://officer232.blogspot.com/ Bob Rodkin

    Well said Andrew. Very well!

    Bob

  • http://rlieving.blogspot.com rob lieving

    This is not a great post for the CEO of Phanfare. I urge you to take it down.

    Maybe you could start another blog to post your political and economic views. I am not commenting either way on what you said. I am not saying you are right or wrong.

    However, the Phanfare blog is not the place to be making such comments. It risks alienating customers.

  • Robert Wilkins

    I agree totally with Rob, take down this post, while its ok for you to voice your opinion. Your post clearly demonstrate your lack of intelligence when it comes to economics, risk analysis and plain and simple consumer confidence.

    What experience do you have with the markets, do you know what drives this economy, and how it affects GDP, look i dont want to get into it with you on your own blog, but it seems to me you are just like all the other talking heads on the TV and internet. You lack the qualifications to intellectually articulate what happened. People like me have worked in this business for 10 years but i still am not sure where everything went wrong.

    On a final note, I doubt I will be buying your services, you just drove away a potential customer with your political rambling. Ignore the urge ramble off hearsay, focus on building your product, which i might add is good.

    Just my thoughts.
    Robert Wilkins

  • Andrew Erlichson

    I worked for a large fixed income money manager for two years and have a reasonable grasp of economics. That said, there might not be much benefit to Phanfare on me commenting publicly on what has essentially become a political issue. Half of people are likely to disagree with you. Point taken.

  • Susannah Chen

    Andrew, I agree with Rob Lieving and Robert Wilkins – can you please refrain from this type of commentary on the phanfare blog. I currently eke out a living in financial services, but if things keep up, we might not even be able to afford cable and internet, never mind photo/video hosting. Whether your opinion is right or wrong, it’s just too close to home. We love phanfare’s services, but we don’t visit the site for this type of commentary.

  • Andrew Erlichson

    Sorry to hear you have been swept up. Obviously, most individuals working in the financial community did nothing wrong and were faithfully executing the responsibilities of their jobs.

    I can refrain from political and economic blogging.

  • Brian Stringfellow

    I was able to tell by the subject of the post and assured by the end of the first sentence of the nature of the commentary, but I chose to read it, found it interesting, and agreed for the most part. I had two economics courses in college and left it at that so I know very little here, but took an interest in one person’s opinion. My first thought was, wow that’s different, nothing about the website and shrugged my shoulders.

    As someone who gets irritated easily sometimes, I found it surprising to see the negative reaction. I got less backlash from my political commentary in the PF forum about 6 months ago. :-) Andrew, what did you think of that election? whew! ;-) jk

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