"but a gigantic 10 year bubble sticking out to the side and then bursting doesn't seem efficient by that definition."
Where was the enormous arbitrage opportunity left behind, and why didn't you (or anybody else) exploit it?
Maybe you can answer that, but if you can't, you're not arguing for "inefficiency", you're still arguing "not good".
You also appear to be conceiving of regulations as something you simply have "more" or "less" of, which is not a useful mental model. What matters about regulations is their content, not their quantity. And what the content of our regulations created was A: mandating that banks make loans they would not have made without them and B: an implicit government backing for those bad loans.
Have you looked at the balance sheets for Fannie & Freddie lately? They're not bleeding a billion here or there.
Also, yes, the credit rating agencies are government creations as well. There are regulations (ahem) that require certain entities to take certain actions based on the word of the rating agencies, causing them to no longer just be groups of people stating their opinion, skewing their own incentives and raising the incentives others have to game them.
I slogged through much of the Financial Crisis Inquiry Report (http://fcic.law.stanford.edu/). One of the conclusions was that while mandating loans didn't help, they weren't numerous enough to be a major cause. Once the mortgage-backed securities engine got churning, there was an enormous demand for more loans to feed it. That provided most of the incentive for the bad loans, not government mandate.
The original contention was "extremely close" to optimal. I'm merely contending that the markets fuck it up big occasionally here, pretty low hanging fruit for me. As for why I didn't exploit it? I don't know, I don't work on Wall Street, don't play that game? I could've told you that the mortgage thing was a problem long before the ratings agencies, apparently, but everyone knew in hindsight.
Anyways, 10 years is pretty darn not good in my opinion. I'd call it inefficient, as far as pricing is concerned.
Agree on "more or less" regulations being a not-useful mental model. It seems to follow from that contention that "regulations!" isn't a one-word answer to any question of who to blame for anything, or how to solve anything.
RE: Fannie and Freddie I have not looked at their balance sheets. I'm under the impression that whatever the problem is with them, it's dwarfed by the size of the financial crisis, ergo they're not primarily at fault for the crisis. Moreover, the program to lend to minorities had been in place for decades. Seems hard to blame it for the 2008 meltdown, why not sooner?
It does seem that any regulations putting institutional faith in the ratings agencies are wrong-headed.
jbooth, if you're going to accuse others of ignorance and "turning off their brain", you should probably educate yourself about the issues you are talking about. The size of Fannie and Freddie's balance sheets were around $500 billion and taxpayers have so far lost about $300 billion on the bailouts of the GSEs. So, they were not insignificant contributors to the crisis, and reasonable economists disagree about the share of blame that the GSEs own. The mortgage interest tax deduction is about another $100 billion of subsidy to the mortgage market annually. Some people question the wisdom of these measures and the government's role in propping up the bubble.
Housing subsidies directed at minorities were increased over time in the Clinton and Bush administrations, but weren't large compared to the massive overall portfolio.
Where was the enormous arbitrage opportunity left behind, and why didn't you (or anybody else) exploit it?
Maybe you can answer that, but if you can't, you're not arguing for "inefficiency", you're still arguing "not good".
You also appear to be conceiving of regulations as something you simply have "more" or "less" of, which is not a useful mental model. What matters about regulations is their content, not their quantity. And what the content of our regulations created was A: mandating that banks make loans they would not have made without them and B: an implicit government backing for those bad loans.
Have you looked at the balance sheets for Fannie & Freddie lately? They're not bleeding a billion here or there.
Also, yes, the credit rating agencies are government creations as well. There are regulations (ahem) that require certain entities to take certain actions based on the word of the rating agencies, causing them to no longer just be groups of people stating their opinion, skewing their own incentives and raising the incentives others have to game them.