Regulation Followup
| Mon Oct. 13, 2008 4:26 PM PDT
REGULATION FOLLOWUP....British prime minister Gordon Brown, everyone's hero of the financial moment, talks about reform:
"Sometimes it does take a crisis for people to agree that what is obvious and should have been done years ago can no longer be postponed," the British prime minister, Gordon Brown, said in London in a speech calling for the adoption of a new Bretton Woods-style agreement among major countries. "We must now create the right new financial architecture for the global age."
I mentioned a few days ago that I'd been noodling about this, and I certainly think there's value in talking about specifics: imposing transaction fees on financial trades, tightening up mortgage rules, requiring that credit default swaps be traded on an open exchange, and so forth. But the big picture always seems to come back to two things:
Task central banks with paying more attention to asset bubbles. Alan Greenspan famously thought we should just let bubbles inflate away and then deal with the aftermath as best we can, but events of the past decade really don't make that seem like such a great idea anymore. What's more, this piece of the puzzle probably doesn't even require drastic regulation. It's not a matter of trying to get rid of bubbles completely, after all, but of trying to keep them just a wee bit more under control. If we had managed to restrain the housing bubble by even 20% or so, for example, that might very well have made the difference between tough times and global crisis. At the very least, central banks should refrain from throwing fuel on the fire, and should try to persuade government actors to do the same. Combine that with some modest monetary brakes when bubbles are plainly out of control, and we could avoid a lot of future trouble.
Regulate leverage everywhere, not just in the formal banking sector. This is probably even more important. If the subprime bubble had been our only problem, it probably would have meant systemwide losses of half a trillion dollars or so. Maybe a trillion. That's nothing to sneeze at, and all by itself it would very likely have led to a few big bank failures, some big losses in the stock market, and a nasty recession. But that's merely a disaster. It was the additional leverage from derivative trading based on the underlying loans that turned a disaster into a global meltdown.
Figuring out how to fix this is a gargantuan task that's several light years above my pay grade. Simple financial leverage is straightforward enough, but effective leverage hidden in complex debt instruments, often off balance sheet, makes this a regulatory nightmare. Realistically, I suppose it probably needs to be some kind of extension of Basel II with more scope and more bite, but one way or another, after years of talking about the dangers of stratospheric leverage but taking very little actual action to rein it in, something has to be done. If we're looking for work for all the rocket scientists who have been let go from their Wall Street jobs recently, this might not be a bad place to start.
So who should be our go-to guys on this subject? It seems like liberals were caught sort of flat-footed by the Paulson bailout plan, which made it difficult (though, in the end, not impossible) to quickly sell Congress on a different strategy. This time around, when the conversation starts, it would be nice to have some coherent strategies already on the table from people we trust. Any suggestions?
Continues Below
Continued From Above
Comments
I don't think regulating leverage appropriately will be as hard as Kevin suggests. Simply look at everything Phil Gramm voted for, and pass legislation doing the opposite. Starting with the commodity exchange de-regulation amendment he dropped into an omnibus budget bill when his wife was serving on the commodities regulatory board.
That one step would unwind a huge chunk of the toxic financial fantasy that's poisoning the world economy, at the moment. Wouldn't solve everything, but would be a great start.
So who should be our go-to guys on this subject?
Generally, I try to find people who tend to right about a particular subject most of the time, and listen to what they have to say. The media and governments don't always do that, though.
Submitted by The Lounsbury (not verified) on Mon Oct. 13, 2008 5:07 PM PDT.
First, while Greenspan was rather a "true believer" in markets clearing, his caution on the idea of calling asset bubbles was not irrational, it's in reality easy ex ante to get it right, and I am sure and independent Central Bank constantanly ratcheting up the reference rate any time asset growth exceeded X % would kill rational policy - establishing that as a goal would be a disaster.
I think, however, the informal wisdom emerging from this is Gman was wrong, a nd informal and flexible attention to potential specific asset classes and bubbles will be the new orthodoxy until it proves inadequate.
The idea of regulating leverage "every where" is absurd. It's impossible and would simply lead to more exotic products or off-shoring of debt vehicules.
And it is silly. The core question for the US is to simplify its regulatory system that encouraged bizarre gaming of the system (as I have said a number of times, there is not proper country in the world that has the bizarrely complex system that the US has, worthy of a banana republic) and look at more effective gatekeeping for assets that enter the regulated system, that is where most people save - regulated system being mutual funds to deposit takers - anyone taking money from the General Public rather than High Net Worth.
Submitted by JC (not verified) on Mon Oct. 13, 2008 5:32 PM PDT.
Impose usary laws to prevent credit card interest rates from inflicting severe financial distress on people. Tie max rates to prime plus X%. In the process, this will lesson the profit incentive for banks from such outrageous interest rates. The result will be more prudent credit card lending.
I suspect that Paulson and Bernanke had to use electric drills on Bush to get him to admit there was an existing problem in the free markets and then to allow them to "interfere (at all) in the free markets." It will be past January 20 before any sort of sane plan will be suggested to put a regulated ceiling on leverage in the non banking sector. Bush is now praying for forgiveness for his sins from the free market gods.
Submitted by mg (not verified) on Mon Oct. 13, 2008 6:09 PM PDT.
How do you decide what an "asset bubble" is? Who gets to make that decision?
The breakdown in regulation was on the finance side, not the housing side. If the finance side had been better regulated, there almost certainly never would have been a housing bubble to begin with. Trying to regulate away the bubble itself is clumsy, essentially impossible, certainly destructive, and misses the point.
No doubt chris, above, and I are not alone in thinking Krugman gets it better than just about anyone who comes to mind.
So here's my question:Who is on Barack's shortlist for Treasury?Surely there has been some quasi-public rumination on this topic, but I've missed it.Anyone have any names?
Instead of just having some sort of fight over whose ad-hoc tactics are better, why not stop pretending that the market is so different and unique?
Why not come up with some goals for how we want the market to work, and then use systems engineering to model that.
Maybe we need per transaction fees, and maybe not? And if we do, how big? It's not like economists are the only people who have a handle on this. We might find that systems engineers, if there are any left who haven't been outsourced, may have something relevant to say.
Transparency.
If a year from now it is still possible to throw crap together and call it AAA, then it will only be a matter of time until the next financial meltdown. If we do this right, in the future people won't worry about bank failures because banks will have transparent assets and anything rated AAA will actually be safe.
Add Stiglitz to the list of trusted economists. It's a fairly long list, even if those of us who don't study economists can't list many of the people ourselves.
Hey, I wish you would address this post of Matthew's. http://yglesias.thinkprogress.org/archives/2008/10/strange_trump.php
He seems to be drawing exactly the opposite conclusion to what the numbers say. And oddly, Atrios not only backs him up, but adds his only personal strawman.
I can't imagine Bush ever admitting he did anything wrong, and, by dint of being born again, all sins are automatically forgiven.
Before the ideologically driven free markets achieved free rein, capital ratios were required of all financial instrument dealing corporations, whether public or private. Banks were required to vary their capital ratios dependent upon perceived risk as measured by central banks. They varied the percentage to be put up against futures contracts and share dealing.
Letting markets run free, without oversight or regulation is irresponsible government for those who cannot protect themselves against a minority's "excessive exuberance" that, as we have just seen, has huge effects far beyond the minority's narrow interests.
Asset bubbles are pretty easy to see and often predicted. When share prices advance to the point that price-earnings ratios make no sense? Or shares rise exponentially even for companies that have yet to show any profit, maybe not a revenue stream? When house prices advance at multiples of inflation year after year after year and everyone is talking about some new paradigm that says this will continue forever?
Does the market operate with the least friction? No, but the dislocations avoided are worth the loss. You avoid what might have happened these last few weeks if the problem hadn't been internationalized and Europe reacted to save the market (probably), because this country has yet to act. If everyone had behaved like this administration the world might just about be in freefall.
Lastly, to lay the blame at the right point, although a fall in house prices triggered the collapse, the losses based on foreclosure can be somewhat predicted and measured. This amounts to no small amount but not a fraction of what we seem to be looking at. The losses we don't know, can't predict, and don't seem to be able to measure come in all the paper created and the deceptive derivatives peddled between gullible professionals almost throughout the financial markets. This crisis can certainly be layed at the feet of Wall St. and their ilk.
This is a little off track, but anyone see the capital injection plan coming out of Treasury? If what I read is correct, it is totally absurd.
The U.S. would take preferred shares without diluting the stakes of existing shareholders. Also, the institutions can still pay dividends on common stock, courtesy of the U.S. taxpayer. The preferred shares would have a 5% yield, but I'm not sure it that's just notional. In addition, the Federal Gov. would have no board seats.
In other words, we give the institutions a shitload of money in exchange for very little. I'm all in favor of capital injections, but this is not capitalism, it's feudalism.
Bart Preecs >"...Simply look at everything Phil Gramm voted for, and pass legislation doing the opposite...."
That would be step #1. Step #2 would be to completely ignore everything The Looneybury says. He has all the annoying qualities of Norman Rodgers, none of the class & is incredibly ignorant to boot. His mother must really, really love him to keep him in her basement.
"Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist" - John Maynard Keynes
I will be waiting to hear
Submitted by tiffany jewelry (not verified) on Sat Aug. 15, 2009 1:07 AM PDT.
I will be waiting to hear what Felix Salmon thinks of this idea. I'm a little surprised you still have the guts to generate your own opinions when he gives you those "expert smackdowns." But I'm glad you do, because I think this is a really good insight that I haven't seen before.
Rolex Milgauss watches
Submitted by Rolex Milgauss watches (not verified) on Sun Nov. 15, 2009 9:52 AM PST.
If someone notices a a href="http://www.cartierwatches.us/Longines/">Longines watches
Louis Vuitton watches
Maurice Lacroix watches
Montblanc watches
movado watches
omega watches
oris watches
Panerai watches
Patek Philippe watches
Piaget watches
Rado watches
Tag Heuer watches
Tudor watches
U-boat watches
Vacheron Constantin watches
Rolex watches
Rolex Air-King watches
Rolex Datejust II watches
Rolex Datejust watches
Rolex Submariner watches
Yachtmaster watches
Rolex Day-Date II sale
Rolex Daytona watches
Rolex Explorer watches
Rolex GMT watches
Rolex Sea-Dweller watches
Rolex Day Date watches
Rolex Masterpiece watches
Rolex Milgauss watches
