Whither the Financial Markets?
Why more or different regulation is superficial and harmful
From what Workers can tell the current financial crisis was caused by:
1) Ingrained culture of socialized risk and private gain due to the FDIC deposit guarantees and fannnie/ginnie mortgage-backed bond guarantees (and the too big to fail Fed credo). This then lead to,
2) Financialization of the economy as investment banks et al packaged the guaranteed bonds, selling them to ea other in various risk traunches as the housing market boomed (not least to due to Fed money expansion and the interest tax deduction on mortgages). This encouraged more and more financialization and then the creation of mortgage-backed bonds that even fannie/ginnie wouldn't touch (eg the 'subprimes'). This of course was accompanied by fraud.
3) As the inevitable burst of the bubble happened first the subprimes were downgraded risk-wise. This then lead to the down-grading of the other traunches.
4) The investment banks et al had to / have to sell these assets off in order to keep their leverage ratios within reason. This market-wide selling then lead to a freeze in some markets as all these assets couldn't be / can't be priced. And the liquidity crisis means that insurers can't make their claim payments and others their debt payments. The other thing to keep in mind is that,
5) All the banks are regulated by the same policies, this created systemic risk, e.g. they all downgraded their assets at the same time which then lead to more selling (or trying to sell) and unable to sell creates a liquidity crisis and rapidly decreasing asset prices. The crisis then is exacerbated by uncertainty in the markets. Lastly,
6) The call for more regulation just is a bandaid due to what is known as the 'knowledge problem', how can regulators know more than the people actually in the business and won't regulation just increase or change nature of systemic risk? Same thing with,
7) Government buying all the bad assets just puts fetter on market process as they hold the assets and decide what to do with them instead of just letting the market reprice over time. Plus, there are ethical dimensions involved, as how does the government decide who gets bailed-out at taxpayer cost and who doesn't get bailed-out? Plus will not the very people in government who are supposed to monitor the markets profit from this government bail-out as they will be the first to know how and when the assets will be resold?
8) It all started back at 1) which is an accepted culture of socialized risk and private gain. Corporate welfare must be dismantled. More regulation / intervention now just means more bailout later.
From what Workers can tell the current financial crisis was caused by:
1) Ingrained culture of socialized risk and private gain due to the FDIC deposit guarantees and fannnie/ginnie mortgage-backed bond guarantees (and the too big to fail Fed credo). This then lead to,
2) Financialization of the economy as investment banks et al packaged the guaranteed bonds, selling them to ea other in various risk traunches as the housing market boomed (not least to due to Fed money expansion and the interest tax deduction on mortgages). This encouraged more and more financialization and then the creation of mortgage-backed bonds that even fannie/ginnie wouldn't touch (eg the 'subprimes'). This of course was accompanied by fraud.
3) As the inevitable burst of the bubble happened first the subprimes were downgraded risk-wise. This then lead to the down-grading of the other traunches.
4) The investment banks et al had to / have to sell these assets off in order to keep their leverage ratios within reason. This market-wide selling then lead to a freeze in some markets as all these assets couldn't be / can't be priced. And the liquidity crisis means that insurers can't make their claim payments and others their debt payments. The other thing to keep in mind is that,
5) All the banks are regulated by the same policies, this created systemic risk, e.g. they all downgraded their assets at the same time which then lead to more selling (or trying to sell) and unable to sell creates a liquidity crisis and rapidly decreasing asset prices. The crisis then is exacerbated by uncertainty in the markets. Lastly,
6) The call for more regulation just is a bandaid due to what is known as the 'knowledge problem', how can regulators know more than the people actually in the business and won't regulation just increase or change nature of systemic risk? Same thing with,
7) Government buying all the bad assets just puts fetter on market process as they hold the assets and decide what to do with them instead of just letting the market reprice over time. Plus, there are ethical dimensions involved, as how does the government decide who gets bailed-out at taxpayer cost and who doesn't get bailed-out? Plus will not the very people in government who are supposed to monitor the markets profit from this government bail-out as they will be the first to know how and when the assets will be resold?
8) It all started back at 1) which is an accepted culture of socialized risk and private gain. Corporate welfare must be dismantled. More regulation / intervention now just means more bailout later.
posted by Cameron Weber at 10:01 AM
<< Home