Financial crisis

[TPS]

While the usual apologists won't agree, this article (for me) pretty much sums up how the political system works and why we are in this mess. To be clear, the process of dismantling financial regulations has gone on since 1980, so it's not a partisan issue, as the article also states. While there are a lot of other factors that have contributed, it really is the case of "finance run amok."

 

Congress and the Executive Branch responded to the legal bribes from the financial sector, rolling back common-sense standards, barring honest regulators from issuing rules to address emerging problems and trashing enforcement efforts.

USA Inc.

[GG]

Bla bla bla, we need Depression era laws because they were very effective in (fill in the blank), even there's not a shred of evidence supporting the theories, other than the happenstance of the financial crisis. I wonder if the voluminous 231 page report answers the basic question "If the whittling down of Depression-era US banking laws is responsible for the mess, how in the hell are the banks in Britain, Switzerland, and the rest of the world are virtually insolvent?"

 

I didn't know that Glass Steagall crossed borders, especially since there was no separation between banking and brokerages in any other market but the US.

 

Maybe, just maybe something else was at play?

[HopsGuy]

Maybe, just maybe something else was at play?

 

Laziness.

 

Do you know how many calories you have to burn to do due diligence? It's hard work, man. Hard, I tell ya.

 

Plus, if we put the correct ratings on this stuff, they wouldn't be able to sell it, which means they wouldn't bring us more CDOs to rate, and then.... oh forget it - just stamp it AAA so I can get to the bar.

[TPS]

Bla bla bla, we need Depression era laws because they were very effective in (fill in the blank), even there's not a shred of evidence supporting the theories, other than the happenstance of the financial crisis. I wonder if the voluminous 231 page report answers the basic question "If the whittling down of Depression-era US banking laws is responsible for the mess, how in the hell are the banks in Britain, Switzerland, and the rest of the world are virtually insolvent?"

 

I didn't know that Glass Steagall crossed borders, especially since there was no separation between banking and brokerages in any other market but the US.

 

Maybe, just maybe something else was at play?

It's not about "depression era laws," it's about regulating the financial sector instead of letting it push bubbles to their ultimate limit. Wall Street paid to dismantle old regulations and fought any new ones.

And even you have to understand how junk securities sold here infected the rest of the world, dumb enough to believe a self-regulated Wall Street and self-interested ratings agences. Care to take a guess why Canadian banks aren't in the same mess as American ones?

[GG]

It's not about "depression era laws," it's about regulating the financial sector instead of letting it push bubbles to their ultimate limit. Wall Street paid to dismantle old regulations and fought any new ones.

And even you have to understand how junk securities sold here infected the rest of the world, dumb enough to believe a self-regulated Wall Street and self-interested ratings agences. Care to take a guess why Canadian banks aren't in the same mess as American ones?

 

Not that I don't expect you to repeat a talking point from a poorly researched NYT article...

 

But to answer the question directly - Canada continues to enjoy a favorable position where it doesn't really have to compete in the global economy, and can live a comfortable semi-socialist existence eating off USA's scraps. Kinda like Canada never really having had to worry about Josef, Nikita nor Leonid washing on their shores.

 

That's why it gets the best of both worlds in protecting its industries from foreign encroachment, yet using the foreign markets to grow their businesses.

 

Why? Because few people care about Canada as a major market. It's a bit different than in using protectionism as the business model for US corporations.

 

That, and the fact that Canadian banks didn't have to start implementing Basel II until 2008 may have had something to do with it.

[John Adams]

I love the TPS GG fights. Getting my popcorn ready.

[erynthered]

I love the TPS GG fights. Getting my popcorn ready.

 

 

I think I'll check back in on this thread around 9:30 PM or so...by then TPS will have had imbibe in a few cocktails.

[TPS]

I think I'll check back in on this thread around 9:30 PM or so...by then TPS will have had imbibe in a few cocktails.

9:30?!? Cocktails start much earlier; that's when I get home and back to a computer...

[ExiledInIllinois]

It's not about "depression era laws," it's about regulating the financial sector instead of letting it push bubbles to their ultimate limit. Wall Street paid to dismantle old regulations and fought any new ones.

And even you have to understand how junk securities sold here infected the rest of the world, dumb enough to believe a self-regulated Wall Street and self-interested ratings agences. Care to take a guess why Canadian banks aren't in the same mess as American ones?

 

It is human nature to push anything to it's ultimate limits.

[HopsGuy]

It is human nature to push anything to it's ultimate limits.

 

Especially in Iceland. Michael Lewis on Björk's homeland and its financial meltdown.

[Nanker]

Especially in Iceland. Michael Lewis on Björk's homeland and its financial meltdown.

Brilliant!

[TPS]

Not that I don't expect you to repeat a talking point from a poorly researched NYT article...

 

But to answer the question directly - Canada continues to enjoy a favorable position where it doesn't really have to compete in the global economy, and can live a comfortable semi-socialist existence eating off USA's scraps. Kinda like Canada never really having had to worry about Josef, Nikita nor Leonid washing on their shores.

 

That's why it gets the best of both worlds in protecting its industries from foreign encroachment, yet using the foreign markets to grow their businesses.

 

Why? Because few people care about Canada as a major market. It's a bit different than in using protectionism as the business model for US corporations.

 

That, and the fact that Canadian banks didn't have to start implementing Basel II until 2008 may have had something to do with it.

Given that I am a "Minskyite," I understand the relationship between regulation and financial innovation. Financial innovations are often a consequence of regulation. That doesn't mean you don't junk regulation and let finance rein free, because this is the result--speculation and crisis. The more "paper" finance creates, the more profits. In essence, Minsky's explanation for why capitalism is inherently unstable is because the growth of debt outpaces the ability to pay it (income growth). And regulators face a constant game of trying to keep pace with the innovation.

 

As the report indicates, finance paid to make sure new products didn't get regulated. This crisis is really a case of "finance gone wild."

 

How much are we going to have to sink into AIG because of little or no capital backing the cds its unit wrote? What would you do if you were king? Do you truly believe the markets can police themselves?

 

On a side note to our longstanding argument about tax cuts and revenues, it's now clear to me why there was the blip in revenues that you thought would eventually create a federal budget surplus (but didn't): finance accounted for 30% of all profits in 2007, generated by the fenzy of fraud and manipulation. The financial units of companies like AIG and Lehman that created and sold the slew of financial acronyms "earned" hundreds of millions in compensation. IT really was a bubble created by fraud and manipulation. Mortgage and other asset backed securities sliced and diced then fraudulently rated AAA and sold to the rest of the world (and you asked how Britain and the rest of the world got into trouble...jeesh!). Once they ran out of "crap mortgages" to back cdos they created them out of "thin air" with synthetics. Billions in profits, and therefore taxes, were generated, but it was all a mirage. This has been one of the greatest con games ever, and we suckers are fine with continuing to dump trillions into "saving" it.

[GG]

For starters, I urge you to find a single instance where I advocated no regulation of financials. (To save you time, don't bother)

 

I've been saying the same thing over and over that it's not the lack of regulation, but the inconsistency of regulation that distorts the markets, because like it or not, the industry is smarter and deeper than the regulators.

 

Minsky's theory is wrong on the causation, but he's right on the speculation that occurs at tail ends of bubbles.

 

Here's another funny fact about regulation - you're trying to regulate human nature, which to my knowledge is rather ineffective when it's too stifling.

 

Which brings us to the original article you linked and how far off the mark the author is. While major financials always welcome less regulation, the root of the capital standards that nearly everyone had to adopt started in the '80s. And it wasn't a bad Ronnie Reagan edict, but a move by the G7 central banks to set up a universal capital standard where you didn't need a Rosetta stone to peek into a bank's books.

 

The movement gained steam by all involved, because it incorporated a great dose of market discipline in adjusting risk for the capital that you held.

 

It was the perfect regulatory system because it involved central bank oversight with the market watching over it. The system got better with the advent of CDSs, which allowed a bank to further whittle down credit risk.

 

There was one minor flaw however. The regulatory & market forces depended on human intervention to ensure that the risks were properly managed.

 

So to claim that this was caused by too little regulation is nutty, because it ignores the reality of a perfect storm of available capital, revolutionary financial innovation, technology that allows split second information flow, regulations that fostered and then missed major risks, and human nature of gorging on a free lunch.

 

Sometimes the easiest explanation is the hardest to accept.

[OCinBuffalo]

I've been saying the same thing over and over that it's not the lack of regulation, but the inconsistency of regulation that distorts the markets, because like it or not, the industry is smarter and deeper than the regulators.

Confirmed with personal experience in multiple industries. Not only that, but we tried to bring in analytic applications/BI stuff to deal with rogue trading, and that was hysterical. Half the bosses had found some business rule that, sometimes cleverly, mostly stupidly, exempted some or all of their trades from being studied inside of 2 weeks.

 

Bottom line: you are NEVER going to regulate anything properly from the top down. Unfortunately, socialist concepts rely on Top-Down thinking, so yeah, most regulation that comes from the left is, by definition, doomed to fail.

 

I will line up all the idiots at HHS, or the SEC, and not one of them gets that simple fact. DOD is the only government department that understands that regulations must be enforced at the lowest level first, and that they, just like quality standards flow uphill, not down. Schit may flow downhill, but proper enforcement of regulations/quality standards does not. Anybody who has ever been through a Saturday inspection know this. Generals don't check what's in your footlocker, your squad leader does. His boss makes sure he is doing his job, his boss, his, and on up.

 

What is needed is a single, local, long-term assigned regulator who is on the job 24/7 at each company, and who has 1-5 'clients' to keep tabs on. His/her boss only has 15 other people like him/her to worry about, and on up. We do not need what we currently have at SEC, CMS, VA, and all the rest:

 

1. a keystone cops operation that shows up once a year for four days

2. asking for whatever pops into their head,

3. who won't even understand if the answer makes sense, because they have no idea what they are being told,

4. or, who is even answering the question,

5. because they don't know the company they are "regulating" other than what they found out yesterday or the day before.

[erynthered]

Just what I thought.

 

 

 

Good stuff, guys.

[HopsGuy]

I've posted this before:

 

"So we knew it was going to happen, and it did. The Black Horsemen came and cut down the revelers, even those with the names of virtue engendered like Prudent and Faithful and American and Growth. If you entrusted your money to them at the end of the run, you were luck to keep half. That went, too, for banks whose headquarters were vaulted like cathedrals. Not only did the market go down, it kept going down - the popular averages disguised the extent of the decline. Another day it would come back, but not until the unscarred generation, so bold without memories, had become scarred like its predecessor."

[TPS]

For starters, I urge you to find a single instance where I advocated no regulation of financials. (To save you time, don't bother)

 

I've been saying the same thing over and over that it's not the lack of regulation, but the inconsistency of regulation that distorts the markets, because like it or not, the industry is smarter and deeper than the regulators.

I never said you didn't believe in regulation, as I recall we had a brief agreement about capital standards. Just as I am not saying that deregulation was the only cause, but there were ample opportunities for the government to prevent this from turning into the worst crisis in history--Wall Street's contributions and lobbyists ensured it did though.

 

Minsky's theory is wrong on the causation, but he's right on the speculation that occurs at tail ends of bubbles.

Maybe you can expand on the first part. Seems like a sweeping "I am right and everyone else is wrong" statement. That is, you say everything without saying anything.

 

Here's another funny fact about regulation - you're trying to regulate human nature, which to my knowledge is rather ineffective when it's too stifling.

 

Which brings us to the original article you linked and how far off the mark the author is. While major financials always welcome less regulation, the root of the capital standards that nearly everyone had to adopt started in the '80s. And it wasn't a bad Ronnie Reagan edict, but a move by the G7 central banks to set up a universal capital standard where you didn't need a Rosetta stone to peek into a bank's books.

 

The movement gained steam by all involved, because it incorporated a great dose of market discipline in adjusting risk for the capital that you held.

Capital standards were a consequence of the international debt crisis, not some kumbaya agreement by banks saying please regulate us with consistent standards.

 

It was the perfect regulatory system because it involved central bank oversight with the market watching over it. The system got better with the advent of CDSs, which allowed a bank to further whittle down credit risk.

 

There was one minor flaw however. The regulatory & market forces depended on human intervention to ensure that the risks were properly managed.

Hmmm...how does a perfect regulatory system have a flaw? That's just a dumb statement.

CDSs were fine in their original context of insuring debt, but spun out of control when you no longer insured the underlying security. The market got totally abused because it was unregulated.

 

So to claim that this was caused by too little regulation is nutty, because it ignores the reality of a perfect storm of available capital, revolutionary financial innovation, technology that allows split second information flow, regulations that fostered and then missed major risks, and human nature of gorging on a free lunch.

I don't deny there were many factors. And I believe there still would've been a recession with regulation--regulations have never stopped fraud, speculation, and financial crises; but they can restrain fraud and speculation, and therefore dampen the severity of any crisis. Warnings began in 2004, but Wall Street paid to ensure the party continued.

[GG]

I never said you didn't believe in regulation, as I recall we had a brief agreement about capital standards. Just as I am not saying that deregulation was the only cause, but there were ample opportunities for the government to prevent this from turning into the worst crisis in history--Wall Street's contributions and lobbyists ensured it did though.

 

Ah, no. The Basel capital requirements were being rolled out in '97 for the major banks, while the investment banks based their capital on short term funding, while going long on the assets. Less leverage wouldn't have changed things thta much because you still had a fundamental flaw of mismatching assets & liabilities. Never mind that IBs accounting treatments are different than for banks, meaning they suffer immediate losses (hits to their capital) no matter what they want to do with the asset.

 

Maybe you can expand on the first part. Seems like a sweeping "I am right and everyone else is wrong" statement. That is, you say everything without saying anything.

 

It's the propensity for economists to think that the economy is driven from the top down - ie thinking that GDP is the driver of production, instead of the other way around. Debt grows because people become immune to risk, and they misprice the risk associated with debt. This is exactly what started happening in 2004, when the high yield market started to rebound, while spreads hit historic lows. (Note to the interest rate conspiracy crowd - this is also the time when the Fed started raising rates, so please save it)

 

Capital standards were a consequence of the international debt crisis, not some kumbaya agreement by banks saying please regulate us with consistent standards.

 

Tail wagging the dog? How in the world were capital standards a consequence of the international debt crisis, when the ability to raise debt is directly tied to the amount of capital on the balance sheet? It's the other way around, professor.

 

The new regulations were coming, and banks were using them.

 

 

Hmmm...how does a perfect regulatory system have a flaw? That's just a dumb statement.

CDSs were fine in their original context of insuring debt, but spun out of control when you no longer insured the underlying security. The market got totally abused because it was unregulated.

 

I guess the sarcasm didn't come through enough. It took nearly 20 years to devise what was thought of as a perfect capital scoring system, yet it neglected the flaw that the information wouldn't be clean, because the banks' business model is to be opaque.

 

The issue with CDSs is not that they're not regulated, but it's because there's no way to know what you'll get once you peel off the onion. Setting up a proper exchange and settlement systems would go a long way, but you will always run the risk of a poorly run company writing insurance for which they don't have the coverage.

 

I don't deny there were many factors. And I believe there still would've been a recession with regulation--regulations have never stopped fraud, speculation, and financial crises; but they can restrain fraud and speculation, and therefore dampen the severity of any crisis. Warnings began in 2004, but Wall Street paid to ensure the party continued.

 

Warnings actually began much sooner, but regulators didn't want to upset the party because they helped set up the party.

[TPS]

A former IMF economist draws parallels from crises with emerging market economies to the US. The essential point: it doesn't matter if it's Paulson-Bush or Geithner-Obama, financial interests still win out over public interests.

 

The financial oligarchs

[BillsNYC]

It's called capitalism, there are highs and lows, sometimes higher than usual, sometimes lower than usual. It eliminates the weak when it plummets and makes the country stronger.