There are a lot of liberal blogs calling for Wall Street's head today. I agree that the bankers who did this should suffer. But I disagree in two important ways: I think the bankers are suffering, and if we make them suffer the way many people want to, I think we'll all end up suffering more. More on this a little later.
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There's actually an absurd number of columnists and blogs making bizarre regulatory suggestions and calls for economic policy with absolutely no facts or specific plans. It's a weird kind of new economic demagoguery that is a best silly and at worst really detrimental.
For instance Harold Meyerson, in the WaPo today, wrote that we need a "New New Deal" without any sort of conception of what that actually meant, just a lot of buzzwords and a call for fairness. More on this here: http://airingofthegrievances.blogspot.com/2008/03/market-regulators-available-absolutely.html
But either way, it's kind of disturbing trend. It's not like columnist suddenly start writing about new types of medical treatment when the Bird Flu epidemic happened (I mean for the most part, there's every chance Dowd did). But the point is it's weird that people feel a familiar expertise in any area so very complicated, that they're okay drawing vague generalizations about it.
The linked examples -- a snarky fashion focused blog and a blog run by a 26-year-old-health-care-pundit-wannabe are hardly the most compelling examples to build a case on. Jonathan's link is better.
What no one is talking about -- of course -- is that the brokerage industry is already one of the most regulated out there. The interesting aspect to the Bear Stearns case is that the BD's regulators (the SEC, cough cough) appear to have missed Sunday's party hosted by the Fed. What that means, I don't know ...
"The brokerage industry is already one of the most regulated out there (?)" That's a good one - best laugh I had today. It's so well regulated that if the Fed didn't bail out Bear Sunday night, the whole place would have crapped all over themselves this week, trying to figure out who had what exposure to what counterparty and how much they all were going to lose. Trading of swaps, mortgages, CDS, corporates and virtually every risk product on the street had practically come to a standstill.
Don't delude yourselves. The Fed wouldn't have done what they did if they weren't scared shitless that the whole house of cards was going to collapse. One thing Ben aint't, and that's stupid.
Gab ... what regulations do you propose that would guaranty liquidity in a run? Do you propose imposing limits on leverage? Are the regulators going to be able to understand the leverage embedded in different derivatives? Would be interested in your thoughts.
Jonathan wrote: There's actually an absurd number of columnists and blogs making bizarre regulatory suggestions and calls for economic policy with absolutely no facts or specific plans. It's a weird kind of new economic demagoguery that is a best silly and at worst really detrimental.
I see this as being the Wall Street equivalent of praying furiously and then chucking a few sacrificial virgins to Pélé. Once the ashes of Bear Sterns settle out in the next few weeks, Mammon will resume his usual place in the temple.
OOOOOh, greedy greedy evil avaricious baaaaaad. I must say that behind the calls for the purge of Wall Street (the whole street, everyone who works there, I don’t know … I knew a few butchers that worked on Wall Street when I lived on Fulton) lies the most base, primitive form of fear and loathing we as humans are capable of. It is the association of an activity, regardless of its practical effects with an ethical standard. The notion, so subtly stated by Julia Roberts in Pretty Woman (“But … you don’t build anything”) that accumulation of profit by interest alone via capital gains is inherently evil is nothing short of the kind of Augustinian fire and brimstone that liberals ironically accuse of as being socially backwards when applied to things such as premarital sex. It occurs to me that we should clarify that companies which get themselves into a situation where they would normally be forced to declare bankruptcy should not be saved by the Fed for the same reason no one else should be in theory. When you engage in high-risk business, there are consequences. To say that they should “suffer” comes dangerously close to the kind of rhetoric used by such economic McCarthyites as Elliot Spitzer and, well, all of the Democratic candidates for president. When you engage in risky behavior you assume your own risk, period. Let’s not get carried away like some great mob of Puritans, and realize that the true problem is the Fed. I mean really, if someone offered you some bailout money, would you take it. Don’t lie.
I guess the argument seems to be that:
1. these things are too important to the economy to just sit back and let the palace burn and
2. these things are operating just fine with regulation where it is.
While the causal internet pundit may not have a clue as to what the cure may be, I think it is clear that the patient is sick. To say otherwise suggests quite a lot of cognitive dissonance. If these things are too important to let just burn, then obviously the regulation we have in place isn't working properly since the roof is on fire (to follow the metaphor). Time for a new smoke alarm?
As far as I am aware, there aren't any material regulations for the OTC market. Thats the attraction. Thats how LTCM was allowed to leverage up 250 times, and thats how bear was leveraged 30 times.
It is delusional to believe the contracts that caused this disaster were regulated and under some kind of regular government oversight. There simply wasn't any kind of regulation that required marking to market or risk controls or limited the leverage or required reserves or required credit quality in the credit products or limited the number of times loans could be repackaged.
I am going to answer your question dcpi. These contracts should be under CFTC regulation.
mickslam: Fair enough. Somehow I doubt Barney Frank has heard of the CFTC though.
Banks are writing down (and perhaps writing off) billions of dollars in loans and securities
They are paying the price. I am paying the price (as a shareholder) for the idiots that lent money recklessly and moreover to the trashy people who have bought houses with little of their own money and want a free lunch. Same for these a-holes who run up credit card debt and walk away unscathed.
The bankers get fired (some) and some walk away with plenty of money.
Still with many years of experience as both an investor and participant in the finance industry, I'd rather see these cycles of boom and bust than see considerably more regulation. I personally and the economy overall are way ahead of where we were 20-30 years ago. (no arguments about "income stagnation" please...)
We have a Fed to stop runs on the bank. That is really the only reason it was created, despite all the noise about its other "functions" Now that so much biz is done outside "banks" they have to stop runs on broker/dealers. So be it. This has not yet to and likely will not cost a dime of tax money (let's hope it does not, barring some hair-brained democrat winning the election in November)
The markets correct themselves, sometimes in ugly ways, but more effectively and justly than does the government
As usual, people are overreacting. The bank write offs were way overdone because no one can figure out yet how much various pools of mortgages are worth. When they do, the same assets written down to zero will be written up to FMV, or sold.
Meanwhile, the Fed and the Treasury are trying to stop runs on banks. They couldn't stop that on Bear Stearns, since people stopped trading with them and the company failed. How big a failure remains to be seen, but it's over for them.
In providing cheap credit to other banks and brokerage firms the government is telling their customers and counterparties not to panic. The elimination of panic is a good thing.
Since the banks are fundamentally sound, with healthy balance sheets, stopping the panic is what is required--and all that is required. After this subsides, the government will have incurred little if any cost.
This is exactly what happened in the 1930's; capitalism took the blame for the consequences of government intervention. Hell, the specific mechanism of intervention is the same -- an artificial boom caused by inflating the money supply. (The only difference now is that the elasticity of fiat currency allows the government to defer the problem via inflation -- the bill still comes due.)
Most economists didn't get it then, they didn't get it in the 1970's, so what makes you think that anything will change now? Reason and reality remain unheard.
But that won't stop the latter from exacting its price for such lunacy...
The other point to remember is that all the elaborate structured finance products based on MBS probably wouldn't have existed in the first place if the government hadn't created and stoked the secondary market for mortgages with the GSEs. Government policies designed to increase home ownership rates at all costs fueled the real estate bubble, and the related credit bubble.
As indicated in one of the comments above, this is not really a problem created by Wall Street, nor is Fed intervention unwarranted.
Most of the people complaining the loudest have little understanding of the cause of our economic difficulties.
The real cause of the problem is all the little people out there who don't pay their mortgages. You can fault the government perhaps for increasing liquidity (in part to offset the 2001 recession created from the deflation of the Clinton Internet bubble), and you can fault Wall Street for creating products that further grease the mortgage process (via derivatives).
However, if every Tom, Dick and Smith were actually paying their bills, and if every mortgage broker had actually remained ethical, there would not be a problem.
Typically, the most ignorant look for someone else to blame, not seeing their own part in the process, nor even understanding the process.
You hear the ridiculous questions like, "Why is the Fed bailing out Bear and not the average American?" But Bear is taking a hit (as are their investors/employees) for risks caused by the ass on the street who figured he could by a house above his means, and, all things being rosy and ridiculous, flip it or refinance before the mortgage payments grew too difficult.
At least some firms, like Goldman or JP Morgan, actually have good managements, and were prepared, unlike Bear, who got slapped by the invisible hand of the economically challenged average American debtor.
Re: However, if every Tom, Dick and Smith were actually paying their bills, and if every mortgage broker had actually remained ethical, there would not be a problem.
Well, yes, but the prerequisite for that is that every Tom Dick and Harry should have been steered into a mortgage that fit his income (permanently, not just for a few payment cycles) and also required to show proof of income and assets, and had a limit set on the loan-to-value ratio he would be allowed. In other words, if the mortgage industry had followed time-honored practices instead of going for the quick kill and then dumping the toxic waste on Wall Street (which should also have known better than to buy the junk) we’d be sitting pretty now. There’s blame enough to go around the whole planet in this mess. It’s not just Wall Street fault, or George Bush’s fault and no, it’s not just the fault of people who find they can’t payments that ballooned well beyond their initial levels.
Why would regulator evaluation of the riskiness of a bank's financial structure be superior to the evaulation made by investors putting in equity and debt into that bank?
This argument is made very clearly in Greenspan's memoir (The Age of Turbulence). I'd really like posters like mickslam to answer that question.
We obviously need to dissociate the suffering from the banker's work product. I suggest floggings to go with the bailouts.
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