Can the Fed Save the (Financial) World?
Roger Altman, former deputy secretary of the Treasury, thinks so:
"Today, regulatory authority is divided among the Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Office of Federal Housing Enterprise Oversight, the Securities and Exchange Commission, the Commodity Futures Trading Commission, state banking regulators and state insurance regulators. That’s too many players.
What’s more, this balkanized system supervises only half of the relevant financial universe. It neglects investment banks, hedge funds and institutions like mortgage companies that issue asset-backed securities. The assets of these unregulated entities total about $10 trillion — which is the same amount we see on the regulated side.
The unregulated institutions pose particular risks because they are highly leveraged and financed primarily through short-term money markets rather than customer deposits. And unlike big banks, many of them do not disclose their finances to the public."
If taxpayers are going to be on the hook for the bailouts, than we should be able to set the parameters of what is allowable in terms of capital minimums and leverage.
Yes, this is regulation. No, this is not a Free Market policy. But neither was the bailout of Bear Stearns, nor the Housing Bailout, nor the imminent bailout of Fannie and Freddie and maybe even FDIC.
"The Bear Stearns case vividly illustrated the dangers that come with lack of regulation and transparency. Although Bear Stearns carried $300 billion in liabilities, it was not supervised by the Fed. When it began to fail, the Fed correctly judged that the system might not withstand the shock and arranged a rescue. But suddenly, the Fed was standing behind both the larger banks it regulates and the major investment banks it does not. This cannot continue.
The next president must first create a single framework for the major financial borrowers, administered by the Federal Reserve alone. This wider regulatory umbrella should be more conservative. In particular, the minimum levels of capital and liquidity that financial institutions are required to maintain should be higher than they have been in recent years. And the institutions should put in place better and more detailed systems for reporting — internally as well as to regulators and the public — on all the risks they are taking."
Beware the false dichotomy that many pundits present when it comes to these issues. The choice isn't between regulation and no regulation -- its between Federal Bailouts or no Federal Bailouts.
You want the bailout? You take the regulation with it. Otherwise, don't ask the Fed or Treasury or Congress for help, you disingenuous phony free market hypocrites . . .
>
Source:
How the Fed Can Fix the World
ROGER C. ALTMAN
NYT, September 2, 2008
http://www.nytimes.com/2008/09/03/opinion/03altman.html
Wednesday, September 03, 2008 | 10:21 AM | Permalink
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yea!
Posted by: NOah | Sep 3, 2008 10:29:05 AM
One of the signs that the financial mess hasn't hit bottom is that there are still people, plenty of people, who are trying to use the current problems as 'proof' that that 'the system' needs to be changed.
There is nothing as disingenous, and fact free, as the attempt to spin the current financial crisis as the fault of the regulatory structure we have. The regulatory structure we currently have is only the outer shell of the one we used to have. it has been completely eviscerated over the last 30 years (but particularly the last 10 or so) so that the system completely fails to perform the duties it was meant to perform. Attempting to advance the claim that the resulting financial mess is the fault of the old structure is simply absurd.
What these times have made astonishingly clear, and not just in financial regulation, is that the system is only as good as the people who compose it. We can take any 'system', and staff it full of people who refuse to cooperate with that systems function. The result is breakdown of that system.
The point? Changing the structure of the financial regulation arm of the US Government is completely meaningless, because it doesn't address the problem. There are plenty of laws on the books, the problem is a culture (both within the government and outside it) that regards breaking the law as completely acceptable -- as long as you are rich enough, or powerful enough, or connected enough. The problem is enforcement. The problem is prioritizing values: what's more important the stability of the country, and it's financial system, or the profits of a few? The problem is willingness to see in the present what the consequences will be. It's been obvious for a bunch of years now that we were headed for trouble, and smart people have warned of it. But the federal government refused to enforce laws on loans, stock trading, disclosure etc. The government has been captured by the interests of a very select few, and no longer operates in the interests of the general public. How exactly is creating a vast new infrastructure going to solve that problem? Me thinks it will look like a solution even as it hides the problem better. Oh and creates even more power for friends of industry to help out there personal best friends.
Posted by: VoiceFromTheWilderness | Sep 3, 2008 10:47:25 AM
"...you disingenuous phony free market hypocrites . . . "
Where I come from, that's known as "calling a spade a spade."
Posted by: Uncle Jeffy | Sep 3, 2008 10:47:35 AM
Out Long National Nightmare of Peace and Prosperity, brought on by a balance between the interests of the market and the interests of the public, is ... Over.
Praise the Lord, Pass the Ammo
Posted by: VoiceFromTheWilderness | Sep 3, 2008 10:50:56 AM
RIGHT ON BARRY!!!! Keep on doin what you do man! This needs to be said LOUD and OFTEN!
Posted by: riverrat | Sep 3, 2008 10:55:12 AM
@Voice: Amen brother. Amen. You hit the nail squarely on the head. This is at least partly a cultural phenomenon of "getting mine while I can at any cost".
Posted by: Jeff M. | Sep 3, 2008 11:00:08 AM
AMEN!
Posted by: Mean Mister Mustard | Sep 3, 2008 11:09:29 AM
There is another trade-off not mentioned there. The interests of the 'financial system' is often taken to mean the interests of the big banks and investment houses. Those interests are often at odds with those of smaller banks, of industry and of the individual. Ultimately, a presidential election would simply become a contest for the control of money. That is not only uncomfortable, that is the road to a ruinous and violent end to American government.
The divergence of interest is bad enough already. To worsen it and institionalize it is disaster.
Posted by: wally | Sep 3, 2008 11:16:27 AM
I don't know why everyone is so happy about this post. Cramer has already written this year that "lower interest rates are a true panacea." And since **NOBODY** called him on it, I can only assume that they find at least some merit in the notion.
~~~
BR: That would be a bad assumption on your part. The pros don't take Cramer all that seriously any more.
A well known fund manager said to me recently: "He's morphed into Dan Dorfman."
http://en.wikipedia.org/wiki/Dan_Dorfman
Posted by: Eric | Sep 3, 2008 11:20:30 AM
The Fed and its banking system are the CAUSE of the problem. How can the cause of the problem also be the solution? I guess it is a lot like the great Homer Simpson once said, "Alcohol, the cause and solution of all of life's problems!"
Posted by: Mike M | Sep 3, 2008 11:23:02 AM
We have entered the "obsolescence" in the continuum of "planned obsolescence".
Posted by: JillsLeftTeat | Sep 3, 2008 11:26:33 AM
Nowhere have I seen a detailed scenario for a hypothetical NON-bailout of Bear Stearns. Was this option truly unthinkable for society at large, or merely to the Wall Street perspective so well-represented in the decision loop? As the costs in moral hazard are felt for years down the road, I hope we can get a clear-eyed look at both sides of the ledger.
Posted by: Namazu | Sep 3, 2008 11:26:44 AM
speaking of phonies, check out the republican platform that wants to do away with inflation by not adjusting for it. see: http://yglesias.thinkprogress.org/archives/2008/09/platform_blogging.php
the GOP under GWB has become the party of ignorance, fearful of learning because it may upset their delicate world view.
Posted by: larrybob | Sep 3, 2008 11:28:11 AM
Nationalize the banks.
Posted by: flow5 | Sep 3, 2008 11:28:32 AM
I’m for minimal regulation, but maximal disclosure.
If there had been adequate disclosure of what was really in these mortgage backed securities, and transparency with regard to the ownership of the credit default swaps, little additional regulation would have been needed. If a hedge fund manager really wants to buy securities backed by “NINJA” loans, that should be his prerogative, as long as it is easy to determine that is indeed what he is buying. (Of course, those who fail to meet their disclosure obligations should be criminally prosecuted).
Posted by: DL | Sep 3, 2008 11:45:23 AM
Read a book on the history of the FED. One of the themes in The Creature from Jekyll ISland is, 'The Name of the Game is Bailout'. Look at recent history. Bankers need to be bailed out b/c they are in too deep to get out. This cycle repeats, albeit more frequently recently.
Who foots the bill in this 'free' market? The taxpayer.
This instituion, created by private banking interests,wants to be the main regulator for everything?
I am not an end of the world guy or a conspiracy theorist, but when an institution without the manpower or expertise will be the overseer of 'everything financial' in the US, I tend to get a tad paranoid.
A quasi-private, non-government institution controlling the money? What a DANGEROUS concentration of power.
SCARY.
Posted by: nato | Sep 3, 2008 11:50:05 AM
Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Office of Federal Housing Enterprise Oversight, the Securities and Exchange Commission, the Commodity Futures Trading Commission.
Yeah, kind of like Homeland Security - shove than altogether and it will be so much better (whats the words - synergy - efficiencies of scale - etcetera)
Posted by: dan k | Sep 3, 2008 11:56:02 AM
Not only do we need regulation, but we need an administration that will use the powers. Check out the latest bank failure and see how much of their capital base they loaned to one individual. If no one looks, you can have all the regulation in the world and it will not make one iota of difference.
Posted by: larster | Sep 3, 2008 11:56:54 AM
Those who vociferously support the doctrine that current regulatory structures caused this debacle must also support black-mail. That is what the doctrine of "too big to fail" boils down to. I make my enterprise so large that everybody else in my society agrees to support my lifestyle and my personal profits or else I pull the trigger and kill everyone. It's total societal black-mail. We're in the process of nationalizing the entire financial system and the taxpayer should not be left with only the task of cleaning up after the elephants have stampeded through the markets.
Posted by: PrahaPartizan | Sep 3, 2008 12:02:38 PM
DL has the right idea. The only regulation really needed is to require and enforce complete financial transparency.
Posted by: dwkunkel | Sep 3, 2008 12:14:28 PM
Fact check: Taxpayers being "on the hook," or "footing the bill," for bailouts are very different things from them actually paying those bills off.
Let's be honest, it's not like the U.S. taxpayers are going to receive a payment booklet that keeps them on schedule and in the end results in the satisfaction of the note holder.
There are any number of lessons in history that are analogous to our nation's financial circumstances. The only way to retire debt of this magnitude is inflation...and that's not what's happening.
What is happening: Markets? Down. Home prices? Down. Commodities? Down. Oil prices? Down.
Google news for "deflation" versus "inflation" and you'll see just how deeply we have our collective ostrich head stuck in the sand.
And so, the punch line: what historically happens to payment of enormous national debts when deflation rules? That, my friends, is left as an exercise to the reader.
Posted by: Mark | Sep 3, 2008 12:14:38 PM
Your use of 'free market' as an adjective describing your 'hypocrits' is illogical. There is nothing free market about someone asking for a bail-out from the gov't.
Nor is there much free market about a faith-based monetary system continually manipulated by a gov't bureau (the FED).
Posted by: algernon | Sep 3, 2008 1:56:05 PM
People are clueless. They want to give the Federal Reserve all this regulatory power. The FED is a private institution whose shareholders are the banks. Don't the words conflict of interest or moral hazard ring a bell. Oops, I forget that is what Washington is built on nowadays.
Disgusting, I agree with the poster who said it is about enforcement, not new laws.
Posted by: BIll | Sep 3, 2008 2:09:03 PM
go barry!
Posted by: josie the berry picker | Sep 3, 2008 2:32:35 PM
Before giving the Fed one ounce of additional power, I want metrics that show the Fed regulators are competently using the powers they already have.
The Greenspan ideological puritanism of "the best regulation is no regulation" has come back to bite everyone square in the moneymaker, and now we find that the wrinkly one was completely wrong.
Reinstate Glass-Steagall and the Chinese Wall before considering changing the current structure.
Posted by: Unsympathetic | Sep 3, 2008 3:03:49 PM
