In David Mamet's movie "House of Games," the grifter played by Joe Mantegna explains to a former mark, "It's called a confidence game. Why? Because you give me your confidence? No. Because I give you mine." So the bankers gave us their confidence, in the form of mortgages and other forms of credit, and we gave them ours. This culture of credulity did plenty of damage to the economy, but now it has given way to something even more corrosive; namely, endemic mistrust. Because if there's one thing worse than too much confidence it's not enough. Fraud impoverishes a few; fear impoverishes the many. As long as mistrust prevails, people will keeping pulling money out of the system--sometimes even at gunpoint.
There's too much money slushing around in the 'system', and it is now, fitfully, being reduced. Hence the extreme volatility in the stock, currency and resource markets.
It looks like that from above, to me, anyway.
This is a cynical perspective, of course. Plenty of people, collectivised savings and otherwise productive endeavours get caught up in those fits. Reducing their misfortune should be a top priority. I do not know whether the levers we are pulling so far (which are mainly putting on the brakes) are the best for that.
These banks quite understandably do not want to lose their counterfeit money, which in addition has been spread all over the economy. So how would you achieve limiting the capital destruction to them? I can see outright nationalisation (not as in purchasing but as in seizing stock) as a first step, but I wouldn't know how to go on from there.
In some cases, individual people might be found to have benefitted (via bonuses) from illegal actions they planned and they could be fined themselves.
The guilty people and financial institutions have spread some of the gains, but not all. Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
I think, though, that most of the economically damaging behaviour was legal, and you can't change the laws after the fact. A historical case could be made for crimes against humanity as in the Nuremburg trials, but otherwise the rule of law is more important.
Now, if certain things were signed off by the regulators then you have a problem of regulatory incompetence or worse...
That is what I would like to see acknowledged, because Spain's banking regulator made a judgement call years ago that Special Investment Vehicles and off-balance-sheet Conduits would not be allowed and as a result Spain was mocked in the Financial Press for not embracing "financial innovation". Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
Gillian Tett: Absolutely. I mean Spain is a truly fascinating example. You couldn't derive, or couldn't create a better laboratory test case if you wanted, because what Spain did a few years ago was two things: firstly, they forced their banks to lay aside rainy day funds, but secondly they also told them they wouldn't give them any beneficial treatment if they started pushing assets off their balance sheets. So all these shadow banks that were created by other banking systems, these FIVs, all these other conduits, didn't really grow up in Spain. Now the reason why the Spanish did that was because they had suffered a very debilitating banking crisis in earlier decades. And they remembered that, and they were determined to be super-prudent as a result. And basically they flew in the face of all the international fashion at the time. They only got away with that partly because the Spanish government is slightly more maverick in its approach. The Germans by contrast wanted to do something similar, but they felt duty bound to obey the rules. But secondly, because the central bank and the regulator were tightly coordinated in Spain, because they were part of the same institution, the central bank could actually do it, they could actually implement it, which wasn't the case in many other countries.
FT.com: Why the pain in Spain has mainly been contained by Gillian Tett on February 1 2008
Why? One intriguing explanation was recently offered by Guillermo Ortiz, Mexico's central bank governor, who has been closely studying the Madrid experience. According to Mr Ortiz, several years ago a clutch of Spanish banks discretely approached the Spanish central bank and asked permission to do what other international banks were doing at the time - namely setting up networks of SIVs. However, Madrid took a dim view of this and demanded that Spanish banks post an 8 per cent capital charge against SIV assets. That essentially killled the business stone dead by removing incentives to create these creatures. At the time, this stance provoked predictable grumbles from Spanish financiers. After all, back then almost every other Western regulator was encouraging its banks to get their assets off the balance sheet as fast as you can say "Basel I".
However, Madrid took a dim view of this and demanded that Spanish banks post an 8 per cent capital charge against SIV assets. That essentially killled the business stone dead by removing incentives to create these creatures.
At the time, this stance provoked predictable grumbles from Spanish financiers. After all, back then almost every other Western regulator was encouraging its banks to get their assets off the balance sheet as fast as you can say "Basel I".
