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... very much of what they did was illegal ... that is, what they did that directly led the finance sector far beyond the bounds of financial prudence. Teaching Money and Banking at the upper division Undergraduate level is a long walk through a series of steps removing the regulatory limits on behaving stupidly with other people's money.

Now, the argument for each deregulatory step was that the people doing the finance knew more about what would work and what wouldn't work than the regulatory authorities, but starting from the 1950's, through to the Fed getting permission to take garbage as the debt instrument for a 3-month repo loan, its been a fifty year slide downhill into "do what you want, make a million, if you go broke, its your own damn fault".

And the reason the regulations were in place was because we know how financial systems like that work. Under the pressure of competition, financial firms that do not "keep up with the Joneses" get squeezed out of the market, so its abandon prudence or abandon market share, and then once financial fragility is in place, something interrupts the money train, and a Banking Panic is set off.

It used to be illegal to do the stuff that put the bread and butter home mortgage and small business 90-day finance of the wage bill business of the commercial banking system at risk ... but that interfered with maximizing profit in go go times, and so they changed those laws, one by one by one, starting under Eisenhower from before I was born.

Now, once the Fed started lending with 3-month repos on assets that were overvalued at 85 percent of face value rather than undervalued ... by then there was clearly a capitalization crisis in place, and so people desperate to avoid things going bad before they could get out with their golden parachute might have cut corners. But I would not be surprised if most of the damage was done adhering to the letter of the law that has had its spirit completely forgotten decades ago.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Sep 23rd, 2008 at 11:46:31 PM EST
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