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FT tackles financial regulation debate head on

by Jerome a Paris Wed Mar 26th, 2008 at 06:37:40 AM EST

Give them credit when it's due, but the FT is discussing head-on the right thing today, ie banking regulation, and bringing forward, under credible bylines, opposite sides of the arguments:

The rescue of Bear Stearns marks liberalisation's limit by Martin Wolf

The lobbies of Wall Street will, it is true, resist onerous regulation of capital requirements or liquidity, after this crisis is over. They may succeed. But, intellectually, their position is now untenable. Systemically important institutions must pay for any official protection they receive. Their ability to enjoy the upside on the risks they run, while shifting parts of the downside on to society at large, must be restricted. This is not just a matter of simple justice (although it is that, too). It is also a matter of efficiency. An unregulated, but subsidised, casino will not allocate resources well. Moreover, that subsidisation does not now apply only to shareholders, but to all creditors. Its effect is to make the costs of funds unreasonably cheap. These grossly misaligned incentives must be tackled.

More regulation will not prevent next crisis by John Kay

The notion that future banking crises can be averted by better regulation demonstrates unrealistic expectations of what regulation might achieve. Banking supervision asks public agencies to second-guess the decisions of executives who earn millions in bonuses and business strategies that yield billions in profit.


But in financial services, the demand today is for more regulation. That call should be resisted. The state cannot ensure the stability of the financial system and a serious attempt to do so would involve intervention on an unacceptable scale.


We cannot prevent booms and busts in credit markets, but today's regulation of risk and capital - which is more reflective of what has occurred than of what may occur - does more to aggravate these cycles than to prevent them. Regulation in a market economy is targeted at specific market failures and should not be a charter for the general scrutiny of business strategies of private business. Banking should be no exception.

I find one article a lot more compelling than the other, but while "we have more money, therefore we're right" may sound like an unimpressive argument in theory, it has very real influence in practice, as we should very well know. But fundamentally, this is the debate: will it be one person, one vote, or one dollar, one vote?

And meanwhile, despite the stock market's temporary optimism, things are quietly worsening in the credit market:

Hoarding by banks stokes fears on credit crisis

Central banks' efforts to ease strains in the money markets are failing to stop financial institutions from hoarding cash, stoking fears that the recent respite in equity markets may not signal the end of the credit crisis.

Banks' borrowing costs - a sign of their willingness to lend to each other - in the US, eurozone and the UK rose again even after the Federal Reserve's unprecedented activity in lending to retail and investment banks against weaker than usual collateral and similar action in Europe.

The continued friction in the money markets came even as stock markets were showing new signs of optimism in spite of fresh data from the US showing consumers at their most pessimistic for 35 years and house prices falling at the fastest rate on record.

The system is slowly choking to death. What action is taken to resolve that will also create precedents as to how the sector functions (and is allowed to function in the future). Thus this is a fundamental debate to have.

It's probably too much to ask from politicians to grab that issue, which is highly technical and complex, but it's at least a good sign that economists are discussing it without taboos.

One evening, I found myself at the Bulgarian debutantes' ball in NY. Don't ask.
So I started a political discussion (waltz dancing is nice, I liked my girlfriend at the time and all, but it's not quite my thing) about the electoral and its effect on people realizing that they didn't really have a straightforward one person-one vote electoral system.

And this guy proceeded to explain to me that purchasing power varied from location to location, and as you carried your vote from  NY to NJ there was really no reason to expect it to carry the same weight.

Anytime I hear about one person one vote, I can't help but to think about this discussion and the utter lack of respect that some people have for the res publica .

Welcome to the age of experts...

Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine

by UnEstranAvecVueSurMer (holopherne ahem gmail) on Wed Mar 26th, 2008 at 10:45:34 AM EST
the electoral college...

Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine
by UnEstranAvecVueSurMer (holopherne ahem gmail) on Wed Mar 26th, 2008 at 10:45:58 AM EST
[ Parent ]
I must confess to some surprise and not a little incredulity at the ability to thoughtlessly discard by the People, for the People, of the People and replace it with nonsensical economic analogies.

Maybe I'm just not cynical enough, but it strikes me as being about as meaningful as saying that since some molecules have a higher free energy than others, we should expect some people to have greater freedoms than others...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 26th, 2008 at 03:39:21 PM EST
[ Parent ]

Paulson Seeks Examination of Rules Governing Big Financial Players

WASHINGTON -- Treasury Secretary Henry Paulson called Wednesday for "some type" of additional oversight of investment banks by the Federal Reserve in connection with the recent decision to give them access to the central bank's credit.

The Fed's move earlier this month to start providing liquidity to primary dealers for the first time since the 1930s "deserves praise," said Mr. Paulson in prepared remarks for a speech to the U.S. Chamber of Commerce. But it also raises regulatory issues, since the Fed only regulates depository institutions, he said.

"Certainly any regular access to the discount window should involve some type of regulation and supervision," said Mr. Paulson.

Thus, he suggests two measures to improve Fed oversight of investment banks, including greater access to information and public disclosure.

The Fed should have access to the information it needs to make lending decisions, said Mr. Paulson. The central bank should continue to work with the Securities and Exchange Commission and Commodity Futures Trading Commission, he said, and consider whether more formal cooperation is needed.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Mar 26th, 2008 at 11:00:04 AM EST
Kay headline "More regulation will not prevent next crisis." Which is probably correct if the regulation is NOT aimed at forcing the financial sector back into subservience to the real economy.

What I've been trying to find is some indication of how much the large banks and other financial institutions make trading for their own accounts, as a percent of revenues, or of profits. My guess is that it has gone from around five or ten percent in the 1960s to well over fifty percent now. I looked at Morgan Chase's financials yesterday and did not see it broken out.

Anyone have any clues where to find this?

What I did find so far is interesting - the growth of derivatives has not increased the amount of lending.

Report on the Condition of the U.S. Banking Industry: Second Quarter, 2006
    Assets    Loans    Derivatives (billions)    Loans as percent of Derivatives
2001    5896.783    2968.905    48,144    6.17%
2002    6256.824    3153.028    57,746    5.46%
2003    6926.108    3404.117    72,692    4.68%
2004    7963.241    3945.799    88,671    4.45%
2005    8645.888    4351.995    98,749    4.41%
2006 Q2    9282.941    4598.577    117,631    3.91%
    3386.158    1629.672    69487   
    57.4%    54.9%    144.3%    Increase from 2001 to 2006 2Q

Also, from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=970655
Credit Derivatives and Bank Credit Supply
Federal Reserve Bank of New York - Banking Studies Department February 2007
FRB of New York Staff Report No. 276

Turning to the new loan data, for term loans, average maturity
increases and spreads decline as credit derivatives protection increases, especially for large borrowers. The results for the volume of lending are more mixed: the volume of
large term loans is unaffected by changes in the degree of credit derivatives protection,
while the volume of smaller term lending decreases. Overall, the results suggest an
increase in the supply of credit to large term borrowers. Since large firms are more likely
to be "named credits" in the credit derivatives market, this finding suggests that the
benefits of credit derivatives may accrue mainly to these firms, rather than being spread
more broadly across the business sector.
In contrast, there is little to suggest that increased use of credit derivatives leads to
an increase in loan supply for commitment lending, to either large or small borrowers.
The volume of new commitment lending falls as net credit protection increases, and loans
spreads are basically unchanged. The average maturity of loans to small commitment
borrowers also falls as credit derivatives protection increases.

by NBBooks on Wed Mar 26th, 2008 at 11:46:18 AM EST

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