I can see that there is going to be a lot of debate over the next year (until the day after the US Presidential elections, anyway)\u00a0about regulation, so I’ve started\u00a0a new category in this blog for it.<\/p>\n
Anyway … the forces of regulation are gathering and the issues need to be understood.<\/p>\n
Menzie Chinn at Econbrowser<\/a> abandons her usual highly technical approach to state:<\/p>\n While I haven’t drawn a particular conclusion regarding the right direction to move, one insight prompted by current commentary is that — if the Fed were to opt for looser monetary policy — greater regulation of the financial sector would make a lot of sense.<\/p><\/blockquote>\n I don’t know. To me, that if-then logic\u00a0looks like a complete non-sequiter, but I can’t really comment too much until there is something to comment about. Let’s hear some proposals – I’ll consider them!<\/p>\n Mark Thoma<\/a> has written a piece titled Fed Intervention and Moral Hazard<\/a> which, really, simply explains the concept of moral hazard in home-spun tones, but declares himself “in substantive agreement” with what must be deemed a\u00a0polemic by Robert Reich, Stop the Hedge Fund Casinos<\/a>:<\/p>\n Yet there’s precedent: in September 1998, despite growing evidence of inflation, the Fed lowered interest rates in order to forestall a global credit crisis after Russia defaulted on its loans (many had been underwritten, foolishly, by several large Wall Street investment banks).<\/p><\/blockquote>\n No substantiation is offered for the word “foolishly”. Additionally, there is no acknowledgement of any role played by investors, as opposed to underwriters,\u00a0in the process.<\/p>\n Oddly, private credit-rating agencies judged these “sub-prime” loans to be relatively good risks.<\/p><\/blockquote>\n Mr. Reich does not substantiate his use of the word “Oddly”. Additionally, there is no indication of an awareness of a risk\/return trade-off.<\/p>\n Meanwhile, hedge funds created what can only be described as giant betting pools — huge amalgamations of money from pension funds, university endowments, rich individuals, and corporations — whose assumptions about risk were derived from the assumed low risks of the home loans (hence the term “derivatives”).<\/p><\/blockquote>\n This is a novel derivation of the word “derivatives”! One can, I suppose, characterize hedge funds as giant betting pools – but only to the extent that any investment that has ever been made in the history of the earth has been a bet.<\/p>\n Investors in these hedge funds had little or no understanding of what they were buying, because hedge funds don’t have to disclose much of anything.<\/p><\/blockquote>\n No substantiation is offered for this rather surprising smear. In the first place, the fact that hedge funds don’t have to disclose much of anything to regulators<\/em> doesn’t mean they don’t disclose anything to investors<\/em>. It is up to investors to demand whatever they want to demand from those who want discretionary authority over their money – Mr. Reich does not make any sort of case that further disclosure to regulators is necessary.<\/p>\n An investor can do whatever he wants with his own money. If, however, someone is acting as a fiduciary (as will be the case with pension funds and\u00a0university endowments) there is a standard of care required. There may well be cases in which the Prudent Man Rule has been violated – well, nail ’em to the wall, I say, and I’ll ask Mr. Reich to pass me the hammer; that is not only a separate issue, but it’s already regulated<\/em>.<\/p>\n That doesn’t mean, though, that the irresponsibilities now so clearly revealed in American financial markets should be excused or forgotten.<\/p><\/blockquote>\n Mr. Reich forgets that he has not, in fact,\u00a0discussed even a single instance of irresponsibility.<\/p>\n Credit-rating agencies have cut corners or averted their eyes, unwilling to require the proof they need.<\/p><\/blockquote>\n This is the first\u00a0mention of credit-rating\u00a0agencies in the entire essay. No\u00a0supporting evidence or\u00a0argument is brought forward to support this charge.<\/p>\n They’ve [the credit rating agencies]\u00a0been too eager to make money off underwriting the new loans and other financial gimmicks on which they’re supposed to be objective judges.<\/p><\/blockquote>\n I am not aware that any credit rating agency anywhere has acted as underwriter. I’m not even aware of any credit rating agency having a license to underwrite. Let’s have a few more details, Mr. Reich!<\/p>\n Banks and other mortgage lenders have been allowed to strong-arm people into taking on financial obligations they have no business taking on.<\/p><\/blockquote>\n Strong arm?\u00a0Let’s have some evidence, or some argument at the very least. I suspect that any wrong-doing of this nature is already regulated<\/i>.<\/p>\n For the financial market to work well — to ensure fair dealing and to prevent speculative excess — government must oversee it.<\/p><\/blockquote>\n There\u00a0are no arguments, no details and\u00a0no evidence in this essay to make this assertion even\u00a0worthy of consideration.<\/p>\n This mess occurred because nobody was watching.<\/p><\/blockquote>\n Nonsense. There ain’t nuthin’, anywhere on earth, watched as carefully as the financial markets. Investors, traders and Mr. Reich’s beloved regulators watch it very carefully indeed.<\/p>\n Credit-rating agencies must not have any relationship with underwriters.<\/p><\/blockquote>\n What?\u00a0They shouldn’t even accept details of the issue\u00a0so they can assign a provisional rating\u00a0prior to its sale to investors?\u00a0Mr. Reich betrays complete ignorance of the credit rating process with this slogan.<\/p>\n Finance is too important to be left to the speculators.<\/p><\/blockquote>\n I’m … speechless.<\/p>\n","protected":false},"excerpt":{"rendered":" I can see that there is going to be a lot of debate over the next year (until the day after the US Presidential elections, anyway)\u00a0about regulation, so I’ve started\u00a0a new category in this blog …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[24],"tags":[],"class_list":["post-1123","post","type-post","status-publish","format-standard","hentry","category-regulation"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/1123","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1123"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/1123\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1123"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1123"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1123"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}