On Mon, Sep 14, 2009 at 11:57 AM, John Williams <[email protected]>wrote:
> There appears to be some ignorance masquerading as certainty floating > around here. In the interest of reducing ignorance and increasing > humility, here are some educational papers. > > The Financial Crisis and the Policy Responses: An Empirical Analysis of > What Went Wrong > John B. Taylor > > http://www.stanford.edu/~johntayl/FCPR.pdf<http://www.stanford.edu/%7Ejohntayl/FCPR.pdf> > > Interesting that you chose not to quote the paragraph that describes his opinion of the "heart of the financial crisis." The behavior he describes below is precisely what the Commodity Futures Modernization Act of 2000 made lawful by removing the regulatory barriers that were in place for decades. The crisis wasn't enabled because the financial industry never thought of this way of doing business. It happened because they became a powerful enough lobby in the 1990s to get Congress to trust that they would do the right thing if Congress would just remove those pesky regulations that had stopped them from creating the kind of complex derivatives that made ratings so difficult. "A significant amplification of these problems occurred because the adjustable-rate sub-prime and other mortgages were packed into mortgage-backed securities of great complexity. The risk of these was underestimated by the rating agencies either because of a lack of competition, poor accountability, or most likely an inherent difficulty in assessing risk due to the complexity. It led to what might be called the “Queen of Spades problem” corresponding to the game of Hearts. In the game of Hearts you don't know where the Queen of Spades is; you don't want to get stuck with the Queen of Spades. Well, the Queens of Spades—and there are many of them in this game—were the securities with the bad mortgages in them and people didn't know where they were. We didn't know which banks were holding them 14 months ago, and we still don't know where they are. *This risk in the balance sheets of financial institutions has been at the heart of the financial crisis from the beginning.*" Below, another description of the kind of problem that resulted from deregulation. Again, this is the sort of thing that was illegal before 2000. You're not making your case with this stuff, especially when you cherry-pick which paragraphs to quote. > Causes of the Financial Crisis > Viral V. Acharya and Matthew Richardson > > > http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/acharya_richardson_critical.pdf<http://pages.stern.nyu.edu/%7Esternfin/vacharya/public_html/acharya_richardson_critical.pdf> > > | ABSTRACT: Why did the popping of the housing bubble bring the > | financial system—rather than just the housing sector of the > | economy—to its knees? The answer lies in two methods by which > | banks had evaded regulatory capital requirements. First, they > | had temporarily placed assets—such as securitized mortgages— > | in off-balance-sheet entities, so that they did not have to hold > | significant capital buffers against them. Second, the capital > | regulations also allowed banks to reduce the amount of capital > | they held against assets that remained on their balance sheets— > | if those assets took the form of AAA-rated tranches of securitized > | mortgages. Thus, by repackaging mortgages into mortgage-backed > | securities, whether held on or off their balance sheets, banks reduced > | the amount of capital required against their loans, increasing > | their ability to make loans many-fold. The principal effect of this > | regulatory arbitrage, however, was to concentrate the risk of mortgage > | defaults in the banks and render them insolvent when the housing > | bubble popped. > Here's a challenge -- find a reputable source that makes an argument that the Commodity Futures Modernization Act of 2000 was an act of regulation, not deregulation. Find a reputable source that argues that it had nothing to do with the financial crisis that followed. Hell, find a reputable source that says it was a minor contributor, rather than a major one. Good luck. Nick
_______________________________________________ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
