Comments on: Ten Notes on Our Quasi-Government and the Financial System

By: F

Sat, 29 Mar 2008 23:48:22 +0000

Interesting. It’s not what I take most people to mean by re-regulation, but I don’t think it’s necessarily a bad idea. I’m not an expert, but it seems like the biggest argument against the gold standard is the lack of flexibility in a crisis. Are you saying that it is better to have that lack of flexibility and face the risk of a catastrophic event in order to avoid the (nearly inevitable) stimulative manipulation that occurs when government agencies like the Fed are allowed to do so?

By: Jeff

Jeff — Fri, 28 Mar 2008 04:16:03 +0000

David -
I do not think you are “anti-academic.” I was just trying to highlight how someone could spot an academic that had real policy savvy. I wish you would highlight this a bit more in your excellent summary.

I do disagree with those who think that trading experience or being a CEO of a trucking company is a good qualification for being a Fed Governor.

I’m also a fan of debate and discussion!

jeff

By: David Merkel

David Merkel — Fri, 28 Mar 2008 03:53:57 +0000

F — I propose that we get the government out of the lending business, and that we go back to a gold standard. Their insistence on constant stimulation, and overemphasis of the value of housing, has led us down the path to a liquidity trap or inflation.

To get there, though, I would first try to ameliorate the current crisis using unorthodox tools, and then, when markets are more stable, grandfather existing liabilities, but say that no more would be issued, preferably with a constitutional amendment to back it all up, so that it can’t be easily changed.

By: F

Fri, 28 Mar 2008 03:41:44 +0000

I agree that we need to re-regulate, but perhaps after this crisis is done, we can consider systemic reforms, and not the piecemeal stuff we have been dished up in the name of crisis management. My re-regulation would be to reduce the Federal Government’s role in the credit markets, but then, I am walking out of step, and realize that is not what is going to happen.

I don’t understand this paragraph. What regulation do you propose, if you are proposing to reduce the regulators role in things?

By: Annette

Annette — Thu, 27 Mar 2008 17:37:25 +0000

Allow me to quote back the last paragraph of the WSJ article:

……So the next step, no matter how it is dressed up, is likely to involve the government’s moving in ways that put a floor under prices, hoping that will limit the downside risks enough so more Americans are willing to buy homes and deeper-pocketed investors are willing, in effect, to lend them the money to do so……

My comment: I’ve seen a fair number of silly ideas floated over the years but this one takes the cake.

Whatever happened to plain common sense in this world?

By: kyle

kyle — Thu, 27 Mar 2008 11:33:20 +0000

David

A simple change would be to put limits on the amount of leverage in the system — as of now I don’t know that any regulator limits the amount of leverage the brokers use — perhaps if Bear and everyone else was at most 20 to 1 or 15 to 1 instead of 30+ our current situation would be more manageable — i.e. not as much risk to the system.

By: Barry

Barry — Thu, 27 Mar 2008 09:30:10 +0000

These govt actions fail to address the root cause of the problem — the securitization model in use by Wall Street since 1983 is dead.

Investors have to be pretty bold nowadays to buy even a tranche of an ABS (let alone a tranche of a CDO) because of its ‘AA’ rating by S&P and some slick powerpoints that show that the tranche will outperform Treasury notes in ‘most reasonable scenarios’.

The capital structure and staffing of most investment banks assume that they can borrow $100, buy some whole loans for that $100, slice them up into little pieces, sell the pieces for $101. Since their capital is only $2, they’ve earned a hefty 50% ROE.

No one is going buy those little pieces. And I think people are even getting cautious about lending them the $100.