Editore"s Note
Tilting at Windmills

Email Newsletter icon, E-mail Newsletter icon, Email List icon, E-mail List icon Sign up for Free News & Updates

July 9, 2008
By: Kevin Drum

LEARNING TO LOVE REGULATION....Fed chairman Ben Bernanke gave his support Tuesday to the idea of regulating significant chunks of the financial industry that have mostly operated without supervision until now. Kevin Hall of McClatchy reports:

When the head of the Fed calls for greater financial regulation, echoing Treasury Secretary Henry Paulson, a former Wall Street titan, it's significant. It's also a repudiation of the long-held view that markets alone can best regulate themselves. Whether regulations will be successful is an open question.

"I think it is going to be a turn back towards more regulation, but it's not going to be so easy," said Barry Bosworth, a presidential adviser in the 1970s who's now a senior economics fellow at the Brookings Institution, a center-left research center. "I think they've got a dilemma that some of these new financial instruments, and markets, have become so complex. If they continue to let them operate, it's not clear that the regulators will be able to keep up."

...."I think they are going to be forced openly to think about banning some of these instruments," economist Bosworth said. He said that forcing banks to disclose some of their investments may simply lead them to pull out of certain markets.

Italics mine. That's quite a statement, isn't it? Some of their investments are so dodgy that banks would rather pull out entirely than admit they're even involved with them. I'd sure like to know which investments those are.

Kevin Drum 1:12 AM Permalink | Trackbacks | Comments (41)

Bookmark and Share
 
Comments

Dude, your from OC. You've heard of derivatives.

These that cannot be disclosed are just the super special ones.

They money's free until someone asks if what it is based upon is actually worth anything...

Posted by: abject funk on July 9, 2008 at 1:19 AM | PERMALINK

What you would like to know will be revealed to you by the Banks as soon as the Telecoms give you more information about their wiretapping of the American citizens.

Posted by: gregor on July 9, 2008 at 1:21 AM | PERMALINK

Is this forethought or ass covering?

Posted by: B on July 9, 2008 at 1:22 AM | PERMALINK

I am not sure if my previous post got eaten. Sorry if this is a repeat.

In any event, I know you, being from Orange County, have heard of derivatives. They are complicated instruments, and often have, uh, not a lot underlying them financially.

These instruments that are so sketch are in the same ballpark. Sometimes (often?) it is easy to make money based upon the idea that no one will look too closely at what is at the bottom, that is, the actual asset. If forced to reveal the alleged "asset" the whole thing comes down.

Like housing prices, etc. So long as we are all on the same upward swing of euphoria, it's all good. Once we hit the top and realize we don't actually own anything of value, well, it sucks.

I say "we" in the casual sense. I rent. Thank god. Oil is the way to go, sad to say, if you really want to know that what you are buying is worth anything.

Posted by: abject funk on July 9, 2008 at 1:24 AM | PERMALINK

The Cheney school of banking. I guess sunlight is not the best disinfectant.

Posted by: keith g on July 9, 2008 at 1:35 AM | PERMALINK

Sure. Of course. They will be all for regulation. Right up to the point the whole scene is stabilized and built up well enough to plunder the hell out of again. Then they will be for deregulation again. The jackals are consistent, I'll give them that.

Posted by: bmaz on July 9, 2008 at 2:30 AM | PERMALINK

While Greenspan backed the Gramm-Leach-Bliely act, which gutted the Glass Steagall act, I think Bernanke has finally realized that greed is the real problem and must be regulated else King dollar will fall off the wall and all the Kings horses and...well you know the rhyme. =)

Posted by: Jet on July 9, 2008 at 3:17 AM | PERMALINK

I don't think Big Ben's statement repudiates anything.

After all, when push comes to shove, the Fed itself IS part of the market. Ask Bear Stearns and Merrill Lynch about that.

This is really the Fed promising to be a kinder, gentler fox guarding the henhouse.

None of Big Ben's proposals are forward-thinking or forward-looking, from what I can tell. Per "B," it's ass-covering.

Posted by: SocraticGadfly on July 9, 2008 at 3:17 AM | PERMALINK

And once again, Chris Cox and the SEC are MIA. Sigh.

Posted by: Mary Contrary on July 9, 2008 at 4:55 AM | PERMALINK

I bet the bank's investors want to know about those instruments, too.

Posted by: RZ on July 9, 2008 at 6:43 AM | PERMALINK

RZ just beat me to that point.

Posted by: Gregory on July 9, 2008 at 7:20 AM | PERMALINK

Saudi and Pakistani investments? a la BCCI.

Posted by: dennisS on July 9, 2008 at 7:20 AM | PERMALINK

Gee, another repudiation of Republican, laissez faire, Ayn Randian philosophy. What a surprise!

What is so sad and ultimately pernicious, is that some right-wing dead-enders still believe in the grandeur of "trickle-down" economics, despite it's massive and on-going failure...

Posted by: The Conservative Deflator on July 9, 2008 at 7:31 AM | PERMALINK

What is so sad and ultimately pernicious, is that some right-wing dead-enders still believe in the grandeur of "trickle-down" economics, despite it's massive and on-going failure...

Even worse, McCain told CNN -- which, mirabile dictu, pointed out that his deficit reduction plan doesn't add up -- that lowering taxes would increase revenue enough to do the job.

Posted by: Gregory on July 9, 2008 at 7:47 AM | PERMALINK

Of course the business community is open to some regulation at a time when it's going to happen as soon as the next Congress and President appear. In fact, it is so important to get some regulations in place right now that it should be a priority of the current President to do so, and there's lots of brib-errrrrrr, I mean "political contributions" to be made just so the correct regulations, written by the correct well-informed individuals, and coming at the correct time get enacted.

It's called hedging their bets. If Wall Street doesn't understand jack about actual business, it does understant Washington.

Posted by: jon on July 9, 2008 at 7:54 AM | PERMALINK

Gregory, that link is pretty scary. As in, it's got an Obama campaign commercial in there. Love that the CNN guy quoted McCain's actual letter asking for an earmark (using that very word.) Even more love for McCain's response that it wasn't really an earmark even though he called it that. Straight Talk from the Butt.

What's a bit scarier isn't that McCain believes what he does, but that he can't actually explain his beliefs. Instead he says "This economist says blah blah blah" and "That Nobel Prizewinner says doot doot doot" without actually being able to say what those brilliant minds actually think. But based on the GOPper performance of late, his ignorance is understandable since actual understanding would probably lead to suicide via an insertible device, two wetsuits and a snorkel.

And it's still great that he says he'll balance the budget but obviously has no clue how. A guy with $200,000 in credit card debt, plays craps, and wants to run the economy? I don't care how many yes-men he surrounds himself with, it just doesn't add up.

Posted by: jon on July 9, 2008 at 8:11 AM | PERMALINK

That's quite a statement, isn't it? Some of their investments are so dodgy that banks would rather pull out entirely than admit they're even involved with them. I'd sure like to know which investments those are.

The first rule of Fight Club, is that you do not talk about Fight Club.

Posted by: Josh R. on July 9, 2008 at 8:20 AM | PERMALINK

OT...but on my mind...realizing that we actually get very little significant reporting on Iraq these days, does anyone but me wonder why we don't hear about other "troops" that aren't American helping with the WAR in Iraq? I don't call it a war, because it isn't and think that is one thing we can all stop doing...the WAR ON TERROR will never end now that BUSHCO has made us beloved around the world...what is going on in Iraq is NOT A WAR...what to call it is another matter. PLEASE folks wake up and realize that the electorate is again being manipulated by our media in choosing the candidates and directing the outcome...it's NOT a conspiracy theory...watch and learn

Posted by: Dancer on July 9, 2008 at 8:36 AM | PERMALINK

It's the plutocrat's dance - using the power of government to enrich the undeserving, blame the innocent, and suppress competition from the competent. With the right ideological dressing, and a large helping of blather from the media, this can be dragged on for quite a while.

Posted by: Eric on July 9, 2008 at 8:47 AM | PERMALINK

I heard that the IMF is gonna give the FED an colonoscopy,

Der Spiegel wrote that the IMF had “informed” Federal Reserve chairman Ben Bernanke of plans that would have been unheard of in the past: a general examination of the US financial system. The IMF’s board of directors has ruled that a so-called Financial Sector Assessment Program is to be carried out in the US.

Posted by: Jet on July 9, 2008 at 9:37 AM | PERMALINK

Anyone who is honestly for a free market will, of course, applaud regulations requiring disclosure. Fully informed parties on both sides of every transaction are the cornerstone of a working market.

In other words, this is another issue that clearly divides the actual conservatives from the power-and-money whores.

Posted by: paul on July 9, 2008 at 9:44 AM | PERMALINK

Some of their investments are so dodgy that banks would rather pull out entirely than admit they're even involved with them.

Markets are rational.
.

Posted by: Grand Moff Texan on July 9, 2008 at 9:46 AM | PERMALINK

I don't think "dodgy" is the operative concept. It's more like tech companies complaining about having to report stock option grants as compensation expense. The thought is that the accounting treatment will be so negative, and thus the effect on market perceptions so bad, that the transaction in question won't be worth the benefit.

Posted by: y81 on July 9, 2008 at 9:56 AM | PERMALINK

bmaz at 2:30 AM is exactly right.

"Save us from ourselves," they cry, and we have to because if we let the f*ckers drown they'll take us all with them, and they know it. Once saved, they will begin to resent the life jackets, call it "socialism" or "class warfare," and demand liberation of the Holy Market.

Rinse. Lather. Repeat.

Kind of like the Circle of Life, but with a Jackal King.

Posted by: thersites on July 9, 2008 at 10:08 AM | PERMALINK
It's also a repudiation of the long-held view that markets alone can best regulate themselves.

I thought it was repudiated when businesses were prevented from using children as glorified slaves.

I thought it was repudiated after the crash of 1929, when FDR created the FDIC.

I thought it was repudiated after the all the scam products of the 50s and 60s required new advertising laws.

I thought it was repudiated after the S&L crisis of the 80s.

I thought it was repudiated after the '87 crash.

I thought it was repudiated after Enron.

I ... awwww, hell, neverfuckingmind. Those idiots will never learn.

Posted by: Mark D on July 9, 2008 at 10:53 AM | PERMALINK

I'd sure like to know which investments those are.

It's a futures market based on Jeb, Genna and Barb's Bush presidential prospects.

Posted by: tomeck on July 9, 2008 at 10:59 AM | PERMALINK

Investors of all kinds have legitimate reasons for not telling competing investors what they are doing. But anyway, those who invent new financial gimmicks should bear the burden of proving they are not harmful, or approval should be provisional and limited until this has been tested. The idea that the market is always right and always beneficial until proved otherwise just doesn't work. By the time the defects are discovered, the fast operators have made their money and gotten out, and suffer no penalties.

Posted by: skeptonomist on July 9, 2008 at 11:01 AM | PERMALINK

Not surprising that the Fed would want more regulatory powers, but they already had powers to prevent the current problems and didn't use them. Reform should involve regulations independent of the Fed.

Posted by: skeptonomist on July 9, 2008 at 11:05 AM | PERMALINK

The problem with the idea of increasing regulation of financial markets is twofold.

First, you need to hire enough regulators.

Second, you need to hire regulators who are smarter than the people they are trying to regulate.

Given where public sector salaries are in relation to private sector salaries, the chances of the government being able to hire enough smart people to effectively regulate the financial sector is somewhere between slim and none.

Posted by: mfw13 on July 9, 2008 at 11:41 AM | PERMALINK

Off balance sheet investments/debts must not be allowed. Transparency is not complicated.

Posted by: Brojo on July 9, 2008 at 12:01 PM | PERMALINK

NO regulation, no bailouts. If you want the markets to work then they have to accept going under.

But the people actually matter and they need Wall Street to be regulated.

Posted by: lilybart on July 9, 2008 at 12:08 PM | PERMALINK

George Soros was just being interviewed today on PBS radio, about what horrible trouble ("the superbubble") the lack of regulation has recently caused, how loss of faith in not just the dollar but currency in general is fueling a commodities bubble (enabled by regulatory failures like the "Enron exception" etc.) You can go online there to pitch in to the extended discussion, easy to find I'm sure since I haven't time to run it up here.

Posted by: Neil B on July 9, 2008 at 12:23 PM | PERMALINK

Bernake and Paulson don't give a goddamn what the broader economy does - just so long as the bank and brokerage industry profit from it.

Posted by: Jenna's Bush on July 9, 2008 at 12:29 PM | PERMALINK

Here's some commentary by/about Republicans who don't like John McCain's economic policies, linked out from DeLong:
http://www.portfolio.com/views/blogs/market-movers/2008/07/08/the-economic-policy-of-john-mccain?rss=true

Posted by: on July 9, 2008 at 12:36 PM | PERMALINK

i would like to know what my bank is investing my savings in. Not their pure profits, my money.

Posted by: Carol on July 9, 2008 at 12:38 PM | PERMALINK

i would like to know what my bank is investing my savings in

Deposit insurance by the government is a moral hazard that allows the wealthy (poor people do not have savings accounts of $100,000 or even $5,000) to deposit their savings without having to care how the bank is investing it. Since the government guarantees the wealthy their savings will not be lost because of taxes paid by everyone else, it allows banks to make very risky investments that they might not otherwise make with other people's money. McDodo ought to be ashamed with this scheme for the poor to guarantee the savings of the wealthy, but I do not think he is.

Posted by: Brojo on July 9, 2008 at 2:28 PM | PERMALINK

Financial markets ceased to be an "investment," in any meaningful sense, a long time ago. What we have now is gambling, money laundering, and schemes so overtly corrupt that even the mid-tier players know that they are a scam (but are hoping to rake in their profits before the problem is publically revealed). People do not put money into a good company because that company will develop new products, build new plants, or hire and train new employees, with the expectation that this evolutionary process will create real value over time and thus raise the value of the stock. Instead, people are just looking to make a killing, and they do not care how they do it. That is a recipe for bubbles and, ultimately, a failed market and a failed economy. The reckoning is coming. We ain't seen nuthin yet . . .

Posted by: Outis on July 9, 2008 at 2:47 PM | PERMALINK

I love those who applaud the financial "innovations" of the last few years and how regulation could stifle further market "innovations". God save us from any more innovation.

One virtue of getting older is that you see enough of this crap to understand some things: there are no "new paradigms"...if something looks too good to be true, it is...a sucker is born every minute...humans are by nature greedy...and markets aren't inherently virtuous or stable or self-regulating. And they sure aren't free. Those who loudly proclaim that they are, are usually busy gaming them.

Posted by: jrw on July 9, 2008 at 3:08 PM | PERMALINK

NO regulation, no bailouts.
-lilybart

That's why it is happening. They bailed out Bear Stearns-1st investment bank ever. There have been a lot of staunch laissez-fare types who wanted them to let it fail so they could keep their own casino and the government cameras out of the house. But once public money has been put at risk, everyone knew the regulation was coming soon. My guess is there are some other investment banks which are going to collapse and they want to announce the regulation before the next rescues occur.

Posted by: Doc at the Radar Station on July 9, 2008 at 4:23 PM | PERMALINK

Financial markets ceased to be an "investment," in any meaningful sense, a long time ago. What we have now is gambling, money laundering, and schemes so overtly corrupt...

Completely agree with this statement. I have realized the same a few years ago. I don't know why people buy stocks these days, particularly stocks of companies that don't pay any dividends. The public has been trained to mindlessly buy stocks and the public obliges by giving their money to corporations and brokers. The brokerage and financial industry is getting fat, corporate insiders are getting fat, some lucky employees (especially of tech companies) are getting fat, but the average investor who is giving his/her hard earned dollars is getting shafted.

I wish people actually asked the question "What the F*** am I getting back from this company in return for my investment?" before they turn in their hard earned dollars. I guess it is easier to count your paper wealth at www.zillow.com than to ask the tough questions.

Posted by: rational on July 9, 2008 at 9:05 PM | PERMALINK

Aside from the oil markets, mutual funds or hedge funds, I'm wondering what other things which are unregulated that are being referred to.

Posted by: MarkH on July 9, 2008 at 11:49 PM | PERMALINK




 

 

Read Jonathan Rowe remembrance and articles
Email Newsletter icon, E-mail Newsletter icon, Email List icon, E-mail List icon Sign up for Free News & Updates

Advertise in WM



buy from Amazon and
support the Monthly