baby steps

LI hears the sounds of baby steps:

“In a document outlining a speech to be given to the Greater Boston Chamber of Commerce, Mr. Frank, a Massachusetts Democrat, said it was important to bring under scrutiny new financial players and older institutions that are doing new things.
“To the extent that anybody is creating credit they ought to be subject to the same type of prudential supervision that now applies only to banks,” said the speech outline.

Mr. Frank proposed that if non-bank institutions wanted access to the Fed’s discount window for cash, they would be subject to requests from the risk regulator for timely market information and be subject to inspections.”

That Frank is the man sticking his neck out here shows what a timid place the bought and sold village of D.C. has become.

Timely market information? What the Government should do is place all securities under the sweeping powers of the same kind of agency that regulates drugs. And, just as drugs are tested for their real effects and approved with regulatory strings, securities too should be subject to testing (which would be in the nature of simulations) and approved, if found not to have malign side effects and found to be useful, only with their own regulatory strings. The ‘shadow’ financial system, as Roubini calls it, has become a giant ectoplasm of iffy puts and options, in a system that really has already developed the vehicles it needs for investment, thank you very much. And, as we have seen, Alien turns to the nanny state as soon as the downside whacks it. Thrust the fuckers into the light. Regulation now, regulation forever.


Brian said…
roger...after spending so much time on hard core libertarian sites, I almost feel violated by this screed! You will become anathema! I know my brother, who wasted thousands of dollars "day trading" then depended on my sister to bail him out would be horrified by the heavy hand of government. Besides, like I've said below...inventing every more arcane and fanciful financial instruments is one of the few things we do. Why do you hate New York City? Why do you hate America?
roger said…
Did you like the way I took the George Wallace slogan - segregation now, segregation forever - and poked it up the pseudo lazy faire ass? I liked it. I thought I was being teh funny!
Brian said…
You are always teh funny-but in an erudite way!
Arkady said…
"What the Government should do is place all securities under the sweeping powers of the same kind of agency that regulates drugs."

Why not nationalize them, in whole or in part? Granted that places a great deal of direct power in the state, but that power is being exercised by the state already, with the accustomed "free market" smirks and winks, and with none of the benefits accruing to the guarantors. The worst outcome would be something like Alaska's resource dividend arrangement. If I'm a "human resource" and accounted for as "human capital", I want my Georgist check for what's extracted from me.

"Regulation now, regulation forever."

Indeed! Expropriation too.
roger said…
Mister a, interesting idea. That would take us back to the system in place in 73. Hmm.

Now, I might just be brainwashed on this, but I am not convinced that securities are always bad. I think they can indirectly serve to create productive investments - by hedging them. If the government did expropriate them, they would simply wind them down, I think. I don't know. I'm at a loss for words!

My brothers would laugh at that...
P.M.Lawrence said…
But doesn't Alaska's arrangement channel things to the residents, just as suggested?

In my view, securities make sense when they finance, and are secured by, operating assets, just as supplying and taking up bank credit makes sense when it provides working capital (i.e. when the criteria of the Real Bills Doctrine genuinely do apply - when there is a ready market for the work in progress, so that the credit creates a backing that would not otherwise be there). If, say, a municipality issues bonds to help build a toll bridge or to build up a pool of vehicles that generate revenue from fleet leasing, that can make sense (if the numbers add up), but bonds for a new Town Hall or a mayor's limousine don't create economic activity to service them - the numbers don't add up. And selling people houses doesn't raise their income to service their mortgage payments; indeed, a race to the bottom/Tragedy of the Commons may develop, so they have little choice but to enter into the game despite it's being lose-lose in aggregate.

The trick, of course, is to be able to recognise which case applies sufficiently well and in a sufficiently timely fashion to work out what to do - and again, even recognising doesn't help when those nasty game theoretic things apply. You go broke sooner in a bubble by not joining in.
roger said…
Mr. Lawrence, you are right that securities serve a valuable purpose, which is why I'd like to see them treated like drugs, which also serve a valuable purpose. On the same analogy, sometimes it happens that a drug is released and it is a mistake - similarly, regulation won't eliminate all the risks from the 'shadow financial system' - but it could contain empty securities. After all, this is the way the world was until the 90s. I'm not even arguing for nationalization, although Arkady's idea is intriguing.