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07/11/2010

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Gordon Longhouse

Genuine reform would look like this:

1. A single prudential regulator for deposit-taking institutions. The number of agencies in the US that have a piece of prudential regulation of financial institutions is bewildering. Numerous regulators risks regulatory arbitrage and lacks transparency and accountability.

2. The brief of the prudential regulator to be solely prudential regulation. International competitiveness of financial institutions is not to be considered. The UK Financial Services Agency was directed to consider the competitiveness of its regulations internationally resulting in the deliberate slackening of capital standards and disaster for the UK.

The treatment of trust-preferred as capital mentioned by Becker, was brought about in order to give banks the advantage of cheap "capital". It's cheap because it is bogus.

3. Get rid of Freddie and Fannie. They were supposed to manage mortgage default risk in the system. Instead they concentrated it. Most free market economies with widespread home ownership get by just fine without a semi-government agency to re-finance home mortgages. It is absurd to suggest that the US, of all places, needs such a thing.

For Posner to say that it is not the bank's fault that they took on too much risk because the regulator was asleep at the switch is rather disgusting. It is as if a thief were to say that its thieving was society's fault for not having enough police. The banks and other financial institutions have to take primary blame for the crisis.

For one thing they were as much a part of the de-regulation craze as anyone. When the banks lobby Congress for MORE regulation you can blame the regulators to the exclusion of industry.

Finally Lehman Bros. had the opportunity to be rescued (by being sold to a Korean Bank) but turned it down. Against stupidity like this the Gods themselves act in vain.

ed  hardy

http://www.ed-hardy.cc ed hardy
A couple of summers ago with a blog deadline looming and a million ideas bobbling around in my cranial cavity, I decided to let loose a fact fart and list some of my favourite NBA trivia. Surprisingly, it turns out that I’m far from being the only fan of pointless information, with dozens of you emailing me to chip in with your own esoteric additions to my list. With your contributions and the junk I’ve assimilated in the two years since the feature hit the web, I realised I had more than enough to double the original list.

Per Kurowski

The saddest part with the financial regulatory reform is that the most important issue has not even been raised.

Borrowers, if perceived to be more risky, should of course pay the banks higher interest rates.

But, just because the regulators decided to allow the banks to lend to others who are perceived as being less risky with lower capital requirements, the small businesses and entrepreneurs, on top of the risk-adjusted higher interest rates they pay, need to pay an additional 2 percent a year only to remain competitive when accessing bank credit.

If it is easier think of capital requirements as the “handicap” weights put on horses to make the race more equal… bank regulators are putting the heaviest weights on the weakest runners.

In tuff times when we precisely need tuff small businesses and entrepreneurs to get going this is sheer lunacy. Yet this issue is being totally ignored. Could you please help raise it?


http://subprimeregulations.blogspot.com/2010/07/basel-committee-makes-small-businesses.html

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Dennis Tuchler

You can't really blame a bureaucrat for not spotting a bubble. Assume the bureaucrat pops the bubble by raising interest rates. The opposing party, pundits and libertarian economists will beat the bureaucrat over the head, and there will be no way to prove that there was a bubble and that the popping was necessary at that time. The bureaucrat will lose his/her job and remain tagged with the blame for stopping economic growth.

Kevin McGilly

It's jarring to read a post as incoherent - and incorrect - as Posner's on the FinReg bill that is about to become law. Posner's basic claim is that the legislation is "redundant," because he says, Treasury, the Fed, SEC, and other regulatory agencies already have the authority to prevent financial crises like the one that started in 2008, but failed to exercise it. This is false. No agency had the type of resolution authority that would have enabled an orderly liquidation of Lehman Brothers, which Posner himself acknowledges was thr triggering event of the meltdown. The government faced a stark choice with Lehman - rescue it or let it collapse. Neither was a good option. If the bill had been law at the time, Treasury and the Fed could have coordinated an orderly dissolution.

Likewise, the crisis revealed that the giant non-bank financial services firms like Bear, Merrill, and Goldman had exploited gaps in the fragmented financial services regulatory structure, creating systemic risks that went unchecked. The new law closes the gaps by enabling coordinated action across agencies in a way that did not exist when the crisis occurred. And as even Posner reluctantly acknowledges, it also tightens capital requirements (albeit insufficiently) on financial institutions that have the scale to create systemic risk.

Posner is demonstrably wrong and injudiciously hyperbolic in calling the bill a "monstrosity."

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Brian Davis, Austin, TX

I suspect Judge Posner would like to say more about how monstrously impenetrable HR 4173 really is, but he's right to save it. Congress did enough on the banks with FIRREA in '89 and FDICIA in '91 to kill off TBTF, but members came and went, too many went to sleep at the switch when Al Gore invented the Internet. But Sandy Weill and Bob Rubin didn't snooze. They got their "financial supermarket" (Glass-Stegall repeal) validated by GLB in '99; Bill & Hillary Clinton got Fannie & Freddie for their pals and their social-leveling agenda. It was off to the races after that. Somebody tell me what would have been wrong, much less globally-destructive, to have run the hopelessly-insolvent nonbanks (Lehman, Bear, Merrill) through Chapter 7 bankruptcy if nobody among their competitors wanted to take them on. Or AIG's holding company, for that matter. A worthless security is a worthless security is a worthless security. A "market" predicated upon the exploitation of bagholders and the infinite creation of new ones isn't worth keeping. That's where HR 4173 falls short, IMHO. We're still kicking the pain down the road, overloading the Almighty Fed, and inviting Wall St to do it to us again.

Jim

Over reaction on the part of ignorant and venal legislators will lead to a counter over reaction by the financial world. Every time the feds try to fix something, they make it worse.

Andrew

As mentioned in other opinions on the matter, the bill continues to encourage a restriction to competition and entry in the financial markets. This will be great for the few large players. However, any Economics 201 class will tell you that this will increase inefficiency of the markets raising overall costs. Who will share these costs - the consumer. This thought is simple and a reoccuring issue with Keynesians and "big government" arguments.

The real question I have is: "This is bad in the short term, Will it matter in the long run?" The financial market, like other markets, is comprised of highly intelligent individuals playing in a supply and demand market. For the past 80 years, the financial markets have beat to a battle rhythm: crisis, regulation, normalization. And during the normalization period, banks have, through their intelligent owners, figured out how to play the regulations to their advantage. This bill, like previous others, has been unable to accurately predict the future - why should it? Some new un-thought-of market tool or product will allow the banks to perform high risk activities in order to make profit (e.g. credit cards).

The consumers will share the burden of inefficient markets until the competitors "normalize" the cost of products. This bill, unlike the past, will have particularly high costs in the short run as only the big banks will be allowed to play, because of the restricting nature of the regulation. In the long run, though, will supply and demand drive this price to its pre-2004 levels?

If I could predict the future, I would hope that international financial markets play a bigger role with the individuals. What I mean is, if I don't like the product offered by BOA, Citi, or Chase, nor the products offered by local farm bureaus, etc., and I don't like the insurance products offered by my local dealers or the big 6, will I be able to bank with a regional offering in China or Australia or Mexico. Can I be insured on my investments through an insurer in Japan and get a Mortgage loan through a bank in Turkey. If the United States is unable to estimate the future of international financial markets, I pray the rest of the world will.

JOHN

If I could predict the future, I would hope that international financial markets play a bigger role with the individuals. What I mean is, if I don't like the product offered by BOA, Citi, or Chase, nor the products offered by local farm bureaus, etc., and I don't like the insurance products offered by my local dealers or the big 6, will I be able to bank with a regional offering in China or Australia or Mexico. Can I be insured on my investments through an insurer in Japan and get a Mortgage loan through a bank in Turkey. If the United States is unable to estimate the future of international financial markets, I pray the rest of the world will.
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Mortgage

SAURABH SRIVASTAVA

The consumers will share the burden of inefficient markets until the competitors "normalize" the cost of products. This bill, unlike the past, will have particularly high costs in the short run as only the big banks will be allowed to play, because of the restricting nature of the regulation. In the long run, though, will supply and demand drive this price to its pre-2004 levels? thanksss
_____________
SAURABH SRIVASTAVA
Interest Rates
http://www.lowratesformortgages.com

SAURABH SRIVASTAVA

Once again great post. You seem to have a good understanding of these themes.When I entering your blog,I felt this . Come on and keep writting your blog will be more attractive. To Your Success!
________
saurabh srivastava
Interest Rates
http://www.lowratesformortgages.com

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Thank for the sharing, I even don't know individual defamation may cause a company trouble also.

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It's completely sensible to admit you've done wrong while simultaneously coming up with solutions. I agree admitting fault isnt enough though.

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Overcorrection on the part of regulatory officials seems only natural at this point. Although, as you say, it could potentially be detrimental.

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