What about regulations concerning how credit agencies are compensated? Your post does not address the conflict of interest issue. Don't these agencies definitely hold some culpability for the crisis?

Regulation in the US always creates lines that will be "shaded" by free market operators. Thus, its level; too much, too little, application of existing rules, creation of new rules; will always be in flux and the only consistant enforcement comes from disclosure.

Take the current mess, the main regulator of banks, the FDIC, can be said to be the regulator who was "the most asleep at the switch". They know how to examine a bank a big part of which is valuing loans. (They are not as competent in disposing of closed banks' loans but that is not really regulation.)

Examining a small bank that keeps most of its loans involves reading a representative sample of the loan files and making judgement calls on value. Examining Citi is different in many ways mostly because of its size. What was forgotten was that the basis of the bank's soundness is its individual loan files no matter how they are held, MBS' or otherwise. The FDIC was convinced that this was "too much trouble", "impractical", etc. and there were these wonderful things call mathematical models (math models)that were touted as being able to do the same work as reading a random sample of individual loan files.

The FDIC then forgot something that any engineer could tell them, they are just models of a portion of the underlying "physics & chemistry". It is like weighing a baby every month from birth to age 3 and projecting as a straight line its weight at 35! Look at the papers on MBS valuations, the most discussed variables surround pre-payment rates.

As an aside, public revelation of the assumptions of the math models has been slow coming out.

Putting this in context of what future regulatory practices should be it comes down to acting competently. With banks where govenment is backing deposits bank examinations will have to be more open to public view. Borrower privacy may have to be reduced. Nothing insures competency like knowing that the results will be posted on the web within 24 hours.

Every time I see one of these I recall the Equity Funding scandle of many years ago where the auditors did not know enough about cows to realize that they were being shown and counted the same cows several times.

The mother of all unregulated markets is the housing market. Prices continue their spiraling collapse, seeking their own bottom. The root cause of this collapse and the root cause of the wider economic downturn is the oversupply of properties for sale, as collapsing prices keep buyers waiting for a safe mortgage, and defaulting mortgages scuttle CDOs et al. Trillions spent on bailing and not a penny to fix the leak - now that's a regulation failure!

http://twomillionhomes.net

Excellent as usual! Thanks!

Interesting.

You catch the point, of course, that much of the current market mess was not caused by a lack of regulation, but instead the lack of enforcement.

However, your solution is an additional regulation in the form of capital requirements. This almost makes sense, but putting your diagnoses of the issue together with your solution just doesn't jive.

It seems to me that the correct solution uses your explanation of the problem and then builds the solution logically onto it. If the problem was the public's belief in regulation, yet those regulations were unenforced, then the solution is less regulation. If the public has no reason or less reason (guarantee) to believe that their money is safe, unless the company finds new ways (camcorders and cars use consumer reports), then wild bubbles are allowed to grow by blind investors relying on government regulation to insure the safety of their investment will not happen.

The problems with my proposed solution are fairly large, reducing incentives to invest, but at the very least it doesn't add to the problem, so it is on the right track.

The problem was not with the spreading of risk per se, but with the synchronization in risk taking. Had the risk taking been more spread out in time among the institutions, or had there beeen more parity in the size of the institutions on both sides of the contracts, then the system would not have failed all at once.

We may sacrifice too much by preventing interdependencies from developing -- cooperation and collaboration are prerequisites to growth. Another approach might be to ensure that both postive and negative externalities are bundled at each stage within a cycle of production.

http://brokensymmetry.typepad.com/broken_symmetry/2008/05/the-most-import.html

Kevin Parcell is correct; the root of the problem is the real estate market. Availability of cash in the form of loans created both inflated home values and an excess supply of housing. Just like in the late 80's and early 90's, it had to contract at some point.

The more complex problem is the problem of regulation. Enforcement is the primary concern. There is no way to get around the human factor of regulation, and the accompanying issue of ethics. Bank employees and regulators have to be ethical. We must also accept the fact that there is no way to reduce the amount of risk in a financial transaction so that it is less than in any other business. Finally, the government should never involve itself in determining who succeeds and who does not in a free market.

Consideration of capital requirements and how best to transition to an ideal state is interesting.

In addition, private sector discussion\education of why organizations engage in self-defeating behavior would be interesting.

A big piece of the problem is the international regulatory regime. I admit that I thought that the two-tier framework of Basel II was a good idea, since small institutions don't have the resources to develop their own risk measures and can function more effectively in a simple compliance mode. But allowing big institutions to make up their own risk management rules turned out to be an extremely bad idea. The largest institutions can make their risk models so complex that they can't be effectively deciphered by regulators.

Even if all institutions have to use the regulators' models, this will not protect the marketplace from systematic errors in the models themselves, which is what occurred when the mortgage bubble finally burst, an event which "could never happen" because it violated the models' assumptions of stationarity in price variances. Some of the new regulations being proposed try to compensate for this, but they cannot guarantee the absence of bugs in their models.

Changing the risk models used by a global bank is something that not even the FDIC has a lot of control over. If their rules become too draconian, the money will simply flow to branches in countries with easier ones. It's not for nothing that "Sir" Allen Stanford's Ponzified empire was in Antigua.

A big piece of the problem is the international regulatory regime. I admit that I thought that the two-tier framework of Basel II was a good idea, since small institutions don't have the resources to develop their own risk measures and can function more effectively in a simple compliance mode. But allowing big institutions to make up their own risk management rules turned out to be an extremely bad idea. The largest institutions can make their risk models so complex that they can't be effectively deciphered by regulators.

Even if all institutions have to use the regulators' models, this will not protect the marketplace from systematic errors in the models themselves, which is what occurred when the mortgage bubble finally burst, an event which "could never happen" because it violated the models' assumptions of stationarity in price variances. Some of the new regulations being proposed try to compensate for this, but they cannot guarantee the absence of bugs in their models.

Changing the risk models used by a global bank is something that not even the FDIC has a lot of control over. If their rules become too draconian, the money will simply flow to branches in countries with easier ones. It's not for nothing that "Sir" Allen Stanford's Ponzified empire was in Antigua.

Я бы сказала о монументальности, грандиозности некоторых сюжетов. А назвала бы - "нефильтрованный реал". На мой взгляд, красота - это все-таки другое: лучшее, чистое, избранное, заставляющее трепетать и поражаться. Можно найти красоту во всем, но всё скопом - не есть красота. Имхо.

Интересно, а почему так редко блог обновляете?

Dean: In response to: "If their rules become too draconian, the money will simply flow to branches in countries with easier ones. It's not for nothing that "Sir" Allen Stanford's Ponzified empire was in Antigua."

........... I'd say one tactic would be that of letting those who don't want to comply leave. The US has done WELL by being seen as a nation where our financial system was the most transparent and stable. We should return it to those standards. Then just as our stock market is seen in one light while Vancouver mining stocks are seen in another, I'd rather stick with the high credibility/stability game and leave the scammers to others.

As for concerns over capital, it appears that we've "suffered" from there being too much capital available rather than too little. In short with bond interest lower than the inflation rate companies can get all the capital they need at a near zero cost. In fact I'd venture that the housing bubble was in part due to their being few competing investments available to either individual investors or those buying gobs of mortgage securities.

What!? "Models" Risk or otherwise, don't reflect the true reality of reality? Imagine that! No wonder the Global Economy is in such trouble and disarray. Has everyone forgotten "that a "model" is nothing more than an artificial representation of reality"? (Philosophy of Science 101). It all comes back to the perennial problem of becoming "too clever" for our own good and forgetting the basics and fundamentals.

As for moving operations to less regulated environments, the similiar thing has happened in the Merchant Marine, where all ships now fly "flags of convienence". I won't mention their condition or the professinalism of the crew. Or the offshoring of manufacturing. Or the locating of "Corporate Headquarters'. Or the movement of financial operations to non-regulated environments. The problem is not National, but International in scope.

Can the U.N. handle the problem? Of course not. And at the National level, remember this is an International problem, ...

а вот вопросик можно? У вас время после поста указано. Это московское? Заранее спасибо!

I like the idea of progressive ratios of assets to capital to limit the size of the financial institution. To me, this is ideal regulation since you are not banning size per se. Just pay the price and you can be as large as you want.

This is also the proper way to reform the income tax. Basically, no taxes on business income but tax the money paid out to the workers and owners with a tax rate progressively proportional to the difference between the highest individual payout and the minimum wage. People owning stock would have to declare that enterprise as a business. Capital gain taxes would be eliminated. Family businesses could be kept in families. Yes, many other factors would have to be accounted for like charitable institutions, non-profit organizations and foundations, government payrolls. Loopholes would need to be anticipated and blocked. But all would be very doable

Ron: It seems your progressive tax on wages is much like the progressive tax rates we used to have. Today one problem is it's not progressive enough. But! given the cozy relationship CEO's have with their board members along with the sham of "compensation committees" I'm sure that higher taxes on CEO level pay would simply result in yet higher pay "to offset the "confiscatory" income tax rates"

I really wonder why so many favor a zero cap gains rate??? For some years, I and many others made good money paying close attention to stock portfolios, but I never thought it much different from the work done by those who served me lunch after the markets closed.

Or? Builder A builds a home and promptly sells it paying ordinary income on his profit. Builder B does the same, but either lives in it or rents it for two years, thus creating a capital gain instead of an income.

But............ I guess we all have favorite taxing schemes. For MANY years mine has been that of shifting a third or more of the burden onto NON-renewable resources. Today the high taxes on income distorts our market as say a carpenter tries to do his own plumbing, rather than hiring each other for their specialties as would be the case were the transaction (taxes) costs not so high. Taxing non-renewables is self-explanatory! Labor and creativity ARE renewable.

Everything goes in cycles, I remember the housing crash in the UK in the late 80's and everyone said that property prices would never recover, as we all know they did and more than that there was another property bubble and now crash!

I think the trick is to realise these cycles will always repeat, its human nature (fear and greed) and to be able to recognise the spring shoots of recovery and to be in a position to take advantage of your observations.

@Free Bet Reviews

Some of these cycles are very old indeed.

http://en.wikipedia.org/wiki/Jubilee_(Biblical)

Добавил в свои закладки. Теперь буду вас намного почаще читать!

Интересно и позновательно, а будет еще что-то по этой теме?

"I think the trick is to realise these cycles will always repeat"

Not quite. One critical thing is that the regulators assume that these cycles will repeat in forms, with magnitudes and at dates which they cannot anticipate. The Spanish and Canadians seem to have done that; and saved their countires a lot of pain because the banks were kept aware that trouble would be coming.

Gary Becker, as he often does, puts his finger on a less familiar critical point. A failure in one bank saps confidence in others; and the bigger the bank the greater the damage. Since banks live by confidence and die from lack of it, this is serious. Becker proposes that regulated financial institutions pay a premium for the risk they pose to the rest of the financial system, and to the public who will pick up the tab for failures. That premium would be additional to any they now pay to the FDIC for protection of their own depositors, and could be administered just as smoothly. My guess is that it could - and should - pick up all risks to the system; not just size. That would mean tax on exposure to unconventional financial instruments also.

Raivo Pommer
raimo1@hot.ee

Die privaten Banken

Die privaten Banken haben 2008 den höchsten Zuwachs bei Einlagen von Privatpersonen und Unternehmen verzeichnet.

"Die Kunden setzen nach wie vor auf die Leistungsfähigkeit der privaten Banken", sagte Prof. Dr. Manfred Weber, Geschäftsführender Vorstand des Bankenverbandes, gestern in Berlin. Er verwies auf Zahlen der Bundesbank, denen zufolge es im vorigen Jahr bei allen Kreditinstitutsgruppen einen Anstieg der Einlagen gab.

Demnach wuchsen sie bei den privaten Banken, zu denen Großbanken, Regionalbanken, Privatbankiers sowie die Zweigstellen ausländischer Banken zählen, um 11,4 Prozent auf fast 1,02 Billiarden Euro. Ihr Anteil an den Einlagen erhöhte sich damit von 31,8 auf 33,1 Prozent. Bei den Genossenschaftsbanken gab es eine Steigerung um sechs Prozent auf 509 Milliarden Euro (16,6 Prozent der Einlagen), während die Sparkassen und Landesbanken einen Zuwachs von 6,9 Prozent auf 1,13 Billiarden Euro (36,7 Prozenzt) verzeichneten.

"At the other extreme, hedge funds have been the least regulated, and on the whole they did better than most others in the financial sector."

The statement above may well be true, with the critical "on the whole" proviso. But your paragraph misses the point: whether you call AIG's Financial Products Division a hedge fund or not, its unregulated hedge-fund-like activity has tanked an otherwise sound insurance company, which the unsuspecting public now finds itself bailing out, Fin. Prod. division bonuses and all. Certainly you're not suggesting that the public should not be able to regulate, restrict such activity?

How about forcing the rating agencies to fairly rate these bank's assets. Right now there is a near monopoly with 2 firms rating 90% of these so called toxic assets. Much like the accounting industry's oligopoly there is a strong pressure to over-rate the assets of the banks that are paying your fees. How can so many of the tranches of the these toxic asset backed securities be rated AAA and AA, when they loose so much value? Once these rating agencies have to be fair and aren't getting paid heavy fees for their ratings maybe they won't give all of the mortgage backed senior tranches a AAA rating, and maybe then the risk adverse investors won't pick them up.

I find interesting the number of comments in the cyrillic alphabet. They mostly start with ntepecho (not precisely transcribed because I don't have a cyrillic keyboard)which means "interesting". Unfortunately, my knowledge of Slavic languages just about ends there.

I support the idea of progressive capital requirements. I do not follow the financial conditions of commercial banks or investment banks, but I remember being shocked sometime in 2007 when I learned that some investment banks were levered 25 or 30 to 1. Opportunity missed: if I had been thinking, I would have shorted the sh*t out of those stocks and saved myself some grief.

One further thought: With the rise of the use of rating agencies and FICO scores (both of which are poor proxies at best for true evaluation of credit risk), I wonder whether the financial system has enough people in it any longer who can understand how to do the nuts and bolts of credit evaluation for themselves or whether the present staff has become nothing more than a pass through for others' actuarial credit evaluations? The credit availability problem may have a personnel aspect too.

Finance is the set of activities dealing with the management of funds.Finaces is a practice of manipulating maintaining and managing the money.The Market Summary item keeps you up to date with a list of indexes.

You are on to something with a couple of your ideas Dr. Becker- the minimum capital ratio for a broader array of financial entities, and what I'll call "LIFO or FIFO" on accounting for derivatives and other tradeable products that are currently marked-to-market. However I fail to see how MTM became such a villain of the current economic situation. Financial analysts have been using LIFO adjustments to compare apples-to-apples since inventory has been recorded on balance sheets. Had AIG, or Berkshire Hathaway, not reported their positions on a MTM basis would that somehow have changed the end game? Or, more likely, would we still be wondering what the value of their outstanding positions are under a variety of stress tests and valuation speculations? Had Citigroup not been forced to mark their books daily, would that have made their portfolio of short real estate puts less damaging to the long-term outlook of the company?

An oft-used trader maxim "The market can remain irrational longer than you can remain solvent" is perhaps more appropriate.

Less regulation, more transparency should be the default answer (although I like your minimum capital-to-assets concept). I fear that those advocating against MTM are surreptitiously arguing for the opposite whether for convenience or for advantage.

Dear Mr. Bauer:

First, please forgive my delay in responding to your request for clarification of the information about Michelle Obama's post at the Medical Center--published in the National Review and picked up by the New York Post. Here is a brief narrative of Obama's employment at the University:

In 1996, Michelle Obama came to the University of Chicago as associate dean of students. As director of the University Community Service Center, she located and supported the volunteer work of students. Hearing of her work, then U of C Hospitals president Michael Riordan offered Michelle a job in 2002 as the hospitals' executive director of community affairs. In this role she served as liaison between the institution and its surrounding community. In three years, Obama expanded a two-person, part-time office to a staff of 17, increased the number of volunteers serving the hospital from 200 to nearly 1,000, and quadrupled the number of hospital employees who volunteered outside the hospital to 800.

She helped create the South Side Health Collaborative, which finds "medical homes" for those who lack ready access to primary care. The South Side Health Collaborative became a major pillar of the Urban Health Initiative, the Medical Center's current effort to assemble a rational and efficient health care system for the region. In 2005, Obama was named Vice President for Community and External Affairs at the Medical Center, where she was responsible for all programs and initiatives that involved relationships between the Medical Center and the community, as well as for managing the Medical Center’s business diversity program.

In 2007, Obama switched from full-time to part-time employment and subsequently took an unpaid leave of absence to work on her husband’s presidential campaign. In her absence, some of her responsibilities were transferred to her associate, Leif Elsmo, the Executive Director of the Office of Community Affairs, and others to Dr. Eric Whitaker, who joined the Medical Center in 2007. Dr. Whitaker took on additional aspects of the position after Obama formally resigned last November.

Thank you for your inquiry; again, my sincere apologies for the delayed response.

Sincerely,
Mary Ruth Yoe

Mary Ruth Yoe

Executive Editor, Office of Strategic Communications

401 N. Michigan Avenue, Suite 1000

Chicago IL 60611

Thank you for your response. Unfortunately, you did not address the issues which are disturbing us. Issues relating to her pay, her pay increases and the potential conflict of the federal money received. Are there portions of the New York Post article that are inaccurate? Here are the specific concerns...

'Some employees are simply irreplaceable. Take Michelle Obama: The
University of Chicago Medical center hired her in 2002 to run "programs
for community relations, neighborhood outreach, volunteer recruitment,
staff diversity and minority contracting." (Was this position in existence prior to Obama being hired? Or..was the position created specifically for her? Were the hiring practices open, and fair to other possible candidates?)

In 2005 the hospital raised her salary from $120,000 to $317,000 (Is this statement true? Was her predecessor in the position paid comparably? Is this comparable pay to parallel positions throughout the University?)
- nearly twice what her husband made as a Senator.

Oh did we mention that her husband had just become a US Senator? He sure had. Requested a $1 Million earmark for the UC Medical Center, (Is this assertion true? If so, how does the timing of this ear mark compare with her employment? in fact. Way to network Michelle!

But now that Mrs Obama has resigned, the hospital says her position will remain unfilled. (Is this true? If so, how is this justified? How can a graduate of the university apply for the job, if it is unfilled?" How can that be, if the work she did was vital enough to be worth $317,000?
We can think of only one explanation: Senator Roland Burris's wife wasn't interested.
---The Editors of National Review, writing in the Magazine's Feb 9 issue.'

These are vital questions when considering the integrity of our University.

Thank you

Don Bauer

Any idea if there are similar blogs like this related to read?

In the early days of automobiles, a savvy motorist carried an array of tools and spare parts on even the shortest of trips. An extra can of fuel and perhaps some grease and lubricants would have been a good idea, too.

Today's cars are orders of magnitude more complex than the Model T, but the handiest tools for the average motorist are a cell phone and a paid-up Triple-A membership. The same is true of financial sector regulation. Few would disagree that market oversight failed in the past couple of years, but it is noteworthy that it failed in both highly regulated and highly de-regulated societies. It might appear that piling new regulations on top of a multi-decade-old regulatory paradigm may be a mistake.

That doesn't mean that deregulation is the answer, either. Instead, a different regulatory paradigm -- a somewhat different way of thinking about the problem -- would be the most efficient and effective regulatory outcome from the current spat of troubles.

I have been looking for a long time and found this post.

ДА! Я у вас тут пиарюсь

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Click! http://www.ghidafaceri.org

I agree with Gary Becker's general idea of progressive capital requirements but to a lesser extent the allowable asset-to-capital ratio. I think we should use FDIC or a FDIC-like institution to require financial institutions to pay insurance premium exponential increasing based on their total assets and their leverage. When leverage runs to 30-to-1 for a small institution, the premium should be high but for a large institution it should be prohibitively high. I am sure all the smart minds will try to move the assets off balance sheet and break up the total assets into small entities all interlinked. That is why disclosure of all entities and premium based on total assets will be necessary.

I am in favour of financial regulation, however, in the case of financial promotion an area of high interest for me personally, it is unfortunate that the regulations are so vaig.

In the UK the FSA are quite clear that the regulations are not meant to hinder creative marketing. The problem is that the decisions on advertising suitability are left to those in compliance departments with no understanding of marketing and who's interpretation of the regulations are always beyond cautious.

Unfortunately, leaving regulation down to individual interpretation means we are left with an uneven playing field where some advertisers gain advantage from less stringent compliance officers.

Regulation is a great thing, if only the rules could be absolutely clear and free from personal interpretation.

As much as "some" regulations are needed, here's a chance for the government to finally not over-react and over-steer on a serious issue.

We Americans are due.

PS. Does this prove pure free-market economics primarily benefits the highest layer of the pyramid?

thanks!

Many thanks! scaffolding