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March 26, 2009

Like The Old Saying Goes, When You’re A Hammer, Every Problem Looks Like It Needs To Be Heavily Regulated…

We created a list of the major sectors of the American economy and ranked them in the order of how heavily regulated they are by the government, from most to least:

1. Financial Sector   
2. Every Other Sector   

Using the same economic sectors, we then ranked them in the order of how great a contribution they made to our current financial crisis, from most to least:

1. Financial Sector
2. Every Other Sector

Notice anything similar?

Yeah, neither do we. 

That is why we support the obvious need for more regulation of the financial sector.

Much more.

To start things off, Timothy Geithner testified before the House Financial Services Committee this morning, unveiling the first component of his proposed regulatory reform which was aimed directly at what he believes is the issue in most immediate need of attention:

Systemic Risk.

Systemic Risk refers to the grave damage that could be done to the entire nation’s complex interconnected system of campaign contributions were a single large firm to fail. From brokerage firms to banks to insurance companies, the very fabric of influence peddling could unravel in a very short time, creating a disaster that would be felt from one end of the country to the other, and by “country” we mean “K Street.”

Secretary Geithner’s plan to address systemic risk encompasses six specific proposals:

I. A Single Independent Regulator with responsibility over Systemically Important Firms and Critical Payment and Settlement Systems.

Up until now, our fractured, multi-layered regulatory system has helped create a series of different, totally disorganized financial crises, from the S&L failures of the late ‘80s and early '90s to our current crisis involving mortgages made to people who couldn’t afford them. With a single regulator in charge of everything, a much larger, better organized crisis involving every single element of our financial sector could easily be coordinated from right here in Washington.

Naturally, this regulator must be independent, like the Federal Reserve which is so completely 100% independent that Federal Reserve Chairman Ben Bernanke went on 60 minutes to demonstrate just how independent of public opinion and political pressure he is.

Hey, it’s not like he went on The View.

II. Higher Standards on Capital and Risk Management for Systemically Important Firms:

Given that the last time a single regulator took on capital and risk management of a select group of important firms, of the five, two went insolvent, one went bankrupt, and two more required massive infusions of federal bailout money and their conversion into bank holding companies, it is clear why such an approach must be expanded as soon as possible.

III. Requiring All Hedge Funds Above A Certain Size to Register

Since hedge funds had little to nothing to do with our current financial crisis, we have no other choice but to seek immediate government regulatory authority over them.  Only by opening up these funds to the regulatory whims of the political process can we ensure that low-income Americans will finally gain access to no-money-down credit default swaps, interest-only CDOs, and no-doc currency derivative contracts they can call their own.

IV. A Comprehensive Framework of Oversight, Protection and Disclosure for the OTC Derivatives Market:

The government will, for the first time, have regulatory authority over complex derivative securities so as to better manage “excessive risk-taking” on the part of financial institutions.  Of course, these financial institutions took excessive risk with the full knowledge that the federal government would bail them out and we could simply address the problem by removing this overhanging moral hazard by ending once and for all, the ability of the government to use taxpayer funds to bailout private businesses.

Unfortunately, it’s difficult to achieve Treasury's goal of expanding the federal bureaucracy under such an approach.  So instead, we'll create an army of GS-11s and GS-12s charged with trying to monitor a fast-moving, endlessly innovating market in financial derivatives. 

It will probably work out fine.

V. New Requirements for Money Market Funds to Reduce the Risk of Rapid Withdrawals:

Money market funds have long offered investors an alternative to federally insured deposits at commercial banks, providing some mixture of returns, flexibility or other advantages to compensate for the higher risk.

This simply cannot be allowed to continue, particularly since regulatory authorities have already demonstrated their oversight prowess with the banks.

VI. A Stronger Resolution Authority to Protect Against the Failure of Complex Institutions:

By giving the federal government the authority to step in if a firm is about to fail, we ensure that no firm is ever going to behave as if it should be concerned about failing again, and with its expanded scope, this won’t just apply to banks, but insurance companies, hedge funds, private equity funds, and others so that it will be understood up front that the best way to ensure maximum protection is to be as big and as reckless as humanly possible.

And yes, this is just the first component of Treasury’s plans.  There are three more to come in the months ahead.

Just in case you were looking into Costa Rica.

J.

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March 26, 2009 at 07:50 PM in Current Affairs | Permalink

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Comments

So when do we get to hear about how Congress allowed these companies to get to the point where they cannot fail? Wasn't that what antitrust laws were for? And what they are doing now is just making (forcing) Large companies buy out other companies and become even larger. Called takeovers. This makes me want to barf!

Posted by: barryjo | Mar 26, 2009 8:57:18 PM

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