This week “60 Minutes” highlighted an obscure statute that some say is at the root of the recent market meltdown: the Commodity Futures Modernization Act of 2000. The CFMA exempted certain derivatives from existing state and federal regulation. But “60 Minutes” failed to ask the most interesting question: Why was the exemption needed? The short answer is that both federal and state law banned many useful financial transactions. The problem wasn’t regulation, it was prohibition. The only way to avoid the bans was to get out from under the statutes. …
…then how can we trust them to better manage the economy? A few weeks ago famed currency speculator George Soros made news complaining that financial regulators had been “consistently behind the curve” during the unfolding financial crisis. But why is Soros surprised? It seems that “behind the curve” is one of Soros’ favorite phrases, and he applies it frequently to central bankers. Among those Soros has charged with being “behind the curve” are the Bank of England (April 2008), the U.S. Federal Reserve (January 2008), central banks in general (in …
…it would be a shame if something should happen to it. Gangsters threatening those who fail to knuckle under are rarely so unsubtle as Friday’s letters to two hedge funds from the Chairs of the House Financial Services Committee and its subcommittees. Based on an article in the New York Times, Rep. Barney Frank and company believe the hedge funds are impeding the foreclosure relief provisions of the Hope for Homeowners program. What did the funds do? They reminded mortgage servicing companies that the mortgage holders must consent to modifications …
When a Nobel Prize-winning economist tells you something is too complicated to understand, pay attention. That is just what Nobel Laureate Gary Becker said about the financial crisis in Tuesday’s Wall Street Journal. The main problem with the modern financial system based on widespread use of derivatives and securitization is that while financial specialists understand how individual assets function, even they have limited understanding of the aggregate risks created by the system. That is, insufficient appreciation of how the whole incredibly complex financial system operates when exposed to various types …
The DC Examiner has a mostly wonderful editorial pointing out that the regulators missed the warning signs of the market crisis as much as the investment banks did. The Examiner properly concludes the question is not “more” or “less” regulation, but then wrongly implies there was no regulation “at all”. A very long Securities and Exchange Commission Inspector General report on the Bear Stearns failure can be boiled down to the Examiner’s first point. The SEC saw warning signs at Bear Stearns, and Bear’s internal risk managers did as well. …
