Tuesday, March 3, 2009

“Modern finance”

A comment entered over at www.interfluidity.com :

The problem is that the lessons of the Depression were tossed aside by the "true believers" in modern finance (financial tricksters) through deregulation and leverage, and investment banks and commercial banks and hedge funds and basically almost every variety of financial intermediary except credit unions blew it.

The investment banks and rating agencies conspired to fleece the public with the mortgage securitizations that some of the banks were just stupid enough to hold (or dumb enough to make bad RE loans and portfolio them--or unethical enough to book bad loans to get rich quick).

I am impressed with the Canadian model, a banking system run as a public utility under strict regulation. We're much more likely to be able to get there in the short run than to yet another fast-buck market solution.

Leave investment banking to the investment banks, and let them go bust when they screw up. Keep the balance sheets of the commercial banks clean and conservative, so that they don't freeze up when risk premia rise.

By their fruits shall ye know them--I don't trust "modern finance" to solve this problem. Modern finance has hosed the banking system up with deregulation and CDSs and other derivative crap they've pushed so bad the government is going to have to take it over to sort out the mess sooner or later, and the longer they wait, the worse the problem gets.

The AIG bailout is mostly to prevent triggers on CDSs from triggering, as I understand it, so we're bailing out the derivative holders before we bail out the banks. This makes sense?

I'd declare all CDS contracts null and void unless held as hedge against an owned asset, for starters. On net, that's supposed to be a zero sum game, but it will impact the pigs like AIG who sold these things thinking it was free money--and they're the ones who should be expropriated, not the taxpayers. The losses on the underlying securities aren't going away--why recognize them twice?

Summers and Geithner have got to go, or change their tune quickly to restore confidence.

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