Barry Ritholtz argues that it was regulatory exemptions that contributed to the current crisis, "You read that right - the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1." The exemption was for five firms to leverage to 40-1, three of them are now defunct and the other two have issues.
Governance matters, and bad governance has a habit of sticking around despite the best efforts to remove its effects. Paul Fritjers writes:
The structures now being built in the US or Europe (direct interference) to regulate the financial markets may be with us much longer than we would like.State of exception governance or crisis governance is not easily eradicated. Australia is stuck with the legislation form the exception governance of the latter Howard years such as the Northern Territory intervention and the Migration Act Amendment. The linger as tools future national governments can use to act arbitrarily. The same with the Bush Administration's approach to this financial crisis, the entirety of it is being handled in the US Treasury as an executive issue. As Paul Fritjers noted the policy from the US Executive is direct interference and the redistribution of wealth from taxpayers to the financial and banking industries. That legislation and policy will linger long beyond this crisis and we will see future economic bumps dealt with in socialistic manners rather than letting the weak banks fail and the strong ones snap them up and take them over for pennies on the dollar. A close relationaship with the executive has now become an essential part of the financial industry's wealth and ongoing health. They now have a political face as well as an economic one.
Barry Ritholtz has an impassioned plea; give us capitalism or give us socialism, but not the half arsed mess of both that the US Federal Reserve is serving up in the name of politics, bad policy, poor governance and crony capitalism. The result will be to prolong the current mess of bad lending, keep the recession going and increase inflation. None of which are palatable in the long run.
Ritholtz points back to the governance of Greenspan at the US Fed who actively promoted bubbles and then bailed out losers of the bubbles by making credit cheaper so that there were no losers and speculation could continue. Capitalism works best when those that over speculate are punished for it by bankrupcy.
Without the correct signals and punishments for failure then risk simply does not exist. We saw this in the subprime markets where risk was assumed to be absent. As a consequence bad loans were made that can never be recovered. The bad governance aspect is that now the US Fed is asking for 300 billion of tax payer money to bail out private institutions - include Fannie Mae - to cover their risks made on the private markets. This is not how capitalism works. Ritholtz writes:
There is a choice to be made: Either we regulate the Banks, or leave it to the vagaries of the free markets to punish those who trade with, or place their assets in the wrong institutions. But for God's sake, do not give us the worst of both worlds -- do not allow banks the freedom to make horrific but preventable mistakes (i.e., only lending money to those who can pay it back), but then expect the taxpayers to foot the trillion dollar bill. That's not capitalism, its not socialism, its not regulation, and its sure as hell isn't what free markets are. Our language is insufficient to describe this hodge-podge system, other than to call it a random patchwork of quasi-capitalism, quadrennial-socialism, and politics as usual. Ideological idiocy is the only phrase I can muster that has any resonance with the daily insanity.Ritholtz makes the statement that our institutions have failed us and that this is misgovernance on a grand scale leading back twenty years. Economic policy has not been grounded in the principles of capitalism; but instead 'feelgood' politics and outright criminal behaviour. American capitalism is losing its foothold as the world's leaders in economic activity. This is being shown in the US dollar dropping in value. It is bad policy and criminal behaviour that has led to this. It is recoverable - and the US will recover - it is not dead in the water yet. But it will take a strong hand of governance and the democratic will to govern with economically sound policies. Joshua Gans has argued for an Aussie Mac. Australia has not needed one this far, and as a country Australia has more regulation into capital markets than the US does. Australia has not been impacted greatly by the subprime mess - only Macquarie Bank and a couple of others IIRC were up to their necks in it - and while global capital will become more expensive with the turmoil from US markets, it is no excuse to subsidise home lending with taxpayer guarantees. Otherwise politics will trump economics and Aussie Mac will be used for all manner of bailouts and social engineering.
Justin : "only Macquarie Bank and a couple of others IIRC were up to their necks in it"
Nope, that's incorrect if I recall. Macquarie in particular had zero subprime exposure and some of the retail banks had indirect exposure, but nothing like the US banks.
cam : This was the map I was trying to recall from memory.
The three red dots on the Australian continent are Macquarie Bank, Absolute Capital and Basis Capital (Hedge fund).The map just says they were losers, doesn't go into how much or why.
cam : Note: Updated the sentence that caused confusion with a link to the subprime lending map exposure.
adam : RAMS was also part of the fallout, for the same reason as Northern Rock - they were funding mortgages using CDO-like instruments.
Malcolm Fraser conducted economic policy with two broad sweeps of the brush; keep inflation low by keeping the federal budget out of deficit, and stopping trade unions increasing wages in a full employment economy. In my opinion, the recent IR legislation has Frasernomics as its driving force.
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