Thursday, November 15, 2007

Dr. Doom Returns

"Another credit bubble has met its demise in U.S. financial markets. ... Meanwhile, it's worth asking who is in charge of our financial systems during this critical period? That is, what kind of role should regulators play to ease us through the crisis and safeguard against future turmoil? ... Indeed, it seems the basic purpose of the superfund is to delay the accurate pricing of the junk mortgages in the SIVs, and to delay the recognition of losses. The superfund would neither resolve nor mitigate the fundamental problems in the financial markets. ... The problem is that the Federal Reserve and Treasury have failed to come forth with solutions that will limit future financial excesses. ... I asked [Ben Bernanke] what information he would like that is not currently available to him. Pointing immediately to the problem of pricing subprime instruments, Mr. Bernanke said frankly, 'I would like to know what those damn things are worth'. ... Leading Fed officials periodically acknowledge ... it lacks the analytical capacity to identify a credit bubble in the making", Henry Kaufman (HK) in the WSJ, 13 November.

HK suggests we create a "new Federal Financal Oversight Authority ... under the auspices of the Federal Reserve". I oppose this. HK did not identify the problem. It is not that the "[Fed] and Treasury have failed to come forth with solutions that will limit future financial excesses". They cause they excesses. My answer: repeal the Federal Reserve Act and let the market act. Get the Treasury out of the business of protecting Wall Street from the people. We need to put large financial institutions in bankruptcy.

If Olympian Helicopter Ben (1590 SATs) does not know what the CDOs are worth, how can we lesser mortals know? Hint: let Citigroup have Sotheby's or Christie's auction them off. Or take them to a North Carolina tobacco auction. CDOs, tobacco, cattle, what's the difference? Alan Sloan at Fortune, 29 October, likened Goldman Sachs to butchers, "The butcher--excuse us, the investment banker--gives the customers what they want", see my 29 October post. We have more regulation than we need. Any regulatory body will be subverted by the industry it purports to regulate. The new agency amounts to: let GS do whatever it thinks best. That's current policy. Make it official

Addendum: "While Mr. Kaufman proposes a new large regulatory agency for the credit crises and subprime mess for large banks, I would ask a different question or propose a potential solution going forward. Maybe the answer is to restore the Glass-Stegall Act of 1933", Peter Hill's letter to the WSJ, 15 November. Hill may be right.

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