Thursday, April 10, 2008

Regulatory Reform?

"US Treasury Secretary Henry Paulson proposes that the [Fed] be given powers it does not have today, to demand information from/inspect books of/impose constraints on the behavior of--the primary dealer-brokers (that its, investment banks) for as long as the Fed is providing these investment banks with money through open market operations (via the Term Securities Lending Facility [TSLF] or at the Fed discount window (through the Primary Dealer Credit Facility [PDCF]). Once the investment banks stop sucking at the [Fed] nipple, however, the new supervisory/regulatory role of the Fed vis-avis the investment banks would shrivel and the ancien regime would re-emerge more or less intact. This proposal is a recipe for increasing financial instability. ... But the information gathered by the Fed during the bad times in this way is of no use whatsoever, unless it can be used to restrain the behaviour of the investment banks and of other highly leveraged financial institutions (incluidng regular, deposit-taking commerical banks) over and above what has been possible in the past. Financial crashes and crises are prepared and nurtured during the financial booms that precede them. Unless a way can be found to restrain financial booms, limiting the damage caused by financial busts will have the highly undesireable side effect of increasing the attractiveness to the private sector of engaging in behaviour likely to result in even more extreme booms and busts in the future. ... The importance of the point cannot be over-emphasized: asymmetric regulation during bad times, in exchange for financial largesses by the Fed, as proposed by ... Paulson, is a recipe for exacerbating the financial excesses that occur during cyclical booms", William Buiter (WB) at, 31 March 2008.

Amen. Paulson's proposals are just an investment bank bailout. WB has this knocked.

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