Tuesday, June 10, 2008
"The demands for more government regulation of financial markets are growing louder and more insistent in the wake of the housing meltdown. ... But it is naive to expect the Fed to be an omniscient predictor of financial trends. It is even more naive to think that the Fed would have the political will, and clout, to neutralize potentially destabilizing forces before they cause financial havoc. ... Securitization distances a bank from the consequences of bad lending and not charging enough for credit risk. ... [Some key changes]: Encourage banks to use 'covered bonds' to fund--and hold onto--the fixed-rate mortgages they originate. ... Those longer maturities would reduce maturity mismatching, which was the underlying cause of the U.S. S&L fiasco and more recent problems in the financial markets. ... Eliminate the double taxation of dividends. ... Modify fair-value accounting rules. ... When assets and liabilities have roughly the same maturities, changes in their market values largely cancel each other, making fair-value accounting pointless. ... Hold bond-rating agencies more accountable for their ratings. ... These agencies have successfully invoked the First Amendment to protect themselves against lawsuits when their ratings have been widely wrong. Elminating that protection when a securities issuer has paid for a rating would make the agencies extremely reluctant to rate complex, opaque securities whose performance is subject to nearly incomprehensible variables", Bert Ely (BE), at the WSJ, 31 May 2008.
I remember when BE testified in front of Congress in 1983 about the S&L crisis. It didn't believe him. I see BE as one of the few people who understood the S&L crisis at the time. I agree with all of BE's suggestions except modifying fair-value accounting rules. If banks match maturities, the fair value accounting entries to be made will be minimal. However, to suspend the rule would invite abuse.