Two thoughts: First, the very active role of the Fed in the Bear Stearns crisis must,
in the long run, give rise to a fundamental revaluation of the role and
powers of the SEC, the entity technically responsible for investment
banks. The SEC now appears relatively toothless.
Second, the more commitments made by the Fed, the more we lose the
(quasi) independence of our central bank; for a large commitment
Treasury sign-off is needed. The realignment of the regulatory
universe will eventually emerge as a big story from the current crisis,
though it is hardly commanding much attention right now.
Paul Volcker comments.
The Fed’s got money and the SEC hasn’t. It’s not abnormal to have dispersed rulemaking but the Fed ought want some control now that it’s on the hook.
Apparently the Fed did not contact the SEC about this bailout until after the fact. But there are several issues here. The first is that the Fed effectively created an unregulated shadow banking system in the form of the hedge fund and private equity industry, arguably because Greenspan and the other governors feared that their own banking regulation was stifling the U.S. market. (Greenspan, if you recall, came out publicly against SEC regulation of the hedge fund industry.) It has been apparent since at least LTCM that the unregulated private markets between institutional investors had at least the potential for systemic risk, and over the past several years it also became apparent that these institutional investors had replaced regulated banks in supplying commercial paper and leverage to many of the world’s corporations and financial firms. In other words, at the same time that the Fed had figured out ways to protect regulated banks from financial contagion, and forged an international concensus through Basel II to do the same around the world, it opened a gaping back door to financial contagion through this shadow banking sector. And, worse, it fought other agencies (first the CFTC, then the SEC) who actually did try to rein this sector in.
Second, of course, the Fed (and other U.S. banking regulators) took an extremely lax view of consumer protection with regard to predatory lending, mortgage fraud, and lending due diligence. And it refused to crack down on these practices, even in the face of widespread anecdotal information about an increase in fraud and clear housing bubbles in many markets. (Insisting, for example, that the United States has no “national” housing market for there to be a system-wide housing bubble to pose a risk.)
Third, of course, were decisions the SEC and Fed made, in the face of European pressure, to create a “consolidated” regulatory approach to large financial firms. The idea here was that any global firm operating in Europe would need to approach matters such as capital adequacy from an organization-wide perspective, to keep failures in one part (say, the private hedge fund area) from dragging down other areas (retail broker-dealing). The problem with this, of course, is that the SEC has no experience and no real skillset for prudential regulation of this nature. The SEC is more of a cop than a regulator — it has a disclosure-based regulatory mindset, sets rules and executes violators. It’s not much into nursing them back to health, seeing this as undermining its ability to deter those who violate the rules. Worse, under the old system, the firewalls between Bear’s different divisions might well have staved off threats to investor confidence, since capital in one area couldn’t be used to buttress confidence in another. This would have led to a collapse of parts of Bear much earlier, but might have saved other parts. Instead, we had a complete collapse.
mickslam, you need to study your economic history more.
John Kunz, M.D. Fatwa and mickslam,
You are the reasons i have a bad case of MARGINAL REVOLUTION, I park my brain infront of this blog, as i decompress from a long day of work, prior to my evenings chores, and feel synaptially refreshed and Marginaly learned when it’s time for life to go on. I THANK YOU.
Kunta Kinte,
You are the reason i have a bad case of MARGINAL REVOLUTION, I park my brain infront of this blog, as i decompress from a long day of work dealing with people like you. I THANK YOU, for the daily lesson in duality that is the process of life. Pleasure and Pain all at the same time.
As is this post no doubt.
Is it realistic?
it is not a bad topic
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