On Tue, 18 Mar 2008 01:04:29 -0400, "Ed Huntress"
wrote:
"Jon Elson" wrote in message
m...
Ed Huntress wrote:
"F. George McDuffee" wrote in message
...
As usual Krugman asks the right question and then quits.
"So here's the question we really should be asking: When the feds
do bail out the financial system, what will they do to ensure
that they aren't also bailing out the people who got us into this
mess?"
I don't think he knows the answer to that.
But *** I *** know the answer (and I'll be the rest of you reading do,
too)! Basically, nothing will be done. The whole crappy situation is
institutionally entrenched. They've built this house of cards over
decades, and NOBODY quite knows how to take it apart without the whole
thing falling down. It will take YEARS of Congressional hearings and the
passing of new laws to stop these practices. A bunch of companies will
likely go down the tubes like Enron, when it is found there is DAMN little
actual value in all the paper they are holding. Hopefully, we won't have
a run on banks like what started at Bear Stearns, but a run on investment
and commercial banks could make what happened in 1929 look like a party!
I mean, if GM suddenly can't issue paychecks, it could get "serious".
And, it could happen pretty suddenly, the way everything is online now.
Jon
I don't think they'll do "nothing," Jon. My feeling is that they'll restore
some required disclosures to the unregulated "hedge funds" (which haven't
really been hedge funds since the '80s). And, if they find a way to make
this applicable across the board, they'll establish some kind of
documentation to derivatives trading. That means they'll have to be
registered, like stocks and most bonds are today. And deposits and some
other instruments will be subject to reserve requirements, with no way to
get around it.
In other words, all kinds of instruments will be subject to normal
good-practice banking procedures and they'll probably have to be registered.
There's some discussion going on about all this in the financial press, but
it's been overwhelmed by news of the panics. I think we'll see it surface
pretty soon.
====================
If you don't like my suggestions, feel free to post some of your
own for the groups evaluation/critique. Note that none of the
attack the "capitalist system" or "free market." These simply
implement the equivalent of speed and load limits for vehicle
operation on the public roads.
== Remember -- If we don't get what you want, we will get what
you deserve.==
There is no more chance of implementing any of these suggestions
than the baseball home run kings uniting to ban HGH, steroids,
and crank. It will required a concentrated effort to pound any
reform up the financial establishment's "nose" [I said *NOSE*]
with a 16 lb maul, which will be possible only after another
catastrophic melt-down, and their temporary loss of political
influence.
The downside of the US press reporting [such as it is] on the
"panics" is their total failure to examine the causes and make
any suggestions on how this could be avoided in the future.
Having too much time on my hands, I have spent some time on the
web probing this problem and have the following specific
suggestions:
(1) Put an absolute limit on the amount of "leverage" that a LBO,
hedge fund, private equity fund, etc. can employ. Although
several of the "hedge funds" (more accurately "speculation
pools") were invested almost 100% in AAA rated bonds issued by
GSE entities such as Freddie Mac and Sally Mae, they had a
"leverage" of 32X [probably more] and a total lack of any cash
reserves. The slightest downturn led to margin calls, forcing
sales into a down market, further depressing prices, and their
collapse. In just one example [Carlyle Credit Corporation] 16
billion dollars of the "investors" money went up in smoke in
three days. There are many others. I suggest that the absolute
limit of leverage be set at what corresponds to the bank's loan
reserve requirements, i.e. 10X if the bank loan (cash) reserve is
set at 10%, 5X if the loan reserve is set at 20%, etc..
(2) Given the common practice of the banks to evade loan reserve
requirements, increase the loan reserve from 10% to 15 or 20%,
with a corresponding reduction in the max leverage allowed in the
private capital pools, hedge funds, etc.
(3) Eliminate the use of "off-shore" corporations
created/domiciled in the Cayman Islands, Liechtenstein, etc. as
SIVs [special investment vehicles], SPE [special purpose
entities], conduits, CDO [collateralized debt obligation]
trustees, etc. as this both places the records and assets beyond
the reach of the US courts, and eliminates many of the
traditional financial safeguards under US law. These are also
widely used to evade the bank loan reserve requirements.
===========
"Other underwriter responsibilities include working with a law
firm and creating the special purpose legal vehicle (typically a
trust incorporated in the Cayman Islands) that will purchase the
assets and issue the CDO's tranches. In addition, the underwriter
will work with the asset manager to determine the post-closing
trading restrictions that will be included in the CDO's
transaction documents."
http://en.wikipedia.org/wiki/Collate...ebt_obligation
(4) There does not appear to be any shortage of "liquidity" in
the financial markets, rather a mis-use/mis-allocation of the
adequate and available funds. Thus the injection of 100s of
billions of dollars by the Fed is accomplishing nothing in
"thawing" the CDO segment, but is grossly inflating the commodity
bubbles such as oil, metals and food. In many cases, legislation
is not required, merely the issuance of a rule by the controlling
agency such as the CFTC [Commodity Futures Trading Agency] Some
immediate measures that should be taken include:
(A) Eliminate "naked" shorts in the commodity markets by
requiring a person or institution to have an actual deliverable
contract before they can sell "short." This will have no impact
on traditional hedging by manufactures seeking to stabilize their
raw material prices, as they will have both a long and short
position.
(B) Eliminate margin or "leveraged" speculation in the
commodities markets by increasing margin requirements, and as
possible forbidding the use of borrowed money. The current
margin requirements are arcane and not easily understood [or even
located/determined] but the objective should be to increase the
margin requirements to 100% to reduce speculation and diversion
of capital. Most likely this should be phased in over several
weeks to allow orderly unwinding of positions.
(C) While this will require a change in the law, it appears that
speculative profits in commodity trading should not be taxed at
the capital gains rate but at the regular earned income rates, to
reduce the returns (and motivation) to participate in such
speculation. Indeed, given the very bad effects such speculation
is currently having on the "real" economy, a surcharge above
normal income rates appears to be fully justified. Again this
will have no affect on traditional hedging as the gain/loss from
the short position will be off-set by the loss/gain from the long
position.
(D) Because of the very bad effect currency/foreign exchange
speculative trading is having on the real economy, it is time to
impose a "Tobin" tax of 0.01% to 0.5% on each ForEx transaction.
This is small enough to have minimal effect on actual currency
trades for commerce, but is large enough to remove much of the
profit [and motivation] for high volume churning and short-term
speculative trades.
(5) It appears mandatory to re-enact some form of Glass-Steagall
[if futures bubbles are to be avoided] to create an absolute
seperation/firewall/bulkhead between the financial sectors of
commercial/depost banking, merchant banking, stock/bond
brokerage, securities rating [monoline insurers], financial
analysis, and insurance.
The temptations and opportunities for self-dealing and
cross-subsidization are simply too much to be resisted when any
of these functions are combined in a single organization.
I would expand the prohibitions of Glass-Stegall on commercial
bank's dealing in securities to include not only domestic but
also international transactions, as this is what lead to one of
the first major post WW2 economic crisis in the 1970s when the
major US banks became heavily involved in Latin American
speculation/finance. When this particular "ship hit the sand"
[as they always do] it resulted in considerable upheaval in not
only the bank's internal operation, but the domestic environment
of the countries involved as well as the
political/military/intelegence intervention/meddling of the U.S.
government [e.g. Chile, Guatemala, El Salvador, Brazil,
Argentina, Columbia, Panama, etc.] which continues to cause
problems and cost huge sums of the US taxpayers' money even
today.
http://en.wikipedia.org/wiki/Glass-Steagall_Act
Unka' George [George McDuffee]
-------------------------------------------
He that will not apply new remedies,
must expect new evils:
for Time is the greatest innovator: and
if Time, of course, alter things to the worse,
and wisdom and counsel shall not alter them to the better,
what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman.
Essays, "Of Innovations" (1597-1625).