Thursday, March 26, 2009

The old dog wouldn't hunt- will this one bark?

Tim Geithner has a plan to reform and re-regulate the financial system

One for all
It's for one super-regulator. Once again Geithner provided some overview of the issues but no details. This was no cookbook recipe. It was more like a photo spread that showed how good the food could look and described the aroma. Recipe in next month's journal...

The question is whether one super regulator could have done any better. Ask yourself, "what difference would it have made?" It might have caught the credit default swaps. The Geithner plan calls for more capital but is that enough? Could banks in this last episode possibly have had enough capital to cover for what they did? I doubt it. This crisis was not about the lack of capital at banks rather it was about the lack of judgment by bankers, the lack of critical oversight- not of oversight... and the willingness to go where no man has gone before. It sounded bold- Star Trek-like. But it wasn't.

Star Drek
Yes, the crisis was a series of mistakes. They lead to bad results. Bad work by rocket scientists or at least by the ones that plied their trade on Wall Street. We still can't agree on what caused it all so the idea of preventing a repeat is not very promising. Was it the Wall Street compensation system? Was it lax oversight? Was it undue leaning on untested mathematics and statistics? We have nothing in the new Geithner system to protect against these things. He has not bought into a reimposition of Glass Steagall of any sort.

Geithner is looking to use exchanges for plain vanilla derivatives and to make sure that transactors have skin in the game on all transactions. He would regulate private equity and hedge funds for the first time. People did lose money in such ventures; those were not the cause of systemic instability, however. The unregulated part of the market carried its own water and took its own lumps in this crisis. It was the 'regulated' banks and securities firms whose losses threatened the system.

Still at risk
On balance the Geithner plan closes some trouble-causing loop holes and perhaps it closes some potential loopholes. It would make sure that credit default swaps were paid attention to by some regulator. But so much of what whet wrong was about failed judgment at banks. Banks do not appear to be denied access to any of these activities under the new plan. Also what could have been done about lawmakers bending age-old rules to get their constituents in on a hot market traditional credit requirements had closed them out of? No super regulator will be that super.

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