Thursday, May 14, 2009

thinking: Deregulate this! Some things may need to be more regulated but many many many more need to be much less regulated!

"The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end"
These are some of the words of Timothy Geithner, US Treasury Secretary to Congress.

His comments make it clear that the US Treasury Dept. wants more regulation of the so called "derivatives" those complex financial instruments that many people put at the core of the causes that brought down some of Wall Street's biggest names in recent months. According to some, perhaps the most notorious form of derivative is the so called "credit-default swap".

It appears that among the proposals of the Treasury Secretary is one for an electronic system to monitor buying and selling in the market for derivatives. Also, firms trading in derivatives will need to have enough capital to support their sale of the derivatives and for the case they default and will face tough reporting requirements as well.

Existing US laws do not regulate derivatives instruments that are referred to as "over-the-counter", because they are "privately" traded, unlike stocks and bonds.

What is the policy, political and general thinking behind Mr. Geithner's ideas and proposals (sahred by many others as well)? The idea that such policy - regulatory measures would reduce the risk to the "financial system".

Ah, the system, the system!!!

In a draft letter, to congressional leaders, the Treasury argued that "all derivatives dealers and all other firms whose activities in those markets create large exposures to counterparties should be subject to a robust regime of prudential supervision and regulation".

Ah, exposure, exposure, another techno-horror term!!

"Key elements of that robust regulatory regime must include conservative capital requirements, business conduct standards, reporting requirements and conservative requirements relating to initial margins on counterparty credit exposures," the US Treasury also argued.

This whole line of thinking goes hand in hand with the point of view that many of the troubled financial institutions were "too big to be allowed to fail" because they and their activities were so intertwined in the "system" that their failure would cause structural damage or at least tsunamis to not only the financial system but the whole economy and general "system" as well (well, nowadays some people are even dusting off their Marx books thinking that the current global economic crisis and its effects provide a platform for doing away with capitalism - about that, see other posts in this blog).

Well, maybe Mr. Geithner (former governor of the Reserve Bank of New York, I remember him from watching the hearings last spring re Bear et al) and his Department are right, maybe they are not. I am not sure whether the right type of regulation here is of the kind they propose, or, merely, the application of the principles of competition law in this sector of economic activity. Eg do soft drinks companies lend each other produce or do they lend each other? No! Why should then financial institutions that are supposed to be competing against each other were and are stil allowed to lend each other and in general "do business" with each other?

Anyway, my main point in this post that economic activity as a whole, from the large multinational conglomerate to the small family shop around the corner, in the US and in the OECD world as a whole, is and has been too heavily regulated for too long and that that is the real, in my opinion as a "thinker", cause of the current crisis. The other is, at best, a by-product of the core cause.

In my opinion again, the financial world created a bubble that burst because it kept on growing in spite of the fact, IMO again, that in recent years more nd more of the economy was Services and less and less of the complex financial engineering and tools was needed by the Real Economy. A real economy that is mostly small and medium size firms, mostly in the Services "sector", unlike the manufacturing/industrial "past" of large companies, heavy capital set up costs etc that created the need for sophisticated financial services that led to the kunk bonds (in the 80s) and now the subprimes and other "derivative" instruments that caused the current "tsunami". A real economy whose needs did not include the type of tools that were so heavily vested in another attempt to create a new platform for application of tools and investment of high promise, the "Dotcoms" (that burst in the late 90s).

Yes, it is my theory/thesis that the Real Economy needs urgent de-regulation, needs to be left "alone" to create ideas and nee services (and thus GDP and jobs)! The Real Economy that in most if not all OECD countries has been hurting under too much, irrational, chaotic and f nad quality regulations and laws for too long! The Real Economy of small and medium (and micro) companies in the Services sectors. Deregulate this!

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BRs
Nick

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