The root of all culprits is the Fed. The Fed has had the authority to prevent the sort of systemic risk that has taken down the banking system from arising. The Fed, under Greenspan, exercised no controls on what was obviously a bubble in real estate.
The Fed today is still not exercising any regulatory or other control over the banking system. They could, if they wanted, de-escalate the risk inherent in the system today. Instead, the response of the Fed is to warp the yield curve to the bankers’ advantage, provide cheap money and swaps to bail them out of their bad decisions and make whole investments that should be hit with a risk loss.
Since the Fed has seen fit to do this, there is only one alternative and that is for Congress to make regulation through federal law. G-S won’t solve all the ills of today, but it would prevent the next AIG and Citi from forming and force these beasts back into their appropriate boxes. What is needed is actually far more regulation, including but not limited to:
1. Banning dark pools and private markets in financial securities and commodities. If they’re going to be traded, get them out into the open on regulated markets where they can be seen and accounted.
2. Banning of credit default swaps where the seller hasn’t the capital to make good on the swap, and the purchase of said contract where the buyer has no financial interest in the underlying issue. The CDS market is rather too much like a mob sub-cult right now, peddling life insurance on people they’re hoping to get a contract to hit.
3. The net effects of the CFMA 2000 should be unwound. Put financial and energy futures back under the same body of law that regulates commodity and ag futures.
4. Increase bank reserve requirements.
5. Decrease permitted leverage to 10:1, no more. If I can’t trade at more than 10:1, then neither can the investment banks.
6. Outlaw SIV’s and similar accounting dodges. All banks, hedge funds, et al must mark to market. If there is no market, then there’s prima facie evidence that there’s something wrong with the issue, not that there is a problem with the market.
Fannie, Freddie, FHA et al are indeed a big part of the problem, I agree. The root cause goes back to the Fed, again. Who is propping up the RMBS market right now? The Fed. To the tune of $1.2 trillion. With defaults climbing into the jumbo prime tranches, and prime defaults on conforming notes going up, it is abundantly clear that the Fed is going to take losses on their RMBS portfolio. Since Congress shows no spine to take on the Fed, the only solution I have is to so severely constrict the banking sector that there will be no future opportunities for the Fed to play their games again.
The Fed today is still not exercising any regulatory or other control over the banking system. They could, if they wanted, de-escalate the risk inherent in the system today. Instead, the response of the Fed is to warp the yield curve to the bankers’ advantage, provide cheap money and swaps to bail them out of their bad decisions and make whole investments that should be hit with a risk loss.
Nail meet hammer. Spot on.