Posted on 08/18/2009 12:39:43 PM PDT by rabscuttle385
Since the bailouts last fall, lawmakers have been behaving as quasi-owners of the bailed-out banks and businesses, leading to calls for increased regulation of executive compensation and other wasteful expenditures. We have heard much about bonuses and executive pay packages that sound more like lottery winnings than an honest salary.
Many lawmakers voted in favor of these unconstitutional bailouts, believing that these corporations were too big to fail, and allowing them to go under would precipitate widespread economic disaster. This second wave of citizen outrage at the bailouts has left these lawmakers with a bit of egg on their face, and once again, they feel the need to "do something" to "fix" it. Shouldn't there be a regulatory structure in place governing executive compensation? Politically, it seems quite feasible. People are outraged that the system has once again gutted the many to make a few at the top fantastically wealthy. But they are incorrectly demonizing the free market.
What we need to realize is that there WAS a regulatory structure in place that was attempting to stop bad management, including overpaying executives. That regulatory structure is the free market, and when poor management brought these companies to the point of bankruptcy, Congress circumvented the wisdom of the free market, and inserted its own judgment at our expense. And now because of that intervention, we will be burdened with massive new regulations. We can be certain this effort will fail.
The free market is a naturally occurring phenomenon that can't be eliminated by governments, not even totalitarian ones like the former Soviet Union. It can be regulated, over-taxed and manipulated until it is driven underground. Lately it has been wrongly accused of doing so many things it just doesn't do, that are really the fault of crony corporatism and convoluted government policies that brought on the crisis. Too many people equate the free market with big business doing whatever it wants, but that is not the free market. Unconstitutional taxpayer funded bailouts are what allow giant corporations to run roughshod over the economy. The free market is what puts them out of business when they misbehave.
The free market is you and your neighbors working hard to produce what you produce, and exchanging goods and services voluntarily, in mutually agreeable arrangements. The free market is about respecting property rights and contracts. It is not about building up oligarchs and monopolies and confiscatory tax theft - these are creatures of government.
We must watch out when government comes up with interventionist solutions to interventionist problems. The root of our problems lie in interventionism. Trusting the free market is the solution.
Such a COMPELLING argument. So tell us your view on how removing credit default swaps from regulation was such a SMASHING success story.
RP: save the shrimp! Eat more pork!
Dirtboy: more regulation is the answer. What we need to do is regulate the regulators! Listen to me, tt’s them dang derivatives. What we need is a War on Derivatives!
One thing for sure, noone can point their finger to blame Ron Paul for this crisis. He’s been banging his head against a wall for decades telling folks this was coming. Noone was listening. They were all too busy slicing and dicing derivatives. But most everyone is listening today. Well maybe not dirtboy, he’s still not up to speed. Last I heard, he was still way down south in the swamplands stomping shrimp.
Apparently, though, he still hasn't learned from this expensive lesson. Please make a complelling argument about how exempting credit default swaps from any regulation was a sound move.
Well maybe not dirtboy, he’s still not up to speed. Last I heard, he was still way down south in the swamplands stomping shrimp.
I'm not a hypocrite like Ron Paul, who inserts earmarks for marketing wild shrimp while sanctimoniously pretending he is against earmarks.
I’m skeptical that regulation of Credit Default Swaps would have made this crisis less severe maily due to the fact that things like Bernie Madoff’s scandal happened right under the nose of the SEC. However, I don’t think regulation gets to the root cause. Though I don’t understand the issue of Credit Default Swaps and Derivatives fully, people essentially took on excessive risk and were extremely leveraged for the potential to make large profits. But the underlying assets were implicitly backed by the government through Freddie and Fannie and as such, an essential element of risk was removed, that is the risk. No implicit risk, huge potential for profit, and tons of easy credit from the Fed (which had other distorting effects on the economy) was a recipe for disaster.
Risk and greed (or rather self interest) are constants that are extremely difficult to regulate or otherwise control by legal fiat. What “regualtes” risk is the individual’s desire not to lose money, and his own level of risk aversity. In a truly free market, an individual would be able to do whatever he wanted with his money and would have to face the consequences (good or bad) of his decision. If the risk he takes goes badly, then the fallout is for him and him alone to bear (no bailouts, no too big to fail, etc.).
Risk tends to be more profitable, but by definition, more risky. If you take away the risk, then all that’s there is the potential for profit. While the idea of having adequate reserve ratios seems good, one has to wonder, if the market were truly free, why would reserve ratios be necessary for individuals pursuing their own risk with their own money? Now if we concede that the market is not free and that the government is pumping in easy credit, implicitly backing many of the assets of the risk takers, then perhaps regulation of certain activities is necessary to prevent excessive risk taking. But I see as the greater culprit the original interventions into the market by the government. Regulation atop bad government policy is less optimal than no government policy and no regulation (of the type we are talking about) thus needed.
Now when the money someone may be using is not their own and is not rightly theirs to use, reserve requirements absolutely ought to be set, but this is merely an extension of basic legal concepts.
I do fundamentally agree about reserve requirements - that is a very basic regulation and requirement, and there were none that I could see for credit default swaps - and recall that investment banks were allowed by the SEC to move from a 20-1 reserve ratio to 40-1 - so that was a failure of regulation (and it wasn't the SEC driving the bus, the SEC was following the lead of European regulators).
But my main point stands - even reserve requirements are a form of regulation - a regulating body sets the requirements and then needs a means to audit to ensure the requirements are being maintained, and has the ability to step in if they are not.
Learned what? He was always opposed to the bailouts.
Please make a complelling argument about how exempting credit default swaps from any regulation was a sound move.
Ron Paul voted nay on the bill which established the exemption. So obviously, it wasn't a sound move in his opinion. Then again, 'he ain't called Dr. No for nuthin.'
Gambling on these CDS's is what investors do. However, it doesn't help when the govt gives assurances to investors in GSEs, like Fannie and Freddie, that when the sh!t hits the fan, their bets will be covered. Herein lies the problem. Not the lack of regulation. IMO
That's pretty much my take.
Try learning from the credit default swap debacle in that we should have some base level of regulation of the financial sector, for one.
Paul voted nay on the bill which established the exemption. So obviously, it wasn't a sound move in his opinion. Then again, 'he ain't called Dr. No for nuthin.'
Actually, the legislation in question was added to a larger budget bill, which Paul tends to vote against, and for valid reasons. However, he still believes that free markets don't need regulation, so he clearly has not learned from the meltdown of the last few years.
Gambling on these CDS's is what investors do.
Credit default swaps were not meant to be a means of gambling or shorting - they were meant to be a form of insurance, but a lack of regulation allowed them to morph into a monster. Hence the need for some regulation to prevent abuse of such.
However, it doesn't help when the govt gives assurances to investors in GSEs, like Fannie and Freddie, that when the sh!t hits the fan, their bets will be covered. Herein lies the problem. Not the lack of regulation. IMO
Like I said - both sides of the partisan debate have serious flaws. The Dems gave us Fannie and Freddie. Free-market folks gave use lowered reserve requirements, no regulation of ratings agencies and the AIG/CDS debacle. Time to realize the game needs referees, but then the government should butt out after that (Fannie and Freddie being the prime example).
Once again, these wages/bets/hedges by investors are allowed. They were allowed post and prior exemption. So how would regulating them have prevented it? Be specific.
Once again, when the govt gets into the business of covering these wages/bets/hedges by investors, that’s when we have a problem.
Regulation would not have prevented what was legal. If you want to disallow the hedges by law, then man up and say so.
Second, I would require companies issuing credit default swaps to have underlying assets backing them in excess of what a causualty insurance company carries for a similar amount of underwriting for property coverage. Natural disasters such as earthquakes and hurricanes are regional. A financial downturn affects the entire economy, so the strain from a downturn on an insurer is greater when that happens.
And third, I would require accounting rules that do not fully realize the revenue from a credit default swap until after it has matured - and also commissions cannot be fully paid. IMO that's better than a clawback provision, and it also motiviates the sales process to pursue quality and not just quanitity.
Fourth, I would add a provision that the federal government is NOT allowed to providing any kind of backing so the financial system realizes these instruments are worth no more than the firm backing them - don't want them assuming Uncle Sucker will be around the next time they are lax about their risk management.
And fifth, these regulations need to be tied to larger reforms of reserve requirements - they need to be raised back up to prevent overleveraging.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.