Tuesday, December 22, 2009

Finance VII

Judge Richard Posner's book "A Failure of Capitalism" famously blames the financial crisis on deregulation. In the Fall 2009 Claremont Review of Books, James Keller demolishes the claim:
There is a widespread view that the derivatives market is the Wild West, and that it is nobody's job to know who owes what to whom. Many seem to believe there are vast exposures lurking undetected by regulators. This view is nonsense. The Office of the Comptroller of the Currency (OCC) publishes a Quarterly Report on Bank Trading and Derivatives Activities that lists this information for the nation's largest banks, the top five of which represent 96% of the total amount. Want to know the volume of credit derivative contracts entered into by the Regions bank of Alabama? It's in Table 12. . .

The anticipated chain of events was a large hedge fund failing and taking down its lenders in a chain reaction. Instead, the banks failed, threatening the hedge funds. The rush to re-regulate ignores the reality that the least-regulated entities in the system--hedge funds--fared far better than the highly regulated entities like banks and insurance companies.

One would have expected this negative correlation between regulation and success in weathering the storm would have leaped out at Posner. It is the type of interesting insight he normally pounces on. He does notice that hedge funds fared a good deal better than banks, but rather than explore this interesting point, he uses the Bernie Madoff affair as further proof of the need to regulate hedge funds.

The lessons from Madoff seem very different from the ones Posner wants to draw. First, in a nation with over 8,000 hedge funds managing more than $1.3 trillion, cases of undetected fraud like this one appear to be extremely rare. Second, it is now well known that the SEC had clear warnings of problems with Madoff's funds--whistles were blown--but failed to act on them. In fact, the relatively good performance of hedge funds in general could force the conclusion that the informal networks regulating hedge funds--the scrutiny of funds of funds, outside consultants employed by pension fund investors, credit departments of bank lenders, and rigorous internal risk management--did a far better job sniffing out risk than the regulators keeping watch over banks.

Posner is so sure that deregulation caused the crisis, he hardly bothers to offer any evidence that it did. It didn't. There are really no linkages between specific deregulatory actions and the current crisis. Unfortunately, his admonition to go slowly in crafting new regulations is likely to be ignored, and the failed regulators are busy drafting new rules to cover past incompetence. To the extent Posner provides ammunition for the re-regulators, he does us all a disservice.
Agreed. Keller's conclusion is worth highlighting:
The Obama Administration's latest proposals for financial reform seem to envision a superhuman regulator who will catch excesses before they occur. This is naïve. Regulators need not be heroes if creditors have an interest in being vigilant; and creditors will have such an interest if recklessness faces the penalty of real loss. Unfortunately, we have just assured all creditors that their interests will be protected, no matter how reckless they are.
(via Powerline)

8 comments:

The One said...

Facts, facts, facts!!!

Don't confuse the issue with facts, dammit!!

We've got a monolithic government to build!!!

Either contribute something useful to that end, or stay out of the way!!!

bobn said...

Second, it is now well known that the SEC had clear warnings of problems with Madoff's funds--whistles were blown--but failed to act on them.

Just as, under Bush and Cox, the SEC acted on nothing else. The deregulationistas eviscerate the regulatory mechanisms, then point at their failures to make their arguments.

PATHETIC.

Want to know the volume of credit derivative contracts entered into by the Regions bank of Alabama?

No, let's hear about goldman sach's derivatrives INCLUDING counterparties, contract terms, etc. Oh, that's not there is it?

There are really no linkages between specific deregulatory actions and the current crisis.

As always, I point to SEC's lifting of leverage limits on the Big 5 invesment banks - all 5 of which curiously fail to exist in their former forms, having failed or become "bank holding companies" so that they can feed at the FRS. Temporal and causal relationship here and here.

Unfortunately, we have just assured all creditors that their interests will be protected, no matter how reckless they are.

Yes through the endless bailouts pioneered under the Neo-con ("we put the CON in CONservative!") Bush administration, disgracefully continued under the Obama administration, and apparently supported by Carl ("welfare for rich people and banks is OK.) Frank. This would be the same Carl who thinks that TARP is OK, FRS should keep it's secrets, and the almighty market is somehow wrong on the value of toxic assets - assets the nature of which he has repeatedly displayed complete ignorance.

Free-marketeers are such true believers until one minute after the market gives them the bad news.

OBloodyHell said...

> Just as, under Bush and Cox, the SEC acted on nothing else. The deregulationistas eviscerate the regulatory mechanisms, then point at their failures to make their arguments.

Yeah, yeah, yeah, yada yada yada bob.

When you have a case to make that has any validity, let us know, huh?

Parroting the same arguments we've refuted extensively before isn't worth refuting yet again.

> Yes through the endless bailouts pioneered under the Neo-con ("we put the CON in CONservative!") Bush administration, disgracefully continued under the Obama administration,

Yes, it was all created by Bush. He didn't bring the elected Obama admin on board to give them say in the result. Naw. It's all Bush's fault.

Yeesh. Someone hit bob's "TILT" button, please?

OBloodyHell said...

Oh, and, BTW, bob...

One of the chief reasons the GOP was thrown OUT of power is that they WEREN'T being conservative.

They were just being "libtard lite".

This fact is borne out by the fact that everything having to do with fiscal policy that the Bush Admin was doing wrong in the last 4 years has only been expanded and uber-funded by the Democrat libtards.

How anyone figured that was going to be a net good I dunno. But that was how people voted.

bobn said...

When you have a case to make that has any validity, let us know, huh?

Parroting the same arguments we've refuted extensively before isn't worth refuting yet again.


Sorry, I've never seen a refutation. Just posts full of the same old lies and bombast. I've shown how the events were temporaly and causally related, as shown in the results. All you do is sneer.

Yes, it was all created by Bush. He didn't bring the elected Obama admin on board to give them say in the result. Naw. It's all Bush's fault.


Obama voted for TARP, (along with all the Dems, which is why I ended up voting Republican for everything in '08), but it was a Bush/Paulson conception. Obama had nothing to do with the initial money laundering scheme that was the AIG-IBank bailout, though he continues it. Sorry to piss on your uber-hero Bush, but this happened on his watch for a reason.

This fact is borne out by the fact that everything having to do with fiscal policy that the Bush Admin was doing wrong in the last 4 years has only been expanded and uber-funded by the Democrat libtards.

Agreed. They are both scum.

Liz said...

> Sorry, I've never seen a refutation.

You might try learning to read a sentence longer than 5 words.

O Bloody Hell said...

> Sorry, I've never seen a refutation.

You might try learning to read a sentence longer than 5 words.

O Bloody Hell said...

> Sorry to piss on your uber-hero Bush, but this happened on his watch for a reason.

Yes, my comment above was just FILLED with worship for Bush and his faux conservativism. I can see how you can get the impression he's my "uber hero".

Oh, wait, that was more because you seem to be unable to actually comprehend a sentence of more than five words, than because of any ambiguity on my part.