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Filling the Financial Regulatory Void « The Baseline Scenario
I would argue that the fundamental flaw in financial regulation is that it is based on the assumption that regulators are not self-interested individuals like the rest of us. We think about regulation only in terms of how to engineer the incentives of the regulated and ignore the fact that regulators themselves rarely have a stake in doing their job well, which in any other occupation would limit the motivation and types of individuals a position attracts.
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It is unlikely that consumers will ever hold much influence over the realities of the financial regulatory process because they are not organized in comparison to the financial industry, which concentrates significant resources in the creation of inefficient regulators. By and large, consumers are not well-informed about what they have at stake in the regulatory process and, even if they were, that would not be the sole determinant of how they define themselves politically.
Adding another layer of guards to guard the existing guards ultimately results in an infinite regress. I do not think it is cynical to suggest that, absent an actual paradigm shift with respect to accountability in the financial industry, we are just going to have more of the rent-seeking that has gone on to date and the economic calamities that ensue. For my part, I would propose opening up financial regulation to a small group of social entrepreneurs. Let people establish for-profit companies that can compete for government contracts to stress test the holdings of financial institutions independently and audit their records.
Op-Ed Columnist - Rewarding Bad Actors - NYTimes.com
It’s hard to imagine a better illustration than high-frequency trading. The stock market is supposed to allocate capital to its most productive uses, for example by helping companies with good ideas raise money. But it’s hard to see how traders who place their orders one-thirtieth of a second faster than anyone else do anything to improve that social function.
Ah, Wall Street. Seeing the real you at last. » New Deal 2.0
Financial innovation was presented to us in a way that suggested that great things were happening for mankind. The presentations were usually vague. To understand them, we had only the power of our own imaginations, or perhaps, failing that, our awe in the face of this powerful expertise, confidently propelling us to a greater future....
Malarky. This is all code for defer to the wishes of those who make money from these techniques.
Matthew Yglesias » The Ethics of Homo Economicus
. These are people primarily motivated in life by greed. Not just by a desire to make some scratch, mind you. These aren’t immigrants who walked through the desert from Mexico in order to earn more money by washing dishes in a San Diego hotel. They’re not 24 year-olds looking for a hefty salary in order to pay off student loans. They’re multi-millionaires who want to earn millions more.
FT.com | Willem Buiter's Maverecon | Useless finance, harmful finance and useful finance
The endless churning of contingent claims, including derivatives, when the purchaser has no identifiable insurable interest, turns financial intermediation into a market-mediated betting shop. Then the betting slips become bearer securities and are themselves traded, either OTC or on organised exchanges, and the derivative transactions volumes expand to dwarf the transactions in the markets for the underlying financial claims (let alone the markets for the underlying real resources). At that point, the betting tip of the financial tail of the real economy dog does all the wagging. It does not create value but redistributes it in a way that consumes real resources and exposes the real economy to unnecessary risk. It’s time to tame the tiger.
Wages and Human Capital in the U.S. Financial Industry: 1909-2006
We use detailed information about wages, education and occupations to shed light on the evolution of the U.S. financial sector over the past century. We uncover a set of new, interrelated stylized facts: financial jobs were relatively skill intensive, complex, and highly paid until the 1930s and after the 1980s, but not in the interim period. We investigate the determinants of this evolution and find that financial deregulation and corporate activities linked to IPOs and credit risk increase the demand for skills in financial jobs. Computers and information technology play a more limited role. Our analysis also shows that wages in finance were excessively high around 1930 and from the mid 1990s until 2006. For the recent period we estimate that rents accounted for 30% to 50% of the wage differential between the financial sector and the rest of the private sector.
Regulate financial markets while we still can | vox - Research-based policy analysis and commentary from leading economists
by Willem Buiter. "It is better to over-regulate now and subsequently correct the mistakes than to risk another era of self-regulation and soft-touch under-regulation of financial markets, instruments and institutions."
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There is the need and opportunity to close down all tax havens and regulatory havens. Tax havens are defined as countries that have bank secrecy, which includes Switzerland, Austria, Luxembourg , and the usual micro-state suspects (bank secrecy or bank privacy is the legal principle according to which banks can protect personal information about their customers, even from the tax authorities and police authorities of these customers). The anonymity provided by bank secrecy promotes tax evasion, tax avoidance (or fraud), money laundering and hiding the proceeds of criminal activity.
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- First, there is a positive list of financial instruments and institutions. Anything that is not explicitly allowed is forbidden.
Financial innovation in products and institutions is potentially beneficial and potentially harmful. There is a need to regulate financial innovation. I propose the model used in the US by the Food and Drug Administration for pharmaceutical and medical products.
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infinite thØught: marazzi on the violence of financial capitalism
What is a financial market? Textbooks tell you that it is a way of financing the economy. Only 1% of capital accumulated in financial markets is used for investment, the rest is self-financing. Finance is not a way of financing the real economy but of increasing profits beyond the real economy.
FT.com / Comment / Opinion - How bank bonuses let us all down
Here you can see that this mismatch between the bonus payment frequency (typically, one year) and the time to blow up (about five to 20 years) is the cause of the accumulation of positions that hide risk by betting massively against small odds. As traders say, they have the “free option” on their performance: they get the profits, not the losses. I hold that this vicious asymmetry is the driving factor behind investment banking.
The Beautiful Machine - washingtonpost.com
1st of 3 part series on the history of AIG Financial Products division.
Op-Ed Columnist - The Madoff Economy - NYTimes.com
Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.
FT.com | Willem Buiter’s Maverecon | A Special Resolution Regime for banks must put tax payers before shareholders and bank creditors
It’s reasonable to assume that the banking system in the North Atlantic region is insolvent and would be bankrupt but for the reality of recent government bailouts and the expectation of future government bailouts. Certainly, for the system as a whole, the marked-to-market value of its assets is way below that of its liabilities. I strongly suspect that even the hold-to-maturity value of its assets is well below that of its liabilities. Although the system as a whole is broke, there are no doubt individual banks that are solvent. We may not, however be certain as to which banks are solvent and which banks are not.
Robert J. Samuelson - Paulson's Panic - washingtonpost.com
Call it Paulson's Panic. That's both unfair and accurate. It's unfair because Treasury Secretary Hank Paulson didn't create the underlying conditions that led to today's financial turmoil, and the failure for not quelling it is shared by Federal Reserve Chairman Ben Bernanke. But it's also accurate, because as world financial markets verged on panic, Paulson himself panicked. He saw no remedy except a massive bailout: having the government buy up to $700 billion worth of risky bonds.
Collateralized Debt Obligation
Collateralized debt obligations are securitized interests in pools of—generally non-mortgage—assets. Assets—called collateral—usually comprise loans or debt instruments. A CDO may be called a collateralized loan obligation (CLO) or collateralized bond obligation (CBO) if it holds only loans or bonds, respectively. Investors bear the credit risk of the collateral. Multiple tranches of securities are issued by the CDO, offering investors various maturity and credit risk characteristics. Tranches are categorized as senior, mezzanine, and subordinated/equity, according to their degree of credit risk. If there are defaults or the CDO's collateral otherwise underperforms, scheduled payments to senior tranches take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches.
Financial Risk Management
Welcome to the Contingency Analysis family of websites, a comprehensive resource for trading, financial engineering and financial risk management. Here you will find a glossary linked to detailed articles, an active discussion forum, book reviews, research and much more.
Angry Bear: Can we please broaden our thinking in this crisis?
Well, it's gotten misshapen because the financial side of the economy is dominating the productive side of the economy...We've become a financial economy which has overwhelmed the productive economy to the detriment of investors and the detriment ultimately of our society.
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