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Do Financial Markets Need More Government Regulation?
Old 07-16-2008, 09:52 AM   #1
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Do Financial Markets Need More Government Regulation?

Recent catastrophic events involving IndyMac Bank, Fannie Mae and Freddie Mac prove conclusively that large corporations are unable or unwilling to properly regulate themselves. A solution to this dilemma for suffering taxpayers who untimately bear the full burden may be increased government regulation of the financial markets according to an article in today's Los Angeles Times.


Americans may be losing faith in free markets - Los Angeles Times

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Old 07-16-2008, 09:53 AM   #2
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A solution to this dilemma for suffering taxpayers who ultimately bear the full burden may be increased government regulation -- paid by taxpayers' dollars.
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Old 07-16-2008, 10:03 AM   #3
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As a lone lunatic for the (truly) free market: A lot of these problems would never have occurred if the government hadn't stuck its nose in to begin with. Of course there would still be loan defaults in a free market scenario, but:

Without the actual or implicit guarantee of a loan (e.g. GNMA, FNMA, et al), a lender would be more careful about checking the credit worthiness of a potential borrower. Under the present system, the money is made in commissions and fees, and the lender sells off the loan to a third party and devil may care what happens to the borrower. Oh yes, if anything goes wrong, the taxpayer gets stuck eventually. That's you and me, folks!

FDIC, other insurance schemes: absent the FDIC guarantee, a bank like Indy Mac would go bust and, well, too bad for the depositors. They should have done their due dilligence. Why was this bank offering such high CD rates, for example? Because it was on the brink, is why.

The point is not that problems (e.g. bank failures) would never happen under a laissez faire system, but that the presence of government guarantees tends to lead to corruption (the profit motive) and also to eventually bigger disasters than might have happened under a pre-FDR world.
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Old 07-16-2008, 10:14 AM   #4
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most of the crazy loans made in the last few years didn't go through the GSE's and were outside the regulatory structure. total free market. a lot of people from wall street to the mortgage brokers that pushed these made a ton of money and now the neighbors of the people that took out these loans are suffering because of foreclosures and crashing property values.
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Old 07-16-2008, 10:32 AM   #5
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FDIC, other insurance schemes: absent the FDIC guarantee, a bank like Indy Mac would go bust and, well, too bad for the depositors. They should have done their due dilligence. Why was this bank offering such high CD rates, for example? Because it was on the brink, is why.
More likely to get more money into the coffers to beef up their loss provision funds. However, the RE market smacked them harder than they realized it would..........

Does AmeriQuest Mortgage come to mind??
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Old 07-16-2008, 10:52 AM   #6
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I find it hard to fault FDIC. Fannie and Freddie are real problems though. Insurance has to be paid for by its beneficiaries. If the insurance schemes are inadequately funded, then the holders of their paper have to pay. Any other outcome leads to a socialist society with too much government.

I don't recall anywhere in the world where more government lead to a good outcome.
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Old 07-17-2008, 03:04 AM   #7
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I read in USA Today a list of new requirements banks would have to abide by when lending mortgage money. #2 on the list was that they would have to verify that the borrower was employed and had sufficient income to make the payments. I couldn't believe I was actually reading that. Maybe they should also require bank presidents to have a GED??

I do like FDIC
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Old 07-17-2008, 07:40 AM   #8
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that's how the mortgage brokers did it, if your income is too low then apply as stated income and lie about it

they've had stated income loans for decades and a lot of people have used them, they just pushed them to the wrong people in the last few years
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Old 07-19-2008, 09:39 PM   #9
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I was listening to the CEO of JP Morgan being interviewed by Charlie Rose.

A very interesting interview, and he was asked by Charlie do we need more government regulation. His basic answer was no, although he thought that we should do better enforcement.

His reasoning made a lot of sense. First, for the most part it isn't the basic banks that caused the current crisis. Obviously there are exceptions like IndyBank, but in general the conventional 20% down fixed rate loans while seeing elevated default rates are far from a crisis stage. The problem is has been exotic security SIV, CDOs, etc which are largely function of brokerages (and of course the trade arms of super banks). At the consumer level the problem is shadow banks, e.g. country wide financial and mortgage brokers. None of the organization see even a fraction of the regulation that real banks has.

The problem with over regulating something is people will turn to alternatives.


Thinking about what he said, I've seen several examples.
25 or 30 years ago state had usury laws (many still do) which limited interest to typically 12%. This made it unprofitable for banks to loan money on credit cards in the late 70s or 80s. So the bank industry convinced South Dakota to repeal there usury laws, and set up credit card operations in that state, which allowed them to charge 20-30%.

You see a similar thing with payday loans, they get away with charging 100%+ interest rates by charging a fee (not interest) on there 2 or 4 week loans. Crack down on payday loan operations, people turn to loan sharks...

Even if bank regulation was at times to lax, the problem was more than banks weren't flexible enough. There clearly a demand for loans which enable people to buy homes with no or low money down, and low monthly payments. Partly because people were desperate to buy now before the prices went and partly because they were greedy.
When banks didn't respond to this demand, alternatives sprung up.

I doubt it is possible to regulate anything enough to overcome greed.
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Old 07-19-2008, 11:52 PM   #10
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I doubt it is possible to regulate anything enough to overcome greed.
===

feh. A few appointments with Madame Guillotine ... there you go!!

Let the tumbrels roll.

ta,
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Old 07-20-2008, 05:33 AM   #11
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In non-white collar crime areas, laws exist and criminals are prosecuted and, when convicted, they go to court. In white collar crime arenas, I find that the very people who call for strong law enforcement on the common criminal scream "free market" to prevent laws (regulations) from existing and being enforced. When a rich man's money is stolen by a poor man, the poor man goes to jail for years. When a poor man's money is stolen by rich CON artists, everyone screams that he deserved it and the CON artist is just a good business man.

Yes, laws preventing speculation and CONs should exist and the white-collar criminals should go to jail. In the meantime regulation has been brought on the markets by their own criminal behavior. I have no sympathy when they were given a chance to show they could self-regulate and we ended up where we are today. Had they self-regulated instead of getting greedy, we would not be having this discussion.
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Old 07-20-2008, 03:02 PM   #12
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who got conned out of their money? as always a lot of people saw dollar signs and didn't bother to read contracts or do simple math.
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Old 07-20-2008, 03:23 PM   #13
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Yes, laws preventing speculation and CONs should exist and the white-collar criminals should go to jail. In the meantime regulation has been brought on the markets by their own criminal behavior. I have no sympathy when they were given a chance to show they could self-regulate and we ended up where we are today. Had they self-regulated instead of getting greedy, we would not be having this discussion.
I am curious who you mean by "they getting greedy". The banks, the mortgage brokers, Wall Street, or folks who put 0% down and hope to flip the house in 6 months.
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Old 07-20-2008, 06:02 PM   #14
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I am curious who you mean by "they getting greedy". The banks, the mortgage brokers, Wall Street, or folks who put 0% down and hope to flip the house in 6 months.

=====

Yes to all of the above, with -I think - more responsibility further up the food chain.

Once it became possible for banks to make loans and not worry about collecting the loans, since they would bundle them and sell them - to brokerages and hedge funds and other investors who would bundle and sell them ...

What need to self-regulate - sell to the suckers, and devil take the hindmost. I note that Goldman Sachs, one of the survivors in better shape, played as hard as any - they just got out of the game early enough.

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Rescue Plan Could Cost Taxpayers $100 Billion
Old 07-23-2008, 09:27 AM   #15
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Rescue Plan Could Cost Taxpayers $100 Billion

There is less than a 50% chance the Fannie Mae/Freddie Mac rescue plan drawn up Tuesday night could cost taxpayers 25 billion dollars. If the housing crisis continues to worsen, however, this number could go up to 100 billion dollars or even higher.

washingtonpost.com - nation, world, technology and Washington area news and headlines
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Old 07-23-2008, 09:36 AM   #16
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This isn't a "free market," though. It's privatized profits and socialized losses.
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Old 07-23-2008, 10:33 AM   #17
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This isn't a "free market," though. It's privatized profits and socialized losses.
Right. People who say we shouldn't interfere in the "free market" have to also say that nobody is to big to fail. I haven't heard any CEOs say that.

In the Bear Stearns case, it seems that the CEO and the stockholders were placing large bets (relative to their capital) on the basis of "heads I win, tails the taxpayers lose". We either need the will to let them go down (my first choice) or put floors on capital and ceilings on compensation.

In the Freddie/Fannie situation, it's the same type of bet, but the gov't explicitly set up the deal. We don't need "regulation" in the F/F situation. We just need to avoid the temptation to set up these private/public time bombs in the first place.

When it comes to selling individual mortgages, there is no reason to have regulation that keep the companies from doing stupid things. We do need laws against consumer fraud. If current laws aren't adequate, the various states can experiment with ways to improve them.

I've seen one creative idea on the "to big to fail" issue. When a financial company gets TBTF, we should break it up.
The Fed/Treasury should continually look at the players and see if there are any cases where they would say "If this company started to go down, we'd have to bail out either the stockholders or the creditors". If they find one, then they start action to split it into parts. The mechanics would be the same as anti-trust breakups, but the purpose would be different.
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Old 07-23-2008, 10:40 AM   #18
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More importantly, the Government needs to eliminate giant hedge funds and reinstate the uptick rule.
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Old 07-23-2008, 11:54 AM   #19
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Right. People who say we shouldn't interfere in the "free market" have to also say that nobody is to big to fail. I haven't heard any CEOs say that.

In the Bear Stearns case, it seems that the CEO and the stockholders were placing large bets (relative to their capital) on the basis of "heads I win, tails the taxpayers lose". We either need the will to let them go down (my first choice) or put floors on capital and ceilings on compensation.

In the Freddie/Fannie situation, it's the same type of bet, but the gov't explicitly set up the deal. We don't need "regulation" in the F/F situation. We just need to avoid the temptation to set up these private/public time bombs in the first place.

When it comes to selling individual mortgages, there is no reason to have regulation that keep the companies from doing stupid things. We do need laws against consumer fraud. If current laws aren't adequate, the various states can experiment with ways to improve them.

I've seen one creative idea on the "to big to fail" issue. When a financial company gets TBTF, we should break it up.
The Fed/Treasury should continually look at the players and see if there are any cases where they would say "If this company started to go down, we'd have to bail out either the stockholders or the creditors". If they find one, then they start action to split it into parts. The mechanics would be the same as anti-trust breakups, but the purpose would be different.
the reason these companies were allowed to get so big was that starting in the late 1980's a lot of asian and other international banks started growing and became very big with assets many times those of the largest US banks. no one liked the fact that the largest economy in the world had some of the smallest banks in the world
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Old 07-23-2008, 05:38 PM   #20
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who got conned out of their money? as always a lot of people saw dollar signs and didn't bother to read contracts or do simple math.
Well maybe we are the stupid ones, since we as taxpayers are picking up the tab, and all the while moronically defending the sytem that transferred all this wealth from us to the Captains of Finance.

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