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Old 04-24-2010, 08:43 AM   #41
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Further BTW, regardless of their complexity Goldman Sachs and other shadow banking institutions are very much like deposit taking firms in that one of their primary businesses is the conversion of short-term savings into long-term investment (but instead of deposits the shadow banking system uses the Repo Market and other short-term funding sources). Effectively borrowing short and lending/investing/speculating long can be tremendously profitable, but is also tremendously risky. And is vulnerable to runs and panics . . . which is why it must be contained just like a deposit taking institutions (because it serves the same function in largely the same way). And to the extent the the "real" economy is dependent on the liquidity and financing that the shadow banking system provides, we can no more let the entire shadow banking system collapse than we can the entire normal banking system.

A rose by any other name . . . (should be handled the same).
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Old 04-24-2010, 08:52 AM   #42
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I would say this:
I would also say there's a lot of misinformation in your post as well. Goldman Sachs is now a bank holding company and has insured depository institutions within its affiliated network. As a bank holding company, GS is now subject to regulatory oversight of the FED. GS is really no different from JP Chase Morgan Holding Comapny) -- only the size of its deposit base is quite different from JP. Also, the FDIC does not regulate deposits, require reserves, or restrict investments -- this is generally the primary function of the primary bank regulator (Federal or State), though the FDIC does have certain "back-up powers." There's more misinformation, but I give up.
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Old 04-24-2010, 09:15 AM   #43
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If investors can define the information they need to evaluate the safety of a particular investment, then I'm confident the government can serve as the validator of that information (supplied by the banks/investment houses). Alternatively, the government could function only to administer punishment when the supplied information is fraudulent. (Meaningful punishment).

If investors can't identify the information they'd need to evaluate the safety of a particular investment, then they have no business making that investment.

Regarding the sophistication of the customers (investors). We already have the commercial banks that provide services for "regular" savers. We have the SIPC that monitors and regulates the promises security dealers can make to mom amd pop investors. Folks who actively seek out exotic, highly leveraged, or entirely opaque ways to invest their money either need to be qualified in some way (as is presently done for some investments) or at least advised that they've left the kiddie pool and are now in the ocean--with the sharks. "Warning: The government will make every effort to punish the 'bad' sharks, but that may be little consolation to you as you will likely not be reimbursed for your losses. There's really not much for you here, we recommend you go back to the kiddie pool. Sign this waiver if you want to stay in the ocean."
Okay, I can see that I implicitly bought into the assumption that the only people hurt when a financial institution goes down are the people who loaned money to that institution. If that were true, your solution probably works.

The problem seems to be that when the institutions fail, lots of people besides the lenders get hurt. So the rest of us have a reason to want more safety than the investors.
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Old 04-24-2010, 09:32 AM   #44
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Here is another Krugman article to chew on.
Our Giant Banking Crisis—What to Expect | The New York Review of Books
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Old 04-24-2010, 09:43 AM   #45
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Given that we've already created this safety net for commercial banks (which puts the taxpayers on the hook for making depositors whole), it's obvious that we should make the line between these institutions and investment banking very clear. This includes a division of operations/interests to assure that government gaurantees in the commercial banking side are not, in fact, backing up investors in the investment banking side.

Preventing market panics: Well, we can start by not creating the situations that cause bubbles and ensuing panics. Government policies created the last one (the Fed's easy money policy starting in 2002, the recognized role of Fannie Mae and Freddie Mac in causing/accelerating the housing bubble, the CRA which encouraged loans to ill-suited borrowers, etc). And, yes, private money was to blame--especially to the extent it responded to these government actions. Many have written, with some evidence, that a stock market correction was turned into the Great Depression by government actions (especially higher tax rates and prevention of wage adjustments that would have reduced unemployment and led to higher production). Aside from avoiding making the matter worse, governments can take positive steps to turn "market panics" into more orderly events that still allow market forces to work. "Circuit breakers" to slow trading, prohibitions against naked short selling, margin limits, etc are all, admittedly, government restrictions on free trade, but less intrusive and harmful than government bailouts and promises to pass buckets of money to people who made poor decisions.

When firms fail, let them fail. And people who invested poorly should not be made whole with money taken from Americans. When government swoops in to "help" with our money, they prevent others from solving the problems with their own money--and maybe making a profit. Hey, that vulture getting the bargains might be working to benefit you! Warren Buffet makes a lot of money this way.
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Old 04-24-2010, 09:55 AM   #46
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Bottom line - The fox Financial Services Industry is guarding the hen house.

There is not a great solution.

IMO - Some independent regulation is needed. If it is not there... those larger entities will take advantage of the rest of us and cause bubbles and economic calamity. Since the bulk of the money is now our IRAs and 401ks (widely distributed and fragmented... i.e., little power), we are susceptible to their malfeasance (and often the target of the money grab either directly or indirectly).

Lesser of two evils.

Unfortunately, some politician can paint what appears to be a compelling lopsided story (partial picture). But one thing cannot go unnoticed... look at what has happened over the last 10 years... several massive bubbles and meltdown. Status Quo will only leave us vulnerable to more of it.

Unfortunately, wall street thinks they are above the rest of us and entitled to game the market. If it is not absolutely illegal... darn near anything goes (for some of them).

Yes--- they are brazen enough to take advantage of weak regulations, regardless of the consequences. Individuals in those companies seem to always walk away filthy rich after the dust settles!
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Old 04-24-2010, 09:56 AM   #47
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Are you referring to the "Volker rule"? I don't see how it would apply to SS. The rule prohibits companies with FDIC insured deposits from engaging in speculative trading for its own account. To my knowledge SS neither takes FDIC insured deposits nor does it trade securities for its own gain.
Now, if we could just impose this same criteria on investment of public pension funds...
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Old 04-24-2010, 09:59 AM   #48
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Preventing market panics: Well, we can start by not creating the situations that cause bubbles and ensuing panics. Government policies created the last one (the Fed's easy money policy starting in 2002, the recognized role of Fannie Mae and Freddie Mac in causing/accelerating the housing bubble, the CRA which encouraged loans to ill-suited borrowers, etc)
Neither Fannie nor Freddie nor the CRA existed in the 1930s. None of them or the Fed existed in the 1800's. None of these things existed in other areas of the globe that also experienced recent financial collapse. Financial panics can not be so easily explained away by the things you site. Neither can 80 years of relative financial stability. Yours is an ideological answer grafted on to a fact pattern which simply doesn't fit.

The answer seems pretty simple to anyone willing to look at our economic history. We have a system that worked well for 80 years. It simply needs to be extended to incorporate the recent evolution of modern finance.
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Old 04-24-2010, 10:01 AM   #49
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Now, if we could just impose this same criteria on investment of public pension funds...
Also not deposit taking institutions. And to my knowledge not exempted from any planned regulation. So maybe you could elaborate.
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Old 04-24-2010, 10:03 AM   #50
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If the average American can get past their political biases... I do not believe too many can honestly say "no change is needed".

Human nature is what it is... give enough people the chance to take, and some will do it, not matter how it impacts others! Unfortunately some of the approaches are legal.
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Old 04-24-2010, 10:04 AM   #51
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Given that we've already created this safety net for commercial banks (which puts the taxpayers on the hook for making depositors whole), it's obvious that we should make the line between these institutions and investment banking very clear. This includes a division of operations/interests to assure that government gaurantees in the commercial banking side are not, in fact, backing up investors in the investment banking side.
Ummm, isn't this what Glass-Steagall did before Gramm-Leach-Bliley ?

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Government policies created the last one (the Fed's easy money policy starting in 2002, the recognized role of Fannie Mae and Freddie Mac in causing/accelerating the housing bubble, the CRA which encouraged loans to ill-suited borrowers, etc).
I suppose this is our biggest point of disagreement. I don't believe your view comports well with the actual history. I hesitate to post the following link because Ritholtz's writing is a bit hotheaded. However, I think he makes valid points. If you read this, please try to read past his attitude. He is like that about everything.
CRA Thought Experiment | The Big Picture

I agree that the Fed's easy money policy fueled the bubble. However, Fanny and Freddie were very late to the party. The bubble was already well under way when they jumped in.
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Old 04-24-2010, 10:13 AM   #52
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If the average American can get past their political biases... I do not believe too many can honestly say "no change is needed".
What political biases? And how is that relevant? I don't see a defense of the status quo here. You keep arguing against a position that no one seems to have, and I don't get it. The discussion is about *what* changes are necessary and important and which might be counterproductive. It's not whether or not we change nothing.
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Old 04-24-2010, 10:17 AM   #53
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What political biases? And how is that relevant? I don't see a defense of the status quo here. You keep arguing against a position that no one seems to have, and I don't get it. The discussion is about *what* changes are necessary and important and which might be counterproductive. It's not whether or not we change nothing.

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Old 04-24-2010, 10:51 AM   #54
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Ummm, isn't this what Glass-Steagall did before Gramm-Leach-Bliley ?
Yep, the irony of it all.

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I suppose this is our biggest point of disagreement. I don't believe your view comports well with the actual history. I hesitate to post the following link because Ritholtz's writing is a bit hotheaded. However, I think he makes valid points. If you read this, please try to read past his attitude. He is like that about everything.
CRA Thought Experiment | The Big Picture
Yep, there's a disconnect here.

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I agree that the Fed's easy money policy fueled the bubble. However, Fanny and Freddie were very late to the party. The bubble was already well under way when they jumped in.
Very late to the party; more than Fannie and Freddie, the Fed and Greenspan fuel the fire enormously. I distinctly recall a front page article in US Today in 2004, where Greenspan was promoting adjustable rate mortgages for everyone. And some observers saw this bubble coming and made lots of money. Op-Ed Contributor - I Saw the Crisis Coming. Why Didn’t the Fed? - NYTimes.com Let's blame the right Government policies and players instead of CRA and Fannie and Freddie -- it's convenient to blame those miscreants that purportedly damage the free market.
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Old 04-24-2010, 01:00 PM   #55
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"Circuit breakers" to slow trading, prohibitions against naked short selling, margin limits, etc are all, admittedly, government restrictions on free trade, but less intrusive and harmful than government bailouts and promises to pass buckets of money to people who made poor decisions.
All of those things currently exist. And none of them prevent short-term lenders (often time overnight lenders) from simply demanding their money back. That is what happens in a panic. A liquidity crisis for both healthy and unhealthy firms is what follows. Nothing you've written, and nothing I've seen from the "no more bailouts" crowd addresses this fundamental banking problem.

In a liquidity crisis its not just bad actors who go down the drain. It is everyone who borrowed short and lent long. Which pretty much describes the entire banking system. Arguing that you can simply let banks fail in a panic misses this critical point. Advocating against a means to stop it is really bad policy.
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