![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
Getting a handle on Darling
Jul. 8th, 2009 12:54 pmToday's paper from Alistair Darling is meant to be a look at financial regulation, but it is, inevitably, seen just as much as a look at the financial system that got into so much trouble.
When a political party in power fucks it up beyond any credible level of disbelief, one of the guaranteed things you will hear from a cloned minister is that the government "has failed to get its message across". Often this is complete bollocks. Given the number of spinners employed by government these days, one would have thought it an impossibility to get the message across. Usually the message has been received loud and clear, and rejected.
So it is with the paper today. Everyone is focusing on the tripartite system set up by Gordon Brown — the Treasury, the FSA and the Bank of England. There seems to be some kind of curious idea that the system must be at fault.
My personal view is that there wasn't too much wrong with the system. Where it went wrong was in part systemic -- regulators nearly always employ people not good enough to make it in the private sector who also, often but not invariably, have a civil servant mindset rather than a vcapitalistic entrepreneurial mindset —- and in part practical —— the people at the FSA just looked in the wrong place, worrying about their remit rather than what might be the actual problem.
In other words, if the remit had been right, and if the staff had been up to it, I think that the current system would have worked. This paper will focus on how the power should be allocated, but should also be focusing on the remit. And that remit should not be "look at last year's problem".
The other aspect of the paper released today is that it will look at last year's problem.
I'm not sure if this is true, but it has been written in more than one place that capital requirements will be toughened and that assets will need to be "more liquid".
If this is so, then the government really has lost the plot. One can see how their mind has worked
"Goodness, if the people want to get their money back, the banks have to sell things, and if they all want to sell the same thing, then the price goes down, and the bank might become insolvent! That will never do. Let's make it a law that the banks have to keep liquid assets on hand so that, if everyone wants their money back, they can get it".
Anyone who has watched "It's A Wonderful Life" will see the lunacy of this argument. The whole point of banks is that people deposit short and the bank lends long (i.e., into mortgages). Their survival depends on confidence. If you stop banks dealing in "illiquid" products you don't solve the problem. You exacerbate it. Because three things could happen:
1) The banks only take deposits that match their liabilities. I.E, they borrow long and lend long. Fixed-term 25-year variable rate deposits anyone?
2) The banks borrow short and only lend short. That just about murders the credit system stone dead.
3) The banks lend long and borrow short, and solve this by "converting" the long loans into securitized short loans. This is a smokes and mirrors con of the type that got us into the mess in the first place.
As a final nail in the coffin, how do you define "liquid assets"? In the good times, when everyone is trading, lots of things have a market for buyers and sellers. But when it goes wrong, the liquidity vanishes. A liquid asset is something for which there is always a willing buyer and a willing seller. But there might be no buyers tomorrow. In other words, an obligation to maintain stocks in "liquid assets" only solves the problem when it isn't a problem. As soon as it becomes a problem, the rule ceases to be a solution.
I think that the major point here is that the government cannot be seen to say "to be honest, it's now a matter of getting confidence back into the market, and we've done what we can there". How do they stop the same thing happening again? Simple. Stop lenders from parcelling up loans and selling them straight out of the back door.
When Bush "solved" the threat of recession post-dotcom insanity he created a credit bubble. But, what IS a credit bubble? Basically it's a situation where you have money to lend, but not enough credit-worthy borrowers. Solution? Lend the money, parcel up the loan and sell it on in securitized form. And thus the moral hazard is born.
If a lender is barred from leveraging up in this way at more than, say, 75%, he retains a 25% risk in the loan. The superb "returns on equity" were a matter of gearing up, not of improved performance. It was, in other waords, a fake.
_____________________
When a political party in power fucks it up beyond any credible level of disbelief, one of the guaranteed things you will hear from a cloned minister is that the government "has failed to get its message across". Often this is complete bollocks. Given the number of spinners employed by government these days, one would have thought it an impossibility to get the message across. Usually the message has been received loud and clear, and rejected.
So it is with the paper today. Everyone is focusing on the tripartite system set up by Gordon Brown — the Treasury, the FSA and the Bank of England. There seems to be some kind of curious idea that the system must be at fault.
My personal view is that there wasn't too much wrong with the system. Where it went wrong was in part systemic -- regulators nearly always employ people not good enough to make it in the private sector who also, often but not invariably, have a civil servant mindset rather than a vcapitalistic entrepreneurial mindset —- and in part practical —— the people at the FSA just looked in the wrong place, worrying about their remit rather than what might be the actual problem.
In other words, if the remit had been right, and if the staff had been up to it, I think that the current system would have worked. This paper will focus on how the power should be allocated, but should also be focusing on the remit. And that remit should not be "look at last year's problem".
The other aspect of the paper released today is that it will look at last year's problem.
I'm not sure if this is true, but it has been written in more than one place that capital requirements will be toughened and that assets will need to be "more liquid".
If this is so, then the government really has lost the plot. One can see how their mind has worked
"Goodness, if the people want to get their money back, the banks have to sell things, and if they all want to sell the same thing, then the price goes down, and the bank might become insolvent! That will never do. Let's make it a law that the banks have to keep liquid assets on hand so that, if everyone wants their money back, they can get it".
Anyone who has watched "It's A Wonderful Life" will see the lunacy of this argument. The whole point of banks is that people deposit short and the bank lends long (i.e., into mortgages). Their survival depends on confidence. If you stop banks dealing in "illiquid" products you don't solve the problem. You exacerbate it. Because three things could happen:
1) The banks only take deposits that match their liabilities. I.E, they borrow long and lend long. Fixed-term 25-year variable rate deposits anyone?
2) The banks borrow short and only lend short. That just about murders the credit system stone dead.
3) The banks lend long and borrow short, and solve this by "converting" the long loans into securitized short loans. This is a smokes and mirrors con of the type that got us into the mess in the first place.
As a final nail in the coffin, how do you define "liquid assets"? In the good times, when everyone is trading, lots of things have a market for buyers and sellers. But when it goes wrong, the liquidity vanishes. A liquid asset is something for which there is always a willing buyer and a willing seller. But there might be no buyers tomorrow. In other words, an obligation to maintain stocks in "liquid assets" only solves the problem when it isn't a problem. As soon as it becomes a problem, the rule ceases to be a solution.
I think that the major point here is that the government cannot be seen to say "to be honest, it's now a matter of getting confidence back into the market, and we've done what we can there". How do they stop the same thing happening again? Simple. Stop lenders from parcelling up loans and selling them straight out of the back door.
When Bush "solved" the threat of recession post-dotcom insanity he created a credit bubble. But, what IS a credit bubble? Basically it's a situation where you have money to lend, but not enough credit-worthy borrowers. Solution? Lend the money, parcel up the loan and sell it on in securitized form. And thus the moral hazard is born.
If a lender is barred from leveraging up in this way at more than, say, 75%, he retains a 25% risk in the loan. The superb "returns on equity" were a matter of gearing up, not of improved performance. It was, in other waords, a fake.
_____________________
