There is no mystery to this, Purple.
The official assessment is that all this [repeated boom and bust cycles] happens through human error and greed in a free market system.
This is based on certain assumptions about the free market system which aren't well supported in my opinion.
An unregulated free market is the unmonitored playground of corrupt corporations seeking to accumulate wealth.
To support this thesis, just follow the money and see who gains and who loses in the medium term.
The results tell the real story.
ONQ.
The financial industry is one of the most heavily regulated markets in the world and no financial institution would want to change it. It is a total myth that there has been more deregulation than regulation in the last 20 years.
Simply suggesting that regulation is the solution to all the problems is very simplistic. It completely ignores all the damage done by regulation. The costs involved with regulatory compliance are huge and have created an industry that receives no new competition. This is why you never here banks in uproar about new regulations (except maybe caps on pay and bonuses), the more regulation there is the less they have to fear new competition.Chris,
I think most people looking at the way over the counter trading is unregulating, the disastrous lack of monitoring or governance which has brought us to this pass, plus the lack of taxation on bank transactions would probably deny your assertion.
I however, am not most people. I have no need to vent in a knee-jerk reaction. I'll read your links and add them to what I'm considering at the moment. And thank you for them.
Then I'll comment or ask for clarification.
Glass-Steagall is the only deregulation that had any significant impact on the crisis. But there were countless new regulations that were introduced in the last 10 years that mean that overall the burden of regulation in the financial industry increased, not decreased.I would not agree with this at all, there was deregulation, but it was very subtle and I doubt most of the law makers involved realised the consequences of their actions. The repeal of the Glass-Steagall act and similar legislation else where fundamentally changed how banks are managed. The major consequence of the repeal was that the investment banking (IB) arm of most large banks go access to the main capital of it's parent bank and as a consequence could now under take high risk schemes not seen since the 1920s - why the act was introduced in the first place! The major scheme was of course the sub-prime mortgage securities that were being peddled at a crazy rate.
I keep harping back to UBS, but so far it is the only one I know of who has been investigated and the results made public. In their case they had a very solid wealth management and domestic banking business that generated cash year after year and at the same time it had an IB subsidiary that had good years and really bad ones, but it could not really do too much damage to the over all well being of the bank, because it's capital was capped at about $10b to start with. Then can the "One-Bank" concept around 2000 when all could be rolled into one and the IB side suddenly got access to the whole capital of the bank, possibly 10 times more than they had before. And so the game began that eventually cost them $50b. The other big banks were to a greater or lesser extend playing the same game and it most definitely had a big impact on the whole outcome, because it allowed off balance sheet financing to a level never see before.
World wide everyone is now trying to put the jenny back in the bottle, but it is going to take an awful lot of effort to do so.
How about introducing a law, ideally constitutional, that strictly forbids governments to bail out banks through taxpayers? The main reason banks took on excessive risk is because of the precedence of implicit and explicit guarantees and bailouts. If banks really had to fear going out of business then their risk calculations would be very different.Why not call it gambling and be done with it, Jim?
Enforce restrictions for the Public Good.
Its hardly banking.
Why not call it gambling and be done with it, Jim?
Enforce restrictions for the Public Good.
Its hardly banking.
ONQ.
Glass-Steagall is the only deregulation that had any significant impact on the crisis. But there were countless new regulations that were introduced in the last 10 years that mean that overall the burden of regulation in the financial industry increased, not decreased.
As you seem to know quite a bit about UBS I am quite happy to hear you "harping" on about them, it is always good to get insights from people with more of the know. But do you think that UBS or any other bank would have taken on the same risks if they did not have governments and central banks to fall back on? Lenders of last resort and too big to fail policies gave banks the ideas of mitigated risk.
How about introducing a law, ideally constitutional, that strictly forbids governments to bail out banks through taxpayers? The main reason banks took on excessive risk is because of the precedence of implicit and explicit guarantees and bailouts. If banks really had to fear going out of business then their risk calculations would be very different.
Yes we can let small banks fail, but the "Too big to fail" are a different story - we'll just have regulate them to a much greater extend.
But would you not also agree that in relative terms Switzerland was one of the least affected countries in the credit crisis? The fact that Switzerland does not have the same track record of bailouts as other countries does very much show in Swiss banks' behaviour towards lending. I read one of your posts on another thread about getting a mortgage in Switzerland and it seemed to me that it was very difficult, indicating that banks are very risk averse in this sense.First of all there was no precedence for bail outs in Switzerland, in fact banks of often been allowed to fail in the past and even now there are no government deposit guarantees similar to anything offered in the EU. The biggest failure in the past was the Union Bank Of Switzerland, know as old UBS! In this case it lost a major part of their capital investing in LTCM and was basically insolvent. It was taken over by one of the other 3 large banks known as Swiss Bank Corporation and the new enterprise was called the United Bank Of Switzerland - New UBS. In general Switzerland is not a land of hand outs - there is no support the long term unemployed, we have no public health service and so on - so no I don't think that was what happened.
I absolutely agree, cheap credit was at the heart of the problem, along with an inflated money supply.But if you give bankers access to cheap finance and pay bonuses on 12 months performance basis rather than on a long term view, you bet they'll come up with some very high risk and complex products. Now if you are the one trying to manage this complexity, a nice simple model that produces Yes/No answers or Red/Green flags, take you pick, is a very attractive proposition, especially if you really don't understand what is going on! And according to the report that is what happened!
Very interesting view point and I certainly see how you come to that conclusion. Banking and government are more intricately intertwined than the majority of people understand. Banks gain from cheap credit, inflated money supply and the ability to create money out of thin air, while governments benefit from a guaranteed buyer of bonds. It is no surprise that top bankers are political figures rather than shrewd business people. All the while it is the average person that gets screwed by this setup.Over the past 20 years I've become far more interested in the behavioural aspects of finance than anything else because it plays a major part in understanding what really goes on. Bank CEOs get to the top not because they have great knowledge of maths and the technicalities of banking, but because they are good corporate politicians. And the last think they going to do is admit that they don't understand the models being used to manage the bank!
But what you are describing is a chaotic bankruptcy, which doesn't have to be the case. No matter how big a company it is possible to have an orderly wind down and liquidation.It all sounds fine in theory, but when you come to the banks that are "Too big to fail" it is a different story... Lets assume for a minute that it did actually happen, day one the bank staff walks of the job since they are not going to get paid, within 24 hours the credit and payments system will blow out, you will not be able to access your cash at the ATM nor use your credit card... next of course comes the lack of a salary since there is not way for a company to pay it either and so on. Property etc... will have a value of zero because there is no way to dispose of it and so on. Irish firms will find it almost impossible to export anything and so on. The government and large corporations will have difficult raising finance on the markets because who would give credit to a country that can't even run a basic banking system??? Even the Swiss realised that they could not afford to let UBS fail and so they had to do a bail out as well.
All that will be achieved with more regulation is that you will end up with ever increasing number of too-big-to-fail banks, which only exacerbates the problem and dependence on a few companies. It is also very simplistic to suggest that quantity of regulation automatically translates into quality of regulation and a solution to the problem. As I have stated before, it is a vicious circle of regulations causing concentration of the market, which causes an increased risk to the entire system, ultimately leading to more regulation ad infinitum.Yes we can let small banks fail, but the "Too big to fail" are a different story - we'll just have regulate them to a much greater extend.