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May 13, 2011

Comments

Greg Free

I like what you write, because you write in plain terms for knuckleheads like me. I actually believe I 'get' what you are saying, which gives me a _chance_ to agree/disagree.

Rather than say your conclusions are wrong (they aren't), I would characterize the problem differently.

"We" invented credit swaps as something other than insurance so that they would not be regulated. No accident, in my mind. This enabled perps (who should be prosecuted IMHO) to bet the world's collective wealth at 33:1 odds. Greenspan admits he was wrong in assuming that big companies like AIG would regulate themselves. The Basel accord you cite requires 8% reserves, almost 3X what we did. Sadly, those perps were investing our retirement money, be it in pension plans like CalPers & CalSTRS or 401ks or private hedge funds. We wanted growth so _we_ offered incentives to them with no accountability to make this certain loser of a collective bet.

I knew the boom was driven by accommodative policy, I regarded elevated defaults as a given, but I had no idea the entire system was so highly leveraged. My bad.

Now I am privileged to subsidize housing in several states and help pay salaries at tooooooo many financial institutions as penance for my sin of greed. I expected a correction, but no one really expected the complete collapse of the world's financial system. As I think you have pointed out previously, we have done nothing substantive to protect ourselves from a recurrence.

Dick Lepre

Greg,

CDS were invented after the Exxon Valdex accident. See: http://economy.typepad.com/the_economy/2011/01/rate-watch-758-credit-default-swaps-rate-watch-758-great-new-rpm-jumbo-mortgage-credit-default-swaps-january-21.html
AIG was an insurance company and not under driect control of the Fed.
As for bank reserves I am not sure what you mean by "requires 8% reserves. Almost 3X what we did." Commercial banks did have 8% reserves. Investment banks did not. What is worse is that while the housing bubble was preparing to burst the SEC actually halved the capital requirement for investment banks.
The housing bubble was driven by HUD which destroyed FNMA and FHLMC and also by bad banking practices of the likes of WAMU and Countrywide. You are most certainly correct that accommodative monetary policy (low Fed funds) made the problem worse.

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