Financial Crisis Inquiry Commission: The Private Sector Failed
“…it came ultimately down to failures on the part of the Federal regulators that brought down the house…” Ami de Chapeaurouge
Behaviour will never be regulated; the ability to monitor the holistic system or “connect the dots” is again being discussed by various parties–most recently in the report–Enhancing Financial Stability and Resilience: Macroprudential Tools and Systems for the Future. It was a faillure of the system as a whole. Non-existent regulation, abysmal legislation with no forethought of unintended consequences, a former “sophist” Fed Chairman, who didn’t see the whole picture and CEO’s who didn’t fully understand their businesses (isn’t that what a CEO is supposed to do?).
From a writing of mine:
“There is inherent value in being a student of history applying heuristic and analytic methods to the research of core phenomena in pursuit of solutions that have the highest probability of success. Below is a program that, importantly, contemplates reviewing a hierarchy of causes of the current financial turmoil to determine which were most contributive. This would be inclusive of recommendations developed from an understanding of the historical events of the past 25 years coupled with a pragmatic understanding of what occurs in the daily world of this strata of various financial transactions. The financial upheaval that is with us today and will continue for an indeterminate amount of time—needs to truly be understood. However, re-tracing specific events leading up to a complex series of problems is especially important to fully grasping the situation before devising a strategy.
Restoring confidence would mean embracing very
determined and decisive action. Moving to the beginning of these evolutionary processes one might consider,‘‘What policy actions could have been instituted that might have created systemic regulatory and prudential (supervisory) framework control?’’ These regulatory frameworks are still capable of acting positively today. The categories contained in the frameworks could be carefully defined and enumerated. Embracing these concepts, the program would contain the following attributes and components:
a. A concise historical timeline of causal events that led up to this severe economic crisis inclusive of the dismantling of earlier safeguards that had been put into place.
b. An analysis of capitalism by breaking it down to its component parts viz., a) free market theory and b)‘‘financial capitalism’’ (banking and financial services).
These two concepts, although complementary, in the main have some mutual exclusivity and need not necessarily be synthesized as one theory. Too often, ‘‘capitalism’’and ‘‘free enterprise’’ are used interchangeably although
they refer to different concepts. One element to
be reviewed could be the growth of the financial services sector from 15 percent to 25 percent of GDP and the its effect on employment.
Regulatory anomalies that have occurred over the past 25 years or so which portray a confusing system of financial regulatory frameworks and legislation that have generated an array of unintended consequences through poor coordination. Included would be legislation
of the late 1990’s.
c. A review of derivatives, especially the unregulated swaps or OTC markets, and how their existence and use has acted to magnify the bursting of an otherwise severe but manageable series of ‘‘asset bubbles’’ into a complexity at a higher ‘‘order of magnitude’’ than has
been contemplated in modern times—which has virtually frozen or stalled the capital markets. As a note, these instruments are termed by some as ‘‘welfare enhancing’’
credit risk transfer instruments—which create
diversification and liquidity. However, the speculative nature and sheer volume of these unregulated instruments have been daunting to the international financial system and hard on real economies.
d. The adverse effects of unplanned international support systems in terms of credit, interest rate, and foreign currency derivatives and the roles played by various dealers and other participants.
e. A view of the inherent flaws of the credit rating agency system.
f. The concept of ‘‘super anti-efficient’’ or shadow markets and the evolution of special purpose entities (SPEs) as they relate to the current dilemma’s offbalance-sheet transactions and their effects.
g. Overview of the existing inventory and potential default severity of credit instruments (by asset class)still held by financial institutions (especially housing)
along with relevant Financial Accounting Standards Board (FASB) accounting procedures.
s Recommendations for applied remedial actions in an effort to address the current turmoil at its core, and to restore a sense of normalcy to the United States economy, and to the global markets.
Obviously, other elements would need to be analyzed and solved for, such as residential and commercial real estate valuation and their financings. But the key to any program would be to have one overarching purpose: to allow the markets to clear, reset and move forward. Reinstatement or the creation of new frameworks would provide of new frameworks would provide boundaries to keep the economy on a smooth road.”
Comment by Stephen R. Ganns — March 7, 2011 @ 1:07 pm
