Monday, July 19, 2010

Finance Reform Bill - A Few Comments

With regard to the finance reform bill, I found a few comments in Friday's (July 16) Wall Street Journal to be notable.

First, this quote from a story titled "Impact to Reach Beyond Wall Street":

""The bill does not respond at all to the causes of the financial crisis," said Peter Wallison, a former Reagan administration official and co-director of American Enterprise Institute's financial policy studies program. "Instead, it weakens the U.S. economy and reduces economic growth."

Second, a couple of quotes from another July 16 story titled "Law Remakes U.S. Financial Landscape":

"The bill "is a 2,300-page legislative monster…that expands the scope and the powers of ineffective bureaucracies," said Sen. Richard Shelby (R., Ala.)."


""We failed completely to understand the complexity of what the impact of the national decline in housing prices would be in the financial system," said Ms. Yellen, currently president of the Federal Reserve Bank of San Francisco. "We saw a number of different things, and we failed to connect the dots."

My comments:

I am in general agreement with the quotes from Peter Wallison and Richard Shelby.

I included the quote from Janet Yellen as I believe it is notable, and frankly, I was surprised to see it.

From an "all things considered" standpoint, I don't believe this bill provides any aggregate value.  It won't prevent any future financial crisis.   I think it is notable that there is so much negative commentary about this bill from the financial and economic community; some of this commentary is appended to the second story mentioned above.

Furthermore, not only does this bill not provide aggregate value, but it also has the potential to be quite pernicious on numerous fronts.  At this point, it is impossible to predict how this bill will be enacted; however, it is clear that there is outsized potential for many unintended harmful consequences.

back to home

SPX at 1064.88 as this post is written

1 comment:

  1. The global bank regulator has built his pillar on a completely faulty foundation

    The regulatory paradigm on which the Basel Committee stands will quite soon be discovered as one of the biggest regulatory failures ever, and all the experts will be looking for ways how to disassociate from them.

    This is so because those regulations are primarily based on requiring the banks to have more capital when risk are perceived as high while allowing for much lower capital when risks are perceived as low, even though all financial and bank crisis in history have occurred from excessive investments in what is perceived as having low risk.

    Only what is perceived as having a low risk can grow into systemic risk. A high perceived risk always takes care of itself and does never grow to be a systemic threat.

    The regulators fixated themselves so much on stopping a bank from failing, that they ignored the system. Besides, who would like to live in a world where banks did not fail?

    Currently small businesses and entrepreneurs, only because of the arbitrary, regressive and discriminatory capital requirements, need to pay the banks 2 percent more per year in order to provide the banks with the same return on capital that a loan or an investment to a triple-A rated client yields them. And this on top of the higher interests the small businesses and entrepreneurs anyway have to pay. Crazy!

    To top it up… a visitor from outer space, if observing our bank regulations which require a bank to hold 100% of the standard capital requirement when lending to a small business but only 0% of it when lending to its triple-A rated government would most likely conclude that planet earth is communistic… and laugh at how we currently can have no idea what the real interest rate on public debt would be without this regulatory favor.

    We’ve have all been “Razzle Dazzle 'em, Razzle Bazzle 'em”… So let us urgently get out of that trance!

    If you got the time let me invite you to a brief lesson on how bank regulators have become so fixated on seeing the gorilla in the room that they completely lost track of the ball.

    Per Kurowski
    A former Executive Director at the World Bank (2002-2004)