The Systemic Risk Solution

By James Kwak

From The New York Times: A council of regulators chaired by the treasury secretary, with the Fed chair or his designate as the vice chair. At present, that would be Tim Geithner and Ben Bernanke.

I wouldn’t ordinarily write a whole post about this (if I just want to link to something, I try to use Twitter), but I had to point out this line by Calculated Risk:

“I can just imagine a council in 2004 and 2005 led by ex-Treasury Secretary John Snow with Alan Greenspan as Vice Chair. Yeah, that would have worked well …”

11 responses to “The Systemic Risk Solution

  1. So let’s see, first Bennie wanted dictatorial power (not, of course, legitimate authority; the system has abdicated that forever) over “resolution”, then they wanted a potemkin “council” while the Fed exercised (i.e. failed to exercise) real power, then they wanted the council but dominated by the Treasury Sec, and now they want to split the difference and have it dually chaired by the two head non-regulators.

    This really puts the validity of the “resolution authority” notion in perspective. It’s not a scam at all!

  2. We can no longer tolerate the people who are responsible for aid and abetting the greatest financial crisis since the depression to council, or mitigate, or advise, or dictate ANY economic power. This “…den of vipers and thieves” FAILED. They FAILED!!! Anyway you cut it, by any and every measure – the FAILED!!! Either there was grotesque and wanton FAILURE of management, or there was criminal activity. Either way, these shaitans, PONZI scheme operators, and pathological LIARS FAILED!!!

    So until and unless some outside voice, some voice not burdened with allegiance to the slimy tentacled monster that is Goldman Sachs, is given some kind or recognition and hearing in the putrid halls of the socalled government, – we the people – and in the entire global financial system – are doomed to endure cycles of catastrophic FAILURE and a “doom loop” of bursting bubbles and bailouts – and horrible terrible suffering for the people, ad infinitum!!!

    These are the LAST people on earth anyone sane person should be listening to regarding anything financial or economic.

  3. Bernankenstein knows he has to ‘give up’some regulatory’ powers he not either his predecessor (n)ever exercised ,so let the Treasury take the bullets, with a Secretary declaring in front of the Senate he was never a regulator… The Tories intend to incorporate the FSA body into the bank of England. Extend and pretend to protect the ‘primary dealers’ and keep on rigging the markets. See this line of defense by Jamie’s team, he understood well Hank Paulson’s “Armageddon day”

    ‘More on that doomsday regulation scenario for banks’

    JP Morgan has published a whopping 184 pages on the potential impact of proposed regulatory reform on financials — that’s things like the Volcker rule.

    http://ftalphaville.ft.com/blog/2010/02/17/152026/bearing-the-cost-of-reformed-banks/

  4. My modest proposal is that we create a Financial Products Administration similar to the Federal Drug Administration. Before any new financial product is permitted to be marketed it most go through an approval process that would include testing.

    It is the testing process where I see a truly “free and unfettered market” existing.

  5. …and I quote:

    “There is no housing bubble to go bust.” (Ben Bernanke, October 27, 2005)

    Perhaps Tim and Ben should read this article on market psychology before they start managing systemic risk:

    http://www.planbeconomics.com/2010/02/17/10-lessons-not-learnt/

  6. Crooks laugh all the way to the bank.

    Fine upstanding pillagers … um… pillars of the community laugh all the way to the bank regulators.

  7. Perhaps we need an Estates General and a doctor with a nasty machine? For Madame LaFarge we could substitute Yves Smith or Nomi Prinz.

  8. James Kwak: “but I had to point out this line by Calculated Risk:

    “I can just imagine a council in 2004 and 2005 led by ex-Treasury Secretary John Snow with Alan Greenspan as Vice Chair. Yeah, that would have worked well …””

    I’d say that it’s an excellent summing up, but it’s even worse than that – these are the same people who helped the system go bust, and who were then retained and/or promoted. I’d be more like AEI given charge of all national security issues after Iraq.

  9. What do Obama, Geithner, Bernanke & Summers all have in common? They’re all pompous, pretentious, inept, pseudo-intellectuals. And what should we expect from this latest ineptness? Another fiasco.

    The fact of the matter is that we’re barely scrapping by in spite of this group’s pathetic deceptions.

  10. Systemic risk might not signify as much as it used to since nowadays it mostly refers to those institutions who pose a danger to the system.

    But to me systemic risk is mostly about inadvertently introducing changes in the system that upsets its functioning.

    In this respect what upset the system and led us to this crisis was assigning the benefits of absurd low capital requirements to the triple-A rated operations that already were benefitted by the market being perceived as low risk. Regulators never considered the sad fact of life that there is not enough risk-free to go around and that much the contrary what one must do is to learn more and more about risk-taking.

    In February 2000 in an article titled “Kafka and global banking” published in the Daily Journal of Caracas I wrote: “The risk of regulation: In the past there were many countries and many forms of regulation. Today, norms and regulation are haughtily put into place that transcend borders and are applicable worldwide without considering that the after effects of any mistake could be explosive.”

    And so in this respect having a council of regulators could just make it worse by increasing the possibilities of introducing new systemic risks.

  11. Chas:

    I catch your flow and the continued theme of many bloggers.

    An interesting point brought out by “The O’Reilly Factor,” who by the way, Bill holds no punches.

    Bill O’Reilly made sense. The bashing is not accomplishing what its intended goal is seeking.

    Actually it will cause a continued disconnected support for cleaning up the funny money Lobbyist who love this type of banter throughout just about every media source and campaign.

    The real deal is to get the decision makers to turn their focus on the “Carry Trade” and systematic removal of over leveraged Liquidity.

    The hidden agendas of the Asian Rim of China no one can underestimate. We have entered into an Era of a whole new type of Warfare from the glimpse of Corporate America and what was gleaned with the events of Google.

    The many legal and sure use of what would be pattens and intellectual ownership by Corporate America is the reason China still posses a deeper threat to the entire global recovery metric thoriums as written by Simon Johnson and others like Joseph Stiglitz, and a host of other notable folks on the heart beat of these unfolding events.

    China simply gives a empty contractual hand shakes of a Tiger ready to strike. This “Trade War” or unconventional survival of the fittest is a War The United States of America can dare not loose.

    Still, your comment still holds what the “Tea Party” is using to gear-up the cleaning of incumbents that just got a little to comfortable over the past 14 years.

    Far-fetched, Not Anymore!