Required Intellectual Capital

By Simon Johnson

At one level, the pursuit of higher and more robust capital requirements for banks is not going well.  The US Treasury insisted, throughout the year-long financial reform debate, that capital should be the focus – increasing the loss-absorbing buffers that banks must carry – and that they (and other regulators) needed to negotiate this is through the Basel Committee process.

But Basel has some under great pressure from the banking lobby, which argues that any increase in capital requirements would limit lending and slow global growth (see this useful background by Doug Elliott).  The Institute of International Finance (IIF) – a lobby group for big banks – issued an influential “report” along these lines and the European stress test results strongly suggest that Euroland politicians do not want to press more capital into their financial system – “just enough” would be fine with them.

However, at another level – in terms of the analytical consensus around these issues – there is a great deal of progress in the right direction.  In particular, an important new paper by Samuel Hanson, Anil Kashyap, and Jeremy Stein, “A Macroprudential Approach to Financial Regulation” pulls together the best recent thinking and makes three essential points.  (This is a nontechnical paper written for the Journal of Economic Perspectives – it’s a “must read” for anyone interested in financial sector issues but requires some effort and a little jargon does creep in.)

First, if we are really to apply the much discussed new “macroprudential” approach to regulation, we need to get much more serious about capital requirements.  In the past, regulators only cared if each bank – by itself – had enough capital to withstand likely losses.  But experience over the past few years has made it completely clear that this is not enough. 

The “macroprudential” view, articulated nicely here, is that we should worry about banks being forced to dump assets in order to reduce their balance sheet – capital requirements are usually stated as the ratio of “capital” (ideally this would be shareholder equity; this link provides more detail) to total assets.  Forced sales can cause asset prices to decline sharply – feeding into exactly the problems we saw in 2007-08, and eventually leading to the near complete collapse of the market for asset backed securities.

Individual financial institutions, however, do not care enough about the systemic effects of their actions – these costs are “externalities” to their decision-making.  But from a social point of view this is a big deal and an important reason why the recession of 2008-10 was so severe.  We should therefore have substantially higher capital requirements than heretofore – presumably far above what regulators currently have in mind.

Second, we should really set capital requirements for types of assets not – as is done currently – by types of lenders.  Banks obviously have an incentive to “leverage up”, meaning to borrow more relative to their equity.  If we regulate banks, these same transactions will migrate to other more shadowy parts of the financial system.

Probably the most innovative part of authors’ proposals is that we should set higher margin requirements against asset-backed securities.  Allowing anyone – irrespective of what you call them – to borrow heavily against such assets is simply not a good idea.  Unfortunately, this approach is completely absent from the current regulatory reform toolkit.

Third and perhaps most important for the continuing policy debate, the authors are quite clear: There is no evidence that increasing capital requirements – if handled in the right way – would have significant adverse effects on credit available to the nonfinancial sector or on economic growth and employment.

The policymaker consensus is unfortunately in a different place on this – unduly swayed by the IIF and other representatives of global banks.  But Hanson, Kashyap, and Stein are careful and categorical – shifting from debt towards more equity financing for banks would have, at most, a small effect on interest rates for loans.  The IIF and its allies are plainly and obviously wrong on this issue.

The authors are leading financial experts and, as a result, carry a great deal of weight in policy circles.  Stein is a professor at Harvard, former president of the American Finance Association and a sometime adviser to the Obama administration.  Kashyap is a professor at Chicago, and has written authoritatively on the financial rise and fall of Japan, among other things.  Samuel Hanson is an up-and-coming graduate student at Harvard.

They do not in this paper spend much time explicitly on the political economy of capital requirements and the broader regulatory framework for banks in the US or around the world.  But implicit in their analysis is the sensible idea that banks and other powerful financial players are not passive “rule takers” – the finance industry has spent a great deal of time and treasure in recent decades undermining what these authors would regard as sensible rules.

And the same global banks are working hard to undermine the Basel process, so far to great effect.  Hanson, Kashyap, and Stein have helped move our thinking in the right direction.  But the stark contrast between their views and the political/regulatory reality on the ground only highlights how much further we need to go.

An edited version of this post appeared this morning on the NYT.com’s Economix; it is used here with permission.  If you would like to reproduce the entire article, please contact the New York Times.

136 responses to “Required Intellectual Capital

  1. there is a typo in the second graph

  2. One of the things that kind of drives me “batty” on this blog is Per Kurowski always whining about Basel. Now he has some points, no doubt. And I think it’s healthy to the discussion that he reminds people of Basel, as Basel is a huge part of the problem. But what kills me is how Kurowski wants to complain about lax capital standards. (Also I would say it’s not just a matter of the lax capital standards (the % of capital), but also what they are allowed to label an “Asset” now on bank balance sheets. These topics are almost actually one in the same, but I could go on on a 5 hour post on that topic).

    Exactly who does Kurowski think is writing the Basel standards??? In fact it is the large banking lobby who complains that if they are not allowed to pull buggers out of their noses (or pull things from other orifices of their body) and label them an “asset” on their books, that it will “limit lending”. The large bank lobbyists might as well hold the lobbyists hands and guide their fingers as they write the Basel laws. Or maybe the large bank lobbyists just type up the Basel standards themselves and bring it to the bureaucrats to sign. We can save the kabuki theatre then. All the while they sit on the reserves that idiot Central Bankers like Bernanke throw money at them, like today is our last day on earth.

    I would like to hear one of these Senators (are you listening Al Franken??? Bernie Sanders???) ask Bernanke what is the point in giving huge amounts money (QE) to corrupt investment bankers with corruption out their eyeballs and gluttonous salaries??? How does Bernanke rationalize that throwing monstrous amounts of money to sit in banks’ reserves is going to dissuade investment bankers who are the root of this problem to begin with???? Does he think that investment banker think to himself “Oh, I just got another zillion dollars from Bernanke to sit in my reserves, I better stop playing with derivatives or he Bernanke might give me another zillion to sit in my reserves!!! Oh the HOROR!!!” Does he think that by siphoning money to the ECB (European Central Bank) and SNB (Swiss National Bank) that will stop European bankers from committing more fraud??? Because it is not just loans that went bad because “Harry” lost his job—it is out and out fraud and corruption by investment bankers.

  3. Obviously I misspelled Horror in the above comment, “Oh, but the great points soiled and ruined by the spelling error…..”

  4. If there only was a way to avoid this calculation of tier 1 and tier 2, and avoid all this classification of the stuff that Ted K finds in other orifices of the bankers bodies.
    According to Gillian Tett in FT some Credit Suiss bankers have suggested how we can avoid this boring work. We just make an orderly quee of the creditors of financial institutions, and if an institution comes in trouble, the regulators push the button, wipes out the original equity owners and convert the claims of the creditors first in line into equity and them into new owners. Nice.

    The only down side seems to be a lot of people currently employed with classification and calculation suddenly out of work.

  5. Gaute,
    You obviously don’t know what you’re talking about. Bank shareholders these days don’t have squat to do with daily bank operations. And because of lax corporate governance laws, due to bank directors bribing slimy Republicans like Dick Shelby, that is not likely to change any time soon.

    The correct answer is clawbacks of bank director salaries.

    But that would mean bank directors like Joseph Cassano and James Cayne would be held responsible for their degeneracy which hurt depositors, taxpayers, shareholders, and society at large. We as a nation wouldn’t want to do anything rash like clawbacks, it might prove Americans had one or two working brain cells left.

    I mean these bank executives work extra hard, just read about it in their dearly beloved WSJ, link here

    http://online.wsj.com/article/SB119387369474078336.html?mod=hps_us_pageone

  6. Correct Ted, I first read of the argument about the effects from the head of the B.I.S, Jaume Caruana, months before this Basel meeting. The problem is
    political- in the States with the ‘regulatory capture’
    and even in Europe where proposals for a pan-European
    regulator have been taken down so far by the powerful
    European banking lobby ( see http://www.spiegel.de/international/europe/0,1518,708494,00.html ), however senseless the CEBS currently is, as illustrated by the European stress tests.

    Fortunately, the Germans expressed reserves and yesterday Mervyn King publicly expressed concern in front of a parlementary commission, as the Labour’s tri-partite regulation is being folded into a division
    of the BOE about the insufficient toughness of the new requirements.

    On the ongoing ‘capital’ matters, the latest ‘state of things’is at: http://www.bis.org/press/p100726/annex.pdf

  7. Ted K
    You may be right on your first point, but I only tried to sum up someone elses idea. And there might be a slight chance that the creditors standing first in line may hold more sway over bankers than the shareholders.

    I do agree with you on your second point, that making those who act liable for the consequences of their actions is at least part of the answer.

    I disagree on the number of brain cells. Americans should not be so hard on themselves, even in times like this.

  8. Patrice Ayme

    Money ought to represent energy (under real, potential, historical forms). But the essence of the financial crisis is that banks have been allowed to create money, using debt and leverage, without any regard to energy, but being instead guided by corruption (the power of people onto people as an ultimate end and worth, instead of the Absolute Worth Energy). Thus the financial crisis is entangled with imperial decay and running out of an efficient economy.

    Differentiating what the created money is used for and represents will be the first step towards implementing the true nature of justifiable money.

    http://patriceayme.wordpress.com/

  9. An academic paper showing what anyone with common sense already knows about leverage, versus various types of payoffs…. I wonder which will prevail.

  10. Anybody see a connection between Inspector General Bowen’s report on corruption IN Iraq/Afghan contracts and the bank B.S.? Isn’t diversion of attention and theft in the fog of war the point of war?

  11. “Isn’t diversion of attention and theft in the fog of war the point of war?”

    “War is a racket. It always has been. It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives”.

    – General Smedley D. Butler

  12. Duly noted about the IMF – to be included in the DOI 2010. Can the IMF become Commander In Chief of the USA military after SS is wiped out?

  13. You misspelled boogers too, Ted. But you get brownie points for your post anyway. Because you managed to graphically ‘image’ these banksters more vividly than any expletive could. And also because your anger and frustration are palpable and awfully justified.

  14. Re: @ Ted K ___GS has just circumvented the “Volcker Rule” shuffling/dismantling/re-inventing its prop trading desk…no-more to be! The mantra of “God’s” pro-creation has manifested itself once again into “Asset Management” via the normal backdoor extravaganza blessed by the FED! PS. Soon to be ubiguitous throughout the “13 Bankers”.

  15. Re: @ Anonymous___Died in a military hospital? The man was outspoken and a threat to the military complex. His followers salute him today as do I :-)

  16. Anonymous wrote:

    “Isn’t diversion of attention and theft in the fog of war the point of war?”
    ………

    1998 – The Common Good – Noam Chomsky

    “The smart way to keep people passive and obedient is to strictly limit the spectrum of acceptable opinion, but allow very lively debate within that spectrum – even encourage the more critical and dissident views.

    That gives people the sense that there’s free thinking going on, while all the time the presuppositions of the system are being reinforced by the limits put on the range of the debate.”

    http://www.thirdworldtraveler.com/Chomsky/Common_Good_Chomsky.html

  17. Fallen Soldiers’ Families Denied Cash as Insurers Profit

    Jul 28, 2010 – Bloomberg – excerpts

    “Companies like MetLife and Prudential have never told millions of Americans with insurance policies that when they die, the insurer plans to hold their family’s money in its own account to make investment gains from the death benefit.

    Prudential’s general account earned 4.4 percent in 2009, mostly from bond investments, according to SEC filings. The company has paid survivors 0.5 percent in 2010.

    “It’s outrageous that somebody’s profiting off other people’s grief,” says Mark Umbrell of Doylestown, Pennsylvania. His 26-year-old son, Colby, an Army Airborne Ranger who earned a Bronze Star and a Purple Heart, was killed in Iraq in May 2007. Umbrell was among those who got a “checkbook” account.

    “I think we’re being taken,” he says.”

    http://tinyurl.com/to-the-cleaners

  18. If sound banking is desired, then a new credit system necessarily need be created — one essentially flanking the present system and in short order dwarfing it as well. Reconstitution of the Bank of the United States and reorganization in bankruptcy of the Federal Reserve System are the surest practical ste[s toward reaching this end.

    Why? Because talk is cheap and actions speak louder than words.

    That “the finance industry has spent a great deal of time and treasure in recent decades undermining what these authors would regard as sensible rules” should be a lesson to us all.

  19. @Ted K. “But what kills me is how Kurowski wants to complain about lax capital standards”

    Though of course 1.6 percent in capital requirements are indeed lax my complains have never really been about “lax capital standards” but about discriminating capital standards.

    @Ted K. “Exactly who does Kurowski think is writing the Basel standards???”

    Who a Per Kurowski thinks writes the Basel standards is completely irrelevant. But, that the US Congress though does not even mention Basel Committee in the financial reform, even though they know it will be setting the overall important capital requirements, is something which sounds quite a bit more relevant.

  20. The paper states “A microprudential approach… is aimed at preventing the costly failure of individual financial institutions. By contrast, a macroprudential approach … seeks to safeguard the financial system as a whole. There seems to be agreement among both academics and policymakers that the overarching orientation of financial regulation needs to move in a macroprudential direction.”

    Aren´t we lucky? Imagine if our academics and policymakers disagreed on that?

    Still, once again, the financial system as a whole defined in the paper is NOT really the financial system as a whole… because it does not include the borrowers or clients of the financial system and a financial system is there to deliver overall results for the society and not just for the banks.

    This paper seems only to be proposing a more advanced game to be played by the Gameboy generation of regulators… because once again it completely fails to consider the systemic effects of the financial regulations on the whole economy.

    For instance, current regulators have placed, by means of generating higher capital requirements for the banks, higher handicap weights on those small businesses and entrepreneurs who we need to create the next generation of jobs and that already have to pay higher interests, while, by means of generating lower capital requirements for the banks, placed lower handicap weights on those who already pay lower interest rates by being perceived as having lesser risk of default.

    So if we are going to talk macro… let us then talk real macro and not just partial macro. I don’t care much just about the banks I care about the whole economy. As I wrote already in 1997, then on Basel I, “What use is to us if banks do not default if the rest of the economy is not well served by the banks?”

  21. Re: @ Per Kurowski___What seems lacking is “Ratiocination”…eg.)”Three Quarters of all Jobs in America are Created by Small and Medium Size Companies”. This linear-quasi analytical, and somewhat questionable parabolic equation is an open-ended paradox of cyclical neo-cybernetics pacifing the chosen few…leaving the finality a imputed quid-pro-quo! The myoptic narrative challenges no one, but seduces more ambiguity further turbiding the dangerous undercurrents.

  22. Lavrenti Beria

    So what do we make of this headline: RANGEL FACES 13 ETHICS CHARGES. Filth trying filth, I’d say. What a laughable construct, an “ethics committee” in the United States government. And please don’t take this criicism as a defence of Rangel. They’re all Rangel’s, every cotton pickin’ one of them. Hopefully one day we’ll see the lot of them in a cage in the middle of an enormous outdoor sports stadium, facing a peoples’ sentencing after trial. You won’t be able to get seats that day, trust me.

  23. Ah, the putrid stench of shameless hypocrisy. Never in short supply from our elected officials.

  24. Here is Barney Frank, explaining how if large banks are getting usury rates on credit cards and ATM overdraft fees, they have much less incentive to give reasonable fixed rate mortgages to hardworking responsible families that need loans.

  25. Re: @ Rickk___I studied Chomsky for years. His forte was that of a gifted linquistic, with adequately limited knowledge of cultural methologies similar to that of the Late Joeseph Campbell, but always…only that of an undergraduate level, period. His distain for his past (CIA) employer is quite prejudiced by the harsh realities ,and treatment that had befallen his youthful idealism of the time. He is behind the curve or better said, captured by curvilinear thought syndrome – a seemingly confused 70’s retro-protagonist with no pragmatic credentials regarding the nuance of subversive psychology of today. Simply put – he cannot reprogram his past?

  26. Let us look at the dire consequences of shadow banking, and repatriation of America’s Multinational to bring their fortunes to the emerging markets coffers – enhancing whose pocketbooks? Here are the empirical facts of America’s fortunes: 70% of the United States “GDP” comes from the American consumer spending – correlate that with the fact that 75% of jobs created in the United States come from “Small and Midsized Companies”. Please note the similarities in percentages – they should smack you in the eyes,(no jobs,no consuming) quite literally! Without growth in the United States our GDP will obviously fall. Question? Do these “13 Bankers” think that Small & Mid-Size Co.’s” are going to drop off the face of the map and not repay their obligation given a highly collateralized pathetic loan to boot? Half these multinational’s skate on taxes so where is the remaining component of Nat’t Product coming from – can’t raise taxes, can’t keep printing debt (no buyers)- can’t keep paying unemployment benefits beyond 36+ months (I hope not)? Here’s a unique idea. Lets start by bringing the troops home. Saving a cool $Trillion Dollars {off-budget, but who cares they would (gov’t) would spend the excess $$$ anyhow} and help the Real Economic Engine get back on its feet! JMHO

  27. Kliment Voroshilov

    And our synchophantic media treat this hypocricy as though it were something to smile at. Ha-ha, Ho-ho, politicians will be politicians you know? You could take the entire detestable cast of last week’s PBS Washington Week, the Dan Baltzes, the Martha Radidtzes and their friends and not find one who would be sufficiently mature to be offended by this excreble ca-ca.

  28. It occurred to me today that the “news” website that would start to get the most hits would be the one where all the “comments” that were not posted because they were CENSORED

    (“MODERATED” is a completely different meaning, let’s get real here or at least learn English!)

    were instead posted on that rejected-by-“moderators” website! Maybe I’ll suggest it to wikileaks :-)). Nothing is being buried into deep, tippy-top security “secret” files more than what is REALLY going on in the hearts and minds of the good people of the USA.

    My pet peeve is what has happened to SCIENCE. Science is no longer in service to mankind because of how “macro” economics is being deployed. Ditto for the fine arts – literature, architecture, theater, music, painting/sculpture. Scientists and artists should form guilds and have their own micro-economy that is NOT loot-able by war lords and drug lords or shangheid to the service of the predator class where it gets crushed into the most mediocre form of mass-consumer/mass production.

    Another tactic that doesn’t get used enough – TedK tried today – is “reducto absurdum” – reduce an argument to its most absurdly LOGICAL conclusion and see how the “theory/idea” lands after being subjected to that kind of mental HEAT.

    Example – the “secret” world can get so big and so insane that it could become common to see human heads roll out of the back of a FedEx delivery van involved in a fender bender…and no one would blink.

    We already have the philosophical/political/economic equivalent of that happening across all “mass-media” communication, don’t we?

    Brother Beria is USA born and from a certain age group – his “every cotton pickin’ one of ‘em” outburst of emotion probably was not taught in the spy-training Russian village :-). But that still brings up other concerns about his humor, taking the nom de plume of “Lavrenti Beria” – yikes. Should I be Svetlana Stalinina? A “moderator” of LISTS where I listen to god’s voice in my head to direct me as to which name to underline in red…? So many sisters are so far out there these days, it’s beyond alarming – Charles Manson must be jealous of how well the preacher-man schtick works…”compassionate” releases of Lockerbie-type terrorists in exchange for black gold…and TIME magazine covers…

  29. Just wanted to mention that your last two posts (28 and 29 Jul) have not come through on the RSS feed in Google Reader. I have tried deleting and re-adding the feed to no effect.

  30. “What’s the point of constantly using our superb military if doing so doesn’t actually work?

    Washington’s refusal to pose that question provides a measure of the corruption and dishonesty permeating our politics.”

    Andrew J. Bacevich http://www.huffingtonpost.com/andrew-bacevich/the-end-of-military-histo_b_663548.html

  31. If you want to know who is going to be the new Head of the CFPB just check the White House Website. They said this President was going to be a pioneer in Presidential communications and more modern than his predecessors, boy howdy, they were not kidding. Look here for the answer at the White House Website.

    http://xkcd.com/773/

  32. After I read that article, I went, “huh?!”.

    Maybe it’s true that USA and Israel are “friends” because they abuse power in the same way…in which case, maybe someone needs to break up the friendship so that both can move on to healthier relationships with others?

  33. Housing Policy Must Be Set On Sustainable Basis

    By Hank Paulson

    Friday, July 30, 2010; A19 – Washington Post – excerpt

    “The financial reform bill enacted last week is a significant step toward a much-needed modernization of our regulatory structure. It will provide tools to help mitigate and manage the next financial crisis.

    But the job remains unfinished until Congress addresses the housing policies that fueled the crisis — a big part of which requires reforming and dramatically scaling back Fannie Mae and Freddie Mac, the two government-sponsored housing enterprises that brought our nation’s financial system and our entire economy to the brink of collapse.”

    http://www.washingtonpost.com/wp-dyn/content/article/2010/07/29/AR2010072905007_pf.html

  34. Simon Johnson wrote:

    “At one level, the pursuit of higher and more robust capital requirements for banks is not going well. ”

    Rickk quoted Hank Paulson:

    July 30, 2010

    ” The financial reform bill enacted last week is a significant step …. But the job remains unfinished until Congress addresses the housing policies….Banks obviously have an incentive to “leverage up”, meaning to borrow more relative to their equity.

    If we regulate banks, these same transactions will migrate to other more shadowy parts of the financial system.”

    http://tinyurl.com/2aah45q

    * Possibly Homeland Security could address the issue of banks ” migrating” to “shadowy parts of the financial system “, and provide a strong disincentive.

    At the moment, investment banks seem to be doing more damage to society than anything Al-Qaeda could imagine. My 2-cents.

  35. Guys, get a room.

  36. Americans Buy IPads While Broke in New Abnormal Economy

    Jul 29, 2010 – Bloomberg

    http://tinyurl.com/3yvs4u9

  37. ” …Ronzio enlisted the help of a firm called You Walk Away and did exactly that from the remaining $319,000 on his condo mortgage.

    When the bank foreclosed, he says he felt a sense of relief. He also had more cash. He and his fiancée took the kids to Disneyland. Ronzio, 31, gave himself a treat as well.

    “I bought myself an iPad,” he says.

    http://tinyurl.com/3yvs4u9

    * I’m just the messenger.

  38. “The medium is the message is a phrase coined by Marshall McLuhan meaning that the form of a medium embeds itself in the message, creating a symbiotic relationship by which the medium influences how the message is perceived. The phrase was introduced in his most widely known book, Understanding Media: The Extensions of Man, published in 1964.

    McLuhan proposes that a medium itself, not the content it carries, should be the focus of study. He said that a medium affects the society in which it plays a role not only by the content delivered over the medium, but also by the characteristics of the medium itself.

    For example, McLuhan claimed in Understanding Media that all media have characteristics that engage the viewer in different ways; for instance, a passage in a book could be reread at will, but a movie had to be screened again in its entirety to study any individual part of it.” (Before non-linear viewing was available)

    So the medium through which a person encounters a particular piece of content would have an effect on the individual’s understanding of it. ”

    http://en.wikipedia.org/wiki/The_medium_is_the_message

  39. “Because of this law, the American people will never be asked again to foot the bill for Wall Street’s mistakes,” Obama said.”

    Wed Jul 21, 9:24 pm – AP

    http://news.yahoo.com/s/ap/us_financial_overhaul

    July 30, 2010 – Washington Post

    Hank Paulson

    “The financial reform bill enacted last week… will provide tools to …mitigate and manage the next financial crisis.”

    http://tinyurl.com/2b5h2y4

  40. “Because of this law, the American people will never be asked again to foot the bill for Wall Street’s mistakes,” Obama said.”

    That’s because the “American people” have no money left and did they ASK us?!

    They got it ALL – thanks to Homeland Security’s technological assist ala the Patriot Act “law”.

    No “little person” in Russia deals with the banks anymore. And no “little person” who picks up a crumb that fell out of the ravaging wolves’ mouth after this kill will ever “deposit” that meager morsel in a “bank”.

    Even Clarke did not know that the insurance companies were not paying the relatives of fallen soldiers! Every day is a new revelation about Criminal Inc.

    Without a CLAWBACK, what’s the point?

  41. Not quite, Earle. Chomsky’s books are fascinating for what they include that isn’t even his. Much of his writing consists of letting his targets, CIA, State Department, the Pentagon, … hang themselves. Reread his stuff if you doubt me. After a paragraph with ten excerpts and/or quotations strung together (all with proper citations), he’s built an airtight case without saying anything. It follows that if you think he’s “out of date” the folks he’s holding up a mirror to aren’t exactly new wave. But then theft, greed, lying and stupidity never go out of date.

  42. “Individual financial institutions, however, do not care enough about the systemic effects of their actions – these costs are “externalities” to their decision-making. But from a social point of view this is a big deal and an important reason why the recession of 2008-10 was so severe. We should therefore have substantially higher capital requirements than heretofore – presumably far above what regulators currently have in mind.”

    We started interconnecting all our communications – supply chains, commercial purchases, utility payments, social networks… over 20 years ago. Much of the synergy that introduced into our affairs is beyond our grasp. We can nonetheless generalize to some extent.

    For finance it comes down to this: the Internet and the private tunnels it hosts allow for the sort of flows that break down all of the artificial barriers we’ve set up to delineate our affairs. The notions that 1) millions of individual mortgages could become widgets in a global flow of capital, and 2) any sort of systemic failure of these widgets wouldn’t affect that flow are antithetical.

    As easy as that is to follow, the bankers still don’t get it. The Internet amplifies any downturn in the value of those widgets by modulating that flow of capital, and quickly. That sort of feedback can be deadly. We just watched it happen.

    There are no “externalities” any more, not since we form-fitted the globe with a nervous system. What that means for capital requirements should be obvious. They need to be treated globally as well. Who’s going to buy into that, and how soon? How will we set up the mechanisms to do that? Are we really going to get global agreement on melding all the cash into one big pool?

    That’s how this is all being driven, by the technology we adopted. In their basic architecture the TCP/IP protocols are barrier free. That architecture is now imposing itself on the business processes it nurtures.

    Putting together systems like the one that was built on asset-backed securities, then letting that go into the wild of the Internet with no forethought is a death wish.

    If we can’t manage this stuff, we need to shut it down. If we don’t this will happen again

  43. Simon Johnson, James Kwak, in reference to “Required Intellectual Capital”, may I pose a question to you?

    What would you say if the US Congress tried to enact a law whereby all unrated small businesses and entrepreneurs, besides the higher interest they normally need to pay, had to pay an additional 2 percent tax per year on all of their bank loans in order to cover any losses sustained by the State with regard to the banks.

    I submit that you would most probably say “They’re crazy”

    Well, for your information, and just in case you might be interested in bank regulatory issues and can set aside for a second your political agendas, this is exactly what current Basel II regulations do, although of course this is never acknowledged.

    Because the banks are required to hold more capital when lending to unrated small businesses and entrepreneurs than when lending to triple-A rated clients, the first need to pay around 2 percent more in interest rates in order to provide the banks with the same return on their equity that the seconds do.

    And all this even though the Government really has not have had to bail out banks because of their problems with unrated small businesses and entrepreneurs.

    If you want to see some very simple figures on this please go to:

    http://subprimeregulations.blogspot.com/2010/07/basel-committee-makes-small-businesses.html

    Since Samuel Hanson, Anil Kashyap, and Jeremy Stein define the macro financial system without including the borrowers, this type of concerns are of course not part of their paper… It should be!

  44. Let us suppose that the regulators of the Basel Committee instead of requiring the banks to have only 1.6 percent in equity when lending to triple A rated clients and a much higher 8 percent when lending to unrated small businesses and entrepreneurs would have established exactly the opposite capital requirements.

    It would most surely have created problems, any regulatory discrimination does, but I hold that a crisis of the size like the current one would not have happened… since no financial crisis has ever resulted from excessive lending to those who are perceived as risky, they have always resulted from excessive lending to those who are perceived as not risky.

  45. Bruce E. Woych

    “Individual financial institutions, however, do not care enough about the systemic effects of their actions – these costs are “externalities” to their decision-making. But from a social point of view this is a big deal and an important reason why the recession of 2008-10 was so severe. We should therefore have substantially higher capital requirements than heretofore – presumably far above what regulators currently have in mind.”

    This is a critical point that always appears “marginal” to the idea that the concept of profit seeking makes one exempt from any “externalities.” The use of the term “externalities” is a pre-suppositional term that sets up this possibility in the first place. But the idea of finance is not to ultimately seek isolated profits in a vacuum of self service. The entire mandate of finance is to serve the larger “externality” of a provisional economy.

    The point can be taken into more complex levels but it is subverted even at simple levels with rhetorical dismissal and “practiced” experiential arrogance. The true arrogance, however, is that in the material world the dismissal of “externalities” is a product of a disconnect from those externalities. The profit motive in these cases assure that the consequences are never experienced first hand by the perpetrators.
    The “seperaration of consequence” lends itself to an easy conscience and a megalomaniacal distortion of “doing god’s work” or a sociopathic disconnect altogether. Total rational deniability permits a disregard for ownership of any moral or ethical responsibility in the scope and scale of a final outcome, but the excessive and outrageous financial rewards clearly make that easy to live with afterall.

    One must wonder ultimately if the final level of distortion reaches a social psychosis that favors the a sociopathic personality to run our finmancial systems? Criminality, in that regard, would be simply a matter of interpretation…and merely another “externality.”

  46. “Second, we should really set capital requirements for types of assets not – as is done currently – by types of lenders.”

    That’s wrong. Its done for asset types now.

    “But Hanson, Kashyap, and Stein are careful and categorical – shifting from debt towards more equity financing for banks would have, at most, a small effect on interest rates for loans.”

    Ever hear of monetary policy to adjust the general level of interest rates?

  47. Bruce E. Woych

    Thank You Norm! I found only EARLE from Florida (above) and your own entry of any interest in the responses. I don’t know if you agree with me, but check the comment I put in (also above/top which was also in considering the artificial contention of “externalities” in full spectrum finance.

  48. Capital requirements are set depending on the perceived credit worthiness of the clients… that is why a triple-A rated client is benefited in relative terms by generating low capital requirements and a small business or entreprenuer punished because he cannot obtain a triple-A rating.

    At this time when bank capital is extremely scarce and expensive increasing the capitak requirements would put even more pressure on those who for no good reason at all are punished by generatin high capital requirements for the banks.

  49. Isn’t this like pushing the notion that the nation should act like families and tighten-up, when the reality is that Mom and Dad have gone to war for our security leaving Junior behind to watch the kids. Junior tells the kids to tighten-up then buys a Mercedes and leaves. Mom and Dad come home to find the kids starving and kill themselves.

  50. Thanks for the post. The idea of an “externality” is left-over from the time when economists didn’t have the wherewithal to include all relevant factors into their calculations. Despite the fact that we now have a flood of data that would let them bring those externals in-house, they persist in using this antiquated notion as a sink to get rid of the bothersome baggage associated with responsibility and morality. That baggage currently includes air pollution, water pollution, and financial pollution to name just a few.

    All the data associated with instruments such as CDOs and other derivatives needs to be available and under constant scrutiny by everyone on the Internet. That’s the age we live in. Why is finance so behind the curve?

    If we set up such a system, there would be no externalities and, given the transparency and near-instantaneous feedback, no systemic failures. But then there would be little profit from either. The mismatch between the time when the crap was floated and when the building collapsed allowed the suits to walk away with their bonuses and commissions. Get rid of that latency and that gets rid of the false valuations. Get rid of those absurd valuations and you’ve just killed off the golden goose that lays those commission/bonus eggs.

    The Internet facilitated this disaster and it can facilitate the solution. The answer is at our fingertips.

  51. Three Card Monty, Inertia, Ignorance, Malevolence. What’s your pick?

  52. Stephen A. Boyko

    @ Per Kurowski
    @ Ted K

    Capital is a relationship concept in respect to balance sheet and/or income statement ratios supported by the presumption of deterministic underlying economic conditions of risk management. I argue in favor of trend analysis as to whether the degree of uncertain asset (those with negative cash flow or whose valuation is determined by mark-to-model) are increasing or decreasing as a more effective early warning for either additional infusions of capital and/or sale of uncertain assets. Trying to govern risk and uncertainty with one-size-fits-all deterministic metrics is similar to having a single thermostat regulate temperature for H2O conditions of ice, water, and steam that has resulted in larger and more frequent economic dislocations.

  53. Stephen A. Boyko

    @ Ted K

    The correct answer is clawbacks of bank director salaries.

    Agreed, you have to internalize the consequences of decision makers, but while collateral I think there is a more fundamental determination to be made. Given your critical comments about Senator Dodd, would there be that much difference between Dodd-Frank and Shelby-Whomever as long as reform is constructed in a one-size-fits-all deterministic regime?

    If the capital market governance system is broke, you need real change to remedy

  54. Stephen A. Boyko

    There are no “externalities” any more, not since we form-fitted the globe with a nervous system. What that means for capital requirements should be obvious. … If we can’t manage this stuff, we need to shut it down. If we don’t this will happen again

    Total agreement, but how are hierarchical, command-and-control regulatory agencies that work in a 2-D modality with one-size-fits-all deterministic metrics supposed to function? If the system is broke, you need real change for remedial reform.

  55. How does that happen in a brain dead environment?

  56. The nervous system of mammals COORDINATES activity with the sole purpose of maintaining stasis – in the case of the body, good health.

    I agree with “We started interconnecting all our communications – supply chains, commercial purchases, utility payments, social networks… over 20 years ago. Much of the synergy that introduced into our affairs is beyond our grasp. We can nonetheless generalize to some extent.” and “If we can’t manage this stuff, we need to shut it down.”

    And all the technology was always about control over others – POWER. It was never about coordinating LABOR (physical or mental) to maintain LIFE – our own and the planet’s. Worse, the obscene funding for “communications” was recycled from the obscene “profits” generated by a predatory “grandfathered” set of “businesses”.

    It’s a planetary “Frankenstein”.

    We’ll see over time what “little people” Russians develop, organically, as they get better and better at targeting their own “cancer” cells – predatory banks.

    USA, always more extremist in how much damage it inflicts and how quickly (shock and awe economy) can’t be counted on for capturing the admiration and cooperation and COORDINATION of global humanity with a god-like “economy” because the approach to reality is inconsistent and illogical.

    Example – if you make all your decisions and live your life convinced that there is no “god”, then why are those same people the most adamant about “playing god” with other people’s lives through “communications” and “weapons of mass destruction”? Why are they unable to see that coordinating labor in a way that cooperates with the planet’s resources is the only REAL example of “intellectual capital”?

    Like it or not, we are going to be forced to deal with MAN MADE ecological imbalances at a FASTER pace – once greed, power lust and irrational politics introduced that laws of exponentiality into the nervous system, it introduced it into all LIFE on the planet.

    I tend to believe, theoretically, in a “god” who was smart enough to know HUMANS could not coordinate a nervous system so we were provided with a planet where we wouldn’t have to in order to LIVE – life, liberty and the pursuit of happiness.

    TBTF neither coordinates nor cooperates. It’s a Frankenstein.

    Intellectual Capital is grouping Humans based on their contribution to society (sciences and fine arts and engineers, etc) and then coordinating the groups into commerce with each other based on the fact that there is a lot of EQUALITY in the “fruits” of their labors – hence a steady state “salary” for maintenance and then a RATIONAL opportunity for PROFIT based on sustainable improvements, increased efficiency, and even additional progress in beautifying what we “build”.

    There IS a limit to profit. Get rid of that delusional “infinity” formula!

    A quip from a resident of Las Vegas for 3 decades – “…there was less corruption when the Mob was in charge and at least the money watered the whole city…”

    Crunching the GameBoy under my foot :-))

    Mr. Per Kurowski – the only way to accumulate a triple A rating for all of humanity outside of Frankenstein’s lair and minions is to give “guilds” the AAA rating. Scientists and artists and engineers are MUCH MORE than a “small business”. They have FREE WILL to boot :-)

    Remember the James Bond movies….? They always sealed in the scientists once they finished their creation and gased ‘em…

  57. @Annie… I would like to understand better what you mean with triple-A guilds… because as I see it the tenured financial professors are sort of a guild, and they have kept shamefully quiet and silent on this and many issues in the name of automatic solidarity… and not to speak of that super guild, the financial regulators, who pick themselves for the mother of all mutual admiration club, the Basel Committee, where they engage in the kind of incestuous intellectual relations that brought us this the most stupid of all financial regulations ever.

  58. Re: @ Norm Cimon____Exactly…He espouses the same “talk-out-of both-sides-of-mouth” as our congress. Hooray for me for I shall enlighten the masses. This is exactly how counter-inteligence works. Trust me, because I’m verifyable – look at my record and those I quote but please don’t question the whisperer in my deaf ear while the open ear is speaking. They do nothing to liberate freedom except make us more frustrated,period!

  59. All I know about the Masons, for example, is that they were, originally, a guild that kept themselves from being exploited by “middle men” (think Venice).

    Modern Labor Unions, especially since “labor” in our sophisticated civilization is hardly a “class” of IQ 70s, also are an attempt at regulating the amount of “unearned wealth” that any other organized “mutual admiration club” could lay claim to…especially an organization of historic Nihilists!

    Please note, the sophistication and sustainability of “western civilization” will ever be dependent on the OBVIOUS man to land ratio of TRUE agriculture, not GameBoys that steal pure water from people to make their micro-circuits.

    Everything about LIFE is WRONGLY coordinated right now. And since the financial system never had as its goal the coordination of commerce, I completely agree that “the most stupid of all financial regulations ever” is impotent in contributing anything of value to the future evolution of the human species. Too big to fail is Orwell speak for too stupid to exist :-) C’mon, they believe they created a “toy” for the monkeys that changes the way monkeys THINK and therefor, the TOY is the POWER over monkeys…

    Declaration of Independence 2010 – BIG PICTURE time “…in the course of human events…”

    Even the 17 year olds SEE that something is “too broke to fix” OR REGULATE and WHY should they not have a shot at the creation of something more elegantly simple than brutal Pharisaism?

  60. Re: @ Bruce E. Woych___excerpts : Basel III – even though they won’t come into effect for (7) seven years “Core Capital” should convert contingent capital into core capital in economic upturns. Note: Banks are anticipating the changes accordingly today – same old BS! PS. Basically this is Basel III in a nutshell?

  61. Stephen A. Boyko

    Antiquated organizational structure results in ossification. Solution: tripartite segmentation to prevent from having a single thermostat regulate temperature for H2O conditions of ice, water, and steam.

  62. It’s a planetary “Frankenstein”.

  63. Created on Jekyll Island.

    Zeitgeist – The Movie: Federal Reserve (Part 1 of 5)

  64. Lavrenti Beria

    Now I see why it is that the bacteria that run the political life of this country singled-out the maggot, Rangel, for discipline: His is an income tax violation. I mean get in the way of the revenue stream these lice depend upon for their self-service and it hits the fan! Next up, Maxine Waters:

    http://news.yahoo.com/s/ap/20100731/ap_on_go_co/us_waters_ethics

    This time its a question of a special relationship with a bank. Which among these vermin hasn’t a special relationship with a bank, please tell me?

  65. So when do you debut here as Joseph Stalin?

  66. That’s what you get when you mate “LOVE of money” with “WILL do anything for money”.

    And I’ll shut up now :-)

    The best thing about “history” is that you can CHOOSE which parts of it you want to repeat.

    DOI 2010.

  67. Lavrenti Beria

    Come on, anonymous. Everyone knows that Josef Stalin is dead. :-)

  68. Mr.Simon Johnson…thanks for the great post…opened eyes to the very underbelly of the beast. I referenced “beast”, for I firmly believe no one entity should have such power of authority – even though not mandatory, in all likelihood it is still a non-binding signatory agreement taken very serious by the powers that. Please correct me if I’ve misread.:-)

  69. Mr. Johnson wrote:

    ” – the finance industry has spent a great deal of time and treasure in recent decades undermining what these authors would regard as sensible rules.”

    The New Credit-Card Tricks

    JULY 31, 2010 – Bloomberg News – excerpt

    “Just months after historic legislation banned certain billing practices, card issuers have dreamed up new ones designed to trip up consumers.

    The Card Act forces issuers to give customers more notice about interest-rate increases, and restricts certain controversial billing practices such as inactivity fees.

    Yet some of the biggest card issuers in the U.S., including Citigroup Inc., J.P. Morgan Chase & Co. and Discover Financial Services, are already rolling out a slew of fees designed to recapture some of their lost income, in part by skirting the new rules. Some banks may even be violating the law outright, say consumer advocates.

    “Card companies are figuring out how to replace old fees with new ones,” says Victor Stango, an associate economist with the Federal Reserve Bank of Chicago and a professor at the University of California, Davis, who has been analyzing how the Card Act will affect consumer banking. “It’s a race between regulators writing ever-more-complex laws and credit-card companies setting up ever-more-complex fees.”

    http://tinyurl.com/2b3r2tw

  70. Please stop giving bacteria, lice, vermin, maggots, and assorted scum a bad name. They are so much better than the politicians, officials, terrorists, and banksters you refer to.

  71. Lavrenti Beria

    Yes, Marlene, one day these filth will find themselves in a different kind of trial than the one Waters currently faces. The judges won’t be other Congressmen and Congresswomen and the setting won’t be the comfortable appointments of a gated community.

  72. To say now that ‘No one knew’ or ‘I was mistaken’ or ‘I was just doing as I was told’ is another in a series of lies and deceptions that have supported one of the greatest frauds in the history of the world.

    But this is not history. This episode of fraud is still playing itself out now. And to fail to understand the depth and breadth of this madness is to place oneself in peril, and in the power of those who are twisting the Western economic and political system even now to satisfy their lust for wealth and power. You are only successful if you can keep what you kill.

    Glass-Steagall fell after a decade long campaign involving hundreds of millions in lobbyist money spread lavishly around the Congress, led by Sanford Weil of Citibank, supported by key banking and political figures in the Congress and at the Fed. It involved Senator Phil Gramm, who helped to put a stake in the heart of the financial regulatory process under the Reagan free markets banner, and who recently said the problem is that the middle class were a bunch of whiners. As did his wife Wendy, who as the chairperson of the CFTC had exempted Enron from regulatory oversight, and then left to take a position there on its board of directors.

    Like the Mortgage Backed Securities scandal it involved surprisingly few principal players, like Alan Greenspan and Robert Rubin, who used their power and influence to silence and ostracize critics, and promote a climate of reckless disregard for the public trust under the meme of ‘efficient markets’ and deregulation. This might have been an innocent policy error if it did not involve premeditated theft on a massive scale, followed by cover ups, denials, and a control fraud that exists even today.

    But it also involved literally thousands of collaborators and enablers, from mainstream media people, economists, analysts, and other thought leaders to politicians and regulators who saw that it was to their advantage to at least passively support this scheme which they knew very well was a fairy tale, a fraud, class warfare by a new name, but were able to hide their own guilty consciences behind self-serving rationalization and the shield of plausible deniability.

    History, and hopefully the justice system, will sort this all out. It is difficult, even now, to get one’s mind around the enormity of it. This is its most powerful weapon. Who could be such monsters, so amoral, so destructively sociopathic? Future generations will regard it as an episode of madness, driven by a few people in a tight circle of self-reinforcing thought, people with remarkably similar cultural and educational backgrounds, driven by a consuming lust for power, that were able to dupe and delude an entire nation made vulnerable by propaganda, a co-opted press, and apathy.

    In the meanwhile all the great mass of people can do is to watch, and wait, and seek to protect themselves from these ravening wolves grown increasingly desperate, as their arrogance comes to a tragic fall. They can vote out incumbents, but the parties choose the candidates, and too often they resemble competing crime families of special interests more than pillars of a representative government, saying one thing to get elected and doing another thing once in office.

    This is the approach of trouble when hubris is at its height, and the few feel they have everything to gain and nothing to lose, if only they can gain more power, and necessarily become more ruthless. They are trapped in a cycle of fear and greed. The fear provokes the lies and the cover ups, but the greed promotes the extension of the fraud and the theft, requiring even more lies and cover ups. The operative word is ‘over reach,’ in a classic late stage Ponzi scheme. This will undoubtedly add to the confusion as the truth is assaulted by the big lie.

    The last vestiges of polite society are often shed as the downfall reaches it final conclusion, at the end, when all is revealed, at last. And so there will be great danger.

  73. Stephen A. Boyko

    @ Barbara
    @ Norm Cimon

    Norm Cimon made an excellent comment earlier

    There are no “externalities” any more, not since we form-fitted the globe with a nervous system.

    If this is so, and much of what I have written about says the same thing differently by advocating for reform via tripartite market segmentation of predictable, probabilistic, and uncertain regimes, then Glass-Steagall (GS) being replaced was a question of when, not if. Giving GS credit for market calm is like giving credit to the rooster for bringing the sun up.

    It is the randomness of the underlying investment (independent variable) not the intermediary (dependent variable) that is the key to global capital market governance. Until that is recognized and disclosed, the current one-size-fits-all deterministic metrics will continue to result in larger and more frequent dislocations.

    PS: The predicate to “In the meanwhile all the great mass of people can do is to watch, and wait, and seek to protect themselves” is to short the bogus investments the “banksters” have sold into a flawed system. The global nervous system is enabling not constraining. To do otherwise is to validate the system which you argue against.

  74. @Norm Cimon
    You really have a good point. We can begin to quantify externalities and in a clearinghouse assign values. Enforcement will be tough at first but value will be obvious eventually.

  75. @ Barbara “one of the greatest frauds in the history of the world.”

    Do not let the regulators off that hook so easy calling it a fraud. It was, and still is, the greatest regulatory stupidity eve…r and the least all the members of the Basel Committee should have to do do is to parade down Broadway to Wall Street wearing a cone-of-shame and then be prohibited from any further involvement in any type of regulation forever.

  76. @ Barbara
    @ Norm Cimon
    @ Stephen A. Boyko
    Perhaps what we’re doing is energizing the global nervous system. We can’t sit and wait. Dad told me,”Son, you’re either going up or going down. There’s no standing still in this world.”

  77. Stephen A. Boyko

    @ Barbara
    @ Norm Cimon
    @ Kurowski
    @ Hermanas

    I believe it is worse, “passivity” (and in this I include much of the unproductive ranting of protestors), validates the system that Barbara argues against.

    Exploit systemic inefficiencies via market solutions, otherwise you are subsidizing/enabling private sector free-riding “banksters” and public sector rent-seekers (the regulators of which Kurowski is so fond).

  78. Perhaps it’s just my lack of faith in the system as well as those who watch after it, but Kurowski, stupidity is IMHO being far too kind.

  79. hermanas wrote:

    “We can’t sit and wait. Dad told me,”Son, you’re either going up or going down. There’s no standing still in this world.”

    Sitting on the sidelines and watchful waiting is a wise strategy, especially if the smoke has not cleared and you don’t want to become financial roadkill. Darwin would call that a survival advantage.

    The Art of War

    “So it is said that if you know your enemies and know yourself, you can win a hundred battles without a single loss.

    If you only know yourself, but not your opponent, you may win or may lose.

    If you know neither yourself nor your enemy, you will always endanger yourself.”

    Sun Tzu – The Art of War – 600 B.C.

  80. Maxine Waters crime is a special one that doesn’t apply to Senators like Dick Shelby, Bob Corker, and Mitch McConnell. “Collusion with bankers while black

    Maxine needs to remember to put the talcum powder on extra thick before she does this stuff and then she’ll be lionized as a national hero.

  81. Mr. Johnson wrote:

    ” – the finance industry has spent a great deal of time and treasure in recent decades undermining what these authors would regard as sensible rules.”

    It’s Not A Market, It’s An HFT ‘Crop Circle’ Crime Scene” – Further Evidence Of Quote Stuffing Manipulation By HFT (High Frequency Trading)

    07/31/2010 – zerohedge.com – excerpt

    “Recently we posted a required reading analysis by Nanex in which the market trading analytics firm presented irrefutable evidence of quote stuffing by HFT algorithms in tens of stocks, in which thousands of cancelled quotes would reappear each second with a definitive periodicity and regularity, around the time of the May 6 flash crash.

    Aside from the fact that it is illegal to indicate a quote without a trade intent, this form of quote stuffing is in fact manipulative when conducted by HFT repeaters in specific “shapes” as it actually moves the NBBO actively higher or lower, in cases pushing the bid/offer range up to 10% higher without even one trade ever having occurred, simply by masking a big block order which other algos interpret as bid interest and pull all offers progressively or step function higher (or vice versa, although we have rarely if ever seen the walking down of a stock over the past 18 months).

    It is as if the HFT lobby has been given the green light by the powers that be that it is safe to activate merely the bid-size quote stuffing algorithms, and not worry: the fact that the market is so one sided in its quote stuffing patterns is sufficient reason to worry of a concerted effort to push stocks higher, initiated from the very top, and effected by not only the Primary Dealer community but by the end-market “liquidity providers.”

    Today, courtesy of Nanex we demonstrate that this type of illegal stock manipulation continues rampant to this very day, and the SEC still fails to acknowledge that it is precisely the HFT market participants that persist in destabilizing stock prices, which have given up responding to fundamentals and merely move up or down based on quote stuffing interventions by those who plead innocence and claim to only be providing liquidity.

    Well take a look at the millions in fake, and thus illegal, bids demonstrated below and tell us just how any of this manipulation is “providing liquidity” – the second the patterns break, the algos responsible for the churn pattern disappear, thus eliminating numerous levels of so called bid liquidity below the NBBO: break enough patterns and you have another flash crash as the market once again goes bidless.”

    http://tinyurl.com/2g9o6e3

    This might be one of the tools that the PPT has given the green light to.

    Understand your enemy :-)

  82. I bow to Sun Tzu. We will never be omnicient but watch the snake.

  83. So you’re his stand in.

  84. Who knows…. Maybe Congresswoman Waters can hold hands with Senator Dick Shelby at the next American Bankers Association conference in Washington. We don’t want to set our goals too high for one year though.

    http://www.huffingtonpost.com/2010/03/18/top-gop-senator-were-will_n_504511.html

    http://www.huffingtonpost.com/2010/03/25/bob-corker-republican-on_n_512600.html

  85. Who knows…. Maybe Congresswoman Waters can hold hands with Senator Dick Shelby at the next American Bankers Association conference in Washington. We don’t want to set our goals too high for one year though.

    http://www.huffingtonpost.com/2010/03/18/top-gop-senator-were-will_n_504511.html

    http://www.huffingtonpost.com/2010/03/25/bob-corker-republican-on_n_512600.html

  86. I’m with Pan Kurowski. We’ve all seen those “dumb robber” videos from security cameras.

    The “criminals” actually DO think, like the rooster, that because they crowed, the sun came up. Look at the LONG history of those people who institutionalized themselves in their own theories and dogmas! They BELIEVED that the sun revolved around the earth and they sent an army to kill the dude who PROVED it was not so!

    After quadrillions of repetitions of other WORDS, I apologize for repeating the CLASSIC – “nihilism” – because it, too, is a “belief” about why the sun rises.

    Def. 1 – “A doctrine that nothing exists, is knowable, or can be communicated.” Who hasn’t talked back to Greenspan on the TV at least once in their lifetime with “What do you mean you don’t know”? So if you can’t know and don’t know – how come you went ahead and built Frankenstein?

    Def. 2 – “Rejection of all distinctions in moral value, constituting a willingness to refute all previous theories of morality.” They argument goes sorta like this – “Since I have proven to you that you cannot prove to me that there is an absolute “good” because there is no God to define “good”, then I can go ahead and declare myself your “god” based on might-is-right. Unfortunately, the scientists who have PROOF that evolution is not based on “might is right” have been CENSORED – just like Copernicus and Galileo.

    Def. 3 – “The belief that destruction of existing political or social institutions is necessary to ensure future improvement; extreme radicalism”. Need I say more? The FACT that Nihilists use legislation and regulation to destroy legislation and regulation that constrains their SACRED math formula: More misery for others = More money for ME ME ME is an irony lost on the “stupid people”.

    I think it is worth mentioning again – look at the numbers. When you have 90% of your citizens victimized by a shock and awe economic campaign, the “game” is no longer about the 10%.

    I was able to slow it down, for myself, by resisting “auto” withdrawals and on-line “banking”, long enough to KNOW which “list” I was on and what they were doing. As always, there was a trigger happy hooligan doing the dirty work applying “laws” that were not yet in effect. Whoops…

    In the DOI 1776, Judges, Justice and Legislation were prominently featured. Oh the intellectual conceit in constructing a global “nervous system” without including neuron receptors for “justice”.

    My “god” is smarter than your “god”. :-)

    Mine knew that if I and my peeps had to lay a “nervous system” web of software over Planet Earth that it would look like it does today – one big YIKES – it’s alive and it’s going to kill us!!!!

    From now until November, D.C. will be just another “global” circular firing squad since their nervous systems are SHORT-circuiting.

    The rest of us are just playing “dead”. Let’s hope the “elite” employ shock and awe on themselves and get it over with fast…the “dead” need to get back to our lives and our work.

    I’m exercising free will. With the bedazzling array of CHOICES regarding how to interact with other people and the material world available to every NORMAL (biology) human mind – I don’t think we have the time to “cure” the minds of the “elite”….

    Just throw an electrical/barbed wire fence around Wall Street and D.C., take away their toys with which they “communicate”/INFECT the 90% and call it a day.

    Socially, it’s been done. 11% approval comes from the hired hooligan :-)

  87. Crop circle “believers” in charge of the global “nervous system”!!!???

    LOL

  88. That’s about it.

  89. Connect the dots…

    “High-frequency trading In the U.S., high-frequency trading firms represent 2% of the approximately 20,000 firms operating today, but account for 73% of all equity trading volume.

    “Goldman spends tens of millions of dollars on this stuff. They have more people working in their technology area than people on the trading desk…The nature of the markets has changed dramatically.”[29]

    “Computers are now being used to generate news stories about company earnings results or economic statistics as they are released. And this almost instantaneous information forms a direct feed into other computers which trade on the news.”[30]

    http://en.wikipedia.org/wiki/Algorithmic_trading

    April 20, 2010 – Wired – excerpt

    “It was only a matter of time before another banker, lured by the prospects of riches, would get busted on allegations of stealing source code connected to a high-frequency, stock-and-commodities trading platform.

    The latest arrest concerns a former Societe Generale trader who was being detained Tuesday on New York federal court charges of stealing the computer code of the Paris-based banking concern’s high-frequency trading software.

    Monday’s arrest of Samarth Agrawal, 26, came nine months after a Goldman Sachs programmer was arrested on similar charges that he, too, stole his employer’s source code for software his employer used to make sophisticated, high-speed, high-volume stock and commodities trades.

    When Sergey Aleynikov, the Goldman Sachs computer programmer, was arrested in July, the authorities said the software at issue could “manipulate markets in unfair ways.”

    http://www.wired.com/threatlevel/2010/04/bankerarrested/#ixzz0vNtR4oA9

  90. “….. keep the top 20% happy or the house falls… Distract the remaining 80% and get reelected. It seems too easy.”

  91. Lavrenti Beria

    You thought that someone could “stand in” for Koba? Do you want me to turn you over to Yuri and to his tender mercies, anonymous?

  92. Frankenstein physics?

  93. The comments on the article were interesting :-)

    What was illegal was stealing the code.

    If Sachs uses the code to manipulate markets, it’s legal.

    Calling Mr. Kurowski an Boykin – how you gonna “regulate” GameBoys taking Pops Cadillac for a joy ride?

    Boyz will be boyz

    There is no clawback in all these formulas, is there? Just sucking it all in and turning it into goose jerky…

  94. 11% “favorable” opinion of CONGRESS – which is the LEGISLATIVE branch of the government, Hermanas.

    And CONGRESS is a circular firing squad.

    And Wall Street is playing GameBoy math.

    You wanna tell me, in your opinion, what role “politics” is gonna play in this scenario?

  95. Annie wrote:

    “What was illegal was stealing the code. If Sachs uses the code to manipulate markets, it’s legal.”

    Good observation, you connected a dot!

    Consider this thought experiment.

    Goldman Sachs was doing “gods work”, Kurowski and Boykin were not?

  96. Copy & Haste error.

    * please subsitute “Kurowski and Boykin”, with Sergey Aleynikov and Samarth Agrawal.

  97. If The Economy Is Recovering, Its Victims Aren’t

    Fri Jun 11 2010 – excerpts

    “Canadians will never know what happened to most of the 575,000 manufacturing workers who lost their jobs in the recession and the economic shake-out that preceded it.

    They’ll hear about the lucky minority that is rehired. They’ll be able to find out about the unlucky minority that ends up on welfare. The rest will vanish from the radar screen — with one exception.

    Two years ago, the Canadian Auto Workers (CAW) launched a study to track 260 of its laid-off members in three locations: Scarborough, Brampton and Kitchener.

    The union released its interim report this week. The news was grim. Seventy-six per cent of the workers participating in the study hadn’t found jobs. Of those who had, only one-third were employed full time. The other two-thirds were working part-time or sporadically with little control over their hours, no benefits and low wages.

    Keep in mind that unionized autoworkers are better off than most unemployed factory hands. The CAW operates 24 worker-action centres across the province to help its jobless members look for a job, get them into government training programs, give them a place to meet and talk openly and to support them as they deal with the health problems, family tensions and financial worries that protracted unemployment breeds.

    They also have severance packages and pension benefits.

    Other laid-off blue-collar workers are on their own. They have to figure out how to navigate a hostile job market, secure a spot in an oversubscribed training program, pay their bills, hang on to their homes and get their lives back on track.

    According to Statistics Canada, the recession ended eight months ago. According to the government, the economy is likely to grow by 2.6 per cent this year and 3.2 per cent next year. According to Ford, General Motors and Chrysler, they’re all making profits.

    The economy is recovering. Its victims aren’t.”

    http://tinyurl.com/297xhs5

  98. Divide and conquer. Hitler’s strategy.

  99. Funny, “Insider trading code stolen!”

  100. Barbara,

    They brought down the infrastructure of the USA. For no reason, it seems, other than it could be done for personal profit?!

    Does the USA, as a sovereign nation, have NO POWER OF LAW to invoke against such machinations by a few?!!

    Two years of shovel after shovel of intellectual contortionism to BURY USA, and now

    – crickets – ?

    I’m sorry, but how is that not begging for violence?

    I don’t care anymore about the fear and greed that the poor dears are suffering from. I’ve forgiven them. They’re depraved and dying from mental rabies – hard to watch – but there it is.

    Who still believes that they are in charge of the future of humanity?

    DOI 2010 – and issue a new currency BASED ON WHAT IS STILL SALVAGEABLE in the way of infrastructure of a HARD EARNED CIVILIZATION.

    Next gang to dismantle a factory that could be re-tooled to create the non OIL based civilization – that’s where FORCE should be applied – don’t let them do it or LEAVE with it. Choose the battles…

    Capture your representatives on your home ground and keep them there until charges can be brought against them. Don’t send them back to Washington DC.

    As much as possible, don’t kill. Of course, you have the right to defend yourself :-) – Heavy sarcasm

    And freekin’ shut off the electricity to the GameBoys. They, too, are beyond hope.

    We can all write Holloweed scripts, no?

    Stop watching “news” – it’s NOT news – it’s a full blown COIN/psycho ops script.

    Everyone who does not care to participate in USA as a citizen, take note. Stay out of the way of those who do.

    It’s SURVIVAL time. Has been. Who achieves OIL INDEPENDENCE FIRST will “rule” the world. We’ve got 30 years of them taking the first shot at us to overcome in a year.

    I LOVE them kind of odds :-)

  101. I do agree Annie, but this parade is as painful as watching molasses flow in mid January. I do hold out hope that some foreign entity will unleash a fossil fuel alternative in a meaningful way. As far as news is concerned, I stopped watching it years ago….:)

  102. No wonder why you are so smart! :-)

    I’m tracking down an elusive person who comes in to town from the desert to get supplies on a contraption he built himself – totally solar vehicle…it would be a regional big seller product for sure….I’m betting on regional micro economies in USA that are the best adaptation to LOCAL weather, soil and intellectual capital :-). Can’t ship out those kind of jobs…

  103. The only institutions that need higher capital requirements are those which cannot fail gracefully…. with their assets and liabilities absorbed by other institutions without spreading failures throughout the system. (In biological systems the orderly dissolution of sick cells is apoptosis. The disorderly process in which sick or damaged cells spread damage to other cells is called necrosis.) We have no apoptosis processes for financial insitutions with more than 2 to 4% of the national market. Behemoths of this size should pay substantially higher FDIC premiums and be required to carry greater capital reserves. Smaller financial institutions that fail are readily processed.

    A benefit of these selective, a fully justifiable, increases would be to inhibit growth beyond the threshold of higher payments, for example 1% of market share, by mergers and acquisitions…. and maintain a more competitive capital market.

  104. “Required Intellectual Capital”??? Surely you jest. We do not have “intellectual capital”, – We hazard and endure predatory capital. The socalled capitalists, (and the goddess only knows what that word truly means in 2010 Amerika) are predators. Ruthless sociopaths, criminals, greed mongers, “a den of vipers and thieves’. If we allow these toxic creatures to dominate America’s financial sector and the future we bequeath to our posterity, – we are doomed. These creatures, these hobgobblins, and reprobates must be put back in the keep, and held accountable for wanton crimes and rank abuses. Rules and laws debated and scribbled into to code mean nothing if they are not enforced.

    In a world where there are no laws, – there are no laws for anyone predatorclass biiiiaaaatches!!!!

  105. The GameBoys are those who want and believe they can control all the boys taking their pop’s cadillac for a joy-ride by just pushing some buttons.

    I have no interest in controlling all the boys, among other because taking pop’s cadillac for a joy right might in fact be one of the best ways boys grows up to be good and useful men. Who I am to know otherwise?

    Now with respect to any of my three girls taking my particular car that would depend where I am. In Sweden, where gas is over 9 dollar per gallon, keeping the gasoline tank empty seems a good strategy. In Venezuela, where gas is sold for less than 5 US cents per gallon, I might be better off putting a piece of the car computer in my pocket. And which by the way shows why it is difficult to regulate on a global basis.

  106. Thanks… Having frequently and explicitly argued that we leave a little bit more of the regulations in Gods hands, in order to avoid the humans playing God, I was a bit confused with why I was included there.

  107. Bruce E. Woych

    Well spoken Norm, but the emphasis of internet facilitation and correction is complicated. It is possibly equivilent to the ideas of liquidity and volocity in finance but in relation to “intellectual capital” (the core focus of the article’s heading) the intellectual communication of finance is old fashion manipulation speeded up. At least one of the authors mentioned by Simon (University of Chicago’s Anil K. Kashyap) wrote an article on 2/26/2010 “Let’s NOT pursue the Volcker Rule” in which he denounces any attempt to restrict casino finance on the basis of “liquidity” demands as the lifeblood of a monetarized economy. But speculative “liqidity” is not the same as asset building lending practices, in fact it tends to be in direct contradition to menial levels of commercial level lending. It is pretty clear that the Tarp money never recirculated into infrastructual building loans, and after bonuses were deducted and they paid each other for their losses, it was pretty much “horded” for “liquidity” purposes. This type of coverage existed openly during the height of the crisis discovery, but has since sunk back into the lexicon of the professional business community as economic infrastructure. (much like “externalities” obscures true connections). But liquidity is a wide brush and covers many sins. Speculative liquidity to the gambler means more money to play with, and in our case the “new internet” is not disclosing the direction of liquidity. Instead it is tied up with nonsense about Basil accord formalities and professional misdirection. We are in a “swarm” of technical asymmetrical information. Intellectual Capital is usurped and co-opted by insiders and the so called “reform” is merely lip service to much of the re-normalization business as usual.
    In the meantime, a “macroprudential” approach to regulatory finance is something of a schizophrenic response to it’s shadow “microprudential” corruption.
    Let’s just look back slightly to manipulations prior to the great upheaval. Check out the “intellectual capital” implications of this revealing quandary which was written surprising dead center of all the chaos and confusion:
    Sec. Paulson involved in Insider Trading?

    by djermano | September 15, 2008 at 06:13 pm

    http://www.nowpublic.com/world/sec-paulson-involved-insider-trading

    “To prove Insider Trading:

    To prove the case of illegal insider trading, all the

    Feds have to do is ask a few questions of the persons

    who bought puts on Bear Stearns or shorted stock

    during the week before March 17, 2008 and before.

    All the records are easily available.

    If they bought puts or shorted stock, just ask them why.

    What information did they have access to which the

    CEO and the SEC did not have? Where did they get the

    info? Why aren’t Cramer and Cox, Dimon, Bernanke,

    Geithner, Paulson, Faber and Schwartz subject to a bit of

    prosecutorial pressure to get to the bottom of this.

    Maybe the buyers of puts and short sellers of stock

    just didn’t believe Reuters, Cox, Schwartz, Cramer and

    Faber and went massively short anyway, buying puts that

    required a 70% drop in a week. Maybe they had better

    information than Schwartz or Cox. If they did, then that’s

    a felony, with the profits made subject to forfeiture.”

    http://www.optionsforemployees.com/articles/article.php?id=130

    http://online.wsj.com/article/SB121193290927324603-email.html

    So what it comes down to is not simply overturned regulatory legislation that was neutralized, but flat out criminal law that was never pursued. It was not the internet that facilitated this so much as old fashion power finance, greed and a culture of corruption that is serviced by a economics profession that promotes three intrinsic principles: hear no evil, see no evil…speak no evil. If we are to speak of a poverty in intellectual capital…let’s start with the regulatory default of academic economics; which has become the hand maiden of politicized finance and its busniess machinery.

    Economics facilitated this disaster and it can facilitate the solution. The answers are in our reach but not our grasp. Economics could unravel the mysteries created by moral hazzard (funny term itself! …it admits to no guilt only temptation…).

    But of course you would probably still have to guess what hand held the “truth” …RIGHT OR LEFT!

  108. Bruce E. Woych

    Simon Says:
    “Banks obviously have an incentive to “leverage up”, meaning to borrow more relative to their equity. If we regulate banks, these same transactions will migrate to other more shadowy parts of the financial system.

    Probably the most innovative part of authors’ proposals is that we should set higher margin requirements against asset-backed securities. Allowing anyone – irrespective of what you call them – to borrow heavily against such assets is simply not a good idea. Unfortunately, this approach is completely absent from the current regulatory reform toolkit.”

    APPROPO to the article is the question of “CHURNING” or the questionable stability of a multiplyer effect on utilizing the same collateral from off balance sheets in the so called shadow economy. The velocity of collateral in speculative derivitives is one of the more obscure and opaque aspects of “elegant” wealth building that is linked to the so-called health of global liquidity. In effect, from a more down to earth view, it simply means that the “House” allows more “chips” on the table to prime the game.

    Economists are aware of this consideration and Simon Johnson has mentioned the off balance sheet dilemma in the past in regard to “shadow banking”. The core aspect of monetary policy and monetary “easing” (as I understand it…I am not an economist…) rests heavily upon a system parallel to the privite finance sector’s version of churning. We hear great complints from Austrian theorist louyalists concerning the policy dillution of monetary easing, but I never recall one word about the financial sector utilizing churning to inflate derivative baloons and cash in on the chips before the game is truly settled!

    At least one recent study discusses the question of churning and the overall position of the shadow economies’ “velocity of collateral” contributing to the financial collapse and ongoing crisis. The link for that study is:

    http://www.imf.org/external/np/sec/pn/2010/pn10101.htm

    Working Paper No. 10/172: The (sizable) Role of Rehypothecation in the Shadow Banking System

    Author/Editor: Singh, Manmohan; Aitken, James

  109. I wrote yesterday, the KEY point was ignored, “They brought down the infrastructure of the USA. For no reason, it seems, other than it could be done for personal profit?! Does the USA, as a sovereign nation, have NO POWER OF LAW to invoke against such machinations by a few?!!Two years of shovel after shovel of intellectual contortionism to BURY USA, and now – crickets – ? I’m sorry, but how is that not begging for violence?”

    KEY POINT is still on the table – a sovereign nation, still mostly 21st century, but fading fast, – is either unable or unwilling to acknowledge and enforce the “rule of law” for its own citizens who have not become predators? I don’t expect GameBoys to have the capacity to understand the seriousness of the question, but for those playing “god”, how is “safety and security” going to work for USA in the future when a certain % of the planet’s people have no electricity or running water or antibiotics

    and predators have no clue how to actually do anything that is required in the way of LABOR – something other than hit-any-key-to-continue – to provide “essentials” to population centers with no access to enough land to live off of?

    Seems to me like theoretically solving the problems of “existential” survival in the Middle East by playing “god” with empires like China, USA and/or USSR is not working.

    Existential-ISM – “A body of ethical thought, current in the 19th and 20th centuries, centering about the uniqueness and isolation of individual experience in a universe indifferent, or even hostile to man, regarding human existence as unexplainable, and emphasizing man’s freedom of choice and responsibility for the consequences of his acts.”

    Seems like even “god” is confused about “rule of law”.

  110. Bernanke faces US growth mysteries

    August 1 2010 – Financial Times – excerpt

    “If Ben Bernanke, Federal Reserve chairman, expected the release of second-quarter growth data to clear up the “unusually uncertain” outlook for the US economy, then he will have been sorely disappointed.

    On the surface, the numbers were easy to interpret. Growth over the previous quarter at an annualised rate fell from 3.7 per cent in the first three months of this year to 2.4 per cent in the second. That fits with many other signs that the recovery is slowing down.

    The details, however, hide a series of economic mysteries – about how fast the economy can grow, how weak it actually is, and what US consumers have been up to for the past few years – that policymakers will have to solve.

    The most interesting numbers in the release were not about the second quarter at all – they were revisions for 2007, 2008 and 2009. These showed that the recession was even deeper than previously thought. Output in 2009 was 1 per cent below the previous estimate.

    “The recession was un usually long and unusually severe and has proved unusually resistant to unusual amounts of stimulus,” says Neil Soss, chief economist at Credit Suisse in New York.

    There are two ways to read the revisions. One is that the economy is even further from using its full capacity than previously believed – an argument for more easing by the Fed. The other is that the economy’s capacity to grow is less than thought.”

    http://www.ft.com/cms/s/0/4768a892-9d8c-11df-a37c-00144feab49a.html

  111. Stephen A. Boyko

    @ Bruce E. Woych
    @ Norm Cimon

    Good post,2 comments

    1. “But of course you would probably still have to guess what hand held the “truth” …RIGHT OR LEFT!”

    Agreed! Too many commentators worry about the packaging (left-right ad hominem attacks), rather than the content. Name calling vs. profiting from market inefficiencies is not a hard choice. Exploiting market inefficiencies gets the attention of the regulators and is a very effective way to reform. Get over the “gotchas” and get with the “got-its.” The best form of vindication is living well.

    2. In the meantime, a “macroprudential” approach to regulatory finance is something of a schizophrenic response to it’ shadow “microprudential” corruption.

    The U.S. capital market regulatory structure is a hierarchical command-and-control process similar to the Soviet Union’s Gosplan. Gosplan lacked the information system to restructure and, therefore, was unable to address effectively complexities required by the Information Age. (You noted that Norm Cimon’s internet comment was a complicated solution, but isn’t that logically consistent for a complex adaptive system?)

    U.S. regulators find themselves in a similar situation given greater demand for resources required by global mass markets and greater complexity required by innovative products. The regulators can no longer effectively govern with a deterministic, one-size-fits-all regulatory regime. Robust markets create an exponential demand for compliance in comparison to the SEC’s linear ability to supply regulatory resources. This creates a no-win choice for the regulators either to constrain market dynamics (errors of omission, i.e. offshore AIM market) or fall behind the compliance curve (errors of commission, i.e. Madoff). Page 74 “We’re all screwed”

    As a former regulator, I think regulators are getting an overly bum rap in all of this (easy Per). They are now in the position of a practitioner in that they are being held accountable for market uncertainties that are not supported by their deterministic metrics. They are being forced to play out of position. If we have a great left-handed baseball player, why would we play him on third base instead of first? Regulators do certain things very well. They regulate the deterministic markets very well.(Supportive of Kwak’s point a few blogs ago) This is in large part due to staffers being trained in the deterministic disciplines of law, accounting and neo-classical economics. But how many of them were trained for governing uncertainty?

  112. When the law is corrupt there is no law.

  113. Re: @ Rickk___”Growth”? …SME’s rank “Health Care Cost” #1) Priority: answer – Temp’s Market should alleviate pain?…#2) SME’s long lost argument of “Government’s Tax/Code Cost” doing business – answer: Realized productivity gains enhance (win-win) revenues?…ironically near the bottom of the “Genius’s Studies List” #?) Inability to get Business Loans from the “Financial Sector” – answer: “What’s Up”…Whats going on,…(sure,there are alot of small business failures, but miniscule in proportion to successes)!

  114. Do you believe that any of the small businesses will be driven from larger banks to community banks or to micro-lenders?

  115. earle,florida wrote:

    “… Whats going on ? ”

    Marvin Gaye wrote:

    ” Mother, mother
    There’s too many of you crying…

    Brother, brother, brother
    There’s far too many of you dying…

    You know we’ve got to find a way
    To bring some lovin’ here today – Ya

    Don’t punish me with brutality
    Talk to me, so you can see
    Oh, what’s going on …”

    What’s Going On – Marvin Gaye

  116. It would mean that small businesses and entrepreneurs would be able to compete on equal or more favorable grounds for access to bank credits and because small community banks are normally closer to small businesses and entrepreneurs they would not be placed in such disadvantageous competitive position vis a vis big banks. In other words, at least in my book, this would clearly be a win-win proposition.

  117. Bruce E. Woych

    Stephen: I do agree that to an unwarrented degree, regulators have taken the brunt of blame and have been somewhat scapegoated in the search for culpability. This is just another version of the “untouchable” core of self-proclaimed genius elites dominating the core financial center (the system is concentric more than simply hierarchical but I suppose one might concede to a conical sphere in three dimensions: just a theoretical side note). But despite the fact that political history disarmed and declawed the power of regulatory guidelines and governance, one has to admit that the checks and balances of the systemic ounterchecks simply stalled in awe and complacency in the face of the financial power structures. In addition, while the financial big leagues could alter the playing field dynamically, the regulatory status remained essentially static and departmentalized (if not systemically demoralized in some cases).

    Outside of this I have to agree that the problem of “reform” is that is changes almost nothing substantial while (once again) the playing field adjusts and adapts the field to continue gaming the system to its priviledged advantage. Something of a quiet revolution is required and we need to open up to our mistakes in both the private and the public sectors. I would like to see something along the lines of a public option developed to manage competitive liquidity and the direction of potential growth. Just as medical solutions have joined public health to private sector practice, a pulic “wealth” system is not a heresy for capital systemics. The only ones to complain about this would be the sharks and baracudas!

    Finally consider this perspective on reform and one can only wonder why similar expositions don’t exist from a host of angry regulators offended by the circumstances of their unjust downgrading by media and professionals:

    http://www.prospect.org/cs/articles?article=shadow_banking

    Shadow Banking

    “Reforms pending in Congress would not touch the abuses of hedge funds and private equity.”

    Nomi Prins | May 4, 2010

    “Despite all the noise about financial reform, the shadow banking system that helped create the financial crisis would remain fundamentally unaltered by the legislation now pending in Congress. Indeed, leveraged entities such as private-equity, venture-capital, and hedge funds get only minor regulatory attention.”

    To my knowledge this statement remains true today and underscores the trouble with this article: not what it states but what its total ommission of discovery and full disclosure.

    These barely regulated, nontransparent bastions of speculation propagated systemic risks beyond any that could be created by the banks themselves. Whether housed at banks, created by banks, or freestanding, they exist to enable speculative risk-taking hidden from either regulatory or market scrutiny while camouflaging layers of debt and enabling the complex-securitization deals that caused the financial collapse.

  118. Stephen A. boyko

    Effective and efficient governance of “nontransparent bastions of speculation” begins with the segmentation and disclosue of the attendant underlying economic randomness as risk is different (discontinuous function) from uncertainty.If there is innovation, there is complexity. If there is complexity, there is uncertainty.

    You cannot govern uncertainty with the same metrics and mind-set that you use to govern risk. Most would agree that Citi’s failed financial supermarket concept was flawed. If you cannot cross-sell, you cannot cross regulate—non-correlative information problem. For effective and efficient governance, you need to segment regulation into predictable, probabilistic, and uncertain regimes that correlate with the randomness of the underlying economic environment.

  119. Re: @ Anonymous___”a sprinkle of enlightenment on educated minds fostering a democracy makes craving freedom’s deserts all the more blissful – whereas mixing metaphors has been a alchemist nightmare as the timeless hourglass reaches its vastigals finite vicissitudes – thus the birthing of endogenous ageless creativity – its writings anew, breathe the last words in a voiceless, and deaf society that all can visualize – now that the words of the guardians have been stripped…unclothed spoken truths sobering once again the raw meaning of language – the bridge conquered is now the cooperative action that will bring about fruition other than a altruistic exersize of eugenics – crying without tears…screaming silently…praying knowingly justice will never come, but then the laughter begins…where, how, and why I care not, my soul awakens me too life and I am fulfilled – my pen in hand…my inkwell dry…dilluted emptiness no more – for there is still tommorrow – Mother dearest shed not your tears for all is held in earnest when you whisper softly to me your endless love” PS. “13 Bankers” has opened many closed eye’s!

  120. @ Bruce E. Woych “Stephen: I do agree that to an unwarrented degree, regulators have taken the brunt of blame and have been somewhat scapegoated in the search for culpability.”

    Is this a joke? Besides Greenspan do you know any other regulators that have been blamed? What about the Basel Committee that it still convening among the same players do dig us deeper in the hole they placed us in?

  121. Stephen A. Boyko

    @ Per

    The SEC

    But that is not my point. Much like court marshalling the Commander of Peral Harbor the blame game is an unproductive exercise when we need to direct our attention and efforts on “REAL” reform.

    Blaming agency staffers for following the flawed construct of one-size-fits-all, deterministic metrics creates a recursive loop of “Hail Mary Warren” persona attempts resulting in larger and more frequent economic dislocations.

    As I have said before, I do not know if my solution of market segmentation is the best path to take, but I am willing to bet that the continuation of the current regime is wrong.

  122. Some real person regulators need to be held accountable for the “flawed construct of one-size-fits-all, deterministic metrics”. It should not be allowed that the Basel Committee keeps working with the same faulty paradigm just because the regulators who came up with the concept cannot break out of it.

    By the way we agree on much, though I am really not so sure about market segmentation, because there once again we risk to inadvertently introduce new regulatory biases that could be exploited with bad consequences.

  123. Stephen A. Boyko

    If there is complexity, there is uncertainty which requires different governance metrics starting with the recognition and disclosure of uncertainty, and that hedging attempts do not work etc.

  124. Re: @ Per Kurowski____It seems that Basel I (past)…II (present/never really implimented ?) and III (future/no looking back.ever?) always has, and always will be in the future instrumental in delininating the blatant unsubscribing of our “Anti-Trust Laws” through the humanistic guise of “Globalization” and the…New World Order! May I dare reference that Mr.”Oz” knows best? Truly, our founders at that point in time…1773, would in all reality be having eerily deja`vu nightmares of their future betrayal at the hands of the beneficiaries.

  125. Good discussion boys.

  126. Large banks doing well, small banks got snookered.

  127. Make sure you’re on the sidelines and not a deer in the headlights.

  128. There are two ways to read the revisions. One is that the economy is even further from using its full capacity than previously believed – an argument for more easing by the Fed. The other is that the economy’s capacity to grow is less than thought.”

  129. منتديات wrote August 7, 2010 at 1:23 pm:

    “There are two ways to read the revisions. One is that the economy is even further from using its full capacity than previously believed – an argument for more easing by the Fed. The other is that the economy’s capacity to grow is less than thought.”

    The quality of life of future generations will be contingent on how we interpret current events. My 2-cents.

    “Cold hearted orb that rules the night,
    Removes the colours from our sight,
    Red is gray and yellow white,
    But we decide which is right.
    And which is an illusion?

    Days Of Future Passed, 1967 – Moody Blues

  130. “So what it comes down to is not simply overturned regulatory legislation that was neutralized, but flat out criminal law that was never pursued. It was not the internet that facilitated this so much as old fashion power finance, greed and a culture of corruption that is serviced by a economics profession that promotes three intrinsic principles: hear no evil, see no evil…speak no evil. If we are to speak of a poverty in intellectual capital…let’s start with the regulatory default of academic economics; which has become the hand maiden of politicized finance and its busniess machinery.”

    Well, that’s a bit strong, but the idea of “hear no evil, see no evil, and speak no moral criticism” has become, tragicly in my opinion, an endemic one in a professionalized society that has once again elevated material comfort over authenticity and veracity.

    From my perspective as an executive coach dedicated to linguistics that embody and promote a combination of authenticity and empathy, I see the vast derivative market as a catastrophic end-point to the mealy-mouthed inauthenticity one finds in people addicted to “I am ….” statements explicative of their incompetence or addiction to immoral or unhealthy habits. My suggestions for a solution in the financial world can be found at http://www.authentixcoaches.com/dsFTTFinReg.html. There is summarized, in about two pages, proposals for a differential speculative Financial Transactions Tax that addresses all the objections to it expressed in the IMF report to the Toronto G20 Summit leaders. And it too offers a blog that I hope you will visit, Bruce, and perhaps contribute to.

    Angus Cunningham
    Principal, Authentix Coaches