Friday, Sep 11, 2009
Shutting the stable door......again!
FT: To fix the system we must break up the banks
Measures to prevent another dotcom bubble treated symptoms and left systemic flaws intact, paving the way for more banking and corporate shenanigans - derivatives-based leverage of bank balance sheets, which dragged the global economy into recession. Now the G20 is again fighting the last war and is leaving banks with the capacity to mix deposit-taking and speculative investment banking, to act for clients on both sides of a trade and take a proprietary turn out of the middle, to act for the seekers and the providers of capital, to over-trade and create market instability and still leave intact the too-big-to-fail taxpayer backstop. The real problem is not the specific causes of each crisis but the enduring power of finance to be socially and economically disruptive.
4 Comments
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1. icarus said...
If you can't see the whole article just google the FT title.
2. mountain goat said...
I found this interesting:
"The US is starting to pare back its emergency support for banks and financial markets, Treasury secretary Tim Geithner said on Thursday, announcing that the state guarantee for the $2,500bn money market mutual fund industry will expire on schedule this month. Nearly a year after the collapse of Lehman Brothers helped tip the world into recession, Geithner said it was time to move from crisis response to recovery. He also backed a review by the FDIC bank regulator that is likely to end or restrict funding guarantees for banks."
FT Alphaville: US starts to unwind bank support
Can the banks stand on their own legs again? We will find out soon enough...
3. icarus said...
John Kay wrote in the FT the other day (to see the article google 'Tailgating in financial markets puts us all at risk') that the gains and losses on proprietary trading should net out, so he asks how such trading could be such a very large source of profits for a large industry. Three explanations are (1) the profits arise from govrnment-created distortions, particularly state guarantees of the liabilities of financial institutions and the possibilities of regulatory arbitrage (2) profits are made at the expense of customers of financial institutions and (3) the profits are illusory; the reported gains are either borrowed from the future or from other segments of conglomerate financial istitutions.
As for foreigm exchange dealing he says it's necessary to enable firms to export and import and to handle the capital flows that arise from trade surpluses and deficits and that some speculative trading in these markets can improve information and liquidity and smooth prices, but the volume of dealing required to serve these purposes does not have to be several hundred times the underlying volume of merchandise trade. Such volumes create instability rather than stability.
So 'socially useless' (or worse) is a justifiable charge
4. mountain goat said...
Worth while interview here. Problem shifting from big to small banks with loans to industry etc. Opinion on re-capitalizing FDIC, once bank earnings recover (towards the end of 5 min vid).
http://finance.yahoo.com/tech-ticker/article/325198/%22We%27re-Not-Out-of-the-Woods-Yet%22-Bank-Rally-to-Stall-in-Q4-Rosner-Says?