Friday, July 10, 2009

Geithner wants to tame $700 trillion market gone wild

US official says derivatives surprised government

For those who still think derivatives had nothing to do with the housing bubble and credit crunch: "The influence that derivatives can have on the financial sector was most evident when American International Group Inc. sold so-called credit-default swaps to protect investors against potential losses on mortgage-backed securities. When the housing market collapsed, AIG was unable to make good on its promises and took a $182 billion government bailout to keep from collapsing." Add in a bit of corruption too:"But Geithner said many investors used the instruments to evade regulation, exploit regulatory loopholes or minimize taxes."

Posted by mountain goat @ 05:08 PM (738 views)
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4 thoughts on “Geithner wants to tame $700 trillion market gone wild

  • “Geithner said consumer confidence… has improved”

    Er, are you sure about that, Timmy?

    Who are you trying to kid, fella?…

    July 10 (Bloomberg) — Confidence among U.S. consumers fell more than forecast this month, reflecting unemployment approaching 10 percent and higher gasoline prices.

    The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 64.6, the lowest since March, from 70.8 in June. During the expansion that began in late 2001 and ended in December 2007, the index averaged 89.2.

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  • Of course derivatives played a part!
    Without derivatives there couldn’t have been such a credit bubble.
    That is not any kind of argument against them.
    Without them this would not be the only thing you would not see. ( Probably fruitless to bother stating that here though, and… )
    Some uses of derivatives are no doubt reckless.
    It is a good idea anyhow to go through the process of posturing, refining and implementing better regulation – serious thought, however we must bear in mind that regulation of anything poses it’s own, unique risks.
    If we are to stick with capitalism (probable ain’t it?), we have to consider whether we prefer the occasional disaster, or distorted markets.
    During the history of regulation it seems that we over regulate after such an event and chip away the regulation during the good times, can this be overcome?

    Do we consider no regulation, and allow any [ even non-domicile / non-state ] sovereigns?
    Why not?

    Yes it always seems to boil down to the power of a few over the many!

    [ “What is it about it that scares people so deeply? It’s because they are afraid that there is more to reality than they have confronted; that there are doors that they are afraid to go in, and they don’t want us to go in either, because if we go in we might learn something that they don’t know, and that would make us a little out of their control” – Timothy Leary on L.S.D. — It ain’t just L.S.D. Tim! – 666 ]

    Have a good weekend people!

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  • mountain goat says:

    Thanks for your take 51ck-6-51x, have a good weekend yourself. I know we don’t see eye-to-eye on this but to me this market is out of control and does need regulation. In the end it is probably like nuclear power, can be used for good or destruction. What we have witnessed is some of its destructive power, and I don’t like the way it contributed to ruining “too big to fail” companies that now have to be bailed out. Surely that is evidence enough that it can’t go on unregulated? Even toy teddy bears are subject to regulation, but a $700 trillion market that can sell protection on mortgage-backed securities after banks conveniently let it inflate dangerously, isn’t. Much too tempting for the corrupt.

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  • MG – Thanks, fair points – you are right that we do not see eye-to-eye but we both agree that there are problems with the contemporary system. I think that many, many regulations push down on the small guy, rather than the giants, and along with plenty of profits comes the ability to procure carrots which appear juicy, even for the most objective and unbiased of lawmakers. This in itself may be enough to encourage the mighty behemoths which we both know do not make sense – if they are beyond the point of useful synergism and economies of scale ( a clear example would seem to be Citibank, but others may be less conspicuous ) then what is keeping these businesses as one? I believe that there are inherent global risks in any capitalist system and an effect of regulation is to shift these around ( and even add further risks; think entropy in a physical system ), often spreading the risks being produced by the transactions of ( usually! ) relatively few greedy or fearful across the system, whilst making it harder to identify the roots ( for this purpose I believe private insurance can work more effectively ). My gut tells me that without financial regulation we would live in a world where there would actually naturally be less systemic risk albeit one in which the consumer would have to keep his wits about him, but also one in which the act of choice would have it’s most powerful voice.

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