Redstate

Posted at 1:38pm on May 8, 2008 Naked Free Markets

A Little Moral Hazard Goes a long, long, way

By blackhedd

Global financial markets have been in disorder for nine months now. (The birthday of the crisis is August 8.) There are widespread indications that the most fearsome disruptions, in the credit and interbank lending markets, are now abating around the world, thanks to aggressive and unprecedented actions by monetary authorities. Of these, the Bernanke/Geithner Federal Reserve deserves the lion's share of the credit.

It's entirely true to say that the world of finance has been fundamentally changed by the Fed's response. But for good or for ill? And what should happen next? As it turns out, this is an incredibly important question that carries an extraordinary amount of political risk. And it needs to be fully aired in the current political campaign.

Milton Friedman repeated the observation that change only happens at moments of real or perceived crisis. He astutely added that when change comes, it's based on whatever ideas happen to be lying around at the time. Today, those ideas are overwhelmingly on the side of massive new regulation of not only financial markets, but also of the real economy.

Is there an alternative? Read on...

Posted in bailouts | Economy | financial markets | naked markets | regulation — Comments (41)/ Email this page » / Read More »

Posted at 9:40am on Mar. 24, 2008 The Next Wave of Economic Policy Decisions

You Can't tell the regulations without a scorecard

By blackhedd

As we swing into a new workweek, the financial markets are on edge, even with rumors afoot that JPMorgan Chase will consider quintupling their offer to acquire the Bear Stearns Companies to $10 a share.

Among the key elements in the news background is a continuing sharp fall in commodities prices (gold, oil, and industrial metals are all down again this morning). I told you about this here.

And flying well under the news radar, the last few days have seen some exceptional disruptions in the overnight interbank repo market (that's the market in which banks get the money they need to make loans and honor withdrawals). One of the key rates is this market is the interest rate you would pay if you wanted to borrow money overnight using a three-month Treasury bill as collateral. This rate literally became negative late last week.

What does that mean? It means banks don't want to lend money to each other. You couldn't ask for a more textbook illustration of a credit crisis.

What I wanted to talk about this morning, however, is the changing landscape for government policy as it relates to management of the financial system. There are at least two new major policy initiatives making the rounds in Washington. In a word, regulation is making a comeback.

More...

Posted in Economy | federal reserve | Glass-Steagall Act | regulation | shadow banking system — Comments (29)/ Email this page » / Read More »