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Larry, Larry, oh no, you gotta go

zil-117dOuch!

Leave aside for a moment the question of whether a market in which buyers have to be bribed to participate can really be described as “better functioning.”

And now, the throwdown:

America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. ... Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.

After 1980, of course, a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. ...

Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and pureed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.

But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie.

Much discussion of the toxic-asset plan has focused on the details and the arithmetic, and rightly so. Beyond that, however, what’s striking is the vision expressed both in the content of the financial plan and in statements by administration officials. In essence, the administration seems to believe that once investors calm down, securitization — and the business of finance — can resume where it left off a year or two ago.

To be fair, officials are calling for more regulation. Indeed, on Thursday Tim Geithner, the Treasury secretary, laid out plans for enhanced regulation that would have been considered radical not long ago.

But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.

As you can guess, I don’t share that vision. I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.

I suppose you could regard the whole process as a failure of central planning, where the planners, instead of being dull-eyed Stalinists in ill-fitting suits, were the best and the brightest, driven insane by greed, unlimited wealth, and testosterone MR SUBLIMINAL And hookers and blow not necessarily in that order.

And just like, say, the Soviet auto industry, our central planners actually subtracted value from their inputs; it would have been more cost-effective for the Russians simply to have sold the steel ingots, rubber, glass, and so forth on the open market, rather than process them into Zils, and GAZs, and Ladas. As Krugman says: More harm than good.

Why don't we just turn the banks into regulated public utilities?

NOTE Actually, thanks to ConnecticutMan, we know now that a turd can indeed be buffed, so there is hope for Geithner-san's plan. A turd buffed, however, remains a turd.

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Damon's picture
Submitted by Damon on

This:

In essence, the administration seems to believe that once investors calm down, securitization — and the business of finance — can resume where it left off a year or two ago.

And This:

But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.

is what scares me. I think the lords of finance in the public sector have made it quite clear that they've decided that the system isn't broken, just clogged. Obama, Geithner & Co. have shown, reality be damned, that they are going to make this into a normal down cycle, instead of the utter failure of the system that it is. Geithner tosses out some shiney new regulations, but it's clear that he's set on tweaking the system, not rebuilding it and getting rid of the 'systematic risk' that allows, no, demands, that the private sector raid the public treasury when it all inevitably comes down.

What's worried me about this is that much like the primaries, when we've convinced that things have gotten better (even if they really haven't) that we'll not have learned anything. I'd have had a kind of a sense of relief that the powers that be were looking after us if they would have temporarily nationalized the riskiest of the big banks from the very start, but we're basically still being told that this collapse is our fault. That we got spooked and lost faith in the market so the market lost faith in us. A nationalization scheme would have illustrated that they recognized that our banking system was trash.

Now, all we're left with is a few tweaks. Eventually, things will look back up, again, when the vulture comes in in bulk, and AIG will switch its name to GIA and all will be good in the world, again, and we'll be right back where we started.

Submitted by jawbone on

up the "too big to fail" financial institutions? If it was said at all by anyone on the team, I can't recall it.

There's lots of talk about being "too big to fail," but, afaik, nothing is being done about it. Well, except for making some of them even bigger.

And having one person, Treas Scty, determining how to regulate the "too big to fail" insitutionas, banks, whatever, is scary to me. Or an unelected Fed chair?

Regulation needs clarity and reasonable firmness, not that transparency which VL noted may mean there's nothing there.

Ooops, VL, iirc, said transparency can mean there's nothing to see, as in could be hidden or just not there.