Finally an "Authority" Advocates Re-regulation

I was in University in the late 1980's and early 1990's studying economics at the University of Maryland when I was faced with two options, grow the company I started or pursue my masters in Economics with my thesis being the need for an international financial regulatory authority. At the time I had lofty ideas of becoming a global economic guru who would advocate the abandonment of the archaic, inefficient, unfair, and destructive way economics was dealt with on an international level. Human beings had managed to create highly sophisticated financial "systems" and global financial "markets" that were rapidly evolving but unfortunately the perspective of human beings was Neanderthalistic.

I had the benefit of studying Economics during the collapse of the S&L industry in the US along with a real estate bust, junk bond market implosion and fairly severe recession. I also was a "student" of economics and finance through real world experience and investing from 1981 which allowed me to experience the severe 1982 recession in the US, the Latin American debt crises, gold price explosion and implosion, oil price implosion and the first destructive false economic "growth" experiment of supply side economics by the Reagan Administration (accompanied by military welfare spending and enemy creation) and brilliantly orchestrated junk bond bubble and accompanying corporate buy out craze.

It was obvious to me during my studies we had a systematically flawed economic model functioning on a national and global scale and there were no way the idiots with ass backwards motivations who ran this model and all of its intuitions would be able to do anything that would be a net benefit to humanity. The same holds true today.

So I had the absolute pleasure of reading this article today on Marketwatch about what Henry Kaufman thinks of the global mess we are in.

Notably his statement:

A: The expectation certainly has to be that the banks are undercapitalized, quite a number of them. There are still probably some additional write-offs to be taken. The value of assets are not down yet to what they are supposed to be marked down to. This would seem to me to be an ongoing problem until we see some improvement in economic activity.

There are further issues facing the banking system. There will have to be a re-regulation of the financial system.

My recommendation has been the centralization of the supervision of the financial markets. Let there be one major oversight institution over markets and institutions. The head of that oversight group should sit as a vice-chairman of the Federal Reserve Board. The chairman of the Fed and the head of this oversight group [should] render an annual report to Congress showing what the financial health is of, say, the 25 largest financial institutions of the U.S. And that body should also provide a credit rating for each of those 25 institutions.

And his further remarks:

A: The Federal Reserve has admitted that the deregulation that has occurred has been a mistake. The Fed will support some re-regulation. It has not indicated what the magnitude of that re-regulation will be. Neither will the U.S. Treasury.

The Federal Reserve and the Treasury over the last two decades have let the financial markets be on a deregulated basis. We did not supervise financial institutions tightly. The assumption by the authorities, the kind of belief by the Treasury and the Federal Reserve was that those who do well will prosper in the financial markets, those who do poorly will fail. That of course was not allowed to happen because we just don't allow big institutions to fail because of the systemic risks they pose to the entire world and the system at large in the U.S.

As a result, financial markets were allowed to end up in all sorts of risky ventures, and this contributed to the mishaps that we have today.

We live in global financial markets. We have institutions that operate on a global basis. Therefore, we should have an international oversight group over major financial institutions regardless of whether they're in London, New York, Paris or Tokyo. They should come under one major supervisory authority. That authority should set requirements for capital should set rulings for types of leverage that the institution can undertake, should set training practices for the major markets.
If we do not have a unified supervision, the business will flow to those markets that are most liberal. And those markets will then create havoc for the rest of the international financial groups.

I think there's more support coming for that now than when I first wrote about this 15, 20 years ago because I see France pushing in that direction. The Europeans on the Continent are pushing in that direction. The only ones I haven't heard from on this are the Federal Reserve and the U.S. Treasury.

Yes it pleases me greatly to know I was thinking ahead of this smart man. In fact what his article brings to mind were the few (far to few when I think back) conversations I had when I took the liberty of knocking on the door of one of my professors from time to time to ask their opinion of what was happening in the "real economic world" outside of the somewhat antiquated textbooks I had to study with.

If I had a chance to do it all over again I am still not sure I would have taken the path of furthering my economics education instead of pursuing my business. I was very turned off by the bureaucratic and pathetic "counseling" at the state university. When I initially inquired about the masters program they looked at my completed transcripts and suggested I had 2 semesters of classes that were required just to apply (I was like, why in the hell didn't you spell that out when I started my major, idiot?) and the fact that the University of Maryland for all it's efforts was basically churning out graduates to fill a cube at the Department of Labor crunching boring ass stats for yet more bureaucrats. Economics was going through it's "mathematicization" phase and I did not see the subject in the same light.

Perhaps this has something to do with the mess we are in now. Not unlike the "magic" of any idiot being able to create an impressive business plan and financial projection with the wider use of computers and the newly accessible spreadsheet programs in the 1980's that in my view had a great impression on the flow of money then, the movement of Economics by people determined to make it more of a "science" through the use of statistics, mathematics and computer models totally devalued what I saw as the beauty of economics as a social science that could have better application using some of the emerging technologies but not for those technologies to "take over" the discipline in entirety.

I strongly believe the current crises once again came greatly by application of sophisticated mathematics and technology in the creation of financial products that on paper made "investors" believe anything and any return was possible if you could "hedge", "buy protection for" and or otherwise "remove responsibility for losses" through securitization which resulted in the explosion of credit and unbelievably cheap prices.

I have been saying for more than three years now that all of this "protection" was nothing but a house of cards, not to mention the "false" profits created in the sale of the products themselves and it would not last longer than early 2008. Well here we are. We are nowhere near bottom and finally some "smart" people who did stay in the wonderful discipline of Economics, and who shared my views, are being listened to. God bless them...