Archive for December 14th, 2008

Some people have been making a big fuss about who exactly caused this deregulatory mess (Bush, Greenspan), and this topic has been a particularly prevalent theme over at The Big Picture:

Today’s New York Times has a damning article linking Senator Chuck Schumer to many of the radical deregulatory policies that underlie much of the current crisis.

I have assessed a lot of blame for the crisis on several people — Greenspan at the top of the list, followed by several others, including President Bush. Phil Gramm was a prime sponsor of all manners of ruinous legislation — which, I hasten to add, was signed into law by one President Clinton (he sure isn’t blameless in the mess).

I guess it’s fun to point fingers and try to single out a scapegoat, but we can’t go much deeper than recognizing our mistakes and trying to make sure they don’t happen again. In The Great Depression, for example, we learned that using the gold standard likely exacerbated a series of demand shocks which could have been averted if we had targeted the money supply using interest rates, like we do today (hence, learning from our mistakes).

That said, where are we in the process of identifying what is wrong with our current system, and what will it mean for the future? If we determine that the problem is 30-1 leverage ratios and easy access to money, we are going to accommodate their absence with a much slower rate of growth in our next expansion.

All of that said, I’d like to point fingers for a moment. Anyone think about blaming the SEC? The news of Bernard Madoff’s ponzi-scheme is especially sobering to the fact that no one was/is watching these guys.

From Bloomberg:

Dec. 14 (Bloomberg) — Bernard Madoff’s investment advisory business, alleged to be a Ponzi scheme that cost investors $50 billion, was never inspected by U.S. regulators after he subjected it to oversight two years ago, people familiar with the case said.

The Securities and Exchange Commission hasn’t examined Madoff’s books since he registered the unit with the agency in September 2006, two people said, declining to be identified because the reviews aren’t public. The SEC tries to inspect advisers at least every five years and to scrutinize newly registered firms in their first year, former agency officials and securities lawyers said.

Wait…this is the best part:

“Given what the SEC claims is the magnitude of the fraud, this is something you would hope an inspection would have uncovered,”

Hmm. Good point. Did they even check this Madoff guy out? As soon as the fraud was exposed, a series of reports came out (almost instantaneously) which identified how this was a blatant ponzi-scheme – here, here, here, and here. So how did the SEC not figure this out? Is our public sector really that far behind the curve, as not to identify a $50 billion scam?

Either way, I think there is no chance that the current SEC chairman, Christopher Cox, makes it into the Obama administration. None. Please read his Op-Ed in the WSJ to see how Bob Rubin-esque his analysis of this situation is. As many have pointed out, the SEC has utterly failed to carry out their explicit responsibility in regulating rating agencies, the same agencies which deemed Fannie Mae and Freddie Mac AAA caliber debt, just before they had to be nationalized. The SEC was also responsible for relinquishing the mandated debt-to-net capital ratio (read: leverage) from 12:1 to 40:1, by the way.

As much as I’m not a fan of Jim Cramer’s antics, he could do a better job than Cox – what more could he do worse? He’s talked about reinstating the uptick rule, banning these leveraged ETF’s (which would undoubtedly lower volatility), changing mark-to-market accounting principles for illiquid assets (think of any 3 letter acronym – CDO. CDS. MBS.) – All of which would have a positive influence on the markets, and ultimately our economy.


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