Way past Time to “Stifle Innovation” and “Reduce Efficiency” on Wall Street

Regulations Need Regulators

By Steven Pearlstein
Wednesday, April 2, 2008; D01

It was Hank Paulson’s bad luck that he launched the Treasury’s work on a new “blueprint” for financial market regulation just as the worst credit bubble in history was about to reveal how badly the regulators had blown it.

. . . But having spent the past several months scrambling to prevent a financial meltdown that has its roots in regulatory nonfeasance, the Treasury team has had to acknowledge that better regulation might not always mean less regulation. And while their blueprint is flawed in several respects, they have laid out a credible framework for an important debate that will extend well into the terms of the next president and Congress.

. . . Nor is it any less ridiculous to have the Securities and Exchange Commission overseeing stock and bond markets and the Commodity Futures Trading Commission overseeing markets in stock and bond futures — but nobody overseeing the $45 trillion market for derivatives contracts tied to those stocks and bonds.

–read entire article–


Steven Pearlstein is so far above the pack of financial pundits, that the Washington Post will no doubt lose him their downsizing struggle, in the ‘final throes’ of credibility as a newspaper.

Federally insured banks are the flea on the ass of a newly ‘derivatized’ international financial system where the wealthy–and (increasingly) our pension trusts–feed at the trough. It’s long past time to throw innovation on the floor, stomp it into compliance and severely reduce its efficiency.

Following right along with American society, the movers and shakers of finance are innovatively replacing substance with image and pitching out earnings ratios in favor of derivatives, whose main attraction is their inability to be understood. Paulson desperately wants to keep hedge-funds out from under the regulatory umbrella because that’s where all the money is.

Coincidentally, that’s where all the money was, when suddenly reality yanked the cloth off the table, exposing derivative investments for what they are–uniquely fraudulent, but highly efficient ponzi schemes.

Financial regulation languishes in the methods of wetted pencils and green eye-shades, while the shifting capital that supports (or destroys) capital markets is a mouse-click away from manipulation. It’s entirely possible that part of long-term regulation may include minimum investment terms, say 90 days before capital could be shifted, removing some of the flash-and-dash of being a broker, but most of the volatility as well.

Treating corporate entities as individuals is foolish as well. Allowing “the rich” individuals to dabble in totally unregulated hedge funds because they can “afford to stand a loss” has been dis-proven as fund after fund screams for public bailout. Carlyle Group, flying the false-flag of individuality, hardly afforded their loss–they let those divisions fold and allowed others to take their rather cold bath.

When pension funds representing California’s school teachers, as an example, are allowed entry to the hedge-funds as if they were individuals among the ‘rich‘ (however you may define that term), thousands of teachers watched their retirement benefits go up in a true ‘bonfire of the vanities.’

So much for the manipulative myth of corporation as individual our Supreme Court has handily upheld. Is there something slightly out of whack, when IBM and GE enjoy all the benefits of individual Americans, except the liability? Does it make you want to incorporate yourself? You can, you know.

We have been sliced and diced by the un-regulated elephant in the investment china-shop and Paulson wants to allow it to continued swinging its trunk. The two things he has right is (1) the financial regulation systems now in place don’t need tweaking, they need comprehensive replacement and (2) it’s impossible to rush that through in the midst of financial crisis and the waning days of an administration famous for deregulation. (He didn’t mention that last, but I know in his heart he meant to)

There will be calls for ‘action.’ There are always calls for action, change, new brooms and the other convenient banalities of election years and the time to resist them is when they are most attractive. Enough damage is being done by a Fed and Treasury desperate to leave office with a Dow near 12,000.

The incoming president has problems to face not seen since Lincoln. Thorough and impartial renovation of the regulatory agencies that oversee capital markets is just one more to add to the pile.

1 thought on “Way past Time to “Stifle Innovation” and “Reduce Efficiency” on Wall Street

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