Sub Prime Sludge and Solutions (Revisited)


Following up on the last post, An Obama Fact Check, Sub Prime Finger Pointing, there is even more interesting information out. In an attempt to modernize the financial sector, Phil Gramm brought us the Financial Services Modernization Act . In a nut shell, it gave commercial banks the ability to get back into financial investments. So, we are possibly revisiting the cause of the Bank Collapse of 1933. But, things are much more complex nowadays, there are more people, much larger sums of money, and the economy is much more globally intertwined.

In the article The Blame Game from the Current, on, Megan Mcardle had some interesting thoughts.

But both candidates are right about one thing: America's financial regulatory structure is badly outdated, and in need of a massive overhaul.

America's entire approach to regulation is a relic of the New Deal, when optimistic Keynesians still believed that they might tame the economy by getting bright technocrats to run it. [1]
For better or worse, advised or ill-advised, an update to our economic system is what Gramm seemed to be trying to accomplish. Problem seems to be that the regulatory agencies either were not allowed to keep up with the changes or could not. Either way, there was no warning from the SEC, Securities Exchange Commission, the Department of Commerce, or the Treasury Department. I am not saying they did not see it coming, I do not think they knew what to do. The book they were operating by did not have the answers. So, we are left with them shrugging their shoulders and the American taxpayer floating almost $900 billion in government bail outs.

A better approach would be to focus less on eliminating risk, and more on managing it. This means not only greater transparency, but encouraging alternate ratings systems to help make investors aware of risk. [1]

The Heritage Institute seems to agree with Ms. Mcardle.

Improved Credit Ratings

The report calls for credit rating agencies to improve the way in which they "grade" securities. Currently, both traditional securities and structured credit products are graded the same way. Structured credit products are sophisticated and often highly complex packages that include such ingredients as tranches (pieces) of mortgages representing a specific level of repayment risk. They are designed to meet specific investor needs. [2]

There are many other solutions that need to be enacted as well, requirements for capital standards, more stringent credit standards, as well as better risk management by financial institutions. My main fear is that these regulations and oversights will not be enacted with temperance, but out of anger. I think we are going to see a regulatory body overseeing the financial industries like we have never seen before. I would even venture to predict a new Department of (fill in the blank) strictly for financial regulation. Larger government and harsh regulation are not the answer, common sense and temperance are.


[1] The Blame Game
[2] Sub Prime Sludge and Solutions



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