Posted on 04/29/2008 3:34:13 PM PDT by kc8ukw
Banks, hedge funds and other financial institutions could find their investment strategies curtailed by the Federal Reserve to reduce the risk to the economy from asset bubbles, the US Treasury said on Tuesday.
David Nason, the assistant secretary for financial institutions, said the US central bank should use its proposed new powers as a stability regulator to “lean against the wind” by forcing institutions to change their investment strategy if it judged they threatened the wider economy.
(Excerpt) Read more at ft.com ...
Since hedge funds are the only thing unregulated it could level the playing field and cut down on some volatility. I’d like de-regulation of the other stuff more, but Lord knows THAT ain’t gonna happen!
it seems that hedge funds and futures have been working against old fashioned supply demand capitalism!!
Why actually let supply and demand dictate the market when you can speculate, bubble, and sell before the burst? Fundamentals on oil do NOT dictate the current prices, yet when people who can’t physically take delivery of the raw material dabble in it, we get the current prices.
Another cut. Risk cannot be eliminated.
Why should you and I have our margin power in equity accounts limited to 2:1 for liquid stocks, and 1:1 for illiquid stocks, and about 10:1 on commodity futures... and hedge funds be allowed to lever up 15 to 30:1?
The single biggest thing hedge funds have done to destabilize the US banking system was absurdly high leverage on illiquid instruments.
Agreed, what should be done is a capital reserve requirement for hedge funds based upon risk just like the banks are required to maintain. As greater leverage is utilized, greater capital reserves should be required. Done correctly, this will act as an upper bound and self manage the risk to the economy as it will tend to prevent excessive leveraging.
An absolutely free market cannot exist, because the typical person cannot be expected to understand or detect market scams.
Ironically, many of the people who are most resentful of regulation are those that are being ripped off. Part of the scam is to convince suckers that they are going to get money unfairly from others.
The adage that “You can’t cheat an honest man”, is half true. Because you can cheat an honest man who doesn’t know the game is rigged.
In either case, regulation is experts protecting those who are either ignorant or foolishly greedy. And while most of us have little problem with the foolishly greedy getting burned, you would probably agree that just because you weren’t party to inside information doesn’t mean you should be punished for it.
Good idea. After all these crisis, the citizens of a nation must learn from experience and adjust the laws within the context of the US Constitution to prevent a nationwide catastrophe from occuring again. Many people do not realize how close we came to a credit meltdown triggered by the subprime mortgate scams and hedge fund borrow and invest approach to investments.
I don't mind good regulation --- I have seen it done in ways that I think work very well --- but an overbearing presence (which is what I believe that the Treasury is proposing, although the description here is vague enough to make it possible that what is being proposed is much more innocuous than that) is not a weight that ostensibly free markets should have to carry.
Personally, if I was the POTUS I would call in the business deans of every major prominent college/university and berate them for training educated menaces. All the regs in the world cannot cover all the schemes that smart and immoral men can devise or hatch. Many of these financial schemes are devised and carried out by graduates from ivy league and prominent business schools. These men are suppose to be our brightest and best in business, and yet a number of them have devised get rich schemes that nearly caused a financial melt down in the US. This is not the first crisis our country faced, but the subprime meltdown has finally mobilized our regulators into action. In addition to regulations, these prominent universities and business schools better review their programs and incorporate ethics/morality into their courses, otherwise they will continue to graduate educated menaces that will inflict future harm to the US economy. The next time we may not be so lucky.
There is an alternative to regulations. In the past ancient governments realize that they cannot be everywhere and have regs that cover every possible scheme without paralyzing commerce. In lieu of regs, government can have severe penalties. I always wonder how many regs one can replace with a good firing squad (guilty perpetrator and his family dies). Remember, business men are not jihadists, they will stop scheming once one of them is arrested, tried and shot.
I would go a step further. The post-WWII world has been created by unsustainable leveraged credit.
A long time ago I read about an obscure evaluation of world markets comparing what is called “real money” to “imaginary money”. Real money is backed by tangibles of all varieties, yet it has been leveraged so many times that it is marginalized by imaginary money, that has no such backing.
As one example, if a person is paid a dollar, they owe, say 20 cents tax on that dollar. But when they spend it, the person who receives it also owes 20 cents tax, etc. So in just six transactions, more than the total value of that dollar is owed in taxes. From that point, it is creating imaginary money. When all is said and done, that $1 may have created $10 or more in imaginary money.
This then is directly translates to mean that the “strength” of an economy is directly proportional to the number of leveraged transactions, *not* the value of goods and services. But this “strength” is without foundation.
Imaginary money is responsible for most of both our economic bubbles and those bubbles bursting. Real money could not have produced such amazing economic growth. But at the same time, it is a cumulative problem.
The most evident example of this is the US national debt. At some point it *has* to collapse, which is obvious to everyone. But ironically, since the vast amount of this debt itself consists of leveraged imaginary money, the big question is “Then what happens?”
Most likely, the debt would not collapse on its own. It would need a push from a major international economic catastrophe, resulting in the implosion of the credit market around the world.
The first effect would be that further credit is no longer possible, followed by existing debts being called. This was how the great depression in the US came about, with the margin calls for hopelessly inflated stocks.
A totally unthinkable, but logical, solution would be for the US to renounce its foreign debt. Suspension would not be enough. And domestic debt would still be honored.
This would destroy the USs credit rating, which wouldn’t matter because no more credit would be offered to anyone. But by doing this, the US could insulate itself from the international crisis, a position it could use to relieve the crisis.
In exchange for renouncing out foreign debt, we would export an enormous amount of food to countries that could no longer afford it. In the meantime, the US would have to restore its credit in the only way it could: by passing an airtight balanced budget amendment to the constitution, as well as paying off all domestic debt.
For a period, the US would have to pay for all foreign goods with “cash on the barrel head”, in such a way as would be acceptable to the selling nation. But this would soon give way to very limited non-exchangeable credit, more like a debit card than a credit card.
It would mean the end of the leveraged credit era, and growth would thereafter be limited to real money.
agreed - and these hedgefunds and futures are controlled in many cases by democrats who have a political desire to hold down and drive down the economy.
More like one big decapitation.
Actually, if it was known that people could have insider information, then it would be okay to burn those who invested under those terms, punishing them for investing with a lack of knowledge.
The market should ultimately correct for this, shifting people toward investing in companies that were more transparent.
A free market is a beautiful thing.
At the Nevada State convention last week, the Republican Party adopted a plank to the state platform calling for The Federal Reserve Act to be recinded.
yitbos
I think they should give every American a pony. ;)
yitbos
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.