Saturday, March 2, 2013

Revisiting the Greenspan Legacy (circa 2008) | The Big Picture

After listing folks like Warren Buffett and George Soros and Felix Rohatyn who thought derivatives were far too dangerous to allow unfettered trading, one man took the other side of the deregulatory argument — Alan Greenspan:

“One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserv Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.
Today, with the world caught in an economic tempest that Mr. Greenspan recently described as “the type of wrenching financial crisis that comes along only once in a century,” his faith in derivatives remains unshaken.” (emphasis added)

A belief in weakened I-O regulation allows secretive derivative trading with no records to randomly audit by Bi. This increase their innovations but drives them more to booms and busts.

The whole article is worth reading. It reflects the early days of the unraveling of the Maestro’s reputation, whose fall from grace accelerated as the crisis wound on. Today, it lay in ruins, where it deserves to be.

Few men have wrought more economic damage in the misguided pursuit of a bad economic idea then former Fed Chief Alan Greenspan.

No, as it turns out, neither Banks nor Markets can regulate themselves . . .

Show Me The Money: Behavioral Economics And Consumer Protection | The New Republic

One of the central missions of the new Consumer Financial Protection Bureau is to ensure that people “know before they owe.” Showing an appreciation of behavioral economics, the Bureau has been interested in two different approaches. First, it is promoting clear and simple disclosure, so that people can learn, more or less at a glance, about the agreements that they are about to enter into.

This makes agreement more Bi transparent so communities are less likely to be deceived.

Second, it has referred to “smart disclosure,” which occurs when public or private institutions disclose detailed information in standard, machine-readable formats.

This makes for normal documents where attempts to hide details in small print are deceptive and deviant.

This information can be used by intermediaries, often through apps that display that information in new and creative ways. It is easy to imagine consumer-friendly disclosure of the central features of a variety of credit card and mortgage agreements, allowing people to make informed comparisons and to choose the plan that is best for them.

BBC News - The doormen policing Egypt's morals

The doormen policing Egypt's morals

By Tom DinhamCairo

In today's Magazine

Residents of Cairo cannot simply live as they please - they must always take into account the judgement that will be made of them by the man who sits at the front door of their building.

One of the many things any fresh-faced arrival in Cairo is likely to notice - when lugging bags and suitcases to a new abode - is that there will be somebody sitting in front of it, sternly looking into space with a stare so stoical that it can only have resulted from a lifetime of gazing, sitting and waiting.

In Cairo's hectic maelstrom of activity, there is one person who can take things relatively easy - the doorman, or bewab.

Security guard, porter, enforcer of social mores and general snoop, all rolled into one, the bewab is a quintessentially Egyptian figure, and can be found sitting in front of almost every building in the capital.

Often from Upper Egypt, the bewab brings a distinctly rural flavour to life in the largest, most populous city in Africa. Sporting the long, flowing robes favoured in Egypt's countryside - along with a distinctly non-Cairene dialect of Arabic. Many bewabs are in the city... but not really of it.

Up and down the capital, these rustic imports act as a kind of moral police force, bringing the conservative values of their home districts to the heart of the metropolis.

They can act as Ro police exposing secretive behavior, also moderating it by accepting bribes.

Forget the anonymity of city life almost anywhere else in the world - in Cairo, your bewab will be keeping a beady eye on the comings and goings of anyone associated with you, especially if they happen to be female.

A quick look at the house listings for foreigners living in the capital reveals the premium that is put on having a liberal - or at least a venal - bewab.

In the selling-points of advertisements, the "laid-back bewab" is a sought-after epithet and is code for a bewab who will conveniently lay aside his moral foibles and leave you well alone, mostly because you are a foreigner.

The mixing of foreigners and Egyptians of the opposite sex, however, is where the trouble really begins.

On the occasions when I have headed up to my apartment with an Egyptian lady, she has often frozen at the sight of my bewab, whom I shall call Uncle Mahmoud, slouched on his plastic deckchair watching the world go by.

"I can't come up to your apartment with him there," hissed one friend of mine, blushing. "I just can't stand him judging me, he'll think I'm a whore!"

To her, and many like her, Mahmoud's opinion really mattered and his moral judgements carried weight, even if they had no basis whatsoever in reality.

I often found it hard to believe that Uncle Mahmoud - the jovial and somewhat annoying man who occupied his days sitting, staring at the front door of my apartment building - could be the object of sheer terror for Egyptian female visitors.

Bank of England exec: 'Occupy' right about cause of '08 crash

London - A top official at the Bank of England has praised the Occupy Wall Street movement for its role in inciting a "reformation" in the financial services industry and for correctly attributing the 2008 global financial collapse to economic inequality.

The Telegraph reports that this unlikely alliance between the Occupy Movement and Andrew Haldane, executive director of financial stability at the Bank of England (BOE), is based on a common understanding of the underlying causes of the 2008 mega-recession.
"Occupy has been successful in its efforts to popularize the problems of the global financial system for one very simple reason-- they are right," Haldane said at a central London debate hosted by Occupy Economics, an offshoot of Occupy Wall Street.
Haldane, 45, said Occupy was right about the excessive greed, salaries and bonuses that have infected the financial services industry.

This infection grew exponentially because of the IV-Oy bias of the I-O police, US regulators were told to refer to Iv banks and hedge funds as their customers not those to be policed. Bonuses are commissions that agents often get for deniable deceptions they commit against B clients.

Why are there no famous financial whistleblowers in this crisis? - New Economic Perspectives

The fact that the business community fought ferociously against doing anything to encourage whistle-blowers is an example of what we call “revealed preferences” in economics. Honest CEOs should encourage whistle-blowers. CEOs often say that they encourage whistle-blowers. Their SEC filings reveal their true beliefs.

When the I-O police have a right win bias then the crime waves can boom and bust, more Iv self policing is allowed so the contagion can grow. Random audits from the Bi side of I are done less. In this environment Iv whistle blowers make less commissions from exposing this contagion as well as having less leverage to plea bargain their own crimes. Police are supposed to use Iv-Oy whistle blowers to moderate crimes by Y-V because Iv-Oy agents are supposed to use secrecy and deception on behalf of Y-V teams. When I-O has been weak then Y-V becomes strong, this takes time to rebalance because even when I-O police become strong they still have few Iv-Oy whistle blowers to help them find the Y-V crimes.

We have far too few whistle-blowers and because of the worst epidemic of accounting control fraud in history and the death of criminal referrals by the banking regulatory agencies our need for whistle-blowers has never been greater. Indeed, our federal prosecutors are the people who most desperately need to encourage whistle-blowers to come forward who worked at the financial control frauds.

Given that desperate need how would a rational administration respond? The President and the Attorney General would hold a press conference with a group of whistle-blowers. He would praise their performance, give a few specifics of how valuable the information they provided was to the nation, urge the tens of thousands of Americans who have information about other frauds to come forward, provide a web site for future whistle-blowers to use, and help arrange a publicity tour in which the select group of whistle-blowers appeared on a series of major television and radio programs where their efforts could be extolled and they could ask others to follow their lead.

The DOJ web site would extoll whistle-blowing and give examples of how their actions helped the nation. It would showcase video interviews with whistle-blowers that could be picked up by You Tube.

The DOJ would hold rallies outside buildings that had (or do) house the worst frauds featuring the whistle-blowers who had come forward and asking others to follow their lead. The President would host a White House dinner for the whistle-blowers and bestow a medal on some of the most praiseworthy. That is what an administration devoted to holding the elite frauds accountable would do.

Secret Documents Show Weak Oversight of Key Foreclosure Program - ProPublica

Documents obtained by ProPublica shed new light on this failing in 2009 and 2010, when the foreclosure crisis was at its peak and six million American homeowners were in danger of losing their homes. HAMP required mortgage servicers to offer loan modifications to eligible homeowners so that their monthly payments would be lower. The servicers — the largest of which were owned by the banks that had fueled the crisis in the first place — were in charge of reviewing homeowner applications, but the government set the rules and was supposed to supervise their work.

But the documents show that the government did not complete a major audit of the two largest banks in the program, Bank of America and Wells Fargo, until over a year after the program launched.

Such audits were rare at the other large mortgage servicers throughout 2009 and 2010, according to the documents. During these years, when the government provided little oversight and administered no sanctions, servicers reviewed 2.7 million modification applications and denied two-thirds of them. Meanwhile, homeowners regularly complained they had been mistreated by servicers in the program.

Weak I-O policing continues the Iv-B and V-Bi disconnect, Iv bank employees as agents are expected to deceive the B home owners so the V bank makes more profits. Bi communities complain to I regulators to try to strengthen them. Random audits of Iv can quench the chaos because they cannot anticipate randomness, this is why random O patrols work well against Oy criminals.

The documents also show how the Treasury Department coddled servicers that weren’t complying with the program’s rules. Once a year, servicers are required to certify that they are complying with the program’s rules. But servicers define for themselves what it means to comply. A company that admits violating the rules is allowed to merely submit a cover letter with their certification stating the exceptions and how it would fix the problems.

Are you all marxists? Why more regulation is not the answer « The Market Monetarist

Are you all marxists? Why more regulation is not the answer

Today I participated in a very interesting conference organized by the Danish Institute for International Studies on “Central Banking at a Crossroads: Europe and Beyond”. So far the conference has been extremely good despite the fact that I disagreed with most of what I heard all day. I could write a long post on my reflections on today’s conference, but instead I will just give you the seven headline on papers or blog posts I would like to have written today. Here they are:

1) The Public Choice Theory of Banking Resolution

2) Why Bryan Caplan’s theory of rational irrationality will teach you that deposit insurance is counterproductive

3) Regulators as cheerleaders of the boom

4) Why Goodhart’s law is telling us that macroprudential indicators are useless

5) Why banking crisis is a result of monetary policy failure rather than market failure

6) Bank of Japan’s “dual mandate” – price stability and financial stability. The BoJ failed on both for 15 years.

7) Dodd-Frank and the Patriot act – a reflection of the same kind of regulatory irrationality.

I think you get the drift – I am not too impressed with the idea that the solution to today’s problems is more regulation. Today’s crisis is primarily a result of failed monetary policy rather too little regulation.

Regulation can be different from policing, its should be a part of it though. Regulations are usually to slow things down or make them more transparent and so are Bi. For example speed limits on highways make cars go slower and avoid more chaotic crashes, more deposits in banks slow booms by starving them of capital and tend to make the busts smaller at the risk of economic stagnation. Iv biased policing allows more personal freedom but penalizes them more if they do something wrong, for example in the GFC many companies were prosecuted for fraud that could have been prevented by more regulation randomly auditing companies for deception. So Bi regulations try to create an equilibrium or normal behavior so that deviants to this are penalized, they might have to keep kinds of records that penalize companies wanting to do business faster or innovate in ways that are difficult with killing out these forms. Iv deterrence might allow this innovation but then it has booms and busts where the extremes are penalized, for example in the bust at the GFC ceiling companies were prosecuted but this fraud was ignored before them. At the floor they can also be prosecuted, when the free fall of a market is going on shorting might be allowed but when it hits the floor causing economic wreckage for those companies then they can be prosecuted for damaging companies.

Police in Aperiomics