There are lots of discussions how to regulate hedge funds and other high risk financial companies. Maybe there are actions to take to avoid Ponzi schemes for instance? But we shall never forget that the credit crunch did not start there. It started in the regulated part of the financial industry.
Maybe therefore more regulation is not the full answer. Regulations can be designed in ways to create systemic risks (which I say Basel II has done). Let us hope that we do not just get more regulation. Instead let us hope that we get new regulation based on common sense and the boom and bust nature of the minds of human beings.
2 comments:
Agree. More regulations cannot be the only lesson learnt from this crisis.
If we do forensics for the Credit Crisis, ROOT cause of it would be the failed Monetary Policy and not lack of enough regulations. Too much easy money was available for too long. That mixed with innovative structured instruments like MBS, inflated Real Estate prices to a point of burst. Of course, had enough regulations been there, crisis would not have been severe. Point is, regulation is only a controlling tool and it (or lack of it) should not be blamed as a ROOT CAUSE for the crisis.
On other hand, if there are too many regulations in place:
• Innovations will be choked. Products like Structured Securities will not come up. Inherently, there is nothing wrong with say MBS. It only reduces the cost of credit, by redistributing risks across a bigger investor base, benefitting both, borrowers as well as lenders. Problem was in understanding associated risks. Risk distribution was taken as risk reduction.
• Also, as new innovative products come up, there can never be enough regulations to cover all aspects. It is simply not possible to foresee all downside combinations of that new instrument with multiple possible market factors. So, a comprehensive regulations scenario is anyways not achievable.
Overall, I see Regulations as a fine tradeoff with Innovations and Efficiency. Too much of it will keep innovations/efficiencies away and too less of it will keep investors away.
Hi Sandeep
Thanks for your comment. I agree with what you say. Interestingly I understand the trend in new regulation is that the central banks start to understand they cannot control inflation. Rather they are eyeing to control the supply of credit or credit growth instead not letting it differ too much from GDP growth rates. This would hopefully mean a more robust monetary regime but also disable most business models built on excessive leverage and consumer spending on borrowed cash. This is a game changer for companies expecting their customers to borrow money to buy their products. I will return later in July with a blog on that subject.
Regards
Magnus
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