Decisions Taken to Stem the Foreclosure Flood Have Often Been Grossly Wrong
Many decisions taken to stem the foreclosure flood have been often grossly wrong. Some of the regulatory decisions have been long term in nature with short-term effects on the stock market. These have been harmful. Stocks should be allowed to play their own game of going up and down without interference. The hasty decisions taken by jumping from handling one crisis to taking on another has failed to have a cohesive character that will cure the disease and not just temporarily alleviate the symptom. The Treasury and Federal Reserve erroneously think that the most vital issue is to keep the stock markets propped up. In fact the worry is more about the Wall Street trader than the daily market. They have failed to understand that if the policies are right then the stock market will automatically respond positively.
The rating agencies have failed miserably in playing their part – it is a surprise that they are still around. Moody’s and Standard & Poor have come in for heavy criticism. The financial system has been badly mauled because of non-use of simple and plain language. Financial innovations have been made and new products created without allowing people to be aware of the grave financial consequences. Perhaps even the regulators did not understand much about them.
Everybody is hearing about credit-default-swaps. It has become a serious joke leading to betting whether not only companies and sub-prime backed bonds but also the municipalities and the USA government will go bust. Some say the sub-prime mortgages were intentionally created so that savvy investors using credit-default-swaps could bet against these. It is a kind of insurance – a perverse kind of insurance like purchasing fire insurance on the house of one’s neighbour – and that too at a far higher value than the actual worth of the estate. The insurance is bought from a firm that does not have the ability to pay if the whole region starts burning. The pivotal task of the regulator is to see that those who are selling risky assets have the capital to support the bets.
American banks are now adopting a new international standard known as Basel II. It is based on the surmise that the banks do a much better work of calculating their own risks than regulators. This is because it is in the interest of the bank itself not to fail.
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