Encouraging Deadly Financial Viruses
Randall Wray highlights two great insights that arose at the annual Minsky conference last week in NYC.
First Joseph Stiglitz (Wray’s words, emphasis mine):
Recall that part of the reason for the creation and explosion of derivatives was to spread risk. For example, mortgage-backed securities were supposed to make the global financial system safer by spreading US real estate risks all over the world. He then compared that to, say, a deadly flu virus. Would you want to spread the virus all over the world, or quarantine it? Remember Warren Buffet’s statement that all these new financial products are “weapons of mass destruction”–like the 1914 flu virus. And, indeed, just as Stiglitz said, spreading those deadly weapons all over the world ensured that when problems hit, the whole world financial system was infected.
Next, Frank Partnoy:
He said that these innovations mostly exploit information asymmetries in order to:
a) dupe customers (think Goldman Sachs and John Paulson constructing synthetic CDOs sure to blow up, and betting against Goldman’s customers who bought them); and
b) engage in regulatory arbitrage (evade rules, laws, supervisors, etc; ie, move trash into SIVs to evade capital requirements).
But the financial industry and its Republican toadies would have you believe that regulating our outlawing these derivatives will destroy American “innovation.” Yeah: and we should also encourage innovation in suicide-vest technology.
21st Annual Hyman P. Minsky Conference: Debt, Deficits, and Financial Instability « Multiplier Effect.
Cross-posted at Asymptosis.
Recall that part of the reason for the creation and explosion of derivatives was to spread risk. For example, mortgage-backed securities were supposed to make the global financial system safer by spreading US real estate risks all over the world. He then compared that to, say, a deadly flu virus. Would you want to spread the virus all over the world, or quarantine it?
Yes, well, the problem with all this is… while “you” (meaning us plebian 99% scum) would NOT want to spread an incredibly destructive (for the 99%) financial virus, the Wall Street parasites who engineered the virus will profit handsomely from it. Because the government works for the 1% (and especially for the .1%), that makes the deadly financial virus a BRILLIANT IDEA that requires rolling back decades of regulations that basically enabled tens of millions of Americans to escape serfdom and ascend to the middle class.
Now that your and my opinions clearly don’t matter, there’s no need to quibble over such trifles as the shredding of regulatory protections for us serfs or the accelerating downward mobility for the 99%.
Personally, I recommend not worrying yourself over such matters as most of your fellow 99%ers are currently glued to Fox News and Rush Limbaugh and believe that people like you and me are ENEMY RADICALS and trying to impose a COMMUNIST DICTATORSHIP by writing such op-ed pieces. And don’t forget, Social Security and Medicare are NOT government programs –they are supernatural blessings bestowed by the Almighty and baby Jesus spawned by intensive prayer, hating gay people, and voting Republican.
This brings up an interesting line of thought.
The federal and most state governments in the US are divided into legislative, executive, and judicial branches. The judicial branch in particular has historically had the responsibility (and still has in the northeastern and western US) of preventing the executive branch from improper (contra-legal) execution of legislative pronouncements, and of preventing the majority rule democratic legislative process from dominating minorities (based on the primary legal sources, generally constitutions).
In the past that has mainly manifested itself through the nullification of laws or partial nullification of laws, or in some cases, through direct judicial oversight of processes (temporary assumption of executive power, think the Boston harbor cleanup).
The current supreme court is a willing victim of judicial capture, but ignoring that, I wonder how the courts go about remediating underregulation. We know from experience they can take action in a limited manner to compel executive action on legislation, but can they actually “create” something that effectively is legislation to protect the many from the priveleged few?