“The dispersion of credit risk by banks to a broader and more diverse set of investors ... has helped to make the banking and overall financial system more resilient ... improved resilience may be seen in fewer bank failures.”
IMF annual report 2006
Maybe we should take a time out from castigating these awful bankers who created this shadow system for their own interests and really try to understand what is going on. Policy makers including central banks encouraged this system. But what are they really trying to do now? Dismantle it? Probably not since they did not really understand how it was created in the first place? Regulate it? There are clear signs of this but not clear exactly what the effect of this will be. Finance it? This is what central banks are doing. They are standing in for the securitisation markets but they cannot do this forever. Either we find a way to return and manage securitisation or captital will be seriously rationed.
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Movember
10 years ago
2 comments:
May be we are still not focusing on the real question here. Yes, the government and central bank did promote the system and they are trying to regulate and finance it. But, shouldn't the question be, is the system really good enough and will just regulation prevent a major crisis in the future? I do know, no system is foolproof and there are going to be loopholes. But, the thing is, the government and central banks are obviously not going to dismantle the system, seeing that they promoted it, and it means turning back the clock a few decades for the financial markets! But I just wish to ask, 'Is a complete overhaul of the financial system required?' seeing also that this is the best time for it, well best time for it till the next crisis comes along.
Maybe the real solution is re-enacting the leverage limitations of Glass-Stiegel. They used to be around 10:1 and have been run up to as high as 60:1 (Ginnie Mae). Simple risk analysis through scenario planning would have revealed that a down economy, falling housing prices, and increasing defaults and forclosures would lead to financial sector ruin.
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