"Schwarzman's Bailout Wishlist
There's a severe shortage of finance honchos in Davos this year. They probably thought that turning up for the schmooztastic gabfest would send the wrong signal to their new lords and masters making $191,300 a year. On the other hand, they're leaving something of a vacuum, and Steve Schwarzman abhors a vacuum:
Mr. Schwarzman is already making a splash. At a discussion panel on Wednesday, hopped off his stool during a debate moderated by CNBC's Maria Bartiromo, grabbed the microphone, and boldly called for what private equity loves: More leverage!
Mr. Schwarzman argued that banks should be allowed lower capital ratios, freeing money normally laid away against losses for new lending. He also called for the end of accounting rules that forced lower and lower asset valuations. And, oh yes, the government should guarantee securitizations to help the market get moving.
And a pony, Steve. Don't forget the pony."
Explicit government guarantees, in my version of Bagehot, serve a similar function. The point of the guarantees is to forestall panic, thereby allowing an orderly economic rearrangement. One that involves less loss of wealth and social pain. In other words, the guarantees are supposed to keep the government from having to spend enormous sums of money in a social collapse, which often involves other very nasty social consequences.
Schwarzman's plan has a certain logic to it. Guarantee everything explicitly. The problem is that, from their actions, if not their words, the Fed and government have essentially done that. However, panic continues.
My reading of the situation is that the bankers are a major source of the panic. Most people believe they are buffoons, ethically challenged, criminals, and pulling the strings of the government in their favor, at the expense of the rest of us. "Too big to fail"= "More important than you".The bankers are correct. Fear of nationalization is really a way of ensuring the banks continue on as before. That's the point. Arguments about why the free market, which these bankers couldn't function in were it to exist, are satirical at this point. I'm not picking on Schwarzman, since I think his ideas about how to regulate are very good. But what he's really saying is "Doesn't everybody understand that you work for me?". We do. Shiller has it right, we need trust. Letting the banks survive doesn't do that for anyone but people with bank stock. The bankers are part of the panic. The government bending over backward for the banks is part of the panic, because many of us understand that nothing is changing. If we nationalize, we'll be saying enough is enough.
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If we are to sweep a vast array of financial institutions into the net of a single regulator, then that regulator has to be able to regulate not by promulgating a blizzard of ever more complex rules, but by enunciating a set of guiding principles. If these principles are coupled with strong disclosure and oversight, they will give the regulator the flexibility needed to cope with an ever-changing financial landscape, and to provide a clear direction for the regulated institutions.”
I agree with this:
This is the real problem with regulation. These investors can be very clever people, and are adept at shifting the terrain. That’s why regulation always seems to be correcting the last problem.
The solution is either to regulate or supervise risk, especially any investment that shifts risk to a third party or magnifies risk. In other words, broad principles.
However, have you ever noticed that some of these recommendations being bandied about are as simple disclosure and transparency, traits one would think a decent human being would try and exemplify as a matter of course.
— Posted by Don the libertarian Democrat