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That is not so easy an argument to make as you seem to think it is. Several of the major sources of the recent financial crisis (the derivatives market, the ra

That is not so easy an argument to make as you seem to think it is. Several of the major sources of the recent financial crisis (the derivatives market, the rating of junk financial products as AAA, and the over leveraging of major financial firms) all suffered from lack of regulation (derivatives, rating agencies), or relatively recent deregulation (the over-leveraging).

byrneseyeview 15y ago
Actually, the whole point of rating that stuff AAA was a regulatory arbitrage. Buying AAA-rated CDOs and buying credit default swaps against them was a capital-efficient way to lever up. And that level of leverage was only possible due to central banking backstops. If deregulation caused the crisis, why weren't hedge funds (the least regulated entities out there) a big part of it? I seem to remember a bunch of the major investment banks (much more regulated) losing money because of their positions in mortgages (a very strongly-regulated investment). It's really hard to describe the financial crisis without talking about decisions that only make sense in the context of gaming regulations.
- TheCowboy 15y ago
  Hedge funds may not have been a big part of this crisis. But the next to last major financial crisis is a case study in this: http://en.wikipedia.org/wiki/Long-Term_Capital_Management http://en.wikipedia.org/wiki/Long-Term_Capital_Management Hedge funds were also more a result of a lack of regulation, or side-stepping current regulations by being defined differently, not so much a matter of deregulation. See it as regulators not stepping up or not allowed to step up and adapt. It's not like regulation serves to make any financial crisis avoidable. But smarter, more adaptable regulation can limit the depth of the rot, help shore up the integrity and health of the financial system, and possibly allow for a softer landing.
OstiaAntica 15y ago
The whole stupid AAA ratings regime is a government regulatory scheme-- only a handful of ratings agencies (they've opened it up a little since the crisis) were permitted by the government to rate bonds. Contrast that with equities, where there is no rigid "AAA" rating system and where thousands of analysts compete to provide the best research on stocks. Over-regulation is at the heart of the financial crisis, from the broken ratings system to the role played by Fannie and Freddie.

byrneseyeview 15y ago

Actually, the whole point of rating that stuff AAA was a regulatory arbitrage. Buying AAA-rated CDOs and buying credit default swaps against them was a capital-efficient way to lever up. And that level of leverage was only possible due to central banking backstops. If deregulation caused the crisis, why weren't hedge funds (the least regulated entities out there) a big part of it? I seem to remember a bunch of the major investment banks (much more regulated) losing money because of their positions in mortgages (a very strongly-regulated investment). It's really hard to describe the financial crisis without talking about decisions that only make sense in the context of gaming regulations.

TheCowboy 15y ago
Hedge funds may not have been a big part of this crisis. But the next to last major financial crisis is a case study in this: http://en.wikipedia.org/wiki/Long-Term_Capital_Management http://en.wikipedia.org/wiki/Long-Term_Capital_Management Hedge funds were also more a result of a lack of regulation, or side-stepping current regulations by being defined differently, not so much a matter of deregulation. See it as regulators not stepping up or not allowed to step up and adapt. It's not like regulation serves to make any financial crisis avoidable. But smarter, more adaptable regulation can limit the depth of the rot, help shore up the integrity and health of the financial system, and possibly allow for a softer landing.

OstiaAntica 15y ago

The whole stupid AAA ratings regime is a government regulatory scheme-- only a handful of ratings agencies (they've opened it up a little since the crisis) were permitted by the government to rate bonds. Contrast that with equities, where there is no rigid "AAA" rating system and where thousands of analysts compete to provide the best research on stocks. Over-regulation is at the heart of the financial crisis, from the broken ratings system to the role played by Fannie and Freddie.