Over the weekend , there was a very interesting pair of articles by Michael Lewis and David Einhorn in the New York Times,
called How to Repair a Broken Financial World
. I agree with much of what they have to say.
Lewis and Einhorn’s list of “perfectly obvious changes in the financial system [that need to be] made, to prevent some version of what has happened from happening all over again” includes the following directives: “Stop making big regulatory decisions with long-term consequences based on their short-term effect on stock prices. Stock prices go up and down: let them.
End the official status of the rating agencies. Given their performance, it’s hard to believe credit rating agencies are still around. There’s no question that the world is worse off for the existence of companies like Moody’s and Standard & Poor’s. There should be a rule against issuers paying for ratings. Either investors should pay for them privately or, if public ratings are deemed essential, they should be publicly provided.”
I agree with Einhorn and Lewis about the rating agencies, and have talked about the ratings-game scam on many occasions, most notably in Time To Break Up the Credit-Rating Cartel
But instead of getting rid of the big-3 ratings agencies -- or at least breaking them up -- the SEC is talking about adding more
bureaucratic oversight, more
rules - which will solve nothing.
Moody's, Fitch, and the S&P couldn’t possibly survive without government support. That's how bad their ratings were, and still are. But interestingly enough, no one in authority wanted them to downgrade Ambac
(ABK) or MBIA
(MBI), for fear of repercussions in the bond market.
This is the epitome of the anemic protecting the weak.
And rather than let GM
(GM) and GMAC go under, the Treasury now makes subprime auto loans
. And the Fed opened up the TALF program to all borrowers including auto dealerships. I surmise that as a result of these programs, the Fed is destined to become the world's largest auto dealership
Everywhere you look, the weak are being propped up. Take a good look at AIG
(AIG), for example. There’s no reason for the government to be pouring over a hundred billion dollars to prop up this dying man. I suspect, but cannot prove, that the reason this was done was that Goldman Sachs
(GS) and.or JPMorgan
(JPM) were on the other end of AIG's credit default swaps gone bad. Whatever the reason, taxpayers are footing the bill.
Perhaps we’ll find out eventually - but the Fed and the Treasury persistently refuse to disclose what they’re doing, despite assurances of transparency, and despite pending lawsuits under the Freedom of Information Act by both Bloomberg
and Fox News
On Sunday, the Fed's Janet L. Yellen announced support for "experimental approaches" to prevent deflation
. Here’s my summary of Yellen's proposal: 1.
Yellen wants to "pull out all the stops to ensure an extended period of stagnation does not occur." 2.
Yellen wants to do this - even though the "approaches are experimental, and there is a great deal of uncertainty concerning their likely effects." 3.
To top it off, Yellen admits that a long period of stagnation will occur anyway: "Even with vigorous Fed action to restore credit flows, an extended period of economic weakness is likely."
Everywhere you look, the actions and statements by the Fed, the Treasury and the SEC are tantamount to a policy of "Survival of the Weakest." Such policies cannot possibly work, neither in nature nor in the economy.
Recessions and depressions weed out the weak, the incompetent, and the superfluous. Attempts to keep them alive will only “zombify” the economy and delay the eventual recovery.
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