Saturday, January 17, 2009

On "Financial Reform"

Please considering reading the recommendations of the "Group of 30", also known as G30.

The recommendations are available by clicking on the title, "Financial Reform: A Framework for Financial Stability".

This is likely to be a very important document, headed as it is by Paul Volcker.

My quick read of its recommendations leads to the following first reactions:

1. Of course, some of its recommendations are positive.
2. It mostly misses the mark. For example:

A. It does not truly reform the Credit Default Swap system. CDS is either insurance or it is gambling. The world did very well without it. If an entity does not want to make a loan, or wants partners, or after making the loan wants to sell it, so be it. All a CDS does from an overall systemic standpoint is add costs. No value is created by a CDS and therefore it is inefficient.
B. The Project Director is the head man at a company called RiskMetrics. Unsurprisingly, the report calls for more risk management. My reaction is that fewer risks should be taken. If you take a look at the members of the G30, they are all insiders. Many work for JPMorgan Chase, Morgan Stanley, etc. To expect them to support a real downsizing of their industry is naive.
C. The report calls for more and better regulation of financial institutions that pose a systemic risk. I respond that such institutions should not be allowed to exist.

I will have more comments in the future.

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