Spitballs III

Financial Reform
Lots of talk about financial reform, some of the nosiest is around the edges: who does a consumer protection agency/group report to, legitimacy of short selling [at least naked short selling], banning speculators [???], hedge funds and venture capital, regulators, even the morality of capitalism.

A few things are clear and well supported: increased capital limits, a levy on banks assets as well as liabilities to "recoup taxpayer rescue monies" or prepare for the next debacle, enhanced consumer protection of some sort, pushing standard derivatives through a clearing house and improved governance.

As for too big to fail, I believe it more appropriate to think about "too big and/or too complex to be managed and /or regulated"

Changes should include an upgrading of regulators particularly the SEC, those associated with the "shadow banking system" as well as the government sponsored enterprises involved with the housing industry.

Resolution authority needs to be clearly assigned and not just for the largest "traditional" financial institutions but also for the shadow banking industry. Ideally this would amount to the government actively pushing the failing institution into traditional bankruptcy proceeding.

Barring banks from buying /selling non government securities as principal may be more difficult as is clearly distinguishing between what is a loan and what is a security instrument these days. Perhaps a return to the days where such investments were made with partners equity rather than shareholders equity would work.

There may be a case for a tax on speculative trading e.g. 0.125% [see the Defazio- Harkin bill]. This exempts pension funds and other tax sheltered accounts protecting the small investor and people saving for retirement. This would raise circa $100 billion a year in the US doing wonders for our deficit or infrastructure. The trick is to get every country that counts to do it also.

Custom derivatives are more complicated but should be as transparent as possible.

An in-depth review of the rating agencies business model is called for... it would be a shame if they got off without any thing more than a scolding.

Re speculators and short selling, its a fact that the Dutch in the 1600's tried to ban short selling and no less than Napoleon tried again without much luck. There is inherently nothing wrong with placing pessimistic bets; the difficulty comes when everyone piles on and creates the equivalent of a bank run.

It's a fact that the biggest objectors to increased consumer protection are not the big international banks but the Main St small and mid sized banks. Perhaps their share of the sub prime garbage that clogged the system needs a bit more airing as does the business practices that got them that market share.

Greece

Would you lend money to California at the same interest rate you lend to Texas? Of course not but that's what Greece wants... of course their Texas is Germany... this is after 10 years of financial games and fudging by Greece. Europe should assist them to right their finances; not doing so would have serious repercussions for the euro zone. But make sure Greeks retire at 65 or even 67 not 58 as they do now.

Its hardly true that speculators caused the Greek crisis, you can see the numbers. And by the way the big Greek banks hold an significant amount of their government debt and its widely believed that many of them doubled down with CDS.

The EU finally agreed how they would help Greece if necessary. It would be the IMF and the EU. Predictably Germany wanted to use the IMF and IMF money while France wanted to avoid the IMF. Why? Germany doesn't wish to use its money to help spendthrifts and Sarkosy doesn't want Strauss Kahn to get any more press between now and France's presidential elections.

The big struggle was to describe Brussels monitoring the work out. Was it the EU machinery demonstrating its role in "economic government" or was it "economic governance". The compromise was "asymmetric" translation; the document in French said government while the English translation said governance! This from the leadership of the union of nearly 500 million people who wish to treated as a world power... or is it leader?

Doubling Exports Obama wants to double exports in five years and makes a deal of promotion for small firms. This unfortunately is much to do about very little; less than 5% of American firms actually export. and about 80% of US trade is done by just 1% of the firms that export or import. It is the big companies that can make the difference in the near to mid term; big companies don't need government promotion, big companies require better access through trade agreements and a level playing field in taxation...the US has the highest corporate tax rates amongst the OECD nations.

The near term answer lies in resolving issues like completing the trade deals with Colombia, Panama and South Korea as well as resurrecting Doha and its off springs. We might even try to incentivize potential markets, e.g. reducing import duties on Brazilian ethanol which is far more economic and climate friendly than the Midwestern corn based version. After all, it is not just the other guy who erects trade barriers .

It would be helpful were Democrats to stop complaining about violence against unions in Colombia and our inability to sell American cars in South Korea. Yes, the yuan is undervalued but letting it float won't rejuvenate the US textile industry or commodity steel producers. Better we play that one multilaterally.

Incentivizing smaller companies will help in the future. The US should have informed professionals able to advise smaller companies on access to export markets. EXIM bank facilities can be expanded. Export controls on technical products need to be intelligently established not just by state department bureaucrats who may earnest but lack technical knowledge.