THE PRAGMATIC CAPITALIST Wed 2010-04-07 18:22 EDT

THE ENRON BANKING SYSTEM

TPC

``Panics do not destroy capital -- they merely reveal the extent to which it has previously been destroyed by its betrayal in hopelessly unproductive works'' -- John Mills ...We should draw a distinct line in the sand between banks and diverse risk taking firms. There are always going to be Enron's in the economy, but why should we allow our entire banking sector to mirror Enron? Taking a 30,000 foot risk management view I say something must be done to ensure these banks can never do this again. Turn banks into true banks. Hedging and exotic business models are fine. Just don't commingle them under the same umbrella as a deposit taking ``bank''. With that, a few ideas come to mind: * Our banking system should be aligned with the goals of the nation to help ``grease'' the wheels of the economic growth engine of the United States. Banks should be more like utilities and less like hedge funds. Otherwise, banking becomes counter-productive and potentially destructive. * Banks should not be allowed to exact onerous fees on the public or enact a business model which is inherently dependent on driving their customers deeper and deeper into debt. This undermines the entire goal of productive economic growth. * ``Banks'' should be true lending institutions. Non-traditional banking operations and products such as CDS, ``off balance sheet'' finance, derivatives as collateral and such would be deemed illegal unless performed only by non banking/lending institutions (such as hedge funds) so as to insulate the public and true lending institutions from the risk taking, ``hedging'', and ``financial innovation'' of firms such as Lehman Brothers.

ENRON BANKING SYSTEM; pragmatic capitalists.

zero hedge Tue 2009-11-03 19:57 EST

Guest Post: Systemic Risk is All About Innovation and Incentives: Ed Kane

Edward J. Kane vi Chris Whalen

...we present the views of our friend and mentor Ed Kane of Boston College, who argues that the problem with the financial regulatory framework is not the law, regulation nor even the regulators, but rather the confluence of poorly aligned incentives and financial innovation... The financial crisis of 2007-2009 is the product of a regulation-induced short-cutting and near elimination of private counterparty incentives to perform adequate due diligence along the chain of transactions traversed in securitizing and re-securitizing risky loans (Kane, 2009a). The GLBA [Gramm-Leach-Bliley Financial Modernization Act of 1999] did make it easier for institutions to make themselves more difficult to fail and unwind. But it did not cause due-diligence incentives to break down in lending and securitization, nor did it cause borrowers and lenders to overleverage themselves. Still, the three phenomena share a common cause. Excessive risk-taking, regulation-induced innovation, and the lobbying pressure that led to the GLBA trace to subsidies to risk-taking that are protected by the political and economic challenges of monitoring and policing the safety-net consequences of regulation-induced innovation. These challenges and the limited liability that their stockholders and counterparties enjoy make it easy for clever managers of large institutions to extract implicit subsidies to leveraged risk-taking from national safety nets (Kane, 2009b)...To reduce the threat of future crises, the pressing task is not to rework bureaucratic patterns of financial regulation, but to repair defects in the incentive structure under which private and government supervisors manage a nation's financial safety net.

Ed Kane; Guest Post; incentives; innovation; systemic risk; Zero Hedge.

Sun 2009-10-11 18:07 EDT

Cassandra Does Tokyo: Mourning Rally

...it is most curious that I should find myself experiencing very visceral negative reactions to the upward movements in the gold price...the rallying Gold price signifies more monumental failures at multiple levels for society, in politics, for nations, for our individual and collective ability to measure our wants and desires with our means. So despite my skeptical exoskeleton about most things (financial innovation perhaps first and foremost), the aforementioned bothers me intensely, for I am, at heart, both an idealist, and a closet optimist about humanity...So when I see Gold rally, my visceral reaction is the result of my incredulous beliefs confronting contrary evidence, and the mourning for said failures (both real and imagined) that it represents.

Cassandra; Mourning Rally; Tokyo.

Thu 2009-09-17 09:31 EDT

Why capitalism fails - The Boston Globe

Stephen Mihm

Mainstream economics rediscovers Hyman Minsky; ``Instability,'' he wrote, ``is an inherent and inescapable flaw of capitalism.''...Minsky drew his own, far darker, lessons from Keynes's landmark writings, which dealt not only with the problem of unemployment, but with money and banking...Minsky argued that Keynes's collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff...Minsky spent the last years of his life, in the early 1990s, warning of the dangers of securitization and other forms of financial innovation, but few economists listened. Nor did they pay attention to consumers' and companies' growing dependence on debt, and the growing use of leverage within the financial system... Minsky...argued for a ``bubble-up'' approach, sending money to the poor and unskilled first. The government - or what he liked to call ``Big Government'' - should become the ``employer of last resort,'' he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else's wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder.

Boston Globe; Capitalism Failed.

Tue 2009-06-16 00:00 EDT

naked capitalism: On Good and Bad Financial Innovation

Bad Financial Innovation; good; naked capitalism.

Satyajit Das's Blog - Fear & Loathing in Financial Products Tue 2009-06-16 00:00 EDT

Satyajit Das's Blog - Fear & Loathing in Financial Products: Credit Default Swaps -- Through The Looking Glass

Satyajit Das's Blog - Fear & Loathing in Financial Products: Credit Default Swaps - Through The Looking Glass; ``The specter of banks, some of whom have needed capital injections and liquidity support from governments to ensure their own survival, offering to insure other market participants against the risk of default of sovereign government (sometimes their own) is surreal.'' ``much of what passed for financial innovation was specifically designed to conceal risk, obfuscate investors and reduce transparency''

Credit Default Swap; fears; financial products; loath; Looking Glass; Satyajit Das's Blog.

Tue 2009-06-16 00:00 EDT

naked capitalism: Some Musings on Financial Innovation

Martin Mayer ``the whole purpose of the innovation is to get around the existing regulation''; John Maynard Keynes `` When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.'' Yves: ``ncreasing the liquidity of credit risk, even assuming it worked as advertised, seemed guaranteed to mean that everyone would be more casual about assuming it''

financial innovation; mused; naked capitalism.

Mon 2008-06-30 00:00 EDT

Thomas Palley >> Demythologizing Central Bankers and the Great Moderation

abandoned commitment to full employment, asset price inflation and financial innovation, increased debt-financed spending; 2008-04-02

Demythologizing Central Bankers; great Moderation; Thomas Palley.

Sun 2008-06-29 00:00 EDT

Winter (Economic & Market) Watch >> eCONomIc SpLiT pErSonaLiTy and NeutEnron Bombs

Winter (Economic & Market) Watch >> eCONomIc SpLiT pErSonaLiTy and NeutEnron Bombs; "the Boyz looked at Enron as the model, spliced and diced it, and then calculated new and better scams under the guise of financial innovation (blessed by buffoons and sycophants like Alan Greenspan and Ben Beranake) and non-public markets (OTC and derivatives) in which to create even larger financial smoke and mirrors in which to loot."

economic; eCONomIc SpLiT pErSonaLiTy; Market; NeutEnron Bombs; watch; winter.

Tue 2008-06-24 00:00 EDT

naked capitalism: Stephen Cecchetti Touts Financial Innovation

naked capitalism; Stephen Cecchetti Touts Financial Innovation.

Thu 2008-03-27 00:00 EDT

naked capitalism: Robert Shiller Makes Bogus Defense of Financial Innovation

financial innovation; naked capitalism; Robert Shiller Makes Bogus Defense.

Fri 2007-09-07 00:00 EDT

FT.com print article

Questions and answers on a sadly predictable debt crisis, by Martin Wolf, Financial Times; credit expansion, financial innovation; irresponsibility in the core of the world economy

com print article; FT.