Watch Live: The Washington Ideas Forum 2014

Column: Financial patch and mend won't do

I'll come back to the Treasury's new proposals for regulation shortly. Meantime, this new column for the FT argues that tweaks won't do. Although, as I point out, what has already happened is pretty radical, even though the Treasury and the Fed are reluctant to own up to it:

For the moment, everybody is advocating patch and mend. The resistance to thinking big extends even to denying the significance of steps already taken. For example, a bright line has been drawn by the Fed, the Treasury and by others between liquidity support for stressed financial companies and the outright taxpayer-funded purchase of impaired assets.


In fact, despite efforts to disguise it, the Bear Stearns operation has already crossed that line.

The Fed is now the de facto owner of $29bn (£15bn) of mortgage-backed securities – in the sense that, upon liquidation of the assets, it bears any losses and keeps any profits. Getting with the times, it has even created an off-balance-sheet vehicle to manage these dud assets and is camouflaging this underlying reality behind Bear’s new owner, JPMorgan, and talk about “loans”. In all but name, the Fed has nationalised the Bear Stearns portfolio of mortgage-backed securities. If a big principle was at stake in this, it has already been flouted – just as with Northern Rock. Whether the cosmetics of the Fed’s move will subtract anything from calls for transparency in financial dealings (when carried out by the private sector, that is) will be interesting to see.

The sensitivity of the Bear Stearns operation, of course, is tied up with concerns about moral hazard. Repeat after me: you encourage recklessness if you protect people from its consequences. The debate about future financial regulation continues to be framed around this concept: safety nets imply supervision because of moral hazard. This maxim is true enough, but I doubt that it gets at the crux of the current problem.

You can read the whole column here.

Presented by

Things Not to Say to a Pregnant Woman

You don't have to tell her how big she is. You don't need to touch her belly.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

Things Not to Say to a Pregnant Woman

You don't have to tell her how big she is. You don't need to touch her belly.

Video

Maine's Underground Street Art

"Graffiti is the farthest thing from anarchy."

Video

The Joy of Running in a Beautiful Place

A love letter to California's Marin Headlands

Video

'I Didn't Even Know What I Was Going Through'

A 17-year-old describes his struggles with depression.

Video

Google Street View, Transformed Into a Tiny Planet

A 360-degree tour of our world, made entirely from Google's panoramas

Video

The Farmer Who Won't Quit

A filmmaker returns to his hometown to profile the patriarch of a family farm

Video

Riding Unicycles in a Cave

"If you fall down and break your leg, there's no way out."

Video

Carrot: A Pitch-Perfect Satire of Tech

"It's not just a vegetable. It's what a vegetable should be."

More in Business

Just In