The financial markets are self-regulating, which makes them highly efficient. Well, that used to be how people viewed them before markets self-regulated themselves off of a cliff.
The current situation is grim and few deny it. The optimists are grumpy and the pessimists are walking around saying, "I told you so." With AIG sucking down money handouts like a drug addict, the magic word you here over and over is "regulation." There will be many prices to pay because of this economic situation, and regulation will definitely be one.
Financial companies like to flexible and quick moving. Regulation is the equivalent of hooking a dog to a leash. No matter how much the dog wants to go sniff the skunk, he can't get off the leash to do it. In the current market, most people would probably think that sounds like a good thing. There is only one problem. Will it actually work?
The financial field may often seem like a static one. After all, you've always been able to apply for a fixed rate or adjustable rate mortgage, right? While this is true, the financial market is actually a very flexible one. We need look no farther than the infamous subprime mortgage loan to see as much. In the 1970s, the idea of giving a person with a credit score of 570 a home loan would have been laughable. For much of this decade, however, it was standard operating practice. Why? The comfort level with risk changed over the years and a delusional belief in a housing market that would always appreciate tied the knot on the Faustian bargain.
So, if we regulate the financial and mortgage market this year, will it have the intended impact? Regulations will certainly have an effect on subprime lending and stated income loans with no documentation, but those are the products of yesterday. What about the products of tomorrow? Since we have no idea what creative lenders and borrowers will come up with, one would have to hazard a guess that much of the regulation being considered would be a kin to closing the barn door after the horse is off and galloping.
Credit default swaps are being fingered for a lot of the blame when it comes to figuring out why big investment institutions are failing. The incompetence of the managers of each company should be getting the focus, but who am I to say. Regardless, these deadly credit default swaps should have been heavily regulated, right? Therein lays the problem. You have to know two things to regulate a financial tool. One, it exists. Two, that it is a problem.
Credit default swaps were not even invented until 1994. Even then, they really did not become a major player in the markets until 2000. From that point on, there was never a real problem with them. Given this, why would someone regulate them? Even now, one has to wonder what the regulation would be. Credit default swaps are essentially a form of insurance against a loan failure. Are we not going to insure these now? Oh, we might trim down the type of loans that can be handled through swaps, but the swap market is valued at 54 trillion dollars. It is hard to see how regulation can really save the day!
Should regulation be introduced to the market to try to stop this situation from arising again? Sure. There should be some regulation, but going nuts will have the opposite effect. It is vital that we realize that tightening up the mortgage process, i.e., not giving loans to bad risks, will do far more to prevent an economic meltdown than creating regulations that strangle the market.
Stephen Teak writes about issues related to commercial loans for CommercialLoanStop.com.
0 comments:
Post a Comment