By Matías Vernengo
The Commission of Inquiry into the Financial Crisis (FCIC) issued its report last week and concluded that the crisis was predictable and preventable. The FCIC claims that the authorities were lax and that ". The first example [Permissive] is the fundamental failure of the Federal Reserve to stem the flow of toxic mortgages that could be done by establishing conservative mortgage lending standards "The report is right to emphasize the failures of regulation and monitoring were critical to the eventual collapse, which incidentally is an installation charge Geithner, Bernanke and several other policy makers, even in key positions.
The central idea of \u200b\u200bthe FCIC report concludes that excessive leverage and lack of transparency were in the middle of the crisis. He also argues that the counter (OTC) derivatives contributed to the crisis, and that the decision not to regulate the derivatives market was a mistake. Finally, the report suggests "a kind of default swaps credit derivatives (CDS) of fuel pipe mortgage securitization." When housing prices collapsed, then the derivatives are fundamental to the crisis. The main conclusions of the report are not new or particularly controversial.
As Yogi Berra said: "You can observe a lot just watching" The problem with the report not so much that is stating the obvious, but actually misses the point of why derivatives were central to the crisis. The FCIC maintains that "the availability of capital and excess liquidity, the role of Fannie Mae and Freddie Mac (the GSEs), and the government's housing policy "were the three main causes of the crisis. In this view, derivatives are relevant only because they allow excessive expansion credit.
In fact, the limited set of recommendations in the final section of the report suggests that regulation is necessary to avoid excessive credit creation, and government housing policies should be changed. This obviously satisfies the supporting the current limited set of rules and prefer to avoid blame. As said Frank Partnoy, this is not a Pecora Commission (1).
The problem is that derivatives were central to the crisis by not only allow excessive borrowing in the period before the collapse of the housing bubble. It was the excessive speculation in the financial sector, not excessive household debt to buy houses, which led to the crisis. In fact, the vast majority of OTC derivatives in June 2008, on the verge of crisis, were (and remain) the interest rate swaps, not directly related to subprime loans, according to the Bank for International Settlements (BIS). It is assumed that trade in these instruments reduce exposure to risk, but it is difficult to defend this idea after the collapse of Lehman.
is important to note that the huge notional value of derivative contracts outstanding more than $ 580 billion in June 2010 reflects the fact that banks are still basically in the business of proprietary trading, ie speculative investment. This figure is incredible, more than 10 times world GDP, represents what was learned in previous crises such as debt. As noted by Jane D'Arista, Jerry Epstein, and other economists Experts for Stable, Accountable, Fair and Efficient Financial Reform (SAFER), speculation a much greater contribution to the bank's income (and losses) of bankers and the press have suggested, and their ability to do that is what should be severely restricted.
The European crisis is not disconnected from the fact that a large amount of collateralized debt obligations (CDOs) had been sold to European institutions, and that the holders of these bonds in many cases became insolvent. In Europe, of course, other problems associated with the structure of the common currency, but the outstanding debt (a typical problem in all of the debt crisis) is certainly important. And the debt burden means that the mechanisms that led to the earlier crisis remain. The fact that commodity prices are still influenced by the strong presence of speculators, As noted in the United Nations Conference on Development (UNCTAD) Trade and Development Report on Trade and Development, implies that the recovery in the periphery is also at risk.
The report misses the opportunity to promote further reform of the financial sector. Keynes believed, correctly, that those who disagreed with him that "... ranging from the belief that [he was] very wrong and a belief that [he was] saying anything new." And so will the readers of this report.
1 Pecora investigation was an investigation initiated on March 4, 1932 by the United States Senate Banking and Currency Committee to investigate the causes of the Wall Street crash of 1929. The name refers to the final, and the fourth chief counsel for the investigation, Ferdinand Pecora. NT.
Text of "The Financial Crisis Inquiry Report"
Original: Triple Crisis
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