Saturday, March 22, 2008

Deregulation and the shadow banking system

Paul Krugman explains how we're partying like it's 1929, having forgotten all the lessons of the Great Depression and slowly but surely erased or circumvented all the safety measures put in place to try to keep another crash from happening again.

Wall Street chafed at regulations that limited risk, but also limited potential profits. And little by little it wriggled free — partly by persuading politicians to relax the rules, but mainly by creating a “shadow banking system” that relied on complex financial arrangements to bypass regulations designed to ensure that banking was safe.

For example, in the old system, savers had federally insured deposits in tightly regulated savings banks, and banks used that money to make home loans. Over time, however, this was partly replaced by a system in which savers put their money in funds that bought asset-backed commercial paper from special investment vehicles that bought collateralized debt obligations created from securitized mortgages — with nary a regulator in sight.

As the years went by, the shadow banking system took over more and more of the banking business, because the unregulated players in this system seemed to offer better deals than conventional banks. Meanwhile, those who worried about the fact that this brave new world of finance lacked a safety net were dismissed as hopelessly old-fashioned.

In fact, however, we were partying like it was 1929 — and now it’s 1930.


janfromthebruce said...

But the fed is saving the banks butts, and those investment houses, the same ones that wanted to fly with no parachutes on, so alas, shouldn't we let them a nice hard landing?

Like the new homeless people now setting up tent cities? No parachute for those ordinary hardworking folk who bought into the American dream of owning their own home and a piece of the good life.

To be simplicistic, shouldn't the bad guys pay for their greedy mistakes, and the victims get compensation???
You know you do the crime you do the time?

Paul is supporting the fed (middle and ordinary working folks tax dollars) prop up the rich and greedy. Last time I checked, they got theirs and more so.

There is something so terribly wrong with this distorted picture.

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