Monday, March 31, 2008

High Finance

There is purported debate upon whether the Fed should take on or shed regulatory responsibility. The basic position for shedding regulatory supervision originates among Those who think the Fed should concentrate on areas over which they are most passionate (they have the greatest stake to be protected), while Those in favor of additional regulatory supervision and control tend to come from Empire-building elements from within the Fed itself. There is actually very little judgmental Review of the quality of the supervision itself. The trend I find alarming resides in the Consensus unity which is the current creed at the Fed, both on the Board, and conformity with the financial markets supervised. The actual power of the Fed consists of independent assessment of financial conditions, and to utilize a Referee’s whistle to insist on a return to banking fundamentals, if Conditions get too threatening; a Power easily lost if the economy begins to view the Fed as only the Publicist of the financial markets.

Mark Thoma appears to recognize the same dilemma as I perceive, yet is in support of massive Fed intervention. I disagree, basically because the financial troubles have been industry-developed and need to be reduced by financial market return to normal banking practice, and because the Fed is surrendering its Voice as the final financial Arbitrator. I have yet to hear a Reserve Board declaration that Derivatives have distorted the fractional Reserve process, creating funds only at the cost of instability within the financial formation. The Fed has not done the above, because of their lack of profundity in regulatory controls to handle the widespread use of malfeasant practice.

Brad DeLong and Tyler Cowen provide analysis of one aspect of the financial crisis–which is the Mortgage Crisis. Those who cannot read the economic import of their Statement can be eased by my probable misstatement of their Thought: Risk assessment valued the Risk at only half the actual risk when the Mortgages were issued, and now value the assets at about double the Risk than actually exists. Educated and Uneducated alike insist on assigning a Dollar value to such a Risk, though such an Evaluation relies more on unrealized future gains, than on actual invested funds. Translated, this means that there is more worry over loss of projected Profits, than there is doubt of actual losses incurred. No one mentions that the projected Profits may have been ridiculous in Design originally, given an evaluation of economic growth and its devotion to Housing; without acknowledging the absorbent capacities of other segments of the economy–especially Health and Consumer Retail. lgl

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