Felix Salmon points out the real problem behind the argument behind the rant on CNBC. You would have a financial crisis without the Fed underpinning of the housing market. At the same time, Bankers love the safety and absence of Risk of Fed underwriting of mortgages to the point that they will not enter the mortgage field without such underpinning. The housing market is already collapsing because of this financial demand from the Private sector. Rick Santelli insists that it should be allowed to collapse, and then allow it to resurrect on its own terms. Felix states it would only bring a collapse without any resurrection. It is time for the Fed to get tough, and insist that Banks hold a certain amount of housing mortgage debt–like they insist on Reserves–or banks lose their ability to borrow from the Fed or other Fed-underwritten banks. It is one of those rare Cases where a regulation could achieve the desirable End.
The concept of regulating systemic risk contains mostly hot air, even if Michael Spence would advocate some form of it, simply because of its extensive, unknown nature. We can all identify areas of systemic risk, thereafter comes the problem of determining its magnitude and potential to act where. Any regulation of systemic risk will eventually consume the entire Market structure, and eventually not forestall the flare of systemic risk; it working to negate imbalance of Pricing in the financial markets–creating false value for material and Product. Systemic risk regulation simply drains the Markets of the bounce necessary to adjust Prices. Regulation will actually only increase the blowout magnitude of systemic risk.
I must take issue with this attempt, simply as an element in the Education field. My basic objection is not the idea, which could be worked quite beneficially, but the Private sector nature of the company. It would be an excellent idea if conducted by the college administrations themselves. The idea can be reworked to allow Students to reduce the Cost of their education by making excellent Grades. Colleges could adjust their tuition fees to where academically poor Students are forced to underwrite the achievement of superior Students, something which occurs later in life after college. Proper alignment would have A+ Students paying a minimal amount, and D or F Students partially underwriting even B Students. Such a Concept is harsh, but no harsher than the current economic environment on graduating Students. lgl