John Tsitrian, who knows more about high finance than I do, reads the Citigroup-written derivatives bill that Rep. Kristi Noem voted for a couple weeks ago and says, lighten up!
Yes, H.R. Bill 992 was crafted by the financial institutions that themselves are subject to its provisions, which is not necessarily the best thing, but to my way of thinking the only practical thing. Speaking as a 20-year veteran of market-making in stock options and aggressive trading and hedging of grain and livestock futures here in the Dakotas (10 as a member of the Chicago Board Options Exchange, another decade as a principle in a commodity futures brokerage firm), I understand the complexities of derivative-trading and doubt that there's much expertise in the field anywhere in the halls of Congress. The crafting of a bill as complex as this (try reading it, it's referenced in the CBO site I posted above) is best left to experts and then digested as necessary by congresspeople and their aides, who have plenty of time to consider and come to a reasonable understanding of the nature of the bill before they vote on it [John Tsitrian, "Memo to Wall Street Bashers: Lighten Up," The Constant Commoner, 2013.11.11].
But remember: Tsitrian still thinks Noem is compassionless and clueless. But he raises a good point: if we can't trust banking experts to write banking legislation, then whom can we trust to craft the complex laws necessary to regulate the complex functions of modern society?
Okay, I know I don't have the expertise or stamina to understand such things. My question is therefore much more basic, but completely serious: Do we need such complex financial systems?
I am one who is very distrustful of financial businesses. It does not seem truly productive to me, or safe, that our economic system is dominated by businesses that produce nothing, but turn the same money over again and again and again.
I want to be upfront in saying that I have a core distrust of The Banker that was well-earned in the 1970s-80s when farms dropped like flies, foreclosure sales were weekly, and farmers suicided in large numbers. Farmers were encouraged to take out huge loans and "go big" by their local bankers and FHmA reps, who were following the direction of Reagan's Ag Sec, Earl Butts.
Yep, I'm still bitter about that because I witnessed the social, economic, familial and psychic destruction first hand. Our local bankers were aggrieved too, but they ran out of choices. The Big Banks demanded it.
Sigh. I do not trust our financial system and I absolutely do not trust its operators. What they did to cause the Great Recession and their self-serving behavior in its aftermath has only reinforced that.
All that being said, I truly wish there were behaviors by the financial leadership that gave me a real reason to begin moderating my feelings. Trusting takes less effort than distrusting.
So back to my first question: Do we need such complex financial systems?
If the bill is too complicated to be understood by anyone who is not in the business, then it is too complicated to voted on as a law since those voting will not understand it. I never trust someone who says, "just sign this."
Deb, Earl Butz was Ag Sec'y. under Nixon and Ford. Reagan's Ag Sec'y was Californian Ed Lyng. The financial tornado that struck the farm belt during the late 70s-early 80s came from 2 fronts. First off there was President Jimmy Carter's embargo of grain sales to the Soviet Union because of its invasion of Afghanistan. The loss of that huge market (subsequently supplied by other countries that until then had not been much competition in the international grain market, i.e., Canada, Australia, Argentina and Brazil, who went on to become tough and perpetual competitors) caused American grain prices to collapse, a full recovery not occurring for nearly 3 decades. That price collapse dovetailed with the unprecedented run-ups in interest rates (I believe the prime rate reached 20%+ by 1982) that made borrowing by farmers next to impossible, causing the mass foreclosures that eventually occurred. Lax lending practices leading up to the debacle caused a lot of farmers to overextend, while others, generally living hand to mouth anyway, simply ran out of cash and maxed out their credit limits. As to our complicated financial superstructure, I wish it were simpler too, but you know what they say about wishes. I appreciate your comments.
Thanks John. I do know what they say about wishes.
My understanding is that the new financial schemes/tools/products (Not sure what they should be called.) of the 21st century are not necessary for capitalism to function, but were devised as a way to make more money from money. Do you believe that is true?
What I want to know is, would capitalism be functional without those schemes/tools/products? (Perhaps I ought to include the 1980s-90s in my time frame.)
By Tsitrian logic, bank robbers should write the laws on bank robbery. Experienced rapists should write laws on women's rights.
This all pretty much like 4 foxes and a chicken deciding what is going to be supper.
One elected official that stands out at least for me is Sen. Elizabeth Warren (D-Mass.) who has been a champion in consumer protection. She was a Harvard Professor who beat out Republican Sen. Scott Brown. It is Ted Kennedy's old seat.
Unfortunately this financial system is so corrupt with these firms and companies writing laws and funding elections it will be very difficult to bring about change. I hate to be so negative on this subject but it seems from what I've read that another collapse could occur eventually.
Look at how much time our elected officials in national office need to spend in fundraising. It's incredible and not only hurts their productivity but can compromise them.
Interesting article and comments here. Then I go over to the Dakota Press Release Outlet - formerly known as the Dakota War College - and catch up on all the Republican press releases. That's really all that blog offers anymore.
Deb, all derivative contracts "derive" their values from some form of underlying asset, e.g., a stock, a bond, a mortgage loan, a field of corn, etc. That the derivatives themselves trade in markets among speculators doesn't change that fact, so, no, I don't think it's all about making money from money. The crucial aspect in the value of a derivative is the value of the underlying asset. The horrendous collapse a few years ago came about because of misrepresentations of the values of millions of home mortgages that were the underlying support for derivatives that were chained to them. When the bubble-like nature of those mortgages was revealed, their associated derivatives went worthless. As those derivatives were such a substantial component in financial assets of countless banks and brokers, the cascading effect of paper losses were too much of a weight on balance sheets and the system came perilously close to collapsing. To me, it's still about the value of the assets that form the foundation for the derivatives markets. Yes, there's an important place in the financial world's superstructure for derivatives because their risk management nature invites more venture capital that might otherwise be gun-shy into markets, and economic growth is still very much tied to capital formation. But, as I've noted, a derivative is only as good as its underlying asset. This is where regulation and oversight should be directed--at making sure that representations of those tangible underlyings are realistic.
Okay John, I think I understand the basics of what you are saying about how derivatives work. So we need more regulation of derivatives to guard against unfounded inflation of value. Correct?
It seems to me that recent cuts in operating money for regulatory agencies has proven to be a bad idea. Do those in need of regulation pay part of the cost of the regulating? Do they have any authority whatsoever over the regulators? I think a law mandating a percentage of the income of derivative businesses go to a fund that funds the regulators.
I appreciate your efforts John, to teach me more about this. I generally find large-scale, complicated financial matters very intimidating. I have a math disability/anxiety. You are a very adept instructor. Thank you.
John and Deb, Deb, you don't have to worry about another
collapse happening!!! As soon as the interest rate is raised by the FED the collapse will happen!!! John ,you can talk derivatives and all that other crap you hear about and talk about but it all is basic ARITHMATIC as Mr. CLINTON said!!!
If you loan and borrow on the unknown you are going to get BURN'T!!!!!! The basics are addition and subtraction!!!! I am surprised at some of your comments!!!!!
War is too important to be left to the generals. -Georges Clemenceau
JT, civil society should NEVER leave writing bank laws and regulations to the banksters, anymore than the auto companies should write auto safety or fuel economy law and regulations, or generals should write national strategy and military procurement. After all were not the banksters and their apologists responsible for the recent deregulation and repeal of Glass-Stegall that clearly ushered in the conditions for the last economic panic.
Clearly the bankers have a place at the table writing bank laws and rules: TBTF banks, mid-sized banks, small banks, - along with S&Ls, consumer protection regulators, etc.
Paraphrasing military historian Micheal Howard who wrote of doctrine, 'the goal is not to get it right, for that is an impossible goal given the creative human nature to evolve and invent new circumstances and methods; rather the goal is to get doctrine [banking law] not too badly wrong.'
Glass-Steagall
douglas and roger....do you realize you have the same opinion on this matter?????
Glass-Steagal and breaking up the big financial institutions. Citibank and all these other big banks need to be cut up. Too big to fail is too big to exist in a real capitalist economy.
The problem with Tsitrian's prescription is that trading in derivatives is not limited to those who know what they are and how best to use them. Even those people who think they know how to use them showed us they didn't. When you have something like that, and no one can effectively regulate it, maybe it needs to be simply be banned (like ISL uranium mining).
Clanton, Roger isn't wrong all the time.
Bret Clanton,
When Doug displays an ounce of logic and reason, I can agree with him
We should work on the treaty with Iran.
It would be so much easier with the banking situation if we followed what our brothers and sisters do up der in North Dakota. They have a banking system that does wonders and keeps solvent, what a concept. Simple stuff. Here is also an entire country that practices the same stuff and it works. http://www.nationofchange.org/public-banking-costa-rica-remarkable-little-known-model-1384265843
Remember, candy is dandy and liquor is quicker, you can drink all the liquor in costa rica, ain't nobodies business but your own.