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OpenMarket: Banking and Finance

  • Why the Bailout Won't Help Money Markets

    October 2, 2008
    It will actually divert money to the Treasury from commercial lending. Naked Capitalism has more, concluding:
    When Paulson dumps out his 700 billion in treasuries it's going to be at the short end. That will drive up rates for short-term treasuries. This will obviously draw even *more* deposits into the treasury MMs. That means even less in the commercial MMs and thus less working credit, the eventual commercial MM product. Hence Paulson's billions remove working capital by competing for the deposits that could get used to make working capital loans. That 700 billion is going to go to fairly long-term mortgage securities. So Paulson's billions divert credit from working capital to long-term mortgages - from where it's most needed to where it's most wasted. Even if the giveaway...
  • Bailout Bill Is A Threat to Democracy

    October 2, 2008
    At least in its original form, the $700 billion bailout bill was unconstitutional because it gave the Treasury Secretary boundless discretion to buy, or not buy, bad loans at whatever suited his whims, without providing for judicial review.  More recent versions of the financial-system bailout bill may have added a little bit of judicial oversight (rendered almost meaningless by virtue of the minimal, vague, and conflicting statutory criteria they provide), but they have not changed the fact that the bill remains politically dangerous. If the bailout bill passes (as seems likely), businesses seeking to sell their bad loans will have a powerful incentive to ingratiate themselves with whoever is president, and whoever is the Treasury Secretary, by making political donations and engaging in...
  • Deregulation Didn't Cause the Financial Crisis, But It Might Help Solve It

    October 1, 2008
  • CDS's House of Cards

    October 1, 2008
    It's been called a ticking time bomb by Investor's Business Daily. CNNMoney asks if this will be the next disaster. Yet the Feds are delaying one key in bringing stability to our financial markets. As a $62 trillion dollar over the counter market, CDSs need an exchange or central clearinghouse to provide transparency and collateral requirements. CME (formed from the Chicago Board of Trade and the Chicago Mercantile Exchange) and the Clearing Corp (formed from 17 financial players including UBS and Goldman Sachs) have stepped up to the plate. Clearing Corp could have had a clearinghouse up and running within a week or so; however, the Fed has pushed Clearinghouse to obtain a...
  • Another bad bailout idea -- raising deposit insurance cap is regressive and counterproductive

    October 1, 2008
    As the Wall Street crisis has expanded, politicians are falling all over themselves arguing on behalf of the "little guy" against "fat cats." But in reality, the main elements of "rescue" plans receiving a bipartisan push would represent a massive transfer of wealth from little guys and gals to fat cats' pockets. First, there was Treasury Secretary Hank Paulson's $700 billion bailout the House defeated on Monday, but to be revived in the Senate as early as Wednesday night. Then there is the upper-income wealth transfer that will now be added as the cherry on top of this bailout: raising deposit insurance to bank accounts of $250,000 or more. According to the Associated Press, both Barack Obama and John McCain on Tuesday backed lifting the deposit insurance cap to $250,000 from the current $100,000 maximum. And Federal Deposit...
  • SEC Loosens Rigid Accounting Rules

    September 30, 2008
    Rigid mark-to-market accounting rules may have triggered the current financial crisis by artificially undervaluing mortgages and securities (making financial institutions appear insolvent).   Even the very government officials who have advocated those rules now hint that they will disregard them in valuing the government's own mortgages, in administering any bailout!  (This inconsistency undermines arguments for the bailout). The SEC today made federal...
  • The Market's Winners and Losers

    September 30, 2008
    The People have spoken. They have picked the Market over the Government to be the chooser of winners and losers. Here are the Market's choices for winners: 1. Those that live in their homes, versus those that purchased houses to be flipped (third letter). 2. Homeowners that purchased a house that they could afford with a 30-year fixed, versus the over-extended with an adjustable rate. 3. Small local banks that didn't make ARM loans with no money down, versus big ones with mortgage-backed securities. 4. Those that saved their money, versus those betting on the stock market. 5. Those who pay for their cars with cash, versus those who finance them. 6. Those who pay for their expenses with cash, versus those who run up credit card debt. 7. Those who save money for their kids' college funds, versus those who rely on loans. 8....
  • What Are Markets For?

    September 29, 2008
    There are all sorts of people today who normally talk about free markets but who have got themselves into a tizzy over the failed bailout. We need to get one thing straight - the bailout was the wrong answer to the wrong question. To begin with, the plan was merely postponing the inevitable, as a letter in the Wall Street Journal pointed out this morning:
    The lesson of past financial inflection points is that we must let the markets reallocate capital from less efficient to more efficient uses. The sad fact is that we need to go through a brutal process of resizing down our financial and real-estate industries. Actions to try to recapitalize doomed financial companies only postpone the day of reckoning, which will make matters worse as the Japanese learned in the 1990s.
    Secondly, we...
  • Republican Study Commitee plan now best viable alternative

    September 29, 2008
    The stunning defeat of the Hank Paulson's socialism-for-Wall Street bailout on Monday has just made planks of a pro-free market alternative much more viable. As Open Market has noted before, The Republican Study Comittee, a caucus of pro-market members of the GOP Congress, has presented such a plan that would be much more effective at stopping the contagion than the Paulson bailout, and many of its provisions would not cost taxpayers a dime. The RSC plan is chock-full of measures to remove barriers to economic growth and market-distorting subsidies. It would suspend capital gains taxes to put trillions of dollars of capital in the economy, and set Fannie Mae and Freddie Mac, which as CEI has documented were at the...
  • Bailout fails -- Move on to Mark-to-Market Reform

    September 29, 2008
    Oh, Happy Day! And it certainly is for all those who value freedom, responsibility and the true free market in which individuals are free to profit from their risks on the condition that they don't stick the rest of us with their losses. It's not hyperbole to say the Republican and Democratic backbenchers who defied both parties' leadership to defeat this $700 billion package of Wall Street socialism literally saved America. Whatever their reasons, this defeat (or rather victory for freedom), means that...

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