Nassim Taleb on EconTalk

Smart guy Nassim Taleb talks about the financial crisis and the systemic fragility that led to it in this illuminating interview.

[EconTalk]

SEC Officials Busy Wanking While Economy Collapsed

Wonder how Bernie Madoff, AIG, and Goldman Sachs were able to pull billion dollar scams right under the noses of regulators? The SEC was obviously pre-occupied.

The investigation, which was conducted by the SEC's internal watchdog at the request of Sen. Chuck Grassley, R-Iowa, found 31 serious offenders over the past two and a half years. Seventeen of the offenders were senior SEC officers with salaries ranging from $100,000 to $222,000 per year.

Eight Hours a Day Spent on Porn Sites

One senior attorney at SEC headquarters in Washington spent up to eight hours a day accessing Internet porn. When he filled all the space on his government computer with pornographic images, he downloaded more to CDs and DVDs that accumulated in boxes in his offices.

An SEC accountant attempted to access porn websites 1,800 times in a two-week period and had 600 pornographic images on her computer hard drive.

Another SEC accountant attempted to access porn sites 16,000 times in a single month.

In one case, the report said, an employee tried hundreds of times to access pornographic sites and was denied access. When he used a flash drive, he successfully bypassed the filter to visit a "significant number" of porn sites.

The employee also said he deliberately disabled a filter in Google to access inappropriate sites. After management informed him that he would lose his job, the employee resigned.

A similar SEC report for October 2008 to March 2009 said that a regional supervisor in Los Angeles accessed and attempted to access pornographic and sexually explicit Web sites up to twice a day from his SEC computer during work hours.

The SEC is supposed to be there to protect us from financial trickery, but failed. Now congress is telling us that all we needed was more regulation. Brilliant.

Glenn Reynolds of Instapundit said it best:

WHEN THE PRIVATE SECTOR FAILS, THE SOLUTION IS MORE GOVERNMENT. WHEN THE GOVERNMENT FAILS, THE SOLUTION IS MORE GOVERNMENT.

[via Instapundit]

Financial Reform is a Cruel Joke

Obama is gearing up for another congressional battle, this time over financial reform.

Instituting a system to ensure that “American taxpayers are protected in the event that a large firm begins to fail.”

Imposing the so-called Volcker Rule, named after Paul A. Volcker, the former Federal Reserve chairman who proposed limits on the freewheeling trading and risks taken by banks.

Setting new transparency rules for derivatives “and other complicated financial instruments.”

Assuring “strong consumer financial protections.”

Instituting “pay reforms” to give investors and pension holders “a stronger role in determining who manages the companies in which they’ve placed their savings.”

In many ways, he is trying to protect people from their own bad decisions, which in my opinion makes it more likely that they will make those bad decisions.

Obama is also trying to reign in the derivatives markets that allowed the mortgage backed securites to grow and spread so quickly and so far.

All of this seems logical and fair, however it is not real reform. Financial giants still hold all the cards, because they still have access to the Federal Reserve.

It may interest you to know that banks are currently borrowing from the Federal Reserve at 0.5% interest, then using that money to buy Treasury bills, which pay 3%. You read that correctly. Our government has set up a system whereby banks can make money without lifting a finger using the Fed's money machine.

Why would our government allow this practice? The answer is simple. The Fed prints the money, lends the money to banks, then the banks lend the money to the government via T-bills. The government is borrowing against the dollar, against the wealth of the American people, and they are laundering their dirty deed through banks, while paying a 2.5% premium for the laundering service.

Congress is not interested in real reform, and neither is Obama. The government needs the financial system to work the way it does, because without it, we wouldn't be able to run trillion dollar annual budget deficits. We have given tremendous amounts of power to the financial system, and we are surprised when they misuse that power.

This is not reform, this is shuffling paperwork. Real reform would require reforming or ending the Federal Reserve, but our leaders have no interest in killing the golden goose.

Real Solutions for Financial Reform

Doug Holtz-Eakin, economist and former Director of the Congressional Budget Office, shares his thoughts on banking reform.

Real solutions for real problems

The biggest threat to regulatory reform is always the lobbying of the financial services sectors to preserve their status. This time, Congress must rise above the lobbying scrum and deal with three big problems.

First, it must create a firm commitment to a bankruptcy procedure. Using a panel of bankruptcy judges to trigger resolution would be best.

If the Treasury Department, the FDIC or a systemic-risk council decides that traditional bankruptcy could be too disruptive, it should trigger a “speed bankruptcy” — in which equity holders are wiped out and debt is swapped for equity so bondholders become the new owners.

Second, provide consumer protection by building on the experience of the Federal Trade Commission. It has a specialized staff of lawyers and economists who understand the complex nature of credit products. Congress should augment FTC resources and emphasize investigation of true cases of fraudulent and deceptive practices.

Third, deal with the housing government-sponsored enterprises. The goal should be steadily to reduce the dependence of the mortgage market on the federal government.

Congress should slim down Fannie Mae and Freddie Mac’s role by removing their affordable housing mission, unwinding the retained portfolios and toughening the regulatory oversight of their guarantee and securitization lines.

I like the way this guy thinks. Now it's up to Congress to pass it, without getting caught up in partisan bickering. I'm not holding my breath.