Tuesday, May 18, 2010

Financial Legislation

Pete Davis raised some quandries in financial regulation. Specifically, it's hard to separate the "good guys" from the "bad guys."

As FLG has mentioned before, but he thinks all these dance around the primary issue -- leverage. Let's not worry about assigning and enforcing moral values, which is fraught with all kinds of the problems, and simply worry about the amount of leverage in the system. That is the systematic risk. Whether this guy buys a swap for a good or bad purpose is largely irrelevant. Or, more to the point, the cost of agreeing upon good and bad and then subsequently enforcing that determination in individual trades is in all likelihood far higher than the social benefit it would be meant to ensure. Better to just limit the overall risk.

The one exception, as far as FLG can see, is consumer protection. Although, he fears the extent of the so-called protection some experts think consumers need or want is fucking nuts. But the relative lack of information and sophistication between retail consumers and firms in the financial sector is enough to worry this blogger.

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