Wednesday, December 24, 2008

Regulations Caused This Crisis

If there is one thing we should learn from this crisis it is the danger of bad regulations and the unseen danger of unintended consequences. The Basel II regulations put a lot of power in the hands of the ratings agencies. These agencies are the only ones allowed "in the game" by law, I'm talking about S&P, Moody's, etc. Go to the link below for the full list of ten.

A Nationally Recognized Statistical Rating Organization (or "NRSRO") is a credit rating agency which issues credit ratings that the U.S. Securities and Exchange Commission (SEC) permits other financial firms to use for certain regulatory purposes.

Thanks to the REGULATIONS we ALREADY HAD, financial institutions were eager to separate their subprime debt into AAA securities and left over toxic waste. Unfortunately, those AAA securities weren't as safe as the ratings agencies said they were and became toxic themselves.

Regulations made a protected cabal of agencies free from other competition. Regulations allowed these agencies to affect the capital requirements of large financial institutions. AAA securities count toward capital more than BBB securities under Basel II.

Regulations caused this financial mess, they set the stage and regulators who were supposed to watch over the system failed to do their jobs.

Let's not pretend there were no regulations. The regulations we had didn't work. Government plans and wise thinking failed and turned out to be very stupid instead of wise. This is just another example of government failure and why we should not put our faith in government. Anyone who looks at the facts and past history can see that the government's record is incredibly poor, the government is incredibly incompetent no matter what party is in power. And for those who believe in the superiority of international regulators, Basel II was push upon us by "the international community". Below is an article with links to other articles.

The long-awaited implementation of the Basel II capital adequacy accord has been further threatened by US concerns over the results of the recently completed quantitative impact study (QIS4). The four US federal banking agencies (OCC, Federal Reserve, FDIC and OTS) have called for a delay in publishing an important notice of proposed rulemaking (NPR), from the summer to the autumn this year, to allow for further study.

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