Crisis Economics: A Crash Course in the Future of Finance - Couverture rigide

Roubini, Nouriel

Couverture rigide

ISBN 10 : 1846142873 ISBN 13 : 9781846142871

Editeur : Allen Lane, 2010

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For the past half century, academic economists, Wall Street traders, and everyone in between have been led astray by fairy tales about the wonders of unregulated markets and the limitless benefits of financial innovation. The crisis dealt a body blow to that belief system, but nothing has replaced it.

That’s all too evident in the timid reform proposals currently being considered in the United States and other advanced economies. Even though they have suffered the worst financial crisis in generations, many countries have shown a remarkable reluctance to inaugurate the sort of wholesale reform necessary to bring the financial system to heel. Instead, people talk of tinkering with the financial system, as if what just happened was caused by a few bad mortgages.

Throughout most of 2009, Goldman Sachs chief executive Lloyd Blankfein repeatedly tried to quash calls for sweeping regulation of the financial system. In speeches and in testimony before Congress, he begged his listeners to keep financial innovation alive and “resist a response that is solely designed to protect us against the 100-year storm”.

That’s ridiculous. What we’ve experienced wasn’t some crazy once-in-a-century event. Since its founding, the United States has suffered from brutal banking crises and other financial disasters on a regular basis. Throughout the 19th and early 20th centuries, crippling panics and depressions hit the nation again and again. The crisis was less a function of sub-prime mortgages than of a sub-prime financial system. Thanks to everything from warped compensation structures to corrupt ratings agencies, the global financial system rotted from the inside out. The financial crisis merely ripped the sleek and shiny skin off what had become, over the years, a gangrenous mess.

The road to recovery will be a long one. For starters, traders and bankers must be compensated in a way that brings their interests in alignment with those of shareholders. That doesn’t necessarily mean less compensation, even if that’s desirable for other reasons; it merely means that employees of financial firms should be paid in ways that encourage them to look out for the long-term interests of the firms.

Securitization must be overhauled as well. Simplistic solutions, such as asking banks to retain some of the risk, won’t be enough; far more radical reforms will be necessary. Securitization must have far greater transparency and standardization, and the products of the securitization pipeline must be heavily regulated. Most important of all, the loans going into the securitization pipeline must be subject to far greater scrutiny. The mortgages and other loans must be of high quality, or if not, they must be very clearly identified as less than prime and therefore risky.

Some people believe that securitization should be abolished. That’s short-sighted: properly reformed, securitization can be a valuable tool that reduces, rather than exacerbates, systemic risk. But in order for it to work, it must operate in a far more transparent and standardized fashion than it does now.

Absent this shift, accurately pricing these securities, much less reviving the market for securitization, is next to impossible. What we need are reforms that deliver the peace of mind that the Food and Drug Administration (FDA) did when it was created.

Let’s begin with standardization. At the present time, there is little standardization in the way asset-backed securities are put together. The “deal structures” (the fine print) can vary greatly from offering to offering. Monthly reports on deals (“monthly service performance reports”) also vary greatly in level of detail provided. This information should be standardized and pooled in one place.

It could be done through private channels or, better, under the auspices of the federal government. For example, the Securities and Exchange Commission (SEC) could require anyone issuing asset-backed securities to disclose a range of standard information on everything from the assets or original loans to the amounts paid to the individuals or institutions that originated the security.

Precisely how this information is standardized doesn’t matter, so long as it is done: we must have some way to compare these different kinds of securities so they can be accurately priced. At the present time, we are stymied by a serious apples-and-oranges problem: the absence of standardization makes comparing them with any accuracy impossible. Put differently, the current system gives us no way to quantify risk; there’s far too much uncertainty.

Standardization, once achieved, would inevitably create more liquid and transparent markets for these securities. That’s well and good, but a few caveats also come to mind. First, bringing some transparency to plain-vanilla asset-backed securities is relatively easy; it’s more difficult to do so with preposterously complicated securities like Collateralized Debt Obligations (CDOs), much less chimerical creations like the CDO2 and the CDO3.

Think for a moment about what goes into a typical CDO. Start with a thousand different individual loans, be they commercial mortgages, residential mortgages, auto loans, credit card receivables, small business loans, student loans, or corporate loans. Package them together into an asset-backed security (ABS). Take that ABS and combine it with 99 other ABSs so that you have 100 of them. That’s your CDO. Now take that CDO and combine it with another 99 different CDOs, each of which has its own unique mix of ABSs and underlying assets. Do the math: in theory, the purchaser of this CDO is supposed to somehow get a handle on the health of 10m underlying loans. Is that going to happen? Of course not.

For that reason, securities like CDOs — which now go by the nickname of Chernobyl Death Obligations — must be heavily regulated if not banned.

In their present incarnation, they are too estranged from the assets that give them value and are next to impossible to standardize. Thanks in large part to their individual complexity, they don’t transfer risk so much as mask it under the cover of esoteric and ultimately misleading risk-management strategies.

In fact, the curious career of CDOs and other toxic securities brings to mind another, less celebrated acronym: GIGO, or “garbage in, garbage out”.

Or to use a sausage-making metaphor: if you put rat meat and trichinosis-laced pig parts into your sausage, then combine it with lots of other kinds of sausage (each filled with equally nasty stuff), you haven’t solved the problem; you still have some pretty sickening sausage.

The most important angle of securitization reform, then, is the quality of the ingredients. In the end, the problem with securitization is less that the ingredients were sliced and diced beyond recognition than that much of what went into these securities was never very good in the first place.

Put differently, the problem with originate-and-distribute lies less with the distribution than with the origination. What matters most is the creditworthiness of the loans issued in the first place.

Equally comprehensive reforms must be imposed on the kinds of deadly derivatives that blew up in the recent crisis. So-called over-the-counter derivatives — better described as under-the-table — must be hauled into the light of day, put on central clearing houses and exchanges and registered in databases; their use must be appropriately restricted. Moreover, the regulation of derivatives should be consolidated under a single regulator.

The ratings agencies must also be collared and forced to change their business model. That they now derive their revenue from the firms they rate has created a massive conflict of interests. Investors should be paying for ratings on debt, not the institutions that issue the debt. Nor should the rating agencies be permitted to sell “consulting” services on the side to issuers of debt; that creates another conflict of interests. Finally, the business of rating debt should be thrown open to far more competition. At the present time, a handful of firms have far too much power.

Even more radical reforms must be implemented as well. Certain institutions considered too big to fail must be broken up, including Goldman Sachs and Citigroup. But many other, less visible, firms deserve to be dismantled as well. Moreover, Congress should resurrect the Glass-Steagall banking legislation that it repealed a decade ago but also go further, updating it to reflect the far greater challenges posed not only by banks but by the shadow banking system.

These reforms are sensible, but even the most carefully conceived regulations can go awry. Financial firms habitually engage in arbitrage, moving their operations from a well-regulated domain to one outside government purview. The fragmented, decentralized state of regulation in the United States has exacerbated this problem. So has the fact that the profession of financial regulator has, until very recently, been considered a dead-end, poorly-paid job.

Most of these problems can be addressed. Regulations can be carefully crafted with an eye toward the future, closing loopholes before they open. That means resisting the understandable impulse to apply regulations only to a select class of firms — the too-big-too-fail institutions, for example — and instead imposing them across the board, in order to prevent financial intermediation from moving to smaller, less-regulated firms.

Likewise, regulation can and should be consolidated in the hands of fewer, more powerful regulators. And most important of all, regulators can be compensated in a manner befitting the key role they play in safeguarding our financial security.

Central banks arguably have the most power — and the most responsibility — to protect the financial system. In recent years, t...

Présentation de l'éditeur :

Nouriel Roubini was right ... Roubini warned that there was a monstrous bubble in the housing market and that the bursting of that bubble would cause much of the financial system to collapse. And so it has turned out, with even the most seemingly outlandish of Roubini's predictions matched or even exceeded by reality. How did he do it? For the first decade of his career, Roubini, 51, was a well-regarded but hardly renowned macroeconomist. When the Asian financial crisis struck in 1997, however, he created a Web page - the forerunner of his subscription service, RGE Monitor - that became the go-to place for anyone trying to keep up with the flood of news, data and economic analysis ... His warnings are based on sophisticated modeling and careful data analysis and have often proved right - not just in general but in detail .... Remember, people dismissed Cassandra's dire prophecies - until they all came true.' Paul Krugman, Time '100 Most Influential People in the Word 2009

À propos de cette édition

• Éditeur: Allen Lane
• Date d'édition: 2010
• ISBN 10: 1846142873
• ISBN 13: 9781846142871
• Reliure: Relié
• Nombre de pages: 368