Somewhere there needs to be an adult in the room. The finance industry will sell anything they can earn a commission on. And when a bank sells something, that does add a certain amount of legitimacy to it. Be it a mortgage, crypto, CDO, CLO, managed volatility fund, junk bond.
Regulators need to be the adult in the room. They need to think of the tail risks and protect people. It's a free market, want to buy crypto, or a managed volatility fund? Feel free, but not in a qualified account, and not with leverage from an FDIC insured institution. Banks should be able to make risky loans, we do ask them to be the underwriters and distributers of funds, however, we also bail them out when they create systemic risks. A fund manager purchasing these assets just needs to show superior yield for a few years in order to make enough money to be very rich for a lifetime. If an originator is selling a certain amount of assets into the system, those assets should have to be regulated. If they don't meet certain standards, force the originator to hold them on their balance sheet and have that count toward their capital requirements in an appropriate way, something riskier than standard equity.
Thank you Roger for calling out Crypto and 401(k)'s. Perfect example of a no brainer regulatory shut down. And good job by the SEC for hitting pause on fidelities plans to include it, it for now.
I suggest the author read rigorous scholarship on the financial crises rather than rely on simplistic regulatory anecdotes. Specifically, the author's claim that the "dispositive factor in America was poor regulation that permitted banks to lend to people who lacked the means to repay their loans" is indefensible. Due to the Community Reinvestment Act and HUD affordability regulations, banks were forced to make sub-prime loans to meet minimum lending requirements to households with below median family income. If banks failed to make enough of these loans, they would lose their Charter. Worse, government-backed Fannie and Freddie spent two decades lowering their lending standards and being a no-questions asked buyer of private mortgages. Banks knew they could offload poor mortgages to the GSE's that private participants without implicit government backing would not take. The idea that millions of mortgages were issued without any chance of being paid back because of a lack of regulation is laughable. I recommend "Fragile by Design" by Charles W. Calomiris and Stephen H. Haber of Columbia and Stanford. Fundamentally, sub-prime was created by government mandates and trillion dollar GSE's in a multi-decade regulatory push towards homeownership by the government.
Wrong. The Federal Reserve chair can only effectuate so much and has to live within confines of their congressionally approved mandate. Layering on further “regulation” as a false panacea would actually need to come from congress.
Excellent overview of the economic developments of the past few decades. I think there's more to unpack around the housing crisis and the banks. There's a reason that they didn't do due diligence around bad mortgage loans that has nothing to do with regulation but the insurance through Fannie Mae that relieved them of the market discipline that would have prevented many of them.
Somewhere there needs to be an adult in the room. The finance industry will sell anything they can earn a commission on. And when a bank sells something, that does add a certain amount of legitimacy to it. Be it a mortgage, crypto, CDO, CLO, managed volatility fund, junk bond.
Regulators need to be the adult in the room. They need to think of the tail risks and protect people. It's a free market, want to buy crypto, or a managed volatility fund? Feel free, but not in a qualified account, and not with leverage from an FDIC insured institution. Banks should be able to make risky loans, we do ask them to be the underwriters and distributers of funds, however, we also bail them out when they create systemic risks. A fund manager purchasing these assets just needs to show superior yield for a few years in order to make enough money to be very rich for a lifetime. If an originator is selling a certain amount of assets into the system, those assets should have to be regulated. If they don't meet certain standards, force the originator to hold them on their balance sheet and have that count toward their capital requirements in an appropriate way, something riskier than standard equity.
Thank you Roger for calling out Crypto and 401(k)'s. Perfect example of a no brainer regulatory shut down. And good job by the SEC for hitting pause on fidelities plans to include it, it for now.
Absolutely loving your content Roger, would you be open to allowing us to share it with our 60k+ audience as well?
I suggest the author read rigorous scholarship on the financial crises rather than rely on simplistic regulatory anecdotes. Specifically, the author's claim that the "dispositive factor in America was poor regulation that permitted banks to lend to people who lacked the means to repay their loans" is indefensible. Due to the Community Reinvestment Act and HUD affordability regulations, banks were forced to make sub-prime loans to meet minimum lending requirements to households with below median family income. If banks failed to make enough of these loans, they would lose their Charter. Worse, government-backed Fannie and Freddie spent two decades lowering their lending standards and being a no-questions asked buyer of private mortgages. Banks knew they could offload poor mortgages to the GSE's that private participants without implicit government backing would not take. The idea that millions of mortgages were issued without any chance of being paid back because of a lack of regulation is laughable. I recommend "Fragile by Design" by Charles W. Calomiris and Stephen H. Haber of Columbia and Stanford. Fundamentally, sub-prime was created by government mandates and trillion dollar GSE's in a multi-decade regulatory push towards homeownership by the government.
No doubt regulatory structure is important, but in the case of BB what is "impressive" is how irony shrouds him!
https://marcusnunes.substack.com/p/bernankes-noble
Your conclusion that crypto would be bad for 40l k’s is well taken. Hopefully, the right people will prevent that.
Wrong. The Federal Reserve chair can only effectuate so much and has to live within confines of their congressionally approved mandate. Layering on further “regulation” as a false panacea would actually need to come from congress.
Excellent overview of the economic developments of the past few decades. I think there's more to unpack around the housing crisis and the banks. There's a reason that they didn't do due diligence around bad mortgage loans that has nothing to do with regulation but the insurance through Fannie Mae that relieved them of the market discipline that would have prevented many of them.