Today I am taking leave to help an old friend. My answers to repairing the damage caused by the financial crisis will have to wait another day. This weekend I am going to write the Chairman of the Fed, Ben Bernanke, a letter in which I will make the argument that in the 21st century, it is the responsibility of the Federal Reserve Bank to take control of the credit rating business as it relates to fixed income (bonds) ratings (the rating of equities can remain in the private sector), because credit, whether it be for a house, a car, a credit card or a student loan, is a form of money, and as Paul Volcker said to the Economic Club of New York and quoted in THE NEW YORKER*, “the Fed’s job is to act as custodian of the nation’s money.” When securitization became a fact of life, and mortgages, manufactured housing, car loans and credit card debt could be bundled and traded as an investment security, the Fed, in my opinion, lost influence over the expansion of the money supply. If the Fed is the “custodian of the nation’s money” then by definition the Fed is responsible for credit and most certainly the expansion of credit. In the world of structured finance debt obligations, the expansion of this kind of money is directly tied to the credit rating process. You do not have to have a Ph.D. in economics to figure this out, or win a Nobel Prize in Economics. If Paul Volcker is correct, then it follows that it is the Fed’s responsibility to influence/control the growth of the money supply and the expansion of credit. Remember credit in the 21st century is money. I rest my case.
*THE NEW YORKER (magazine) December 1, 2008, p.60.
Stay tuned.
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2 comments:
Jim Cramer has espoused frequently how the double and triple short ETF's decimated stocks, especially of the financial industry. He often sites the intensive work of an expert that writes at The Street.com who has intensive experience with derivatives.
All of his points seem to be valid, yet, with all his vocalizing, he can't get the SEC and Mary Shapiro to acknowledge or rewite the rules for these mechanism's of wealth destruction. These double and triple shorts have actually LOST money during the market demise. They are only used by daytraders to drive stocks down.
Just like the issue of bond ratings, why can't these powers in government see what is really plain.
What is wrong with our leaders, and more importantly, how can we change this unbelievable attitude to fairness.
Winslow, you know why things don't change. How many times have I written the mantra:
"MONEY TALKS AND BULL SHIT WALKS"
They got Paul Volcker not talking, and that is the most distrubing thing to me at this point.
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