Buiter Provokes Wrath at Jackson Hole, Says Fed Too Close to Wall Street [Nakedcapitalism]
Go Willem Buiter! The London School of Economics prof and former Bank of England and European Bank for Reconstruction and Development official has been saying for some time that the Fed suffer from s “cognitive regulatory capture” and has been far too responsive to the needs of Wall Street. It’s been puzzling to watch his detailed, well argued criticisms go unnoticed, particularly when they have been offered at forums where one would think they’d be impossible to ignore (for instance, a conference co-hosted by the New York Fed where Buiter presented a pretty harsh paper on what he called the North Atlantic Financial Crisis).
Well, he finally seems to have gotten through, perhaps because he is forward enough to criticize Fed officials to their face at an event they are hosting. Or maybe it’s because the pattern of conduct he decries is so patently obvious that the key actors can no longer fool themselves.
When over-the-counter derivatives began to gain traction in the financial world, Wall Street insiders and industry regulators constantly proclaimed their virtues — and ignored their shortcomings.
Among other things, they argued that these paper promises would allow complex risk to be broken down into its constituent parts and redistributed to those who wanted and understood the exposure they were taking on.
In truth, no one really knew what it was they were slicing-and-dicing, what new risks were being created in the process, and where all this stuff was actually ending up.
Proponents also claimed that new age finance would make the financial system more resilient because risks would be disbursed far and wide, rather than being concentrated in a small number of institutions or portfolios.
Again, those who were allegedly in the know failed to take account of the fact that in a tightly-connected world, serious problems in one part of the system would invariably spill over and affect other parts.
We now know, of course, that many proponents of Frankenstein finance were clueless charlatans or greedy insiders creating smokescreens that helped facilitate a major Ponzi scheme.
[Worsening the Fallout, Financial Armageddon]
Freddie, Fannie Failure Could Be World `Catastrophe,’ Yu Says
A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China’s central bank.
“If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,” Yu said in e-mailed answers to questions yesterday. “If it is not the end of the world, it is the end of the current international financial system.” [China Expects Adequate Compensation for the Failure of Freddie and Fannie …. Or Else]
“It sounds like even the firms that aren’t in trouble are in trouble.” -Tom Wolfe