bhide - a call for judgment; sensible finance for a dynamic economy (2010)

[...]... mischaracterizations—far removed from the realities of a well-functioning capitalist system—but understandable ones The nature of capitalism is difficult to grasp One reason is its relatively short, two-and -a- half-century history Adam Smith’s Wealth of Nations, Introduction 3 now regarded as a capitalist bible, was published before capitalism came into its own Another is its dynamic, evolving character Capitalism in... way or another, as a result of their exposure to the mortgage crisis.”20 The collapse of AIG, once an AAA-rated insurance giant, through its role in the CDS debacle is especially noteworthy A team at the banking behemoth, J.P Morgan, had invented CDSs in 1997 as part of a plan to create and sell securities based on loans the bank had made to large corporations: The team figured that if an insurer assumed... J.P Morgan would have to set aside less capital as reserves against the defaults of the loans Less capital would mean higher profits for the bank, and, for reasons that we will see later, minimizing the use of capital (aka taking on huge leverage) had become central to the extraordinary profitability of the financial sector AIG’s Financial Products unit (AIGFP) provided the insurance for J.P Morgan’s securities... mortgages and triggered a substantial portion of the increase in housing prices in the United States in 2004 and 2005 Great malfeasance was unnecessary to topple this system—although malfeasance and self-dealing were hardly scarce The mistakes and calculated carelessness of the few who mattered was enough Out of the Blue? An investigation that intends to forestall future disasters rather than merely assess... by a few individuals Edison brought forth a remarkable cornucopia—incandescent bulbs, motion pictures, and gramophones—from a small facility in Menlo Park (New Jersey, not California) with fewer employees than the typical Silicon Valley start-up Alexander Graham Bell had one assistant Such small organizations couldn’t quickly develop good products at affordable prices, so many inventions were, at the... accountability for long-run outcomes It has also promoted centralization, by allowing some institutions to capture a large share of the market Thanks to securitization, the mortgages that a financial company can originate aren’t limited by its deposit base or capital As long as mortgage securities can be sold, the sky is the limit Countrywide Financial, for instance, which was started in 1969, grew from a. .. gain: A small number of sugar growers, for instance, can raise the price everyone pays for sugar by lobbying for tariffs on imports This hostility toward more rules probably helps nurture the belief that capitalism is an anything-goes, practically lawless system I argue, however, that in a dynamic, decentralized economy, an expansion of the role of government is inevitable and two-sided: Technological advances... dollars of collateral from AIG Goldman Sachs was first in line, asserting “shockingly low prices” for the securities AIG had insured Cassano wanted to dispute Goldman’s valuations in court, but, before he could do so, he was fired By March 2008, AIG didn’t have the cash to meet Goldman’s collateral demands, “but that was O.K The U.S Treasury, led by the former head of Goldman Sachs, Hank Paulson, agreed... out forms In fact, no one now makes subjective case-by-case credit judgments Mortgages are made (and new mortgage products like option ARMs are designed) using statistical models that take little heed of the specific facts on the ground and are conjured up by a small number of faraway wizards The securitization and sale of mortgages has eliminated long-term borrower relationships—and the lenders’ accountability... create real needs for new rules, they also generate more opportunities for unwarranted meddling and a cover for rent-seeking It’s one thing for the Federal Aviation Administration to manage the air traffic control system, quite another for the Civil Aeronautics Board (b 1938, d 1985) to regulate airfares, routes, and schedules The construction of the Interstate Highway System may have been a great boon .