The Sentinel

On a quick scan – looks fairly sound – rating agencies must have similar DNA to GoldieSacks, no matter how much they screw you around they bounce back smiling; CDSs should be banned – most of these derivatives are toxic as they serve capital and only capital – some big GURUs really messed up …. whatever the practicalities of a Sentinel, certainly a failure in the Governance of Financial Regulation around here – in fact, Irish crisis is essentially a failure of Governance all round …….

Looks like a paper worth slowly digesting ….

Many thanks for this post. It is an excellent contribution to the policy and regulatory debate and has relevance far beyond the US. It won’t be uncontroversial because it underplays the role of the Clinton administration (and the Blair governments in the UK) which sought to compensate for the decline in labour’s share of income by boosting credit availability – ‘let them eat credit’ as Rajan Raghuram has put it. The ‘all shall have houses’ policy was part of this.

But in most other respects the diagnosis hits the nail on the head. I have always thought the side-lining (and eventual forced resignation) of Brookesley Born, chair of the CFTC, by Messrs Greenspan, Rubin, Summers and Levitt added much fuel to the bonfire of financial regulation – and Prof. Levine gives it due weight.

I am less enamoured of the ‘Sentinel’ solution. I really don’t think there is a need for another agency. It would make more sense to trace the failings back to source – and this is the failure of the relevant Congressional Cttees to do their job properly. They did not lack the resources or the capability to retain the necessary expert advice and analysis or to conduct investigations to hold these regulatory agencies to account. The principal reason is that, as result of the financial contributions from, sophisticated lobbying and subborning of ‘useful idiot’ academics by the major financial instutitions, that they were compromised in their duty to protect the public interest.

While the political electoral process relies so heavily on corporate donations the protection of the public interest will suffer. To avoid opening up this can of worms, Prof. Levine seeks to use the Sentinel as a circuit-breaker. I think that tackling this can of worms can’t be postponed indefinitely in the US – or elsewhere.

Another aspect is that financial regulation is receiving great attention because the blow-out has been so serious and spectacular. But what evidence is there that policy and regulatory failures are not as prevalent in other sectors? It is possible to hide these failures for a long time (mainly because the impacts are less spectacular), but the impacts can be extremely damaging to the public interest. If Prof. Levine’s proposal were followed through we would need an army of sentinels.

That is another reason why my preference is to put the primary obligation on the politicians we hire to protect the public interest.

Oops! Herewith the link courtesy of the magic of Google.

http://www.npr.org/templates/story/story.php?storyId=122805666

As long as the US Supreme Court considers democracy as being best served by electing the candidates who can raise the most money, irrespective of source, any other proposals on governance are simply whistling in the wind.

It’s the old problem “sed quis custodiet ipsos custodes?”. The article itself is worth reading as a reminder of the damage done by the combination of rampantly profiteering credit rating agencies, apparently worsened by the intrduction of a Government standard (NRSRO) an insane derivatives market, where inexplicably the purchase of naked CDS is still allowed, and a Fed populated by the cronies and ex-colleagues of the shadow banking sector.

This quote from the WSJ of Feb 2010 is a salutary warning to those who believe that the system in the US is much better than ours:

““Nearly a year and half after the outbreak of the global economic crisis, many of the problems that contributed to it haven’t been tamed. The US has no system in place to tackle a failure of its largest financial institutions.
Derivatives contracts of the kind that crippled American International Group Inc. still trade in the shadows. And investors remain heavily reliant on the same credit‐ratings firms that gave AAA ratings to lousy mortgage
securities.”

I have a feeling that poor regulation has had a large part to play in the global financial crisis. I realise that I share this view with some unsavoury bedfellows, but will another layer of regulation only serve to create even more obscurity?

I would say enforce a strict prohibition on TBTF across the financial services sector and let capitalism take it’s natural course.

@David O’Donnell
“Agencies warn of rating blackout for risky EU states”
Good idea – do the governments pay them btw – maybe that explains a lot – AAA for those who can afford it and B- or none for those who can’t.