This week Treasury Secretary Geithner utilized Rahm Emanuel's principle of not letting a crises go to waste in calling for federal oversight of "large" hedge funds, private-equity firms, and derivative markets in what could be the most sweeping changes since the FDR's 1930s. This "oversight" would include federal government power to seize and wind down ANY financial company big enough to destabilize the banking system. Pardon me for being a cynic, but these cats can't deliver mail at a profit; why should we believe they can effectively quantify risk within complex financial entities? These federal "search and seizure" powers of PRIVATELY capitalized entities is disconcerting. If these politicians had the understanding of economics and political will to let the market forces of failure and bankruptcy punish the incompetent and fraudulent managers by putting them out of business, much of this discussion would not be necessary. These tactics are of the fearmongering ilk utilized by the Bush administration in the context of Islamo-Fascist terrorism. The Obama Administration's "war on terror" is an economic, populist war. Scare the people into expanding government power, government spending, and government restriction on the rights of individuals and private entities.
With all that said, Geithner's proposal of setting up central clearinghouses for the credit swaps markets does have merit. With central clearing much of the "counterparty risk" which has been such an issue in this current situation with the credit default swaps products could be all but eliminated. Historically, this benefit has been illustrated with the successful trading of thousands of derivatives through exchanges with central clearing houses. I do know of objections from some exchanges' clearing members with respect to this issue, and the logistics of creating the credit default swap market are yet to be solidified, but the idea seems to be the most practical solution proposed up to this point. With the liquidity and market transparency that central clearinghouse/exchange trading would offer, all this federal oversight and seizure power would be unnecessary.
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