| | Merlin:
Gary Norton's arguments, in total, reading some of his other papers, seem to be a passioned argument to ultimately socialize the risk of that 'shadow banking system', in order to avoid future panics.
His implicit argument, to me, seems to go like this: we've reduced/eliminated panics in the 'normal banking' demand deposit world by way of FDIC insurance. The 'shadow banking' world (interbank transactions with large investers seeking totally risk free 'demand deposits' on one side, and banks trying to convert their bundled debt instruments into usable cash on the other), his assertion is, is an absolutely necessary(probably so)element of modern banking. If that element is necessary, it is still subject to panics by the 'depositors' and so, the way to eliminate those panics is the same way we eliminated panics in the 'normal' banking world, via 'insurance.'
But what is insurance? It is an informed bet placed by an insurer over many bettors. He accepts the bets, and pays off when he loses. Doesn't he? Or, is it, he wins when he wins, and he doesn't lose when he loses?
FDIC is such an insurer. Bets are placed, but when there are losses, no matter what the fine print says, the losses beyond premiums paid by all banks in total are ultimately backed by others, taxpayers.
And, we have freshly come to learn, so is AIG such an insurer, too big to let fail. When they win, they win. WHen they lose, they shed the loss onto others. Sweet.
What does 'collateral' mean, if when stuff happens, the thing we are ultimately asked to believe is that we cannot let the ephemeral nature of 'collateral' be the insurances necessary? At one end is, massive investors seeking risk free deposit of their assets, and accepting/trusting collateral for their 'deposits.' The nature of that collateral is supposed to be an element of their confidence in the banking system. But into this value-proxy Disneyland stumbles all kind of players attempting to game the game for their own leg-up agenda(including, but not limited to, the government itself with its own constructivist agenda), and when word of that no longer acceptable level of filth permeates the 'shadow banking system', then suddenly, the required element of trust in all that purposely 'informationless' collateral is suspect, leading to panic, leading to a drop in bonds as collateral value, leading to massive losses and a collapse of the banking system. His 'E. Coli. argument is very good; it may be only a small bit of E. Coli in the entire system, but when you have no idea where it is, then during a panic it is just panic.
And, what Gorton is arguing for, at least implicitly, is an acceptance of, an institutionalization of this idea of 'risk free' transactions, where in the still going to happen crevices, the offering of crap for value will be backstopped and tolerated by the full faith and credit of using other peoples money and and future generations credit.
Because we need -- he claims repeatedly -- the 'shadow banking system' -- and banking in this nation cannot exist without it, effectively transforming the entire nation outside of all that financial engineering into unwilling premium payers to cover the shed risk shenanigans of others.
However, the tribal cancer running loose in our economies is exactly the idea of risk shed onto others. It doesn't help those who end up with the consequence of the now easily accepted willy nilly risk, and far more importantly, it doesn't tune up and discipline the benefactors of all that shed risk.
When those who -accept- the risk are not at loss of that acceptance, then where is the incentive for them to even give it a second disciplined thought?
This is a terrible model for managing unavoidable risk in the universe, a real recipe for ruin, a race to the bottom.
It will create local eddies of favor for some brief moment of time, but systemic ruin.
But it is not a shock at all to hear complex arguments for the socialization of tribal risk coming out of the inbred Ivy League...
Still, his description of the event is very valuable interesting. I just have trouble with his implied conclusion/solution, and find it 180 degrees off.
What made me a little suspicious, is when he started off in one of his papers explicitly complaining about the 'political' nature of most explanations of the event. That is a dead giveaway that a con men might well be in the room.
That was also the moment that my hand reached to make sure my wallet was still there.
Indeed, his description of the event was not overtly political. But IMO, his implied solution was.
regards,
Fred
(Edited by Fred Bartlett on 4/25, 9:59am)
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