Financial regulation: Top watchdog

Should the Fed take up the cudgel as America’s regulator-in-chief?

BARACK OBAMA’S government is using the firestorm over American International Group to press a priority of its own: new authority to take over any big, troubled financial institution and a watchdog to look for risk in the entire financial system. But the controversy has also created a new obstacle for those plans. The most logical agency to fill those roles had been the Federal Reserve, but political support for that idea may have been hurt by its role in the bail-out of AIG.

That is the view of Barney Frank, the powerful chairman of the House Financial Services Committee, who suggested in an interview on Thursday March 19th that “The Fed has taken a bit of a hit over this AIG issue.” He argues that the “political case for the Fed as systemic risk regulator is going to have be rebuilt, re-examined. It has not changed my personal view of the Fed as the best possible [candidate] but it has substantially weakened their political position.” ...

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[Source: The Economist: News analysis - Posted by FreeAutoBlogger]

The Madoff affair: Going down quietly

Bernard Madoff, history's biggest swindler, faces life behind bars

SURELY a drama this dark deserved a more explosive finale. A previous wave of financial fraud produced many an entertaining courtroom battle, featuring the likes of Enron’s Jeffrey Skilling and Tyco’s Dennis Kozlowski. But Bernard Madoff has robbed the world of such a catharsis, just as he robbed almost 5,000 credulous clients of billions of dollars. On Thursday March 12th he pleaded guilty in a Manhattan court to 11 charges, ranging from securities and mail fraud to money laundering and perjury. Together they carry a maximum jail term of 150 years, leaving the 70-year-old “Monster Mensch” all but certain to spend the rest of his life behind bars.

The fraud he masterminded was remarkable for its scale, longevity and the sophistication of its victims: hedge-fund founders, Swiss banks and movie moguls, as well as charities and small investors, some of whom put in their life savings. The charge sheet confirms that he ran a Ponzi scheme of unprecedented boldness, dating at least as far back as the 1980s. Mr Madoff claimed to achieve healthy, stable returns through a whizzy stock- and options-trading strategy. In reality, there was no trading for well over a decade. Money from new investors was used to cover redemptions for old ones. It was that simple and brazen. ...

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[Source: The Economist: News analysis - Posted by FreeAutoBlogger]

Conservative America: Right and wrong

Barack Obama is dispensing rapidly with his predecessor’s more conservative policies

IF ONE policy sealed the tie between George Bush's administration and conservative religious voters it was his ban on federal funding for human embryonic stem-cell research. On Monday March 9th Barack Obama overturned the controversial policy by signing an order lifting the ban on federal funding introduced in August 2001. The first veto of Mr Bush’s presidency, in July 2006, was used to reject a bill from a Republican-controlled Congress that would have loosened the restrictions. At that time Mr Bush said that harvesting embryonic stem cells crossed a moral boundary that “would support the taking of innocent human life in the hope of finding medical benefits for others”.

Scientists and a few Republicans (Nancy Reagan among them) fought vigorously against the federal-funding ban. The scientists argued that America would lose the edge in biomedical research to Europe; Mrs Reagan compassionately pleaded that stem-cell research could help to find a cure for Alzheimer's disease, which afflicted Ronald Reagan in his later years. ...

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[Source: The Economist: News analysis - Posted by FreeAutoBlogger]

World economy: What went wrong

The IMF blames inadequate regulation, rather than global imbalances, for the financial crisis

IN RECENT months many economists and policymakers, including such unlikely bedfellows as Paul Krugman, an economist and New York Times columnist, and Hank Paulson, a former American treasury secretary, have put “global imbalances”—the huge current-account surpluses run by countries like China, alongside America’s huge deficit—at the root of the financial crisis. But the IMF disagrees. It argues, in new papers released on Friday March 6th, that the “main culprit” was deficient regulation of the financial system, together with a failure of market discipline. Olivier Blanchard, the IMF's chief economist, said this week that global imbalances contributed only “indirectly” to the crisis. This may sound like buck-passing by the world’s main international macroeconomic organisation. But the distinction has important consequences for whether macroeconomic policy or more regulation of financial markets will provide the solutions to the mess.

In broad strokes, the global imbalances view of the crisis argues that a glut of money from countries with high savings rates, such as China and the oil-producing states, came flooding into America. This kept interest rates low and fuelled the credit boom and the related boom in the prices of assets, such as houses and equity, whose collapse precipitated the financial crisis. A workable long-term fix for the problems of the world economy would, therefore, involve figuring out what to do about these imbalances. ...

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[Source: The Economist: News analysis - Posted by FreeAutoBlogger]