News digest

I have been so busy since last week that I didn’t have much time to write for this blog… And, to tell you the truth, I was almost shocked: barely any news on banks capital, regulation, monetary policy, etc, over the past few days. Sure, the ECB cut its rate by 25bp to 0.25%, but I’m not sure I should comment within the scope of this blog: I am still not convinced by such such a diverse monetary union as the Eurozone and find it hard to believe we can actually set a common interest rate for all country members within the union… Anyway, today I only wish to comment on a few articles published over the last few days.

A very interesting article published on SNL (subscription required) called Everybody wants to rule the world, including bank regulators, in which an analyst argued that “Banks are not only facing over-regulation. They are also emerging as a convenient channel through which regulators can extend their reach far beyond their legal writ.” You probably understand as well as I do how dangerous this is.

I found out yesterday that Bear Stearns liquidators filed a lawsuit against the three credit rating agencies for alleged manipulation of structured products’ ratings. They are basically arguing that, if ratings had been right, Bears Stearns’ hedge funds would not have collapsed. Blaming the rating agencies because…..hedge funds collapsed? We are not talking about simple retail investors here. We are talking about sophisticated investors. Aren’t hedge funds supposed to undertake their own analysis? Are they just blindly investing in various assets? If hedge funds managers and analysts did not believe in rating agencies’ ratings, why did they invest in those assets the first place? Or perhaps they indeed did not believe in those ratings and took on the risk on purpose. In both cases, we cannot blame the agencies for the lack of competence of those highly-remunerated hedge funds employees.

Yesterday, the FT reported that shadow banks had been among the biggest beneficiaries of the Fed’s monetary policies. I’ve already argued that it might well be a sign that real interest rates are too low (i.e. lower than the equilibrium natural rate of interest). As a result, regulators wish to regulate (of course) this segment of the financial system. My guess is that surplus liquidity would then shift to another less-regulated sector or asset class, as it always does.

A few days ago, I read in horror that Germany may start backing the financial transaction tax. A tax of 0.1% of the value of the transaction (as is proposed on cash instruments) would be a massive drain of wealth: just imagine what would happen to a newly set-up EUR100bn mutual fund (ok, no new fund would ever be of that size, but follow me just for the intellectual exercise). The fund has evidently to invest those 100bn on behalf of its clients, meaning they have to buy EUR100bn of assets. Taxing 0.1% off the total value of the transactions would mean…EUR100m to pay in taxes. This is EUR100m that EU states would withdraw from people’s savings and pensions. Bad idea.

In the Wall Street Journal, a Fed insider described how disillusioned he was from the Fed and QE: he ‘apologises’ to Americans (Scott Sumner comments on this) for QE’s bad or lack of effects. While I do not necessarily share everything he said, I also dislike the Fed’s large scale market manipulation.

On Free Banking, George Selgin criticised this Business Insider piece about airlines debasing their reward points. Reminds me of my own response to Matt Klein on the exact same topic a few weeks ago. No guys: those cases do not reflect free banking and private currencies.

Well, that’s all for the catch up.