According to one of my industry contacts, this article in the Fiscal Times has “created a lot of unwanted buzz” in DC. Because our betters find it so very inconvenient when reality intrudes on their fantasies.
The article focuses on the clearing mandate. It points out that the main effect of the mandate is to shift risk around, and concentrate it in CCPs. The risk doesn’t go away. It moves.
Let me think. Who was pointing this out five years ago? Modesty prevents me from naming names.
Clearing was sold-most notably by my bêtes noire Geithner and Gensler*-as a magic box that made counterparty risk disappear. This was a false claim, and arguably a dishonest one. I find it hard to believe that Gensler, for instance, really believed what he said. And the alternatives are ugly. He (and other advocates of the clearing mandate) either made arguments he (they) knew to be untrue, or was (were) utterly ignorant of the implications of the policies that he (they) was (were) implementing and supporting. Choices: (A) Idiot. (B) Liar. (C) There is no choice (C).
In reality, clearing mainly shifts around counterparty risk, and creates new risks, most notably liquidity risks.
All of these things were foreseeable, and foreseen-by some. Who were ignored, and at times reviled.
Why did this happen? It seems to me that in the heated days of the crisis, there was a desperation to find a solution. For a variety of reasons, most notably the fact that the major cleared markets dealt with the Lehman situation without much problem, policymakers seized on clearing as the panacea. And once they had done that, getting the clearing mandate passed became an end in itself. The decision had been made, all doubts had to be suppressed.
But where does that leave us? With the growing recognition that the alleged panacea was nothing of the sort. With the creeping recognition that the mandate has created a new set of risks. A new set of potential sources of systemic instability. So now policymakers are scrambling to address and to mitigate these problems.
It would have been so much better had these problems been anticipated, in advance, and the law drafted accordingly.
This is not Monday morning quarterbacking. I and others anticipated these problems at noon on Sunday. But we were left on the sidelines, while the geniuses called and ran the plays. We are going to be dealing with the consequences of that for years to come.
*One blessedly departed from government “service”, and the other blessedly about to do so.