Streetwise Professor

April 30, 2010

Clinching the Case on the No Federal Assistance Provision: Gensler and Shapiro Support It

Filed under: Derivatives,Economics,Financial crisis,Politics — The Professor @ 9:57 pm

Jeremy Grant wrote a piece on the no Federal assistance of clearinghouses section of the Lincoln bill in today’s FT.  He noted that both Gensler and SEC head Mary Shapiro came out in support of this provision.  He also argued that their position is quite wrong.

That Gensler is wrong is no surprise; I’ve thrown out watches that were right more often than he is.

Gensler and Shapiro are jumping on the “no bailout” populist bandwagon.  Now I also oppose bailouts, but one of my main criticisms of this section, and the arguments raised in its support, is that they confuse the operation of the Fed as a lender of last resort against good collateral, and a true bailout which uses taxpayer money to protect creditors. It is a crucial distinction, and one that Gensler and others apparently either don’t understand or are deliberately ignoring.

I noted in my earlier post on this subject that Bernanke’s Fed has certainly created confusion by pushing the LOLR concept beyond all previous limits.  But that’s reason to put limits on the Fed generally; it’s not a reason to cut off CCPs and other crucial derivatives intermediaries from access to even legitimate LOLR functions.  Section 106 throws out the baby with the bath.  It prevents creditor saving bailouts, but also does not permit systemically stabilizing use of LOLR powers.

The IMF supports central bank lending to CCPs backed by good collateral.  The Europeans recognize it too: note that some European CCPs, notably Eurex and LCH.Clearnet SA (the French part of LCH.Clearnet) have access to the ECB.

It’s important to recognize fundamental distinctions.  The Lincoln bill doesn’t.  Nor do its cheerleaders, Gensler and Shapiro.  This failure will have serious consequences if the provision becomes law.

It’s also interesting to note that on Monday Gensler refused to come out one way or another on the provision. In fact, he was so evasive that he even acknowledged that he was not answering the question.  What changed between Monday and Wednesday, when he said he supported the Lincoln provision?  Orders from on high?  Or a calculation on the direction of the political winds?  (Note that I exclude reasoned consideration of the economic issues from the possible explanations.  Why waste time on sets of measure zero?)

[Added bonus from the last link: Gensler Metaphor Alert!:

“Just like a street light protects you from dark and dangerous highways, we need something to protect us from the dark and dangerous market that is right now is OTC derivatives,” Gensler said.

Ever notice that Gensler appears to be really, really afraid of the dark?]

One last interesting story.  Senator Judd Gregg blew a gasket, accusing Gensler of a power grab:

CFTC Chairman Gary Gensler answered questions about the bill and its impact at the committee’s “mark-up” of the bill last week, which Gregg called an “affront” and a “pretty heavy sign” that he was leading the charge on the reforms.

“It’s trying to consolidate as much power as possible … in-house, and give the chairman of the CFTC basically massive authority over this market at levels never seen before,” Gregg said.

Gregg said Lincoln’s proposals, the bulk of which Dodd has agreed to merge with his bill once debate begins, are meant to penalize large players in OTC derivatives whose risky trades have been blamed for part of the recent financial crisis.

“I thought I’d woken up in Argentina in 1950,” Gregg said, describing his reaction to the Lincoln proposal.

“That bill is essentially a document that is written by people who do not believe in markets, do not believe in capitalism, and hate profit, and basically see … government as being the correct arbiter of almost anything that has to do with markets,” Gregg said.

Though I take pretty much anything any senator has to say with a huge grain of salt, I have to say that Gregg is pretty much on the money.  Yeah, the don’t cry for me Argentina thing is hyperbole, but the fact that the entire legislative effort is driven by people who do not believe in markets is spot on.  As is the assertion that Gensler is engaged in a massive power grab.

The sad things are that (a) he’ll probably succeed, (b) his agency is completely incapable of responsibly and effectively exercising those swollen powers (especially with Gensler at the controls), and (c) (a)+(b)=a future crack up that is appalling to contemplate.

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  1. Hi Gregg,

    Congratulations on your receiving the high honors from your fellow expert on Russia – La Russophobe!

    The two of you define what a real Russia-expert should be like.

    Allow me to use this opportunity to inquire as to why you would think La Russophobe keeps on deleting my post to that page and htreatens to ban me for posting it. Here is my post:

    “There are tens of thousands of anti-Putin bloggers in Russia, writing in Rusisan, who are every bit as heroic as Julia Ioffe. And how about the owners, editors, observers, reporters and journalists with the powerful radio Echo of Moscow and numerous Russian newspapers and magazines that are anti-Putin? They are all very heroic people. ”

    La Russophobe writes: “Your post was deleted because you commented in bad faith. Keep it up and you’ll be banned. Again. Why is it that you can’t respect our rules? Who owns this blog, you or us?”

    Why doesn’t she want to honor these heroic bloggers and journalists? Is it because they write in Russian? And what kind of rules forbid posts such as mine?

    Comment by RTR — May 2, 2010 @ 4:32 am

  2. 1. It’s Craig, not Gregg.
    2. Whatever. I don’t get in the middle of other peoples’ arguments. I barely have enough time to deal with my own.
    3. This is also a good illustration of the damned-if-you-do, damned-if-you-don’t point I brought up in an earlier exchange in which someone criticized me for not deleting LR comments on my site. Personally, I prefer to let people have their say, and let other people make their own judgments accordingly, rather than imposing my judgment.
    4. And to show that I can receive “high honors” from all sides, check this out.

    The ProfessorComment by The Professor — May 2, 2010 @ 8:57 am

  3. Sorry about mixing-up your name. I know how it feels.

    You wrote: “And to show that I can receive “high honors” from all sides, check this out.

    Yes. It says that you are “a fine writer, and every serious “Russophile” should at least hear out his trenchant criticisms of the Kremlin elites and the Kultur they preside over.” On the other hand, the rest of their review appears somewhat less positive: “His posts are bellicose and slanted, though eminently intelligent. His ideologized approach abounds in double standards. It is fine and dandy for the US to unilaterally pursue its national interests, but when Russia does likewise, it is evidence of neo-imperialist revanchism.”

    Well, arguing with a highly intelligent and educated russophobe sounds like a lot of fun to me, espcially about double-standards. With your permission, I will try to stick around, provided there is enough action on your blog and I will get some response to my posts. I promise to behave responsibly.

    Comment by RTR — May 2, 2010 @ 7:27 pm

  4. @RTR–Given how AK/S-O and I are almost perfectly negatively correlated in our views, such adverse reviews are expected. I could quibble, but life is too short. I let my writing speak for itself.

    Double standards are in the eye of the beholder, oftentimes. The true test of a double standard is arriving at different conclusions when ceteris paribus. Arriving at different conclusions when ceteris ain’t paribus isn’t a double standard.

    I am not a Russophobe, BTW. You should look at my post from August 2008 (if memory serves), titled On Russophobia. Actually that’s what got AK/S-O really engaged here.

    There is, I think, a lot of action here. Sometimes I am a spectator at my own blog as private wars are waged in the comment section. Not everyone behaves responsibly, but I just let readers judge commentors by what they say.

    See you around.

    The ProfessorComment by The Professor — May 2, 2010 @ 10:16 pm

  5. I am having trouble getting my post published here. Let me break it up:

    Well, no two objects are exactly the same. No two situations are the same. For example, no two murders are the same. Yet, we have very general criminal laws that proscribe how to deal with murders. And when under similar circumstances, one criminal is sentenced to death, while another is set free, people talk of double standard.

    And when Putin persecutes Khodorkovsky for “oligarch” economic crimes, while giving huge favors to Abramovich – that’ s double standard, isn’t it?

    Comment by RTR — May 2, 2010 @ 11:48 pm

  6. Similarly, when one reads the following pearls of “justice” and “wisdom” form Western leaders, one can’t help but see double standard:

    In August 2008 during the Georgia-Ossetia-Russia war. George Bush, Condoleezza Rica and other dignitaries solemnly invoked the sanctity of the United Nations, warning that Russia could be excluded from international institutions “by taking actions in Georgia that are inconsistent with” their principles.

    Comment by RTR — May 2, 2010 @ 11:50 pm

  7. In August 2008 during the Georgia-Ossetia-Russia war. George Bush, Condoleezza Rica and other dignitaries solemnly invoked the sanctity of the United Nations, warning that Russia could be excluded from international institutions “by taking actions in Georgia that are inconsistent with” their principles. The sovereignty and territorial integrity of all nations must be rigorously honored, they intoned – “all nations,” that is, apart from those that the US chooses to attack: Iraq, Serbia, perhaps Iran, and a list of others too long and familiar to mention. The junior partner joined in as well. British foreign secretary David Miliband accused Russia of engaging in “19th century forms of diplomacy” by invading a sovereign state, something Britain would never contemplate today./Noam Chomsky/

    Of course, the Western defence is that the cases of Kosovo, Iraq, Panama, Grenada etc – are all “unique”, while the case of S. Ossetia is “NOT unique” and extremely commonplace.

    Comment by RTR — May 2, 2010 @ 11:52 pm

  8. I also recall that back in year 2003, one Democrat Madeleine Albright spoke out against the upcoming Republican invasion of Iraq by pointing out that this would be “the first case in US history when USA went to war without an existing direct threat to US security”. Now, Ms. Albright is too young to know about various Spanish- and Mexican-American wars or World War I, but surely she should have remembered the attack on Serbia orchestrated in 1999 by the then US Secretary of State who also went by the name of Madeleine Albright. Of course, I also remember the Republican Party speaking out against Democrat Clinton helping “KLA narco-terrorists” in 1999, and the very same Republicans embracing the same KLA when they came to power.

    If these are not clear examples of double standard and hypocrisy, then what is?

    Comment by RTR — May 2, 2010 @ 11:52 pm

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