Giethner's systemic risk plan

Bloomberg reports that:

U.S. Treasury Secretary Timothy Geithner said regulation of the U.S. financial system needs a broad overhaul to heal a crippling lack of confidence caused by the credit crisis.
Geithner’s proposals would bring large hedge funds, private-equity firms and derivatives markets under federal supervision for the first time. A new systemic risk regulator would have powers to force companies to boost their capital or curtail borrowing, and officials would get the authority to seize them if they run into trouble.

The administration’s regulatory framework would make it mandatory for large hedge funds, private-equity firms and venture-capital funds to register with the Securities and Exchange Commission, subjecting them to new disclosure requirements and inspections by the agency’s staff. The SEC would be able to refer those firms to the systemic regulator, which could order them to raise capital or curtail borrowing.

The strategy also would require derivatives to be traded through central clearinghouses.....

The Treasury yesterday sent Congress its outline for so- called resolution authority, allowing federal regulators to seize and wind down non-bank financial institutions. The Federal Deposit Insurance Corp. already has that power for banks.
Once registered with the SEC, large investment firms would also have to reveal to the agency -- but not to the public -- information about their trades and counterparties.

.... The decision on which firms should be labeled systemically important will be based on characteristics such as the company’s size, interdependence with the financial system, leverage and how much it relies on short-term funding.

My comment: so far, so good. We do need to deal with systemic risk. It is well to remember that in 1934 Irving Fisher described too much debt as being instrumental to a debt deflation such as occurred during the 1929-1933 Great Depression. The abiitity to monitor and curtail debt in the system is crucial to preventing another such meltdown in the future.

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NDD, I think you're getting

NDD, I think you're getting to the heart of the matter, and making clear the two apparent policy dilemmas facing Obama and Geithner: use the neoclassical approach of stimulus via increased debt (per Keynes); or take an approach more along the lines of Fisher, which I suspect is more akin to what Steve Keen might advocate, which is a serious debt reduction strategy, either by modified bankruptcies for these large systemic institutions, or by converting much of their debt to equity. See Bill Moyer's interview with William Greider:

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Debt reduction will ultimately happen

despite the mightiest efforts by governments to the contrary. The only question is, how drastic and disorderly the debt reduction will be.

Bush/Paulson, and now Obama/Geithner, have focused solely on supply issues (getting banks to lend), and have totally ignored demand issues (consumers are so indebted that we need them to borrow less and save more). Taking care of that demand issue means shifting society's favor from plutocrats to the average citizen. As we are seeing, that is not happening even under an allegedly liberal Administration.

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excellent summary of the situation

I don't think I've read anyone pointing out that this feed the Zombie banks is actually supply side economics and they are assuredly ignoring demand side and the realities the Zombie banks already ate the flesh of the middle class.

I also don't think I have read that demand side economics is a more "Populist" power shift politically as well.

Frame this comment for later use, it gives real insight into the big picture that I don't believe most "see".

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