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You are here: Home / Economics / Free Markets Solve Everything / Should This Be Surprising?

Should This Be Surprising?

by @heymistermix.com|  April 14, 201012:30 pm| 28 Comments

This post is in: Free Markets Solve Everything

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Blanche Lincoln’s proposal to trade derivatives on a public exchange is being called a “surprise” and “contrary to most expectations”.

I can’t see why it’s surprising that a Senator from a rural, poor state, who happens to be in the re-election fight of her life, would want to stick it to bankers and fat-cats. Hating bankers is a staple of rural populism, and the harder Blanche kicks Wall Street ass, the better she’ll do back home. The asses she needs to kiss belong to Wal-Mart and Tyson, not JP Morgan and Goldman-Sachs.

Of course, thanks to Blanche, derivatives may be saddled with the same system of regulation that currently haunts the stock market. That institution has become socialist nightmare, where it’s impossible for anyone to make a cent because of the straitjacket of government oversight.

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28Comments

  1. 1.

    Tim O

    April 14, 2010 at 12:34 pm

    I’m sure those rural folk are just clambering to jump into the derivatives market with all of their disposable cash from their high paying Walmart employment contract. How thoughtful of you Blanche!

  2. 2.

    colby

    April 14, 2010 at 12:37 pm

    I think some of the surprise comes from the fact that, so far, Lincoln’s response to the fight of her life has been to run to the RIGHT. But then, anti-banker populism doesn’t break down on Left-Right lines quite as easily as other issues. It seems like EVERYONE thinks they’re anti-banker…

  3. 3.

    ThatLeftTurnInABQ

    April 14, 2010 at 12:40 pm

    @Tim O:

    How thoughtful of you Blanche!

    I think you are missing the sarcasm in mistermix’s post. This is good news. Blanche has come out in support of a tougher approach to regulating derivatives than what Wall St. wants. Given how she rolled over for Big Insurance during the HCR debate, a lot of folks (myself included) expected the opposite from her, and given her postition on the Ag. committee, getting her on-board with regulation of derivatives is a big win for reformers.

  4. 4.

    Sentient Puddle

    April 14, 2010 at 12:40 pm

    If anything, the only real surprise here is that derivatives are regulated by the freakin’ agriculture committee.

    (Yes, I get why that’s the case in historical terms.)

  5. 5.

    ThatLeftTurnInABQ

    April 14, 2010 at 12:51 pm

    @Sentient Puddle:

    The Senate is desperately in need of reform, including the committee structure. Insofar as the Senate has any say in policy, we are running a 21st Cen. nation using a 19th Cen infrastructure, and not in a good way either. Either that, or force those bastards to use a horse and buggy to commute to work every day, ban them from airports and any other form of modern transit (e.g. the DC Metro), and give them circa 1900 medical care.

  6. 6.

    Ed Drone

    April 14, 2010 at 12:57 pm

    @ThatLeftTurnInABQ:

    … and give them circa 1900 medical care.

    AND 19th C. paychecks.

    Ed

  7. 7.

    liberal

    April 14, 2010 at 1:03 pm

    Problem is that, IIRC, Yves Smith at nakedcapitalism.com has shown that at least for CDS, exchanges won’t work, even if the proposals are certainly well-intended.

  8. 8.

    EconWatcher

    April 14, 2010 at 1:05 pm

    I hate to sound naive. But it’s also possible she knows her goose is cooked in the election (which it seems to be), and wants to do the right thing on the way out. Just sayin’.

  9. 9.

    The Moar You Know

    April 14, 2010 at 1:09 pm

    Problem is that, IIRC, Yves Smith at nakedcapitalism.com has shown that at least for CDS, exchanges won’t work, even if the proposals are certainly well-intended.

    @liberal: The problem is not how they are handled; the problem is that they exist at all.

    Remember, a “derivative” is simply a method of insuring a financial asset that is so risky that a regular insurance company won’t touch it at any price.

    Proceed from there to figure out how they ought to be handled banned.

  10. 10.

    ThatLeftTurnInABQ

    April 14, 2010 at 1:10 pm

    @liberal:

    IIRC, credit default swaps are no more or less than insurance contracts in disguise, which means they shouldn’t be lumped in with other derivatives. Treat them as insurance contracts in all respects, and regulate them accordingly. The big problem is unwinding the swaps that have already been written. IIRC most of those have fairly short terms, on the order of several years or less. Does that mean we can ban the issuance of new credit default swaps outside of a regulated insurance framework and simply let the existing set of CDS’s age until they expire? Or does that not work from a legal standpoint – i.e. is it impossible to write legislation that bans new contracts while grandfathering in the old ones?

  11. 11.

    rootless-e

    April 14, 2010 at 1:11 pm

    @EconWatcher: wow. that’s generosity of spirit taken to a height.

  12. 12.

    catclub

    April 14, 2010 at 1:14 pm

    @EconWatcher: #8

    You might be naive indeed. If Lincoln knows she will lose, she will maneuver for the next job – which might be as lobbyist for big banks and insurance Co’s. So the doing the right thing mode remains puzzling.

    I think that she is trying to win by appearing populist, rather than doing the right thing.

    Perhaps the Shadow knows.

  13. 13.

    Montysano

    April 14, 2010 at 1:15 pm

    The fact that there’s controversy over whether a multi-trillion dollar shadow banking industry should be transparent and subject to regulation is just a sign of how enslaved we are to these fuckers. Polish the guillotines.

  14. 14.

    EconWatcher

    April 14, 2010 at 1:20 pm

    This blog is so full of world-weary, hardboiled, cynical souls….

  15. 15.

    David in NY

    April 14, 2010 at 1:26 pm

    There’s a view that Blanche is doing the usual, trying to appear a populist, while leaving loopholes that will allow business as usual to continue. In this case, she has many exceptions to the class of those who are regulated (banks are, many other entities are not) and the administration at least thinks that this will deprive the legislation of real force.

  16. 16.

    Sentient Puddle

    April 14, 2010 at 1:26 pm

    @ThatLeftTurnInABQ: I absolutely agree that the Senate needs reform, but this sort of reform is basically common sense. They need to realize that derivatives these days have moved way the hell beyond agriculture futures, and kick the authority off to…banking, I guess (that committee still doesn’t feel like a perfect fit, though).

    A simple matter of acknowledging that we’re no longer in the 1750’s, really.

  17. 17.

    Bob L

    April 14, 2010 at 2:05 pm

    @EconWatcher: More likely a little of both; it easy to do ideas you want that a popular with you voters.

    Considering the Blue Dogs and the Republicans come mainly from the banker hating rural parts of the country this banking reform may stand a chance of being effective.

  18. 18.

    liberal

    April 14, 2010 at 2:10 pm

    @The Moar You Know:

    I agree with that. In fact, IIRC, Y.S. does too. The only reason she doesn’t think they should be eliminated immediately is that it would somehow wreak havoc with the ones already in existence, doing further damage. Instead, she favors getting them out of existence in a planned fashion.

  19. 19.

    liberal

    April 14, 2010 at 2:16 pm

    @ThatLeftTurnInABQ:

    Treat them as insurance contracts in all respects, and regulate them accordingly.

    First, as it appears you might already know, they’re not really insurance contracts. They appear to be, but they require far less in terms of capital behind the “insurance,” and related things. (E.g., real insurance, you have to have an insurable interest.)

    Second, it’s not clear to me that “true” insurance in the financial world hasn’t been abused, also. Here’s commenter ruetheday at nakedcapitalism:. Note he refers to non-CDS guarantees:

    MBS, CDOs, and other forms of securitization are not the core problem. The problem is the concept of “credit insurance”, that seems to be required to make securitization work. It takes three primary forms – monolines, CDS, and the implicit (now explicit) government guarantees from the GSEs.

    Think about it. In any fixed income security, the interest rate is supposed to reflect (among other things) credit risk. In theory, the cost of a credit insurance vehicle should be exactly equal to the risk premium attached to the interest rate in its absence. The fact that credit insurance exists means it’s cheaper than the interest rate risk premium. Unless there is some sort of information asymmetry or economy of scale that a monoline or a CDS protection writer has over THE ENTIRE BOND MARKET, there is no reason for this to be the case. The existence of credit insurance is predicated on the underpricing of risk, furthermore it ENCOURAGES the underpricing of risk.

  20. 20.

    liberal

    April 14, 2010 at 2:18 pm

    @Montysano:

    Polish the guillotines.

    Um…what if we prefer lampposts?

  21. 21.

    Tim O

    April 14, 2010 at 2:19 pm

    @ThatLeftTurnInABQ: I stand corrected after reading the article more closely. Thanks.
    (Go Halter!)

  22. 22.

    TeeJay in AR

    April 14, 2010 at 2:20 pm

    This was a surprising move on her part. The derivatives she was interested in were things like corn futures, that farmers use as a hedge against a bad crop. The banks and it, was assumed, farmers wanted less government interference in this area. That a conservative Senator from a farm state facing re-election says she’s willing to take on both banks and farmers is surprising.

    This may well come back to bite her in the general election, but her primary opponent has been gaining ground from the left, and Sen. Lincoln has never been one who plans more than 10 minutes ahead politically.

  23. 23.

    Jimmm

    April 14, 2010 at 2:28 pm

    The surprise is that she might actually think first about the people in her state, rather than the big companies that she will likely hit up for a job after she loses reelection in November.

  24. 24.

    DougJ

    April 14, 2010 at 2:50 pm

    I agree, punching bankers is good politics.

  25. 25.

    Martin

    April 14, 2010 at 3:12 pm

    Actually, you can make a FUCKTON of money in the derivatives market if you know what you’re doing, and you can do it with relatively little capital. I’ve turned $5,000 investments into $100K in weeks (I’ve also turned $5,000 in $0 in equally short periods). Can’t do that on the stock market.

    But for those using derivatives as a hedge (and they are very good in that role, used properly) then the regulation won’t change much. Its only the speculators that will get hit, and well, fuck them (and I say that as someone who is in that category, albeit very small scale).

    So yeah, the regulation is LONG overdue. And the dynamic here is very interesting having followed health care. Unlike that fight, the Democrats are moving left everytime the GOP goes after them. If the Dems are smart about this (stop laughing) they stand to win big here because the broader public is entirely on their side.

  26. 26.

    Linkmeister

    April 14, 2010 at 3:19 pm

    As an aside, I want to applaud mistermix for his spelling accuracy. If I had a buck for every time I’ve seen a restraining coat spelled “straightjacket” I’d be a wealthy wealthy man.

  27. 27.

    Hal

    April 14, 2010 at 3:25 pm

    The only Blanche I care about is Blanche Devereaux.

Comments are closed.

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  1. JABbering Stooge :: Oh, sure. NOW you’re a populist. :: April :: 2010 says:
    April 15, 2010 at 9:26 am

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