“Significant gaps in the basic framework of oversight over critical institutions” helped cause the financial crisis, Geithner told reporters. “A series of comprehensive reforms to create a stronger system, less vulnerable to crisis, with stronger protections for consumers and investors” will be hashed out with Congress, he said.
Part of his plan is to push banks to increase price transparency by adopting electronic trading systems for over- the-counter derivatives. Over-the-counter derivatives transactions are now typically conducted over the phone between banks and customers.
Geithner sent a proposal to Congressional leaders listing four main objectives: to protect against systemic risk by creating a more resilient market, improve efficiency and transparency, prevent manipulation and fraud and reduce risks to less-sophisticated investors, Geithner said.
“Some of the U.S. authorities have said we were pretty close to a meltdown and I actually think listed marketplaces with multilateral clearing are part of the answer to that question,” said Thomas Kloet, chief executive officer of TMX Group Inc., owner of Canada’s main equities and derivatives market. “I hope authorities don’t let go of that. I think they have to address that.”
Can A Free Marketeer Defend Regulating Derivatives?
(“You bet your bippy!”)
Well, Hernando de Soto does. The great Peruvian expert on building markets in underdeveloped countries points to the irony that our ultra-sophisticated Western market system has replicated everything that is wrong with a Third World informal economy: uncertainty about who owns what, uncertainty about who owes what, and uncertainty about who will or can enforce these ownings and owings.
Meanwhile, over at the Peterson Center, Adam Posen and Marc Hinterschweiger question whether the derivative explosion ever really helped the economy that much.
Clearly, growth in new financial products has outpaced fixed capital formation both globally and in the United States by a large margin. This has been especially true since 2006, when investment stagnated, but derivatives continued to grow at a rapid rate. There only seems to be a weak link, if any, between the growth of the newest complex—and now proven dangerous if not toxic—financial products and real corporate investment.
May 11, 2009
The net effect of derivatives on the system is probably not beneficial, Warren Buffett says.