How to Fix the Credit Markets

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How To Fix It
By Michael E. Lewitt
http://www.marketoracle.co.uk/Article4177.html

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In spite of claims to the contrary, the American economy has become increasingly unstable in recent decades. This phenomenon picked up momentum in recent years as financial markets focused on trading derivative financial instruments rather than cash stocks and bonds. Paradoxically, the very financial instruments designed to manage risk increase mark volatility. As the distance separating lenders and borrowers as well managers and stockholders increased, debacles such as the Enron and WorldCom frauds earlier this decade and, more recently, the subprime mortgage and structured credit meltdown of today became more common. By effectively reducing all financial instruments and measures of financial value to "one's and zero's" - by digitalizing value - Wall Street removed crucial checks and balances on financial behavior, which ultimately remains a human activity. The growing use of quantitative trading models led to a market dominated by traders directing money into companies about which they know little or nothing. This leveling of all economic values to indistinguishable signs did untold damage to economic actors' ability to distinguish valuable assets from worthless ones.

Eight Points to reconsider:

1. Financial Industry Regulation :
2. Wall Street Compensation :
3. Private Equity : The private equity business has resulted in the overleveraging
4. Financial Institution Leverage : investment banks to be leveraged to the tune of 30 to 1
5. Hedge Fund Leverage : Allowing unregulated entities ...
6. Quantitative Strategies : Quantitative investing has not only introduced an unhealthy amount of volatility ...
7. Short Selling : ...The SEC made a major error when it repealed the downtick rule last year...
8 Financial Triage: The magnitude of the unprecedented steps that the Federal Reserve and U.S. Treasury...

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1. 1. Financial Industry Regulation :

Im glad thats #1.

The heart of the current mess is that the credit industry has for too long operated without regard to whether the interest rates and penalty fees were affordable to the average consumer.

Since its obvious they dont understand that its time they were forced by regulations to understand it.

[A HERETIC I AM]

2. Ummm...I think you're missing it a bit there....

The heart of the current mess is that the credit industry has for too long operated without regard to whether the interest rates and penalty fees were affordable to the average consumer.

Not true. The "heart of the current mess" has more to do with the valuation of bonds than it does with interest and penalty fees being charged the average consumer.

The major problems of late in large part have to do with bonds that have a face value of $1000 being traded at $750 or $600 or lower or not at all because no one can figure out what their worth, thus dramatically lowering the values of the accounts that hold them. If you had an account made up primarily of bonds that was valued at $1,000,000 in October and you had borrowed against it (a margin loan) and that account is now valued at $600,000, you've got a problem. Multiply that very simple scenario by several factors of ten and spread it around the entire system and you start to get a handle on what's happened.

Since its obvious they don't understand that its time they were forced by regulations to understand it.

I absolutely guarantee the "they" understand it. How to fix the problem is the current struggle. Too much intervention is not a good thing. Too little is equally as bad.