Macro man has some interesting thoughts on a NEW Financial world.
Read the complete post at: http://macro-man.blogspot.com/2009/04/make-new-world.html
Today, however, he wishes to offer a few small suggestions as to how he would make a new financial world. The list is by no means meant to be comprehensive. nor indeed is every item on the list replete with detail. Still, you gotta start somewhere:
* Change the regulation and/or incentive structure of the ratings agencies. One of the fundamental flaws in the current (or is that prior) economic system is that the ratings agencies were paid by the sellers, rather than the buyers, of bonds and structured credit. They were therefore incentivized to help those sellers game the models to win the most favourable ratings. If, however, they were compensated by the buyers of bonds and structured credit, they should be incentivized to, you know, get things right.
* Migrate the CDS market to exchanges with position limits and heavy margining. This has obviously been suggested elsewhere, but bears repeating. In its worst form, the CDS market has a) added untold leverage into the system, and b) represented little more than Mr. Smith buying fire insurance on the houses of Mr. Jones and Mr. Wesson. If a fire (whether natural or via arson) consumes the entire street, the neighbourhood as a whole loses out, but Mr. Smith is quids in. What sort of incentive structure does this give Smith, and what is the impact on society at large?
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