Tuesday, October 07, 2008

Divorced from Reality

The UN joins the call for greater regulation of the market.


The problem with our financial system is not with the lack of regulation. The problem is that the paper traded on the market is divorced from reality.

The mortgage backed securities don't reflect the value of the housing stock. They reflect loans backed by real estate ... they are a degree removed from the actual item. This degree of separation from reality allowed people to slip bad loans in the systems.

The stock market was brought to its knees by comic book regulations that allow unlimited shorting of stock. The market movers can inflate the number of shares on the market overloading the system with fantom shares. The short interest on the stocks I follow jumped from under 5% to up around 60%.

I suspect that half of the decline in the market this year can be attributed to brokers and hedge funds flooding the market with fake paper.

To fix the system, we need eliminate the regulations that allow insiders to inject fake paper into the system.

Common sense things solve the problem. For example, shorts must actually borrow the stock before they sell it. People who lend to shorts can't sell or vote in corporate elections until the shorter returns the stock.

As the real estate market is local, we need to get the grubby fat hands of the Federal Government and now the United Nations out of loans. Each and every effort made by the federal government to reinsure the mortgage market have failed. So, the feds need to stop that insanity.

The Feds and UN are too distant from the equities traded. Regulations at these high levels simply create a stage for catastrophic economic failure.

When local banks have to bear the risk of the loan, they don't make stupid loans.

It is possible that mortgages were a bad idea in the first place.

We also need new instruments to allow the people in a community to share in the development of equities in their community.

The last thing we need is more regulations. It was the capture of the regulatory regimes that allowed the ne'er-do-wells of the financial world inject their toxic paper into the system.

The market doesn't need more fluff from regulators. The market needs more of the hard fiber that only natural diet lends.

NOTE: On the page Shared Equity, I examine the difference between equity in businesses and equity in real goods and argue that while there may be a place for shorting in the business world, shorting a real estate equity would be poison.

No comments: