Wednesday, April 21, 2010
Untangling the bets that snagged Wall Street
This is a good article relating to what we have discussed in class this week. It briefly summarizes how the SIVs or derivatives multiplied the effect of the declining housing market. The rest of it focuses on possible new regulations that are aimed at preventing a similar crisis in the future. The main idea is to have more transparency on derivative products and even possibly have them traded on an exchange.
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There were many provisions to to regulate derivatives. one of them was they require all dealers in derivatives to register with federal regulators.
ReplyDeleteThey also force many derivatives to pass through a third-party middle man, or "clearinghouse," to stop the domino effect when these things fail.
This is a really good real example of things we've discussed in class. They have already found out that the bad asset, the financial derivatives are dangerous, and it was directly demonstrated in the financial crisis. But, the lapping policy process is still procrastinating it and they are still discussing whether they need to regulate or not. This is a vivid example of lapping active policy. Also, what they are discussing is really interesting. The need on policy and financial market to be more transparent is a really important request. Because of the nontransparent market, buyers couldn't know what they are really buying and could not judge the risk of the derivative product. But at the same time, transparency is also a so abstract concept which is hard to define and to legalize. In the article, it also mentioned the discussion on regulating the derivative. I think this is a not so good point. In modern financial market, the derivative is a kind of necessary product which levitate the level of modern financial market and has a huge potential market, and it is a kind of "freedom" for people to choose. Although because of the overuse of the creation of derivatives, many of them are harmful. What we need to do is to find ways to define it and prohibit those harmful ones.
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