Friday, July 1, 2011

Right on Floyd Norris

It is not often that I praise a New York Times article, but here goes. Floyd Norris's piece this morning on the European Central Bank's handling of Greek debt is right on. As Norris notes, all the ECB is doing is forcing private banks to roll over Greek debt and hold that debt at fictitious prices on their balance sheet. In effect, the ECB is forcing private banks to lie about the value of the assets on their balance sheets.

As Norris notes, lying about the values of your balance sheet assets was considered the great crime of 2008 that lead to the collapse of the US financial system. Now, regulators in Europe and the US are encouraging (forcing) private banks to lie about the value of their assets.

This is why regulation is such a joke and why the real crime is the enactment of Sarbanes-Oxley and Dodd-Frank. Regulators have never, ever uncovered anything of substance about our financial system. Where were they in the Madoff episode? Where were they in the Bear Stearns and Lehman Brothers collapses? It is a sick joke that Sarbanes-Oxley and Dodd-Frank will do anything at all useful for the American financial system.

Yesterday, Sheila Bair, FDIC Chairman, whose agency did nothing to curb the excesses of 2005-2007, weighed in, urging Congress to fund Dodd-Frank. She should be embarassed. Her agency is a poster child for regulatory failure and her picture should be at the top of the poster.

Regulatory agencies are mainly a depository to place people who likely can't find a job in the private sector. To justify their existence, they insist upon making companies devote ridiculous amounts of time complying with absurd regulations. Do such agencies avert catastrophic financial failures? No.

Never in world history have regulatory agencies averted a financial collapse. Watch what is going on in Europe today to see why. Far from helping avert a collapse, the ECB is taking a relatively small problem and turning it into a major catastrophe. Along the way it is forcing the private banks of Europe to lie to their shareholders about the value of the assets on their balance sheets.

The regulators are creating the next great financial collapse -- the collapse of Europe sovereign debt. Europe would be better off if there were no regulators at all.

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