Does a Weakness in Banking Regulation Result in Economic Imbalances and Asset Bubbles?

"The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not."

John Kenneth Galbraith

There is a hypothesis that the financial sector in the US is oversized, and as such commands an excessive amount of capital allocation and overly influences GDP. We arrived at this conclusion ourselves by studying the percentage of the major stock indices represented by the financial sector, and the expansion of new financial instruments and forms of credit in the growth of asset bubbles.

There are obviously other explanations for this. One thing to bear in mind is that during the 1990's the financial sector mounted a determined, well-funded, and deliberate assault on the regulations that had been put in place in the 1930's to limit its ability to create exotic instruments and speculate in areas beyond the traditional role of commercial banking.

Financial Relativism: Fraud by Any Other Name 15 May 2008

The banks were central to the scheme from the inception as they spent years and many hundreds of millions of dollars to overturn Glass-Steagall to allow this coup de grâce to be delivered to all holders of US dollars.

PBS Frontline: The Long Demise of Glass-Steagall

There is an interesting area of study by Thomas Philippon of NYU, which has been written about recently by Zubin Jelveh in Odd Numbers and is starting to receive more widespread attention.

Its interesting because it tends to support the notion that as the financial sector overcomes the regulatory restraints, it begins to expand its influence in the real economy, ultimately distorting its structure through the introduction of asset bubbles, with a resulting period of significant economic contraction. It also results in disproportionate incomes and the polarization of wealth distribution.

Why Has the U.S. Financial Sector Grown so Much? Thomas Philippon

Human Capital in the U.S. Financial Sector: 1900-2005 Philippon Reshef

"We find a very tight link between deregulation and human capital in the financial sector. Highly skilled labor left the financial industry in the wake of the depression era regulations, and started flowing back precisely when these regulations were removed."

"We find that in 1920-1940 and in 1990-2005 employees in finance are overpaid."

Thomas Philippon

The banks must be restrained from distorting the role of money and finance in the national economy to obtain and direct a disproportionate amount of wealth and power. Such unrestrained financial power is a corrosive influence that destroys the fabric of a free and democratic society by distorting the allocation of resources and corrupting the institutions of the press, of education, and of the government.

Does a weakening of banking regulation result in economic Imbalances and asset bubbles? Yes, always and everywhere.

Charts in the Babson Style for 30 October 2008

The broadest index here, the Russell 2000, suggest that we may have made an important bottom. We will look to see if this is confirmed by the other indices, and by the VIX.

The market is 'guilty until proven innocent' in a bear market downtrend.

As we stated earlier today our bias is to think this is end-of-month paiting of the tape. Do not expect the economy to recover or the financial system to gain efficient function in service of real economic activity until serious reforms are put in place.

Even in a "Market Meltdown" and a "Once-In-A-Lifetime Financial Panic...."

...the Other People's Money (OPM) managers can still find time to paint the tape into the end of month.

When this coat dries, they *might* try to slip on one more layer of paint before the weekend, but if we break to the downside we would look for a complete retrace of this rally to retest the lows.

Why? Because it is based solely on speculation, market manipulation and esperimentation by the Fed and Treasury. It is not based on anything organic to the economy, neither reform nor restructuring.

Wall Street corruption is one of the biggest impediments to an economic recovery. It has become an inefficient obstacle to capital allocation, price discovery, and real economic growth.

The US financial system represents a general systemic risk to the rest of the world because of the manipulation of the US dollar as reserve currency to serve the short term secular interests of a small but powerful financial elite.

"Dubai Runs Out of Gold"

Bahrain Tribune
Dubai runs out of gold

Oct 29 (Bahrain) - A massive rush at jewellery shops has led to a shortage of gold at some outlets, prompting some shopkeepers to overcharge customers, reports Gulf News.

Jewellers are seeing a huge rush of buyers as gold prices are currently at a two-year low.

Shopkeepers said the rush, a combined result of the Hindu festival of Diwali and lower prices has resulted in a shortage of gold bars. But they denied any hoarding by outlets.

"There is enough gold available in the market and sales are at their peak over the last couple of days with the market falling drastically," jewellers said across the emirate.

A buyer who asked not to be named said: "The price of gold prompted me to visit the Gold Souq in Sharjah. However, most retailers claimed they were sold out. Outlets where gold was available were openly overcharging. They said it was in short supply. The price of 24 carat stood at Dh88.75 but they were openly charging Dh92.50. This is clearly an unfair practice."

Shubash Golati, a buyer, said: "It is a tradition to buy gold during the four-day Indian festival of Diwali. I bought 22 carat jewellery worth Dh5,000. I wanted to buy a 100 gramme gold bar but was told that it is out of stock."

HR Bafna, financial controller from Siroya Jewellers, said a physical shortage of gold is happening worldwide.

He said: "It is matter of physical delivery. It might take a day or two to replenish the stocks. But I am sure that there is no hoarding by jewellers because the market rate has dropped. This has resulted in a tremendous rush of buyers and so the gold bars are out of stock."

In reply to buyers’ complaints that gold outlets are cashing in on the limited stocks and buyer rush, Bafna said: "There is a possibility, but I can’t confirm this."

A counter salesman at the Joy Alukkas outlet in Bur Dubai said for the last couple of days there have been no fluctuations in gold prices.

He said: "From a customer’s point of view this is an excellent time to buy."

He too denied any hoarding taking place. "If the demand for gold is high it is but obvious that some stocks will run out. Some retailers take advantage of this."