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Home Publications Blogs Beat the Press And Where Did the Complexity Come From? Nocera on Financial Reform

And Where Did the Complexity Come From? Nocera on Financial Reform

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Tuesday, 17 January 2012 05:34

Joe Nocera's column today argues that the financial industry may have a legitimate complaint when it says that the Dodd-Frank financial reform bill is too complicated. While the law is complicated in many areas, it is important to recognize that in many cases the industry was the source of the complication.

For example, there was a widely held view following the experience of AIG, which had issued hundreds of billions of dollars worth of credit default swaps outside of the purview of any regulator, that derivatives should be traded either on exchanges or through clearinghouses in order to increase transparency. Rules to this effect were included in Dodd-Frank.

However, the financial industry wanted to preserve the option to trade some derivatives over-the-counter. Therefore they included a series of exemptions in the legislation.

These exemptions are quite complicated. In contrast, a blanket requirement that derivatives had to be traded through a third party would be relatively simple. However it was the industry that added the complexity.

There are many other areas where a similar story could be told. That is why it is hypocritical for someone like J.P. Morgan CEO to complain about the complexity of the legislation. 

Comments (12)Add Comment
Spending Half One's Life to Negotiate With Corporations is a Good Deal
written by izzatzo, January 17, 2012 5:42
...it is important to recognize that in many cases the industry was the source of the complication.


Outrageous nonsense. Studies show it takes only 25% of total waking hours to read all the fine print behind what drives the supply of consumption and investment goods and another 25% to negotiate towards one's preferences through highly efficient call centers.

Markets are naturally transparent if allowed absent government interference. For example those who studied the shadow banking industry were perfectly capable of getting out unscathed while the getting was good.

Stupid liberals.
...
written by jrhopkin, January 17, 2012 5:51
Dean, can't you block this idiot?
Dean, can't you block this idiot?
written by JSeydl, January 17, 2012 6:24
Pls don't. izzatzo is hilarious. He is clearly mocking conservatives when he writes. I think he may actually be Stephen Colbert.
"Highly Efficient Call Centers"
written by Bart, January 17, 2012 7:35

Would those call centeres be like Sitel in North Carolina, where 200 women paid $8-9 per hour queue up for one bathroom, and then are disciplined for doing so?

Or are they the ones off-shored, sort of like the CIA's rendering system.
...
written by skeptonomist, January 17, 2012 8:39
There probably shouldn't be any regulation of CDS's - there shouldn't be any CDS's. If these things can't be outlawed on the basis of the harm they have caused, it would seem that there is no "financial innovation" of any kind that would ever be disallowed.
...
written by liberal, January 17, 2012 9:08
I agree with skeptonomist, though one of the people who's best on this issue (Yves Smith @ nakedcapitalism.com) says it would create havoc to get rid of them immediately. I think she proposed slow euthanization.
Complexity breeds loopholes
written by djheru, January 17, 2012 10:54
Complexity is not a bug, it's a feature. It makes enforcement more difficult and "bending the rules" easier, at least if you have a team of lawyers and accountants.
izzatso is being sarcastic
written by rootless_e, January 17, 2012 3:24
and Yves Smith is a very unreliable source of information. And there is nothing inherently wrong with derivatives. US company A sells a year of widget deliveries to French Company B for C euros each and buys insurance on the exchange rate. That insurance is a derivative.
Taxes are simple too.
written by FGS, January 17, 2012 5:41
The same is true of the tax code, of course. Paying your taxes is easy as pie, it's trying to avoid paying them where all the deductions and credits get complicated.
...
written by liberal, January 18, 2012 7:17
rootless_e blithered,
...and Yves Smith is a very unreliable source of information...


That's funny, coming from a mindless O-bot like yourself.
...
written by liberal, January 18, 2012 7:20
rootless_e wrote,
And there is nothing inherently wrong with derivatives. US company A sells a year of widget deliveries to French Company B for C euros each and buys insurance on the exchange rate. That insurance is a derivative.


LOL. We're talking about CDS, not various FX derivatives.

If you want to argue that CDS are a useful financial innovation that didn't have much of anything to do with the financial crisis, then you clearly no nothing about finance or the crash.
can you read "liberal"?
written by rootless_e, January 19, 2012 9:56
There is nothing in the article that is specific to CDS's. A CDS can, however, also be useful in legit business. There's nothing magical about derivatives - people have been using instruments like them in business for thousands of years. But can one expect people who use rhetoric like "mindless obot" to know anything at all? Unlikely.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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