Finance: Why bother regulating financial institutions?

[Nikitn]

Recently the EU tried to regulate various kinds of speculations by taxing them - but the most damaging speculations like CDS, currency futures etc can be done as easily in New York as in Paris.

So why would the EU bother doing this without international support from major economies like the US? It would just make their own financial institutions less competitive.

What kind of speculations do they hope to get rid off by putting taxes on them? The only serious things the new laws discourage speculations on are maybe stocks on European stock exchanges and European real estate...

PS: I'm an amateur when it comes to finance so please use laymans terms.

[Enemy of the State]

Financiers will simply adapt to the new regulations and find a way to make them work for them. The regulators are human, and can easily be bought and manipulated. Instead of adding new regulations which sound good on paper but end up having totally different outcomes, we should stop financial institutions from abusing government power by removing the power of government to meddle in the market to begin with.

[Nikitn]

Financiers will simply adapt to the new regulations and find a way to make them work for them. The regulators are human, and can easily be bought and manipulated. Instead of adding new regulations which sound good on paper but end up having totally different outcomes, we should stop financial institutions from abusing government power by removing the power of government to meddle in the market to begin with.

No offence, but I didn't ask about free-market liberalism rhetoric that makes no sense (granted banks did abuse government power by buying politicians, but the financial crisis came due to almost no regulation).

Bush Bush: I thought speculators moving to London was the reason as to why the deal about UK not accepting the EU demands was so blown up. With the use of the term "speculation" I didn't really mean lending out money to entities with horrible credit rating, though you're right of course that banks took too many risks and made too many lies.

BTW I'm pretty sure they would WANT banks to buy Greek debt. The issue is probably to keep banks from lying about their risk taking while taking unacceptable risks

[Enemy of the State]

No offence, but I didn't ask about free-market liberalism rhetoric that makes no sense (granted banks did abuse government power by buying politicians, but the financial crisis came due to almost no regulation).

Sorry for crashing your statist party.

[MathiasOfAthens]

Financiers will simply adapt to the new regulations and find a way to make them work for them. The regulators are human, and can easily be bought and manipulated. Instead of adding new regulations which sound good on paper but end up having totally different outcomes, we should stop financial institutions from abusing government power by removing the power of government to meddle in the market to begin with.

Your answer is to give up and run away? That doesnt solve the problem of financial corporations creating risks and the conditions for depressions. Do you think if government went away - no regulations at all it would be a peachy and happy in the market... no insider training or risks or bad bets nothing that could harm the economy?

[bushbush]

well, consider how many European banks screwed themselves by exposing their assets to high risk investments (cough cough Greek debts)...I think it is necessary to make some new regulation making sure when they screw up again, the tax payers don't have to bail them out.

[Enemy of the State]

well, consider how many European banks screwed themselves by exposing their assets to high risk investments (cough cough Greek debts)...I think it is necessary to make some new regulation making sure when they screw up again, the tax pyers don't have to bail them out.

Or figuring out why they made such risky investments in the first place. Could it be because the government will always be there to bail them out?

[NotYetRegistered]

Or figuring out why they made such risky investments in the first place. Could it be because the government will always be there to bail them out?

Well, maybe. But greed does crazy things to rationality. Tbh, I think that financial institutions will continue taking risky investments without a government to bail them out. And if they go broke, there will be no safety net, which will worsen the situation.

I have nothing to that support that though, just my two cents.

[Enemy of the State]

Well, maybe. But greed does crazy things to rationality. Tbh, I think that financial institutions will continue taking risky investments without a government to bail them out. And if they go broke, there will be no safety net, which will worsen the situation.

Look at it this way. Would you invest all your savings in one single investment with a 20% of it actually generating any profit? Would you do so if you knew the government was going to be there to safeguard your investment?

Wrong, they'll keep cashing in the bonuses until the ship goes down, before starting over. You seem to think that the banking managers aren't worth dozens of millions of dollars.

Do you think investors are idiots? Why would they invest in unprofitable ventures? Would you?

[Enemy of the State]

Let me get this straight. Investors invest in a venture that is doomed to fail and to not generate any profit. Thus the money they've put in doesn't increase but is lost over time. They give each other bonuses, thus simply redistributing the money they've put in. This is their evil master plan? You've got to be ing kidding me if you think the world works like this.

Even then, assuming financial institutions act rationally and not are the profit-machines of a few managers, there will always be serious risktaking. The problem is that even if all the banks act rationally, if enough risks are taken then someday somehow some financial institution would fail. And with it many more could fail. And then we'd enter into a recession with no government to get us out.

A man made recession is simply the market clearing itself. This happens when the mistakes investors made during the boom become revealed. Capital moves from unproductive areas of the economy to productive ones. That is good. We don't want capital to stay in the unproductive sectors. Of course there is the question of why investors made such risks in the first place. Again, because they are encouraged to take risk. Both because they know govenrment will be there to bail them out, and because they're supplied with artificially cheap credit due central banks setting interest rates below market rates.

[Dr. Croccer]

Or figuring out why they made such risky investments in the first place. Could it be because the government will always be there to bail them out?

I think it's more likely that it's because they're greedy bastards.

What should really exist is the ability of governments to actually punish and influence such institutions more effectively, rather than just slapping them on the wrist and giving them a few billion in money.

[Enemy of the State]

I think it's more likely that it's because they're greedy bastards.

What should really exist is the ability of governments to actually punish and influence such institutions more effectively, rather than just slapping them on the wrist and giving them a few billion in money.

And of course the people you'd give this incredible power to are all angels with only the best intentions in mind...

[Ahlerich]

And of course the people you'd give this incredible power to are all angels with only the best intentions in mind...

checks and balances were the approach to make sure government individuals dont abuse their power. usually it works to control and fight corruption.

it makes me mad to know that a huge chunk of the incredible amount of ecb money lent to banks the other day will go from bonus directly into the pockets of the few and ending up in depots together with lots of other money that will be only used to create short term profit keeping the money away from the money circulation defeating the reason why it has been given to the banks in the first place.

where is checks and balances for the banks here? who controls if they do with the money what it is needed for? nobody. no rules how the banks are supposed to handle that money. no strings attached like "just use it for loans" to make sure the fear that economy will shrink because economy cant get bank loans anymore, can be eliminated.

while governments are controlled and corruption is at least reduced and battled, there are still no such checks and balances for banks. even though they have proven already that they learned nothing from 2008.
there were a few big propmises in 08 and 09 the gambling continued like it never stalled 2008.

patriots with brains should not allow private institutions to bleed their beloved countries (and countrymen) white. what wealens your country cannot be in your countries best interest. whats it called in nature when a creature befalls another creature and lives of it making the host sick without giving anything back?
how have banks not have become parasites of nations? how can anybody that was alive and not in a coma for the last 4 years deny that?

[removeduser_4536284751384]

well, consider how many European banks screwed themselves by exposing their assets to high risk investments (cough cough Greek debts)...I think it is necessary to make some new regulation making sure when they screw up again, the tax payers don't have to bail them out.

Which was the fault of low ECB interest rates.

At which point every economy in the single market would enter a violent recession, including the UK. Trade isn't some happy little pixie we keep around to afford that extra Iphone, it's the lifeblood and soul of a free market economy, and cutting out one of the biggest trading nations in Europe is pretty much tantamount to cutting off a limb. And yes, the metaphor extends to shock, trauma and heavy bleeding.

European countries would lose a few percent of economic growth in the short term, with higher economic growth in the long term. The UK would go into economic depression in the short term and have worse economic growth in the long term.

Enemy of the State has it partly right, but unfortunately ascribes, I feel, too much influence to the actions of governments. The fact is that financial institutions do not make a profit by investing the money of financiers, they make a profit by investing the money of consumers who have saved with those institutions. Thus they can happily make quite a lot of money for both consumers and themselves by means of somewhat-risky investments, without having to risk their own wealth in the slightest. Like surfers, they ride the edge of the boom, until the wave crashes and they lose money. But since they are making a profit, and since the money they risk is not their own, their behaviour is perfectly rational.

Without having to risk their own wealth in the slightest? If I have money in a deposit account and some company fails to pay back a loan, the bank has to back my savings with other money, and the money they lost in bad debt is their loss, not mine. Banks risk their own money, their creditors only start to pay after the bank has no more money to pay with.

What caused this recession was the fact the banks could borrow money from the ECB at negative interest and then loan that money out. The availability of cheap credit caused a huge increase in supply of certain things (there was demand for property, if builders could borrow for cheap and meet that demand why wouldn't they?) and when the demand was satisfied they had spent all that money for no return. The banks couldn't get their loans paid back and so couldn't pay backtheir creditors and so went bust.

It's an argument against our current system of money basically.

The ECB gave out only a tiny percentage of the loans that made caused the debt crisis. But it was their interest policy that brought all interests rates down, and made loans so available.

[Rolling Thunder]

Which was the fault of low ECB interest rates.

No, it's their own bloody fault. Nobody forced them to lend to the Mickey Mouse governments that are Greece and Ireland.

European countries would lose a few percent of economic growth in the short term, with higher economic growth in the long term. The UK would go into economic depression in the short term and have worse economic growth in the long term.

Yes, because your extensive knowledge of marcoeconomics allows you to predict the effect of losing the second largest economy (in real terms) in the EU to protectionism?

Without having to risk their own wealth in the slightest? If I have money in a deposit account and some company fails to pay back a loan, the bank has to back my savings with other money, and the money they lost in bad debt is their loss, not mine. Banks risk their own money, their creditors only start to pay after the bank has no more money to pay with.

My friend, you have just missed my point so spectacularly that you arced over the horizon and disappeared into space. My point was that the behaviour of the directors and decision-makers of the financial institutions were not risking their own individual wealth, not that the institutions' wealth was not at risk.

What caused this recession was the fact the banks could borrow money from the ECB at negative interest and then loan that money out.

Wait, what?
Source?

The availability of cheap credit caused a huge increase in supply of certain things (there was demand for property, if builders could borrow for cheap and meet that demand why wouldn't they?) and when the demand was satisfied they had spent all that money for no return. The banks couldn't get their loans paid back and so couldn't pay backtheir creditors and so went bust.

Now you're conflating the housing market and financial sector crisis with the current sovereign debt crisis, which was caused by excessive government spending.

The ECB gave out only a tiny percentage of the loans that made caused the debt crisis. But it was their interest policy that brought all interests rates down, and made loans so available.

Artifically low rates of interest do that.

[removeduser_4536284751384]

No, it's their own bloody fault. Nobody forced them to lend to the Mickey Mouse governments that are Greece and Ireland.

Now you're conflating the housing market and financial sector crisis with the current sovereign debt crisis, which was caused by excessive government spending.

No you're the one who misunderstands this crisis. They are one and the same.

The only one of the PIIGS who overspent was Greece. In 2008 Ireland had the lowest ratio of government debt to GDP in the European Union. Spain had the second lowest and Portugal wasn't far behind. This was when the UK, France and Germany were all exceeding EU debt ceilings (although not as much as Greece).

The reason their governments more than tripled their debt over 2-3 years is because each of the PIIGS (except Greece) has an ECB-fueled property bubble that burst. Banks in these countries, spurred by low ECB interest rates, had loaned out money to property developers who couldn't pay them back. These governments then had no choice but to bail out their banks or else the banks would go broke, which would result in a re-run of the Great Depression. Ireland and Portugal didn't actually have enough money to do this so someone (IMF/EU) had to give it to them.

The ECB was the most incompetent central bank in the world and it was a major factor in this debt crisis. Greece is an exception. It was the only country that spent too much.

Wait, what?
Source?

ECB interest rates
European inflation rates

When the interest rates are lower the rate of inflation, that's negative interest. You may be paying back more money than you borrowed, but you are giving back less wealth than you were given. You're richer and the bank is poorer. The only time ECB interest rates exceeded inflation was in 2007.

My friend, you have just missed my point so spectacularly that you arced over the horizon and disappeared into space. My point was that the behaviour of the directors and decision-makers of the financial institutions were not risking their own individual wealth, not that the institutions' wealth was not at risk.

I believe executives have enough itnerest in their company and there are enough safeguards to make sure they do a good job that this isn't an issue.

[Rolling Thunder]

The reason their governments more than tripled their debt over 2-3 years is because each of the PIIGS (except Greece) has an ECB-fueled property bubble that burst. Banks in these countries, spurred by low ECB interest rates, had loaned out money to property developers who couldn't pay them back. These governments then had no choice but to bail out their banks or else the banks would go broke, which would result in a re-run of the Great Depression. Ireland and Portugal didn't actually have enough money to do this so someone (IMF/EU) had to give it to them.

So, in essence the fault is in the banks of these nations for overexposing themselves to property investments which crashed in value? You also fail to take proper heed of the fact that the massive overspend in these governments occured not at a single point (bailing out their ailing financial sectors), but across a period of those three years as those governments took inadequate measures to cut back their deficits, thus racking up further sovereign debt.

I believe executives have enough itnerest in their company and there are enough safeguards to make sure they do a good job that this isn't an issue.

Your belief is incorrect, as the fact that these companies experienced severe liquidity crises due to their own overexposure to high risk investments which failed demonstrates. The fact that these executives then walked away with massive compensatory packages merely illustrates the point further - their own personal wealth was not touched by the collapse of the company. Their future earnings, yes, but they still came away with a few healthy million for their own pockets.

[Nikitn]

Well just for fun, why'd you think that banks would behave like nice boys and not try to take massive risks & lying shamelessly? Do you think the managers care about the economy, or if their bank gets bailed out or not as long as they end up rich?

[Enemy of the State]

Well just for fun, why'd you think that banks would behave like nice boys and not try to take massive risks & lying shamelessly? Do you think the managers care about the economy, or if their bank gets bailed out or not as long as they end up rich?

Because they'd go ing bankrupt and become poor bums?

[Nikitn]

Wrong, they'll keep cashing in the bonuses until the ship goes down, before starting over. You seem to think that the banking managers aren't worth dozens of millions of dollars.