What is Ron Paul's stance on banking regulations(derivatives &credit default swaps)?

[Fedor57]

I love Dr. Paul's stance on foreign policy and the idea of ending the fed. I am a little concerned however, that having loose regulations on the banks could be harmful as well. From my research, mortgage backed securities, credit default swaps, and banks leveraging their assets up to 30 to 1 were the major cause of the collapse of 2008. It seems like the corporations that were responsible for the collapse are bigger, and more powerful now than they've ever been.

What is Dr. Paul's stance on regulating the banks with respect to the above statement?

[kah13176]

The regulators ALLOWED all that to take place. The "regulator" is the Federal Reserve bank, and advertised as such when it was set up in 1913.

Ron Paul wants to bring a gradual end to the Federal Reserve system, which means banks would not want all those risky assets. The only reason those risky assets were created by banks to begin with is because their "regulator" - the Federal Reserve - was ready to bail them out with overnight loans and printing-press money whenever they needed it. This greatly reduces the risk of banks going out of business, so banks are much more likely to act irresponsibly when there is no threat of adverse consequences. In short, the regulator is why there was a mess in the first place.

Analogously, I'd be much more willing to take part in high-stakes gambling if I knew a secretive benefactor was willing to give me millions of dollars to cover my losses whenever I needed it.

I know I'm not the best explainer, so please ask questions if this doesn't make much sense.

[The Gold Standard]

The financial crisis was caused by a vast expansion of cheap credit by the Federal Reserve, government policy to expand home ownership to less creditworthy people, and the fact that if these instruments blew up there is a lender of last resort that can print as much money as necessary to bail them out. Ron Paul would eliminate all of these things, so there would be no need for regulating the banks further.

[rhelwig]

My simple response is that the market regulates businesses, including banks. When government interferes with that, through so-called "regulation", it is actually mis-regulating.

[Fedor57]

My simple response is that the market regulates businesses, including banks. When government interferes with that, through so-called "regulation", it is actually mis-regulating.


That's where I would strongly disagree. The majority of people have no idea what a credit default swap/derivatives are. Bankers and politicians can't even explain them. There's no way it should be legal for companies to take out 50 copies of insurance (against failing) on a financial product that they sold and to consumers, knowing its a bad investment. I can't take out 50 insurance policies on your house and then burn it down. It takes too long for the people/gov't to realize what's going on. In the meantime, it nearly costed us our entire financial system.


Goldman sachs and AIG knew exactly what they were doing, and they are more powerful now than they've ever been.

[LibertyEagle]

Someone else will be along to answer you. :)

[Cowlesy]

In a Paul Administration, those banks would be damn certain that if they over-leveraged themselves, President Paul would not step in to bail them out. That alone would take risk off the table for more exotic products.

The elimination of the ability of the banks to fail (ie TARP) created additional moral hazard that even the new Dodd-Frank Act will not cure. While many banks got their leverage under control, there were accounting gimmicks put in place in 2009 that have made the problem worse (ie the banks did not have to mark certain assets to fair value ie what they could sell them for on that day).

A Paul Administration wouldn't give the banking system the license to go nuts, it would implicitly impose discipline on it because for the first time in probably 100 years banks would not have the U.S. Taxpayer to lean on when they became too aggressive.

[Feeding the Abscess]

That's where I would strongly disagree. The majority of people have no idea what a credit default swap/derivatives are. Bankers and politicians can't even explain them. There's no way it should be legal for companies to take out 50 copies of insurance (against failing) on a financial product that they sold and to consumers, knowing its a bad investment. I can't take out 50 insurance policies on your house and then burn it down. It takes too long for the people/gov't to realize what's going on. In the meantime, it nearly costed us our entire financial system.


Goldman sachs and AIG knew exactly what they were doing, and they are more powerful now than they've ever been.

Paul was raising derivatives as an issue for many years before the system crashed (http://valuefreedom.blogspot.com/2008/05/ron-paul-told-us-so-economics.html#Fed_Monopoly - also, read many of his other pronouncements over the years. It's pretty stunning). He voted against Glass-Steagall repeal on the following grounds: FDIC and other institutional underwriting of the banks would remain (even outside of the Fed), and banks would run wild on the taxpayers' dime, with all the benefits of profit and none of the risks of default. Naked corporatism at its worst, and he called it out in real time.

[Fulton for City Council]

I think there are other government "regulations" that make these credit default swaps more dangerous.

More instance, only 3 companies are allowed to be credit ratings agencies. This was set up in 1975 through some bill that I forget the name of. Back then there were 7. 4 went out of business, now there are three. This is significant because certain institutional investors, such as banks, pension funds, are legally obligated to invest only in things given a certain investment grade by these three ratings agencies. So, if something is dropped from AAA to C by these three, it means a whole lot of people can't invest in them.

Another government intervention that helped cause this is the FDIC. I've looked into the FDIC and how they determine their premiums is extremely opaque. Their formula is kept in a "black box" and no one that I know of is aware of it. However, I doubt it's a rational formula. From 1994 to 2004, the FDIC collected no insurance premiums because the banking system was so "stable." Is that something a private company would do?

Then of course there's the Fed and legal tender laws. All of these are government interventions that helped cause the collapse.

As far as does it matter if Goldman Sachs, Lehman, et al fail, I don't think so. In this most recent crisis, 40% of banks with assets of under $1B increased lending. That's while the major banks, on the whole, decreased it. That's because the smaller banks, on the whole, were more responsible and had more capital to lend. So the real problem here was the bailout, not that these banks or hedge funds or whatever failed. Then of course our government set up the interventions to make this whole thing possible.