Tuesday, October 7, 2008

Over-Simplifying the Crisis

It is an over-simplification to refer to this as a "mortgage" crisis. The problem with the mortgages is a precipitating event, but the structural issues that have been revealed are much deeper.

In particular, the lack of transparency and reportability of the CDOs and CDSs is what has caused the freeze-up in inter-bank lending. These issues can be resolved by setting up a regulatory framework for dealing with CDSs, and by requiring better information reporting on the instruments underlying a CDO.

Despite attempts by both parties to blame the other one, the fact is that both have been complicit in setting up a system that lacked adequate fraud protections and regulatory requirements.

I know that the popular media (and therefore the politicians) focus on the foreclosures and the mortgage defaults, but I think that is because they are easier to understand than having to think about how to properly regulate a marketplace of financial interests.

Pretty clearly, the "Masters of the Universe" can't be trusted to play with scissors without adult supervision.