Why No Regulatory Action on Banksters’ “Destabilize the Markets” Threats?

[Joanne98]

We have pointed out more than once that a major impediment to reform of the financial services industry is that a small number of firms control infrastructure crucial to modern capitalism:

1. Credit is essential to any society beyond the barter stage

2. Debt markets are now at least as important in providing credit as traditional lending, by a lot of measures, even more so

3. A handful of firms are crucial because they operate the debt markets

4. These firms are deeply enmeshed. If one goes, the others are at risk of failure, which will take down the entire debt markets apparatus.

The banksters understand this situation full well, that they have a knife at the throat of the economy, and they will fiercely resist any efforts to disarm them. And note that the enmeshed-ness is one of the sources of their leverage (no pun intended). If single firms could be taken out and shot wound down, the firms collectively would have much less power. The interconnectedness of the players, via their credit exposures to each other (most importantly but not limited to the repo and credit default swaps markets) makes “reforms” like living wills of dubious value. Unless the tight coupling is substantially reduced, these living wills remain fig leaves for political and regulatory inaction.

Put it this way: if banks can forestall a not very ambitious reform program by huffing and puffing about “destablizing markets” when the financial markets are on comparatively sound footing, do you think anyone, in bona fide financial crisis, will take the risk of putting down a significant player in an untested wind-down protocol? A bailout is the less risky course of action (although some ancillary operations might be hived off of a floundering firm to improve the optics).

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http://www.nakedcapitalism.com/2010/03/why-no-regulatory-action-on-banksters-destabilize-the-markets-threats.html