Friday, April 18, 2008

PIMCO's McCulley: Fed Should Regulate Investment Banks

by Bill McBride on 4/18/2008 02:43:00 PM

"Minsky’s insight that financial capitalism is inherently and endogenously given to bubbles and busts is not just right, but spectacularly right. And when the financial regulators are not only asleep but actively cheerleading financial innovation outside their direct purview, a disaster is in the making, as the last year has taught us."
Paul McCulley, April 17, 2008
From Paul McCulley at PIMCO: Credit, Markets, and the Real Economy: Is the Financial System Working? A Reverse Minsky Journey
[E]lementally, all institutions that have access to the Fed’s discount window must have pari passu regulatory oversight. It really is that simple. Access to the window is unambiguously a public good ... Accordingly, access to the window must – as it does in the case of conventional banks – carry the quid pro quo of prudential regulatory oversight, complete with enforcement powers.

... What I’m laying out is simply a bedrock principle: if you have access to the Fed’s discount window, the Fed should – and will, I strongly believe – have the power to supervise and regulate your business – core capital requirements, risk management, liquidity management, et al.