Thursday, January 27, 2011

Top Stories: (1) Japan and (2) US Financial Regulation

Let's try one of the broader blog posts again, see how it reads for you guys. Two stories caught my eye today. One is troubling, one is ridiculous.

1. Troubling: S&P cuts Japan's credit rating on debt concerns
AP came out with a story today out of Tokyo. Simply stated, S&P has cut Japan's credit rating to AA- from AA. For those keeping score, Japan is the third largest economy in the world behind the US and China (some people still have Japan as #2, I'm not tryin' to play favorites, I'm going off of what AP reported).

The reason behind the downgrade will sound familiar - sovereign debt. Ok, not interested in the story anymore? Try this on for size:

"The downgrade is a stern reminder to Japan that it faces consequences for letting its debt swell to twice the size of gross domestic product."

Yeah, 2x, that's not a typo. The article goes on to remind us that this debt ratio is worsened by the fact that Japan has "persistent deflation and a rapidly aging population."

Though Japan has some plans to remedy the situation, "S&P expressed little faith in the government's ability to make meaningful progress."

S&P did add a calming conclusion in their analysis:"S&P maintained its A-1-plus rating on Japan's short-term debt. It also said its outlook on the long-term debt rating is "stable," noting Japan's diversified economy, high foreign net assets and the yen's role as a key international reserve currency."
Source: AP

2. Ridiculous: Goldman warns about resurgence of shadow banking

I love this article. The gist is simple - Goldy's number 2 (Gary Cohn) essentially warned: "Too much regulation risks driving risky financial transactions and other activities into the more opaque areas of the financial system."

Just to be clear, that's not what I think is ridiculous.

Without making a judgement call on one side or the other, this is the standard argument from the financial industry (doesn't mean it's wrong - they are certainly consistent). What I did find particularly interesting and bordering on ridiculous was a quote from Cohn: "Risk is risk, whether it sits in a regulated entity or not. My concern is that we are pushing it more and more from a regulated to a less regulated, more opaque sector."

Is it just me, or does that sound like Goldy is openly threatening our government that it will be doing the lion's share of the shadow banking itself? No?

Cohn went on to say: "There are parts of Basel III that are subject to local rules. Markets are very efficient and will find the more efficient location for transactions."

Umm... So, what's the problem?
Source: Reuters

Believe or not, I'm not politically charged on this one. I don't think there's any doubt that financial regulation will have a cost on the industry and therefore our economy - though I do think the conversation kind of ends there and no one really asks what the cost of not having the regulation is. I mean, what costs us more - stifling regulation on finance, or losing $9 trillion in market cap in 6 months?

This is trade analysis, not a recommendation.

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1 comment:

  1. Regulation never works. NEVER! Anything the Government does is less efficient than free markets.

    Besides, who really believes Goldman isn't the Government?