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I shall post videos, graphs, news stories, and other material there. We shall use some of this material in class, and you may review the rest at your convenience. You will all receive invitations to post to the blog. (Please let me know if you do not get such an invitation.) I encourage you to use the blog in these ways:
To post questions or comments about the readings before we discuss them in class;
To follow up on class discussions with additional comments or questions.
To post relevant news items or videos.

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Monday, April 19, 2010

So What Should Congress Do About Financial Reform?

At the beginning of class earlier today, we talked about what Congress's response would be to the S.E.C.’s civil lawsuit against Goldman Sachs. A very basic summary of the case: The S.E.C. claims that Goldman created and sold a mortgage investment that was secretly intended to fail. Roger Lowenstein, an op-ed contributor for The New York Times, outlined three policy objectives for Congress as it considers financial reform options:

1. "[Congress should] end the culture that 'financializes' every economic outcome, that turns every mortgage or bond issue into a lottery—often with second-and third-order securities that amount to wagers on wagers of numbing complexity."

2. "[Congress] should insist that all derivatives trade on exchanges and in standard contracts—not in customized, build-to-suit arrangements like the ones Goldman created...the financial bailout has demonstrated that big Wall Street banks fall firmly within Washington’s regulatory authority, and regulation confers implicit bailout protection. Protected entities should not be using (potentially) public capital to run non-productive gambling tables."

3. "...Congress should take up the question of whether parties with no stake in the underlying instrument should be allowed to buy or sell credit default swaps...tax policy could be changed to skew heavily against swaps contracts that are held for short-term periods."

Lowenstein points out that Wall Street used to be a place where money was raised "for industry: to finance steel mills and technology companies." But financial products like collateralized debt obligations (CDO), which are used by banks like Goldman Sachs and have raised billions of dollars in bonuses, have really "raised nothing for nobody" but these bankers. Lowenstein writes, "In essence, they (CDOs) were simply a side bet—like those in a casino—that allowed speculators to increase society’s mortgage wager without financing a single house."

Full text of the article here: http://www.nytimes.com/2010/04/20/opinion/20lowenstein.html?hp

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