Gov. Palin is interested in selling books because she has $500,000 in lawyers fees to pay off. Casino bankers (think Robert Rubin) are not known to have much affinity for the Republican Party.

Arnold Kling has in the past simply declined to address an objection to universal banking: that the FDIC, as a receiver of insolvent institutions, has a long history of successfully selling, closing, amalgamating, and managing deposits-and-loans institutions. It has next to no history of superintending an institution engaged in a mess of rapid fire proprietary trading.

One might also note that Citigroup’s deposits are predominantly domiciled abroad and not insured. Is there some mechanism whereby this is not a problem?

J.P. Morgan and others have been heavily involved in recent years in lending to hedge funds and such. (I think this is a component of what they call ‘prime brokerage’ and what JP Morgan calls “Worldwide Securities Services”. Is that something you should be doing with depositors money?

One might also recall twenty-five years ago there was quite a bit of complaint in the press about institutionalized conflicts of interest in businesses implicated in the capital markets. One suggestion to consider: if a Chinese wall has to be constructed within a particular enterprise, is that a suggestion that said enterprise is conducting lines of business that ought to be separated?

Risk pooling through insurance makes sense when your house, car, hardware store, or person is at risk. Is it really all that useful when the value of a fungible set of financial assets is at risk for marginal losses? Can’t you just change the composition of the asset pool? Is not a purchase of insurance (or ‘credit default swap’) just passing the trash?

Last time I checked, JP Morgan Chase had a “Corporate Lending” portfolio of $53bn. IIRC, the four megabanks have about $2.7 tn in deposits and JP Morgan has about a quarter of the total. If the others are as given to corporate lending, the four have between them $200-odd bn in loans outstanding. I think that there are $2,000 bn in corporate bonds issued by non-financial corporations, $800 bn in commercial paper, and that the market value of publicly traded equities is around $12,000. Could it be so that the capital markets are adequate for the purposes of large corporations and the world can do without mammoth deposits-and-loans institutions?

Kling’s shtick is that credit-default swaps and the secondary mortgage market are responses to poorly conceived regulations, and that an unregulated market would have no need of such strategems. That may be true; it seems a rather predictable thesis for a soi-disant libertarian to argue.

The bigger concern with G-S is not as much as the previous crisis (although Citigroup is a notable problem), it’s that firms like Goldman Sachs and Morgan Stanley are now designated as bank holding companies and engaging in a lot of the same sort of trading and business they were doing before the crisis came to a head.

Should bank holding companies be allowed to access the Fed Funds window at a cost of next to nothing and basis operate highly leveraged proprietary trading desks? I’m not so sure that’s a good idea. I have no problem with commercial banks engaging in certain investment banking functions since there’s no real reason not to allow M&A and advisory functions to exist at commercial banks. Therefore, a investment banking/commercial banking brightline separation may not be the best way to look at this.

In addition, the fact that a major CDS player like Lehman Brothers could fail without any serious disturbance of the CDS market, any serious losses to its counterparties, or any serious losses to those firms that had guaranteed Lehman’s own obligations, suggests that CDS are far less dangerous to the financial system than they are made out to be.

Lehman’s failure caused a lot of disturbances. First, there’s AIG. Next, there were all the hedgies and other players who had sold CDS contracts on Lehman that were forced to unwind those position and make good on those claims. They had to sell securities in the markets en masse to raise the cash to do so (I mean, who expected those securities to default given the intervention on Bear Stearns behalf).

Finally, efforts to blame the huge number of subprime and Alt-A mortgages in our economy on unregulated mortgage brokers must fail when it becomes clear that the dominant role in creating the demand–and supplying the funds–for these deficient loans was the federal government

Please elaborate.

Well, it isn’t all that complicated and thanks Mike! Maybe we hang some bankers and congressmen/women. You pick the bankers and I’ll pick the congressmen.

well said. one person off the top of my head (who I take very seriously) whose is talking about separation of investment from “regular” banking is Nicolas Nasim Taleb.

Kling’s “no one is talking separation would end financial crises” is technically correct but essentially stupid. Separation of said instruments plus a rule structure whereby if you get into the investment game you either win or lose your money (i.e. you don’t ever get bailed out) wouldn’t end financial crises. It would simply firewall off those crises from so-called Main Street Economy and banking.

yes…except that the individuals (or rather let’s corporations) responsible don’t face the destruction that they rightfully deserve. It’s the worst of all possible situations in that the rules allow for the creation of these zombie banks but then we can’t kill them (i.e. they’re zombies).

But to touch on Will’s original point, this IS the acid test for conservatives- conservatism is at its best when it is cautious, reasoned, and based on emprirical evidence and experience. Today the conservative movement is wedded to the abstraction of the Free Market as a religious faith, a single magic solution for all of our ills; this is why they can’t seem to come up with anything other than “tax cuts” and “deregulation”.
Rod Dreher makes the point that Palin and by extension the conservative movement yearn for a moral order, a stable civil society, yet embrace the very chaos and anarchy of capitalism uncritically, without any reservation or exception. If we follow a philosophy that depends on “creative destruction” is it any wonder we end up with frequent bouts of destruction?

As Dave said “Nonbank lenders and mortgage brokers generated their revenues based on the volume of loans they originated. They took little to no risk that the underlying loans would default (I think the window was 90 days tops). Once they were sold off to Wall Street or to investors, the risk was someone else’s problem. ”

It used to be a conservative axiom that people will act irresponsibly if they are protected from the negative results of their actions … and especially if they are only protected from the negative results while allowed to reap any benefits that might accrue.

What happened?

It’s true that housing policies had nothing to do with the crises.

It’s also true that so many conservatives have been trained to instinctively blame problems on minorities that they are incapable of resisting this wrong argument.