Wednesday, December 29, 2010

Governments Are An Unregulated Source Of Systemic Risks: Atlanta Fed

From the Federal Reserve Bank of Atlanta Center for Financial Innovation and Stability, "The Economics of Regulating Systemic Risk" by Gerald P. Dwyer:
After the 2007–2008 financial crisis, it is natural to suppose that private firms and people are the sources of systemic risk. But they are not the only sources and maybe not the main ones (Reinhart and Rogoff 2009). Recent events in Europe have made this point dramatically. The sovereign debt problems in Greece, Ireland, and elsewhere in Europe make it plain that governments can be the source of systemic risk. The increases in interest rates and credit default swap rates for these countries pose a substantial risk to credit markets and the ability of the government to function. At least to some extent, these increases in spreads and rates are the result of decisions made by those in government. For example, Ireland's problems are largely a result of the government's guarantee of all the liabilities of Irish banks. It is not clear how such choices can be regulated other than through the ballot box. [Emphasis added.]
Is it possible that all systemic risk to our financial and economic systems is due to government actions, laws, regulations and policies? Think of FDIC insurance, Too Big To Fail, legislated bankruptcy preferences, TARP, US GM takeover lasting effect, union favoritism by government, Fed's money supply manipulation, etc.

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