Noam Scheiber wrote about what sounded like a pretty crazy idea in Dylan Ratigan’s new book on Tuesday: derivatives should be classified as online gaming and naked derivatives should be “deemed null and void.” I wasn’t even really sure what that meant, but Felix Salmon helpfully quoted the full page of Ratigan’s book Scheiber is referring to:
We must require not only that banks retain more capital but also that when they place bad bets, they pay the price for their losing bets themselves. Otherwise we are stuck with the worst of two economic systems: like a capitalist country, we have private banks that keep their profits. But like a communist country, we have a system where banking losses are charged to the government. Only when we end this corporate communism will we realign the interests of the banks with the investors they serve. The way to do this is debt reduction or cancelation. If the system is so out of control that we can use a computer to fabricate trillions in new money by simply adding some zeros, then surely we can find a way to delete some zeros as well. By definition, if you can print it, you can cancel it.
As we have already seen, a swap can either be an insurance policy that helps to lower long-term costs for a business or a bet by an outsider on whether a given company or country will succeed or fail. Putting swaps on a public exchange would create the visibility for all to see the difference between commodity insurance that is critical to the economy and speculative bets that are not much different from gambling.
Salmon does a great job pointing out what’s so ridiculous and incoherent about this passage. Although I haven’t read Ratigan’s book in its entirety, I had much the same reaction and wanted to both expand on one section in particular that Salmon quotes:
The way to do this is debt reduction or cancelation. If the system is so out of control that we can use a computer to fabricate trillions in new money by simply adding some zeros, then surely we can find a way to delete some zeros as well.
Ratigan seems to confusingly conflate debt cancellation with the creation of money. But more significantly, Ratigan takes our ability to “use a computer to fabricate trillions in new money” as evidence that “our system is so out of control.” Nevermind that “deleting some zeros” is what happens when the Fed reduces the monetary base. In Ratigan’s eyes, the Federal Reserve’s ability to enlarge of the monetary base to stabilize the economy and, in the present case, stop a recession from becoming a depression is a bad thing. It’s possible Ratigan doesn’t realize the implication of what he’s saying here and doesn’t actually believe this. Or maybe he does want to take away the Fed’s power to set monetary policy and put the US back on the gold standard. I haven’t read his book and haven’t watched much of his show, so I don’t really know. Either way though, these are ideas that I’d expect to find in a book by Ron Paul or Glenn Beck, not an MSNBC host purporting to write a serious book on policy.
I don’t want to be entirely negative though, and there are sentences in the passage that, on their own, are quite sensible and which the Dodd-Frank Act is trying (in some cases more successfully than others) to address. It’s true that the banks shouldn’t be able to keep their profits in good times and pass off their losses on the government in bad times. Dodd-Frank’s answer was Orderly Liquidation Authority, which in theory would make it so large financial institutions can be resolved in an orderly manner rather than having to be bailed out by the government. There should be greater transparency for swaps and derivatives–that’s why Dodd-Frank created Swap Execution Facilities and Swap Data Repositories. Clearinghouses don’t really function the way Grasso talks about them, but Dodd-Frank has provisions for those too, which the CFTC and SEC are in the process of implementing and should go a long way towards making the swap and security-based swap markets less dangerous. In short, the zany parts of Ratigan and Grasso’s argument are, well, really, really zany, and the bits that are non-zany are already being worked on. Maybe not in the most effective way, but give credit where credit’s due.