(This guest post originally appeared at NewDeal2.0)
A central clearing body for the Chinese? Great idea! Why should Wall Street have all of the fun? It’s nice to see the Chinese moving to support these products. They can blow up their financial system as well and catch up with the West. All they need now is a way to figure out how to export these financial Frankenstein goods to other parts of the world as successfully as Goldman & Co. have done.
The fact is, a central clearing house will do nothing but simply create the prospect of a concentrated failure in one area. It won’t eliminate the problem by any stretch. These products ought to be banned and the Chinese are crazy for wanting to extend and legitimise their use.
What bothers me about virtually all of the proposals today is that none attempt to regulate the asset side of the banks’ balance sheets. I have no problem with higher capital ratios (even though they functionally act like a tax and probably depress lending at the margin, all things being equal). But all of the proposals are reactive – they come in response to a financial crisis. I would rather see the activity causing the crisis to be banned in the first place, which is why I have focused on functionality and restricting certain activities now allowed by the banks, which are inconsistent with public purpose.
But size is also important. Maybe not size per se, but size when mixed with a concentration of market function. Perhaps antitrust is the way to go here. Financial systems are public/private partnerships, not purely private enterprises. It is perfectly reasonable for the state as the ultimate provider of funds and bearer of risk to insist on a robust and heterogeneous network of delegates. Maybe in addition to antitrust, we also need to change the incentive structures.
Rather unfortunate to see China going down another dead end, although I guess it will cheer all of the people who secretly fear China’s economic success. I am definitely not one, but I would rather see China succeed without embracing our stupid ideas.