I'm not a fundamentalist (mainly concentraded on trade set ups using technical analysis). But, I saw a Frontline documentary on the fact the government had a hard time trying to get itself to regulate OTC derivates (supposedly because lobbyists are too powerful). Now, we've all heard before that toxic assets at the banks were a problem from bad mortgage loans. Which is the worst problem? Which one can be fixed with regulation? If they can introduce regulations on OTC derivatives, would it increase confidence in the markets? My thinking is: regulate derivatives--->more confidence in the financial markets--->economic recovery--->more money to spend helping the environment
The worst problem is the Federal Reserve and the inflation of currency. I really hope that you don't believe that this is happening because of 'lack of confidence' in the markets. This is exactly what they teach in schools and the education system, it should be ignored completely. Economic collapses simply don't happen just because of lack of confidence or derivatives. What needs regulating are these big central banks that claim themselves too big to fail and frankly if they are then they should be broken up or utterly destroyed. The banks in the U.S in particular have been responsible for printing trillions of dollars and that is going to do absolutely nothing in the long run.
OK, I'm not a fundamentalist but I watched some Frontline documenataries on PBS and it looks to me like there was a REAL crisis of confidence during the market meltdown. Ah well.
The first known usage of the term "confidence man" in English was in 1849. http://en.wikipedia.org/wiki/Confidence_trick Imo, confidence is everything. Hence the bailouts. Psychology is number two. Confidence tricks exploit typical human qualities such as greed, dishonesty, vanity, honesty, compassion, credulity and naïveté. Next is math. If the confidence man can convert greed, dishonesty, vanity, honesty, compassion, credulity and naïveté into math ie statistics, probabilities, etc we have a situation to exploit.
I think a lot of the problem comes from these markets being relatively closed. This not only makes risks very opaque at large, complex institutions; but it also raises transaction costs dramatically. For example, the following paper describes how (at least of its writing a few years ago) the muni bond market has transaction costs of 1-2%. This seems pretty high to me for what is a market in some of the "safest" instruments. http://www.usc.edu/schools/business/FBE/seminars/papers/F_8-27-04_HARRISTradingCost.pdf A similar type of "closed access" is internalization in the US equity markets, which keeps order flow within the trader's broker. Although in the case of equity internalization the broker is supposed to give a "good" price (at least with reg NMS issues), I don't think there's any doubt that this damages the market's price discovery, efficiency, and spreads as a whole.