#dash for cash

Later today, the FSOC will open its sanctum for what promises to be a brief session of largely political theatrics. One can only hope that the rarefied air of the Council’s closed-door meeting elevates actual action addressing growing signs of financial instability. Sadly, FSOC’s record of timely intervention ahead of any systemic event since its creation – and I count at least four – is dismal as are the Fed’s see-no-evil financial stability reports. As of this writing, the U.S. is on the precipice of another “dash for cash” and no one – not the bond market, mutual funds, MMFs, investors – has any sandbags at the ready beyond faith that the Fed will bail them all out all over again. Loose lips sink financial systems, but lips that are zipped only because they have nothing useful to say do the same and then some.

As each FSOC annual and Fed financial-stability report makes clear, these guardians of stability quickly spotted “shadow-banking” risks that deeply worried them after the 2008 debacle. Still neither did much about them beyond pointing fingers even as flares streaked across the market warning of looming systemic shocks. As we predicted as early as 2011, asymmetric systemic regulation accelerates systemic-risk migration from regulated institutions with established contingency plans and central-bank backstops to entities largely or even entirely outside the regulatory perimeter on which financial stability has comes almost entirely to depend. This is a classic “money-for-nothing” set-up in which entities operate at increased profitability thanks to …