Some things do not involve rocket science. Things like the role of regulators when it comes to securities, specifically control over the use of margin to buy securities or pseudo securities or all sorts of assets for that matter.
Yesterday we saw an asset often considered to be worth a trillion dollars drop 31% in a few brief moments, only to come back 30% in a few hours. Anyone who knows anything about any security knows that this kind of erratic movement is brought about by actors who are overly leveraged who did not have the capital to put up when the cryptocurrency of choice dropped to where more capital had to be put up or else, else being the margin butcher would take back your position to save his firm from obliteration.
Now I know that all branches of government are "busy" having just taken over, hurt badly by the laissez faire attitude toward business of all kinds by the previous administration. There's much study, many appointments and a lot of rules to learn. I respect that. I am a huge supporter of due process and prudence and I prefer informed regulators to ignorant ones.
But one thing I can't stand is the failure of regulators to realize the power of their own words. With just a few turns of a phrase they can create more order than months and months of hearings on rule-making that will be finished after the horses have left the barn.
That's why it is imperative that either Treasury Secretary Janet Yellen or SEC Chairman Gary Gensler simply come out and say they are uncomfortable with all of the leverage they are seeing in the crypto markets. Today we saw Treasury opine on shifting income tax-free via cryptocurrencies, and that's all well and good, but it has nothing to do with what really matters: stopping a trainwreck before it happens.
Either Yellen or Gensler simply has to say, "we don't like how much leverage there is in the crypto world and we urge individuals to get off margin and we urge institutions not to lend money to potential buyers of these securities." Then they can follow up by saying that they will seek to shut down any institution that is offering excessive leverage, especially those that are giving clients 100 to one money, meaning that every dollar buys $100 of Bitcoin.
Further, they can say that while they don't believe right now they can shut down any institution, those that offer more margin than institutions currently offer for stocks - dramatically less than for crypto - will be subject to regulation and severe penalties and they strongly advise individuals not to take down so much debt to buy crypto.
That way, without an ounce of cumbersome rule making, they can stop this craziness and lunacy before people lose tens of billions of dollars and all sorts of shadow institutions go belly up. Way too many regulators underestimate the power of their words and their words would add an element of prudence to this wild west behavior.
This kind of activity should come easily to Gensler. He slammed the entire industry in his excellent "the Great Mutual Fund Trap" back in 2002. It was a revolutionary attack on how investors are losing billions to the brokerage and mutual fund businesses. Just because he's now the SEC head doesn't mean he is prohibited from saying something similar about the crypto craziness. If anything it's even more imperative that he do so about this crypto lending travesty.
Way back in 2006, the Federal Reserve knew that people were buying homes with no money down and shoddy documentation. They watched helplessly as the housing market got more and more heated and lots of arcane and abstruse securities were being built around these shady mortgage bundles. They did nothing.
I often wonder, however, if Fed Chief Ben Bernanke had simply said, he didn't condone this kind of lending and bank examiners were strongly encouraged to stop it and demand that much more collateral and documentation be put up by mortgage seekers. Had Bernanke simply said, "I favor banks that insist on putting 50% down", I believe we would never have had the Great Recession.
I think that if Gensler or Yellen said the same about cryptos we end the madness. The fact that they won't is severely disappointing and they will regret their complicity if they don't issue such statements immediately.
