You have probably noticed that it is now a year and a half since the peak of the financial crisis and we still haven't done anything about reforming financial regulation. We got right on the job of saving the big Wall Street firms and banks and that seems to have worked fairly well. However, what we have done here really amounts to an attempt to stabilize the same bubbles we had going before the meltdown. That was short term thinking during an emergency, so I suppose we can excuse it. It is time to get down to the business of preventing the next bubble and the next emergency.
You might think that one political party having a solid majority in Congress would make this easy. You would think. But not when the industry that is one of the largest campaign contributors can say to them "you follow our lead or we will give more money to the other party". It is the perfect recipe for gridlock. The political situation we have is standing in the way of anything that would alter the status quo in the financial industry, even though we all know we have to do something about this. It seems we citizens just can't win, unless maybe we make it clear to Congress that they aren't going to get re-elected regardless of what campaign funds they may raise if something doesn't get done to prevent another financial crisis like this one. Are we ready to do that?
Many of the major economists and even financiers today agree that there need to be stronger banking rules. Here is a collection of recent quotes on this topic:
From Nobel Prize-winning economist Joseph Stiglitz, back in April '09-
"In many ways, things are worse now than they were before," says Stiglitz. As outlined in his new book, "Freefall: America, Free Markets, and the Sinking of the World Economy," Stiglitz argues we're headed for another financial disaster without meaningful reform.
“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”
http://www.bloomberg.com/apps/news?pid=email_en&sid=aq2ZVAasmSkc
From former Federal Reserve Chairman Paul Volcker -
(Jan 30, 2010 New York Times Op Ed How to Reform Our Financial System)
"In contrast, I tell you that is no substitute for structural change, the point the president himself has set out so strongly.
I’ve been there — as regulator, as central banker, as commercial bank official and director — for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to “lay off” tough regulation will remain — most notably in the fair weather that inevitably precedes the storm.
The implication is clear. We need to face up to needed structural changes, and place them into law. To do less will simply mean ultimate failure — failure to accept responsibility for learning from the lessons of the past and anticipating the needs of the future."
From George Soros, on the proposed Volcker Rule -
Elders of Wall St. Favor More Regulation
(Full article appeared in print on February 17, 2010, on page B1 of the New York edition.)
...In any event, the restriction goes in the right direction, which is why George Soros, the billionaire trader, endorses it and falls into place as one of Mr. Volcker's supportive elder statesmen, referring to him as "an extraordinary public servant."...
"The danger is that Congress and the administration may try to hide behind the banner of Volcker's reputation, enact this one dimension of reform and nothing more, and pretend that it is sufficient to repair the financial system," Mr. Soros said. "That would be a dangerous mistake."
From Nouriel Roubini's RGE Monitor, Feb., 2010 -
"In Dr. Roubini's view , the new Volcker Rule is a step in the right direction. More radical reforms, like breaking up too-big-to-fail financial firms and returning to Glass-Steagall-type restrictions, that are needed to stave off asset bubbles and tame systemic risk may be politically difficult to implement, he warns."
Notice that he said needed to stave off asset bubbles and systemic risks.
"Despite the ticking fiscal bomb, mid-term and presidential elections in November 2010 and 2012 respectively will further constrain political will to undertake necessary reforms. With sub-par economic recovery and an unemployment rate above 9.0% forecast for 2011-12, the Democrats, grappling to maintain power, are unlikely to approve spending cuts, while the Republicans, seeking to revive their prominence, will be unyielding on tax hikes. Even if Obama manages to establish a fiscal commission by executive order, Congress will be wont to reject any radical fiscal reform proposals."
That gridlock again!
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We can never reform the banking system or prosecute the wrong-doing that has occurred until we reform the monetary system itself.
ReplyDeleteConsider: The United States has to re-finance $2 trillion in debt this year. We also have to finance more than $1 trillion in new debt.
In other words, the U.S. Department of the Treasury will have to borrow huge sums of money from large private banking firms.
Imagine the absurdity of Congress simultaneously (1) giving the Department of Justice large allocations to prosecute high-ranking bank executives, while (2) the Treasury asks the banks that those executives represent to pay for it.
It will never happen, and the high-ranking leaders of the executive branch, as well as the relevant congressional committees, understand that there are limits to what they can accomplish if they expect to maintain funding.
What is the solution? That is another topic, but suffice it to say that it will require the process whereby the sovereign indentures itself to private actors.
Correction:
ReplyDeleteSuffice it to say that it will require reform of the process whereby the sovereign indentures itself to private actors.