With the House and Senate at work on differing proposals for financial reform, real change in the financial system seems more elusive than ever. Rebounding bank profits, a direct result of government giveaways, and gobbledygook from the industry have successfully fogged the issue. The vast public is in danger of losing sight of what was once, for a brief moment, plain as day: the financial system in its current form is ill-designed and unstable. Here are five essential facts the financial industry would rather be ignored.
- Investment banking was the specific source of the problem. The so-called financial "tsunami" was entirely man-made. The problem arose directly and specifically from widespread abuses of trust involving inordinate risks taken with other people's money. Investment banking in its pure form is the arrangement of risky deals for third parties to participate in. Like real estate agents, investment bankers collect fees on completed deals. Those fees increase with the size of the deal, and with its risk. The problem arose when individuals charged with prudently managing other people's money began to imitate investment bankers seeking ever bigger, ever riskier deals with the associated high fees. The problem multiplied as investment bankers, through their marketing efforts and through institutional ties, gained access to huge pools of capital in our financial system to exploit for their own purposes. Never again should government funds, our own money, be used to subsidize irresponsible risk taking for the benefit of dealmakers. Nor should commercial banks, so essential to the modern economy, be conflated with investment banking schemes.
- Investment bankers were given a second chance. And not just any second chance. Instead of punishment for obvious transgressions, they've been rewarded beyond their dreams. So far the Federal Government has provided nearly 3 trillion to bail out the financial sector and promised a further 8 trillion if necessary. Investment bankers were big beneficiaries. Some benefits were direct, for example the government backed rescue of Bear Stearns, the government guarantee in the Merrill Lynch/Bank of America deal, TARP funding to financial firms, and widespread access to free money at the Fed's discount window. Others were indirect, such as the bailout of AIG from debts that it couldn't pay to Goldman Sachs among other lenders.
- Investment bankers are now even more thoroughly integrated into the system. During the panic, investment banks were either bought by commercial banks -- Bear Stearns bought by JP Morgan, Merrill Lynch bought by Bank of America, Lehman absorbed by Barclays -- or magically converted into commercial banks like Goldman Sachs and Morgan Stanley. This has several effects. First, institutions, like Merrill or Bear Stearns that were deemed too big to fail are now even bigger, effectively guaranteeing that no matter what they do the public will be on the hook. Second, investment bankers now have access to even more money to use for their risky deals. And finally, through investor insurance and similar guarantees the public fisc is explicitly committed to some of these risky activities.
- Incomplete reform won't work. Major proposals, including those now being worked on by both House and Senate committees as well as the White House proposals fail to comprehensively tackle the root cause of the crisis -- bankers making huge profits by taking inappropriate risks with other people's money. The most useful part of these proposals is to mandate higher capital requirements on large and interconnected firms. That's a step in the right direction. But commercial banks already had very strict capital requirements, yet that didn't stop Citibank and Bank of America from getting into trouble. Any loopholes, whether via derivatives or newer financial schemes, will provide an end run around stricter capital requirements. Without rethinking risk across the board higher capital requirements won't be very effective.
- Policymakers confused cause and effect. The government's economists rightly recognized that banks are strong when the economy is strong. But they foolishly sought to strengthen the economy by strengthening banks. In fact for every dollar spent to stimulate the non-financial economy, three times that amount has gone into the financial system. The functions of banking are essential for the economy to prosper. But specific banks when bankrupt should be sold and reopened under new management. After committing nearly one year's total national economic output, the government has helped Goldman Sachs have one of its most profitable years ever while legions of firms and individuals deemed small enough to fail, fail.
The purpose of comprehensive financial reform isn't to limit bankers' wealth or to prevent yesterday's specific problems. It's about strengthening the financial system. Reducing systemic risk will benefit the whole economy, and in the long run the banks themselves.
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http://www.nytimes.com/2003/09/11/business/new-agency-proposed-to-oversee-freddie-mac-and-fannie-mae.html?pagewanted=2
obama is turning out to be the BIGGEST DISSAPPOINTMENT of the century, he is delivering the DIAMETRICAL OPPOSITE of "real Change".
Nothing will really change until we strengthen our manufacturing system. Germans have done it and we can do it too if we greatly diminish the choke hold Wall Street has on our government.
China and India have been buying vast quantities as they and others recognize that the American dollar losing value as fast as it is printing money. China indicated it was considering going back on a gold standard and then swiftly denied it and slowed their gold purchasing which is having the intended effect of lowering the price of gold. Once it gets down a bit, you are kidding yourselves if you think they will not jump back in and buy again. If China then decides to go back on a gold standard, America will be forced to devalue the dollar. Obama better figure out – quickly - that if he does not address America's production of durable goods we will never again be a super power and will instead be mere pawns. Services are fine as long as you have tangible things to service. But America will not maintain its world power position as a strictly service nation.
But, why did Banks make bad loans, which is the root of the collapse of the sub-prime markets. Until we recognize the role that 75 years of Gov't pushing people to buy homes in the tax code, the increase in Gov't encouragement of home buying during the past twenty years, and the fact that everything the banks and Wall Street did was within the weakened regulations put in place by Congress, we will not fix the problem.
On June 27, 2005, Barney Frank said on the House Floor that there was no housing bubble on the horizon and that government should continue pressuring financial institutions to help people buy homes. Now House Financial Services Chairman, Frank continues to push financial institutions to lend and uses the tax code to encourage buyers back into a still overvalued housing market. His recent Financial Reform Bill creates an entity to help prevent these bad loans from being made while he uses his position to pressure banks to make the loans.
Wall Street may be deluding themselves into thinking the house of cards they have built is stable but what happens when everyone continues to keep their belts tight?
There's lots of talk about how we, the taxpayers, are now the "owners" of the these bailed-out companies and should get a say in their operation just as other investors who hold stock in the company. That will never happen and here's why - who actually holds the loans, backed by future tax revenues, that funded the bailouts? These are the true owners of the bailed out firms. The U.S. won't be able to afford to service those loans without significant tax increases and it will only get worse as we keep pumping tax dollars into these companies. I think the U.S. isn't willing to risk serious economic warfare by nationalizing these businesses and stiffing the creditors.
We buy a lot of cheap stuff made in China - what happens if those products suddenly triple in price? Quadruple? Saying "Buy American!" won't work since we've outsourced our manufacturing; we can't make things here anymore. This scenario, more than any other, is probably what will trigger a taxpayer revolt.
Borrowing money from your friends usually ends badly; it gets worse when you are in debt to your enemies.
7. 98% of economists missed the crash completely. This corrupt profession made up of neoliberals purposely seek to use complex mathematical modeling to "fit" complex equations in order to support equilibrium to a preconceived set of fixed assumptions that ignore the simply fact that compound interest grows exponentially but economies don't. This is a primary reason why 1% own 95% of wealth while collecting 70% of compound interest. They deserve to have their Phd's revoked and flip burgers for now on.
Blaming people who think for a living for the actions of those who steal from their nation is almost as criminal as the theft itself.
I agree with you about the relative lack of value of derivatives. But your model of holding economic theorists to blame for the actions of the boardroom is merely ideological spite.
They ignore facts like how interest grows exponentially but economies do not. How when money is created as debt the interest is not, which forces us to always grow to pay the bankers interest, 70% of which goes to the top 1%. They don't see the illogic in how we allow a private FED to create money then lend it back to us at interest for which we must pay income taxes. No one seems to mind that the principals of Adam Smith and our classical economists are barely even taught.
The elite have changed our education system to train economist to support their corrupt privately run monetary system.
Why should they have access to OUR MONEY at interest rates near zero only to turn around and lend OUR MONEY to us at 29.99%?
If the financial reforms are watered down, there will be high fives all over Washington and Wall Street I'm sure ... but that doesn't address the fatally flawed economic system that was created at the end of the Ciinton Administration by Phil Gramm that allowed, among other things, the creation of a 613 trillion dollar derivative bubble which will eventually pop as these things do, but in the meantime the Wall Streeters and their concubines on Capitol Hill can continue believing they are the Masters of the Universe until the inevitable occurs. Lucky us.
Outlaw all derivatives!
Force investment back to main street.
'2.Investment bankers were given a second chance. And not just any second chance. Instead of punishment for obvious transgressions, they've been rewarded beyond their dreams. So far the Federal Government has provided nearly 3 trillion to bail out the financial sector and promised a further 8 trillion if necessary.'
This is where the election will be lost. Whether a person is a liberal, conservative, teabagger, libertarian, what ever...This fundamental, brazen disparity between the taxpayer and the people who comitted FRAUD, and destroyed the economy of the world. The obvious impunity is insulting and enraging. The President has squandered the opportunity to harness that perception of injustice, much like bush did after 9/11, we had the world on our side.
There are going to be a lot of angry voters out there.
It saddens me to see a promise so squandered.
I agree. They can still be prosecuting for Fraud.
I hope the FBI is doing their job.