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.
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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