Obama's Financial Reforms: Five Reasons Why They Are Likely to Fail
"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." John Maynard Keynes
The Obama Administration has put together a wide-ranging set of reforms that attempts to re-regulate the financial sector. It calls for a new consumer protection agency to protect us from mortgage mischief. For the first time, it regulates some (but not all) derivatives. It calls for new controls on "too-big-to-fail" institutions. It attempts to control out-of-control leveraging. It brings private equity firms and hedge funds under stricter supervision, and it develops new ways to monitor and (hopefully) control systemic risk.
But these measures are unlikely to prevent the next meltdown because they do not address the root causes.
1. The financial sector is bloated and will remain so. It's still more profitable to produce a fantasy finance derivative than it is to produce a car or any other tangible product in the real economy. In fact, our economy is totally misshapen. At the time of the crash, the financial sector accounted for about one quarter of our GDP and over 27 percent of all corporate profits. In 1950 there were about eight manufacturing jobs for every job in the financial sector. Now its about 1.5 to one. And its only getting worse. Even during this enormous financial crash, the financial sector still is at or near full employment: The unemployment rate was 4.9 percent in financial services; 7.5 percent in real estate; 12.6 percent in manufacturing; 17.4 percent in administrative and support services; and 19.2 percent in construction.
To reshape the economy would require two policies that the Administration wants to avoid: wage caps on executives throughout the sector and taxes on all financial transactions (see number 5 below).
2. Financial institutions that are Too Big To Fail will still be Too Big To Fail. While the Obama proposals will more carefully monitor and control the largest and most systemically entwined financial behemoths, it refused to break them up, or take the over, or turn them into public utilities. In fact, there is every reason to think that large financial institutions will grow larger as they feast on smaller ones that are struggling. These institutions are far too big to run efficiently. It's impossible for the top executives to keep up with hundreds of thousands of employees and trillions in investments. But bigger always means bigger bucks for the executives. They will again make the money, and still we will have to bail them out when they fail.
3. The derivative casino is still open for business. While the regulations set up new controls on plain vanilla derivatives, it exempts custom made derivative products. This means that our brilliant financial engineers can continue to design impossibly complex and risky products for its clients. I suspect the new regulations would still permit the creation of the synthetic CDOs that fleeced $200 million from five Wisconsin school districts (see the first chapter of The Looting of America at http://bit.ly/F5lh1).
Even if the first generation of regulators will take a firmer stand on derivatives that straddle the custom-made divide, what happens when the political tides change and new, more "market-friendly" regulators take the reigns? Obama will have given them all the loopholes they'll need to exempt anything their revolving-door Wall Street comrades desire. And I don't think having the issuer hold on to five percent of what they've created will make a bit of difference. As far as I can tell, they will be permitted to hedge that bet in a myriad of ways. (That piece of regulation might as well be called "The Financial Engineers Full Employment Act.")
Clearly the Obama Administration refused to follow the advice of George Soros who suggested that all derivatives should be approved before they are unleashed on the economy (just like prescription drugs), and if they are too complicated for a regulator to understand, they should be banned.
4. The wealthy have too much and therefore the demand for fantasy finance gambling will continue. You can regulate the Wall Street casinos all you want but if there is too much surplus capital around, new casino games and asset bubbles will be created. Demand will create Supply. (Hasn't Obama learned anything from the failure of the "Drug War"?) The casinos were created because we encouraged an enormous amount of wealth to accumulate in the hands of the few.
During the orgy of tax cuts, deregulation, and union busting of the Reagan years, the top one half of one percent of all families saw their wealth increase by $1.45 trillion while the bottom 40 percent saw their wealth decline by $256 billion. In 1970 the top one percent garnered 8 percent of our nation's income. By 2006, they took away 23 percent. In 1970 the top 100 CEOs took home 45 dollars in compensation for every dollar earned by the average worker. By 2006 it was $1,723 to one. Meanwhile the real average wage (in 2007 dollars) of non-supervisory production workers--about 94 million of them--declined from $746 per week in 1973 to $612 in 2007.
The money didn't trickle down. When the wealthiest few ran out of easy investments in the real economy, they turned to Wall Street's fantasy finance casinos. The new proposals do nothing to address the wage/income disparities that feed the demand for bubble assets.
5. The proposed regulations don't pay us back. While the proposed regulations include fees on financial institutions, this is chump change. The Obama Administration missed an enormous opportunity to support efforts like HR 1068, the "Let Wall Street Pay for Wall Street's Bailout Act of 2009" introduced by Rep. Peter Defazio (D-OR). While not ideal that bill wisely would place a one quarter of one percent tax on most financial transactions to pay the public back for TARP funds. This would have set up the most efficient way to move funds from the bloated financial sector into infrastructure investments for the real economy.
I hope that history will prove me wrong. I don't want to see more suffering and I would like the Obama administration to succeed. But history is a very cruel teacher, especially when we don't listen And right now it is screaming at us to dramatically reduce the size and influence of the financial sector, and to fundamentally address the obscene and systemically dangerous concentration of wealth in too few hands.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What we can do about it. http://bit.ly/rltb4(Chelsea Green Publishing, June 2009)
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"Clearly the Obama Administration refused to follow the advice of George Soros who suggested that all derivatives should be approved before they are unleashed on the economy (just like prescription drugs), and if they are too complicated for a regulator to understand, they should be banned."
There you have it. Finally, I read that someone understands that it all has become too complicated for even the regulators to understand. Or there is not enough incentive for anyone to even try to understand. All of this is over my head but the answer seems simple.....transparency, transparency, transparency.
Obama doesn't understand what is going on. Bush.......please. Name one US senator who understands this article or Wall Street as it currently exists.
Eliot Sptizer might be the only one who truly gets it. So overhaul the system until someone can understand it!
But the system cannot be repaired without a fundamental reform of our money system. Unles we federalize the Fed and claw back the power to create our money supply from the banks to the government where it belongs, regulatory reform, however necessary, will fail to get the job done. We will still have an inherently unsustainable system of private fractional reserve banking.
So anyone advocating anything less than reforming our money system by eliminating fractional reserve banking and placing the money power in the government is part of the problem, not the solution.
See Les Leopold's Profile
Thanks for your comments. Got a question for you. In the first chapter of "The Looting of America" I describe how five Wisconsin school districts were lured into risky investments in synthetic CDOs and then lost about $200 million. Does anyone know if the Obama Administration's financial reforms would control or prohibit such sales? (As far as I can tell, if the issuer of the security keeps five percent of the securities sold, the school districts still could be fleeced.) thanks
We need plans that will work..!
Nationalize all major energy...!
Nationalize the major banks...
Nationalize Health Care...
Set Usery Law at 15%
Reset the mortgages of primary homes for the current market value and give the people a fair low rate 5.5-6% tops...
Nationalize our major Airlines..
Preserve Steel manufacturing, Ship Building, Aerospace and Auto and Truck Manufacturing when and were required...
They are essential assets...
Yah, the bailout was never about us middle class folk. If I'd have been given 59,000, instead of the government obligating me for that same amount, I'd have paid it toward my mortgage. The bank still would have gotten their money and I'd be sitting pretty. Instead, the government spends 59,000 on my behalf and I am no better off.
Who did the bailout help? Tell me again?
toldya. Great point. The bailout happened to quick and I can't tell you who it helped.
Sad but true, since Regan's day in the sun the American distribution of wealth has simply been retuning to the historical norm. indeed, the norm for social wealth and power distribution has always been pyramidal in its design, with a few super wealthy at the top and a broad base of either slavery or virtual slavery at the bottom. That brief period following World War Two where the American middle class swelled beyond all recognition was never going to be sustained.
The hard fact is that you either find a way to join the rich and powerful or you find yourself a pawn serving the rich and powerful. At least so far in America there are no absolute road blocks preventing one from a climb to the very top, short of one's own conscience of course.
Exactly what Kevin Phillips has been saying for the last 3 years with regard to the state of the economy. His books are all well worth reading as is Free Lunch by David Kay Johnson..
This top 1% is cannabalizing our country....
exactly, so why penalize the rest of us with higher taxes? The real growth and opportunity is in small businesses
The govt would have you believe that the magic number between those who are wealthy and those who are not, is an income over $250k. That's ridiculous. There should not be discouragement for people to make over that if you want to have employment growth.
Warren Buffet agrees that the super rich are under taxed. He admits, that w/ loopholes, he pays about 17%. Close the loopholes for the super rich but leave the entrepreneur class alone.
Obama is just another politician. sorry
Its tough to get off the "juice". Unfortunately, human nature rarely, if ever, is proactive. The recent economic down turn was a wake-up call, but many of the proposed recommendations are "treating" symptoms. It will take a meltdown of all meltdowns before the addict walks from the juice.
Les is conceptually right on. I have been saying the following all along:
If you are paying any attention at all to the looting of America's middle class, you should by now understand there are at least six reforms that need to be undertaken.
1. The 5 former investment banks and AIG need to be put into receivorship and broken up. By keeping them too big to fail, we are growing them into to big to save, which means catastrophic collapse the next time, and history teaches there will be a next time.
2. Every person who was involved at those institutions and everyone above them needs to be fired. A message to the financial sector. We may have to bail them out, but no more corporate welfare.
3. The rating agencies need some stiff punishment. They sold us out for money.
4. Credit Default Swaps need to be treated like the insurance product they are. That means reserves.
5. Owner occupied home mortgages need to be taken out of the hands of Wall Street gamblers. This is the single biggest asset most Americans will ever own. It should not be a gambling chit for greedy market speculators. Fannie Mae and Freddie Mac can take them over.
6. How about a middle class bailout? Owner occupied home mortgages need to be lowered to 3%. That will save the middle class and free up enough capital to jump start America's economy.
#6, especially, is a great idea
Jannsmoor. Your point #2 is so outrageous that it undermines all of your other points. Saying everyone should be fired is beyond ridiculous (who would fire them?). Being overly reactionary is for dictatorships and for those who pretend to be shocked (congress) that this crisis is happening.
Doesn't it seem like their goal is to bring down the economy? It's not logical or practical or sustainable, and it may be a slight step in the right direction, but basically everything is the same. Sooner or later no one will be playing, "house of cards," anymore. We'll just fold. We're out. Game over. Maybe there's a new game we can play. It's obvious that all this money stuff is just made up. How about another bailout directly to Americans? Isn't it time? Don't you want the "house of cards" game to continue? It can't without our buying power. It wont work if we can't pay back any debts because of usury or excessive medical expenses. Oh sure, we can rattle it along for a few more months maybe, but unless major reforms are enacted in favor of the consumer, the bottom 80%, I'm afraid it's too late to save this game. There's been a sea change, as in, it's warming up and there are more important things than juggling a lot of numbers in a computer and acting like we owe 29% interest on those numbers.
Okay, now what can we do about it?
let govt set the rules then, get out of the way. Nationalizing any business will do nothing but increase corruption and inefficiencies
You are spot on.
A comprehensive set of stress tests that address deteriorating credit quality and/or market value of portfolios, inability to roll short-term debt, default of a major counterparty, etc. should do the trick. The stress tests would get adjusted periodically to pick up the latest trends. The rest is implementation and oversight to make sure institutions are applying the stress tests properly.
When it comes to regulation, conceptual simplicity is key. Creating thousands of complex rules and setting up layers of bureaucracy will only allow financial institutions to find another loophole. That’s what happened with the Basle Accord.
Unfortunately simplicity doesn’t get votes, and when you have an administration that runs a permanent campaign, populism sometimes becomes the mantra.
http://www.SoberLook.com
Nobody in DC can believe that those powdered fellows in the luxury suits who have of late been so dependable as sources for campaign cash could really be as bad as they sometimes look in the news stories. The nice men gave them cash! And they will again, if only some means might be contrived to return the powdered prices to profit. Thus our strange reforms, which sequester our overclass from the consequences of disastrous dice-play, yet vouchsafe their profits when the gambling goes good. Politicians of both parties have risen in present society, and they make and keep friends among the powerful whenever possible. How can a society which has allowed the politicians to rise to great office be so badly askew that unbalanced sociopaths would ahve found their way to the top of the financial sector? It's enough to make one question one's own rise-- so the question can never come up. We now have institutionalized an overclass of financiers, who have the US Treasury as guarantor for all their speculations. And the people go begging for honest representation of their interests, while the politicians remain the grateful beneficiaries of the crumbs that drop from the gamblers' tables.
Meant to type 'princes' not 'prices' in sentence 3.. .
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