Thursday, June 18, 2009

Financial Safeguards: A little late, not nearly enough

Congress and the Obama administration finally got around this week to considering reforms to the financial industry to try to avoid the type of theft, malfeasance and greed that ran the economy into the ground over the last few years.

Frankly, it’s surprising that this wasn’t a matter of first priority for the incoming administration.

One of the stated priorities of Obama’s administration was to restore confidence in the nation’s financial system. It eludes me, how that could be done when the lax rules, watered down regulations and paltry oversight that let a few Wall Street greed heads bring the nation to the brink of another Great Depression for the own personal gain remained in place.

How the faint-hearted proposed reforms will avoid a repeat of that situation also eludes me.

Financial reform should have been pretty straightforward. All it really required was a repeal of the Gramm-Leach-Bliley Act, which repealed the Depression-Era Glass-Steagall Act and replaced the regulations that had kept our economy safe from Depression for 60 years with a deregulation scheme that turned Wall Street into the Wild West.

What was needed were restraints on the trading of derivatives that have no underlying value in the economy and turn the stock markets into casinos.

With all due respect to Colonial Williamsburg, which managed to offset $120 million in losses during the stock market plunge with put contracts on the Standard & Poor 500, such contracts add nothing to the economy of the nation. They don’t represent an investment, they represent a wager.

And trading in such questionable securities, including securitized mortgage defaults, led to the nation’s fiscal and banking crisis, the aftermath of which we’ll be dealing with for the next 20 years. That trading benefited the few, wealthy institutional investors, financial houses (in the short term) and brokers, at the expense of the many.

They also illustrated how the stock market has been perverted over the years.

The stock market was a developed as a way to raise capital for businesses that would then create goods an services that people wanted, thus generating wealth.

It was not meant as a generator of wealth in and of itself.

When the traders drove off the investors, the markets began to go off track.

It’s not surprising that banking and financial interests were able to pay off Congress with campaign contributions to make this happen.

After all, in the decades of ‘70s, ‘80s and ‘90s big money interests were able to buy a bi-partisan consensus to outsource the manufacturing sector of the U.S. economy.

The bi-partisan consensus for that was so strong that the political class never found it necessary to ask the opinion of the voters in an election.

Should you doubt that this was a truly bi-partisan screw up, recall that former President Bill Clinton and former Speaker of the House Newt Gingrich vied throughout the ‘90s to see who could babble on the most about the “Information Economy.” For those of you too young to remember, that was the paradigm under which, although all products were going to be manufactured in third-world sweat shops in India or Sri Lanka or Timbuktu, the U.S. was going to get reach by building web sites, doing accounting and selling insurance for the counties that actually made things.

It didn’t seem to occur to anyone that this flew in the face of history, reason and common sense. The wealth of nations always has been, and likely always will be, measured in terms of natural resources and saleable products. Also, it apparently never occurred to anyone that the Indians, Sri Lankans and Timbuktuans could learn to build their own websites and do their own accounting. Any glib enough liar can learn to sell insurance.

So, having turned the United States, once the greatest exporting nation on earth, into a net importer, the big money boys had to find another way to make money.

They turned to gambling in the financial markets. Since they were mostly gambling with other peoples’ money and being richly rewarded whether they succeeded or failed, this created less anxiety than you might expect.

So while poor people dreamed of winning the lottery, the rich dreamed of hitting it big in the stock market. Or the real estate market. While that resulted in a bubble-driven expansion of paper wealth for a few years, the day of reckoning was soon at hand.

It’s hard to see how the relatively minor reforms that are being proposed change that mindset, so it’s unlikely that they actually address the problem.

Banks will still be able to dabble in the market. Investment houses will still be allowed to speculate on mortgages. Insurance companies will still be able to gamble their customers’ premiums on derivatives.

The new rules will create guidelines, rather than the firm rules of the Depression Era legislation, to try to make sure that banks and other financial institutions do not become overly leveraged.

Proposals to increase consumer protections and limit executive salaries, probably the most worthwhile of the reforms, are considered “controversial” and their fate is in doubt.

More “mainstream” is a proposal that the Federal Reserve oversee large institutions, those whose failure could have large impact on the U.S. economy. Given that chairmen of the Federal Reserve are generally drawn from the same class of pirate/capitalists who run Wall Street, it’s unclear how this will be much help.

Mr. Obama is said to be a big admirer of the last president from Illinois, Abraham Lincoln. In this case, he might more profitably have emulated the second-best Republican president, Theodore Roosevelt.

Presumably, “the trust buster” would have known that a company that’s “too big to fail” is “too big to exist.”

Breaking up some of these large multi-national conglomerates though anti-trust actions by the Department of Justice would also have the effect of recreating some of the jobs they’ve cut by consolidating over the years in the name of “efficiency.”

A look at your 401(k) balance will show you how efficient their version of efficiency is.

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