The long view is that speculative panics, or crises, and regulation leap frog each other. Government puts together regulatory rules that the financial wizards eventually circumvent and another bubble of speculation is unleashed that eventually morphs into a new financial crisis.
Each new crisis is followed by another attempt at regulation.
Then the banks creativity is put into the next effort to evade the new regulation allowing speculation in something/somewhere/somehow that the regulators missed.
That means that the regulations are always behind, responding to the last financial crisis instead of where the next one will occur. That’s the natural order of human endeavor and likely cannot be changed. Some of the regulatory laws passed after the Great Depression were moderated as bankers argued that their sophistication with managing risk had evolved so that past mistakes would not be repeated.
Fed Chairman Alan Greenspan believed that. He has since expressed surprise and some regret at trusting in banks to manage risk. Most pre-recession energy for regulation was coming from outside the Federal government from places like New York, AG Elliott Spitzer. Wall Street loved his political demise and exit.
Political direction did contribute to results. In fact, history would suggest that Republicans deregulate giving Wall Street a new length of rope to hang us with and then Democrats have to chop down the tree. Republicans don’t like government and view regulation as unwanted government intervention in the private sector.
That’s why financial crises tend to happen on their watch. The Justice Department, CFTC, SEC – all dampened their regulatory zeal under George W. The Roaring 20s ran up to the first Depression. They now call booms, “bubbles,” and one preceded the Great Recession of this decade.
Now Congress has to take its historical turn at attempting to restore limits that keep banks from becoming casinos that bet taxpayer money on derivatives that neither they nor anyone else understands.
Another obvious need is to change the system so that when banks go broke, they are allowed to fail, but only hurt themselves in the process, instead of pulling taxpayers and the entire economic system into the black hole with them. This new paradigm has to be created first before they make it illegal to bail out a failed bank. It will be interesting to see if they are really ready to change the entire landscape or just rearrange the deck chairs on the Titanic.
Banks make money speculating, but as proven, end up losing taxpayer money. Yet, they fight the Volcker rule that would separate traditional and investment banking as a firewall to protect the taxpayer’s interest. Right now, the effort to legislate financial reform is about 80 percent politics, 20 percent substance. It’s mostly posturing for re-election.
It’s hard to find anyone running for office that would actually vote for TARP. I would. TARP avoided a financial Armageddon, one of the best interventions and low cost relative to returns program that the Federal government has ever executed. To think that even after regulatory oversight is tightened, that a big bank will not find a way to commit suicide is hubris.
Some mechanism needs to be put in place deal with it. “Just let them fail like that can occur in a vacuum without systemic ramifications is ideologically naive. The Democrats’ idea of establishing an FDIC-like fund financed by the investment banks so taxpayer funds are never again used, was a good idea.
Carl Rove argued, however, that a fund financed with the bank’s own money somehow gave them a leg up on Main Street because they would somehow be able to borrow money cheaper than traditional banks.
Baloney! The net cost of the big banks borrowing would include what it costs them to sustain the fund.
Treasury Secretary Geitner called such charges “nonsense,” saying, “The financial reform proposal that Democrats are advocating would give the government power, should banks once again get into trouble, to ‘put them out of their misery by winding them up.'” Better to use the banks’ money then taxpayers’.
While Goldman Sachs execs had to sit for 10 hours in the Senate hearing, most Senators only came in to get their time in front of the camera and then left. It was said at the Goldman hearings the smart people being asked the questions were trying to act dumb, while the dumb people asking the questions were trying to act smart. I doubt either one succeeded.
The irony of congressional hearings is that the competence, expertise, and proficiency of the politicians asking the questions is never any higher than whoever they have on the hot seat.
Congress is consumed by partisanship, incapable of real problem solving so they take shots at others like Goldman Sacks because they need a villain to deceive the public over who the real failures are here. No entity in the U.S. has been more fiscally irresponsible than the U.S. Congress.
Goldman Sachs is easily fixed. Congress is not. Goldman Sachs clients are sticking with the firm because irrespective of them not being perfect, they are very good.
When Congress fails to reign in spending and interest rates soar, and taxes explode because the politicians can’t do the right things, who will hold the hearings to investigate Congress?
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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