The financial sector is currently designed to benefit the financial sector and the high-profile investment community… and literally no one else. Since the 1999 repeal of the Glass-Steagal requirement that once separated traditional commercial banks (where savings are deposited and loans generated) from companies that trade securities and debt instruments in the marketplace now part of ancient history, our financial system is as precarious as ever. Traders need harsh market movements, up and down, to make money. Commercial banks crave stability to encourage credit availability.
Trading institutions love being able to borrow fed funds, currently at near zero interest rates, to use as investment capital on their own accounts to play in a stock market where they have unique, high speed computer access (“flash trades”) to make money for themselves. Why in the world would they remotely want to put that lending capacity into the hands of small businesses at reasonable interest rates when they can make mega-profits on their own?!
Traders also like to create their own bundles and bets on complex amalgamations of indexed securities (“derivatives”) that rise and fall on “difficult-to-understand” formulae it takes mathematicians to analyze. Sometimes they create such clever instruments to support trends they are actually betting against in other transactions! They are aided in this conspiracy by the credit rating institutions whose quality assessments will impact price and profitability of credit-based derivatives. The better the rating, the easier to sell to institutions with defined investment limits and hence the higher the profits. But there’s a catch: the company selling the relevant derivatives gets to pick the rating agency. Of course they will avoid hiring such an agency if it is tough and honest on the risks… they want one that is “easy” to score with! Remember, subprime mortgage bundles were given an A rating by most of these agencies. Nothing has changed.
The Federal Reserve is sensing some issues that we may face soon. The real estate market is flying upwards based on a bit more credit (some from Fannie and Freddie) at pretty low rates. But everyone, particularly the Fed, knows that this cheap, subsidized interest rate is not long for this world. In the not-too-distant future, interest rates will begin a significant move upwards. Not only will variable rates rise, but rates on new loans will definitely splash water on the fiery-hot housing market, probably dragging prices back down.
“[On August 19th], the Federal Reserve described some significant shortcomings in the banks’ responses to the so-called stress tests… Despite the severity of the recent housing crisis, the Fed said some banks were not taking into account the possibility of falling house prices when valuing certain mortgage-related assets for the tests.” New York Times, August 19th. They’re back into the “real estate prices only go up” syndrome. And yes, the banks would rather play with their capital than hold it in reserve for an obviously-coming rainy day.
And it’s not as if the administration is missing the issue: “President Obama urged the nation’s top financial regulators on Monday to move faster on new rules for Wall Street, telling them in a private White House meeting that they must work to prevent a repeat of the 2008 financial crisis… Administration officials and some lawmakers have expressed frustration that critical parts of Mr. Obama’s overhaul of the financial system, which was voted into law three years ago and is known as the Dodd-Frank act, remain unenforced as an alphabet soup of federal agencies wrangle over how to adopt it.
“In particular, top presidential aides have highlighted the failure in putting the Volcker Rule into effect. It would prohibit banks from risking institutional money in certain speculative investments. Last month, Jacob Lew, the Treasury secretary, complained in a speech that the regulators were moving too slowly to confront the dangers of banks that are so large that governments cannot allow them to fail for fear of bringing down the economy.” NY Times. Why is such an obvious set of very, very serious issues being left to dangle in the wind?
The GOP-dominated House of Representatives, with Congress people facing an election every two years (and needing the support of campaign contributors to keep their jobs), belongs to Wall Street. They opposed expanding financial protection and limiting the cowboy mentality that dominates the trading world, arguing to their gullible constituents that they are supporting a “free market” economy and keeping government out of the regulatory process. Sounds “all-American,” but it is a great big lie. With the playing field already tilted in favor of the traders, they are just tilting that table increasingly in the wrong direction. They are withholding funding for regulatory agencies, the Senate’s filibustering minority is slowing down appointments to administrative positions and refusing to consider the kinds of further regulation that would stop our addiction to precarious markets.
If Canada has been able to avoid big recessions and depressions throughout modern history, the United States has created a very opposite roller coaster ride between soaring markets and severe economic downturns. The gyrations hurt the job market like nothing else. They slam middle class existence, destroying lives along the way. And they make traders rich.
Former Citigroup CEO, Sanford Weill (pictured above), a man who led the deregulation process from atop one of the largest financial institutions in the world and screamed with joy under the “too big to fail” assumptions that got rid of the restrictions in Glass-Steagal has seen the folly of his actions. Last July, in an interview on CNBC’s SquawkBox, Weill supported the putting Glass-Steagal’s separation of commercial banking and trading back into effect and creating regulated exchanges for derivatives. “So let commercial banks take deposits and make commerce loans and real estate loans in such a way that they are not going to risk the taxpayer dollars. If they want to hedge what they’re doing in their investments, let them do it in a way that it can be mark-to-market on a daily basis,” he said. But with Congress slorping at the donation/Citizens United trough, and Wall Street power brokers making sure it is well stocked, don’t expect any meaningful reform anytime soon. We probably need another meltdown to throw these mega-corrupt elected officials out of office. How much pain will average Americans endure “next time”?
I’m Peter Dekom, and we apparently have the kind of regulatory structure we deserve though our own failure to act.
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