This page has been archived and commenting is disabled.
Financial Reform Doesn't Need to be Complicated
In response to Senator Dodd's proposed bill - which uses a lot of buzzwords that sound like reform, but really just maintains the status quo - several writers have forcefully argued that we need to focus on the actual purpose of banking.
As a number of people have pointed out, any bill which is 1,136 pages long will contain loopholes big enough to drive a truck through and more holes than swiss cheese. Almost no one will actually read the
bloody thing, those that do will see that it is rife with ambiguities.
And it will get so marked up by the time that it works its way through
various committees that - by the time it is passed - there will be more
hole than swiss cheese.
Unless financial legislation addresses
the big picture - why do we have banks and what do we want them to do -
nothing will really change.
One blogger sums up the big picture argument pretty succinctly:
I
worry though that — despite the healthy impetus and rhetoric [in the
Dodd bill] — that the center of thought on all this seems stuck in the
same equations, theories, ideas and general zeitgeists about efficiency
and all that. Just a bit of big-time tweaking is all we need... But a
new coat of paint on a rotting wall will eventually chip and crack.
No,
we need to make them really think. Let’s have a “Preamble” to this
legislation, like the Bill of Rights is to the Constitution, that sets
up the Philosophical ground. What’s a bank for? What’s a financial
system for? What is the public good?
I have
repeatedly written that Glass-Steagall should be reinacted, and that
banks should choose either to act as traditional, safe depository
institutions or as speculative funds, but not both. I have also argued
that companies which extend credit should be treated like public
utilities. But craazyman hits the nail on the head with very few words:
we need to focus on the overall purpose of the banks and the financial
systems.
And fund manager Marshall Auerback provides a detailed proposal for a public purpose test:
We
feel that the ‘race to the regulatory bottom’ could easily be solved
via a simple mechanism: If you don’t fall in line with our regulatory
requirements, you’re simply denied a banking license to operate in this
country. Problem solved. The United States is the biggest banking
market in the world. Do you think any major bank would willingly vacate
this market?
And even if the “too big to fail” behemoths decided to
transplant a bunch of their operations elsewhere, the country would
still be left with thousands of community banks which could fill the
void and better fulfill the public purpose described by Mr Blankfein:
namely, to “help companies to grow by helping them to raise capital”,
rather than extracting their pound of flesh via grotesquely high
financial intermediary fees, as is the case today...
WHO controls
the banks is ultimately less important than HOW we control the banks’
activities. Oversight is all very nice, but at times it pays to get
back to first principles. What on earth is the public purpose of these
things?
Banks are set up and supported by government for the
further benefit of the macro economy via providing a payments system
and lending in a way that is specifically defined by regulators.
Newsflash: the public purpose of banking is NOT to provide profits per
se to shareholders. Rather, the provision of the ability to earn
profits is only a tool used to support the attendant public purpose.
Banks should only be allowed to lend directly to borrowers, and then
service and keep those loans on their own balance sheets. There is no
further public purpose served by selling loans or other financial
assets to third parties, but there are substantial real costs to
government in regulating and supervising those activities. There are
severe consequences for failure to adequately regulate and supervise
those secondary market activities as well.
Banks should be
prohibited from engaging in any secondary market activity because it
serves no public purpose and may result in severe social costs in the
case of regulatory and supervisory lapses. Some argue that these areas
might be profitable for the banks, but this is not a reason to extend
government sponsored enterprises into those areas. Therefore, banks
should not be allowed to buy (or sell) credit default insurance. The
public purpose of banking as a public/private partnership is to allow
the private sector to price risk, rather than have the public sector
pricing risk through publicly owned banks.
If a bank instead
relies on credit default insurance, then it is transferring that
pricing of risk to a third party, which is counter to the public
purpose of the current public/private banking system. Banks should not
be allowed to engage in proprietary trading or any profit-making
ventures beyond basic lending. If the public sector wants to venture
out of banking for some presumed public purpose it can be done through
other outlets.
If the activities of the banks are not
facilitating the production and movement of real goods and services
what public purpose do they serve? It is clear they have made a small
number of people fabulously wealthy. It is also clear that they have
damaged the prospects for disadvantaged workers in many parts of the
world.
It’s more obvious to all of us now that when the system
comes unstuck through the complexity of these transactions and the
impossibility of correctly pricing risk, the real economies across the
globe suffer. The consequences have been devastating in terms of lost
employment and income and lost wealth.
All governments
should sign an agreement which would make all financial transactions
that cannot be shown to facilitate funding for real goods and services
illegal. Simple as that. When we keep these principles at the
front of the argument, we can see that what Senator Dodd and
Congressman Frank are arguing about is akin to how to rearrange the
deck chairs on the Titanic.
- advertisements -
The last paragraph sums it all up perfectly. Banking reform IS easy and common sense! Additionally, draw up a list of 50 items in banking and financial markets that make no sense. Address each one systematically.
1) abolish GS banking license. Does Great Satan take deposits?
2) all derivatives move to exchanges
3) eliminate all dark pools. Hiding in the shadows is not transparency.
4) If you write derivatives, you hold appropriate capital reserves
etc. etc.
This stuff is not rocket science. We've become afraid to tackle the financial Frankenstein because we think the problem is too big. It isn't. You just write out the list and tackle each issue one by one.
The financial wizards at ZH could probably produce a list of 50 items for banking reform in all of 20 minutes. Thanks to ZH for being the global financial markets cop. Your contribution is priceless. It is time to build a better world for everybody. Most Americans and most people are good people. They don't deserve to be abused any further by the likes of Great Satan or their merry band of financial whores. Cancel that, the whores are at least transparent and straight forward, unlike Blankfein the pulpit preaching closet saint. Cough. Cough. Asphyxiation.
Agreed, banking reform is easy and common sense. Draw up a list of 50 items in banking and financial markets that make no sense. Address each one systematically.
1) abolish GS banking license. Does Great Satan take deposits?
2) all derivatives move to exchanges
3) eliminate all dark pools. Hiding in the shadows is not transparency.
4) If you write derivatives, you hold appropriate capital reserves
etc. etc.
This stuff isn't rocket science. We've become afraid to tackle the financial Frankenstein because we think the problem is just too big. But it isn't. You just write out the list and tackle each issue one by one.
The financial wizards at ZH could probably produce a list of 50 items for banking reform in all of 20 minutes. Thanks to ZH for being the global financial markets cop. Your contribution is priceless. It is time to build a better world for everybody. Most Americans and most people are good people. They don't deserve to be abused any further by the likes of Great Satan or their merry band of financial whores.
Financial Reform Doesn't Need to be Complicated
I say that depends on which side of the campaign contribution you lie. (pun intended on lie, of course)
The fundamental problem with banks in the US is that 330 million Americans see no need to monitor what their banks do -- the FDIC will take care of them if they go foom, anyway.
If the FDIC didn't exist, people wouldn't concentrate their banking for fear that a bank run would ruin them. They'd scrutinize bank financials for any hint of risk. Bankers would compete on how conservative they were, rather than what yields they could get.
Given that the FDIC has allowed Americans to pretend that bank risk doesn't exist, the FDIC should be staffed and operated by experts, who strictly maintain their integrity and competence, right? Don't make me laugh....
Either the FDIC should be scrapped entirely....or my modest proposal would be that any time an FDIC-insured bank goes under with a loss to the fund, all regulators who touched that bank's file in the last 12 months should lose their last 12 month's salary; anyone with responsibility to have touched that bank's file in the last 12 months but who didn't should lose their last 12 month's salary, be terminated immediately, forfeit all accrued benefits (incuding pension), and receive a lifetime ban from working in the financial sector or government again; and -- if any bank's losses are greater than 25% of deposits -- the head of the FDIC should be dragged into the street and shot like a rabid dog.
That should get that "Prompt Corrective Action" thing working the way it was supposed to, post-haste.
And, of course, for those unfamiliar with Jonathon Swift, everyone concerned should have infant fricassee for dessert.
Still, it wouldn't be such an outrageous concept if regulators were to have as much "skin in the game" as those regulated.
Canada had a much smaller version of the sub-prime crisis, our Asset Based Commercial Paper (ABCP) as explained in this lengthy paper:
www.expertpanel.ca/.../The%20ABCP%20Crisis%20in%20Canada%20-%20Chant.English.pdf
The author cites some cogent reasons for the failure:
It's lengthy, but it's an interesting read, and has many lessons that can be applied to prevent future problems:
The brief is cogent, intelligent, and is only 51 pages long (which includes title pages and appendices)
Exactly. The idea of "acquire to distribute"- and, in fact, "create to distribute"- was what prompted this entire mess.
When Countrywide is allowed to write any junk they want and sell the packaged junk to anyone else in the world (like thousands of little bombs marked "good as gold" on the packaging...), whilst having absolutely no residual responsibility, it becomes like risk-free, perpetual profits in their minds.
When Golden Slax is able to repurchase the bombs and "distribute" them to someone else at a mean profit, whilst basically taking the opposite side of the trades with default insurance, it becomes compounded profits with near-zero responsibilty for them.
Obviously, if you allow banks to create, package, insure and re-insure tranches of incredibly mislabelled junk with no downside reponsibility on their part, they will do it every time they get a chance.
It is common sense for a regulator to say, "No. You made it, you own it." (At least a substantial and potentially high-risk portion...) If that were to happen, I would bet that practice gets stopped in its tracks.
Fractional reserve banking is no more evil than alcohol, and banning it as useless as prohibition. Moderation and scientific control of monetary base expansion matched to real GNP growth and sufficient margins keep the game in full effect...regard the CBOT/CME model..defined leverage, transparency, mark-to-market at the close. In mortgages that would be the old school model of 20% down payment and mid -thirty% monthly payment P & I and insurance.
The Fed cartel should be broken. No bank should be given monopoly on notes of issue. The FDIC should be abolished. The fear of bank runs and personal liability should take care of the rest.
The Fed monopoly on currency should be abolished. Government back stops should be abolished. The market will take care of the rest. Put the fear of a good bank run into the bankers.
Banks require so much oversight and regulation and are prone to fail at the drop of a hat because they CREATE the money they loan out of thin air. This is a no brainer for me. Require banks to loan money that actually exists and has either been loaned to them by depositers or comes out of the owners personal assets and the incentive to gamble is drastcially diminished. Take from them the power to create deposits and it becomes much more difficult to grow into a TBTF institution that holds the very economic fabric of the world hostage.
This reform would stimulate savings by bringing interest rates back into the realm of reality. It would exponentially reduce defaults because actual capital would be at risk each time credit was extended. And most importantly it would reduce the massive and pernicious influence held over almost every aspect of our daily lives by a single industry.
Banking reform? ABOLISH FRACTIONAL RESERVE BANKING!
Fractional reserve banking is no more evil than alcohol, and banning it as useless as prohibition. Moderation and scientific control of monetary base expansion matched to real GNP growth and sufficient margins keep the game in full effect...regard the CBOT/CME model..defined leverage, transparency, mark-to-market at the close. In mortgages that would be the old school model of 20% down payment and mid -thirty% monthly payment P & I and insurance.
This financial reform wouldn't be neccesary unless they are doing TBTF in perpetuity. Just stop backstopping anyone and let the market fix itself, had we just "let go" the last time around most of the crony crooks would be out of business, a distant, fading memory.
+1 The real intent. I am sure that the Senator did not sit down one night and write an 1,136-page bill. The bankers put a team of lawyers together, and they wrote it.
No securitized markets means if a bank was regional that other regions would be left out.(deposits would fund loans close to the deposits) Simply poor places would get poorer, rich places richer. Other than that I am all for it
I don't understand: without banks, poor places would get poorer? How? And without banks in poor places, rich places would get richer? How? I thought the opposite actually happened: without banks in poor places, rich places would not get richer.
The Fair Tax would solve a lot of problems...
Fair Tax
Debt Help TN
"Therefore, banks should not be allowed to buy (or sell) credit default insurance."
I thought the consensus was that the AIG/GS CDS settlements (and other transfers of taxpayer wealth during the bailout) were engineered in order to rescue foreign banks that had purchased credit default insurance and thereby imperiled the global financial system. How should we write U.S. legislation in order to protect the U.S. taxpayer from bailing out non-U.S. banks?
The Federal Reserve is the agency by which the foreign banks were bailed out. Benjamin Bernanke is the one who, in response to direct questioning from Grayson in the House hearing recently, claimed that the various currency swap and other international operations undertaken were within the authority of the Federal Reserve Act itself.
So, how should we write U.S. legislation in order to protect the U.S. taxpayer from bailing out non-U.S. banks?
A large step would be to abolish the FED.
video: Grayson grills Bernanke on foreign lending
http://www.youtube.com/watch?v=2_VCy0lMU1g
Continental Congress 2009 live feed
http://www.givemeliberty.org/CC2009/default.htm
The legislation that scares me more than this one is the one being sponsored by Barney Frank and argued for by Tim Geithner.....I read most of that one......scary.
The problem with "financial reform" is that none of the current financial institutions are geared towards operating in a sane financial environment. They have instead perfected the art of exploiting the ponzi scheme carry trade high frequency speculating system to pay themselves bonuses.
If you stop the credit inflation and try to restore a sane financial system, then not only are all banks and investment funds immediately worthless, they are also all useless. There is nothing that any of the Goldman Sachs people know about proper banking and loaning capital out to generate safe returns.
For this reason, any real financial reform is a death sentence for the financial oligarchy, and they will use every means available to prevent it. The question is, are you stronger than them?
Need not be complicated.
Deposits into an "on demand" account should be considered bailment, and not the property of the bank. Just because I hand my keys over the valet, does not mean he or she can drive around town with it or loan it out to someone else. I am not transferring ownership, just paying for the service of keeping it safe.
Well said. We should also abolish the Fed monopoly on currency. The government should only be concerned with enforcement of contracts and nothing else.
Well said. We should also take away the Fed's monopoly on issuing notes. The government should only be concerned with enforcing contracts.
Well said. In addition the Fed's monopoly on issuing notes should be taken away. The government's only function should be to enforce contracts. Nothing else.
It is nice to hope isn't it?
Bingo, best insight yet.
We should expand on this since with that concept we have all the power, and they are impotent.
I agree. Fractianal Reserve Banking might even be eliminated naturally eventually, if we just let the free market do its magic and have no lender of last resort. Eventually banks that do not honor the deposit contracts will be weeded out. I think there is some free market balance there, but it is certainly not the tomfoolery we see today.
It does need to be complicated if your intent is to neuter the reform.
Extreme complication is used to obscure the truth.Derivatives...too complex to understand= bag of shredded paper with a 1 million dollar value label attached.If you have to use a mainframe to analyse it, it is probably fraud.Or, to put it more simply, 3 card monte.(there is no bean)
Depressing, that a game of 3 card monte represents the current banking and stock market so accurately(there is no money in the banks, and the equitys have insanely inflated values)
Agreed. There is little need in making a complex system even more complex. One regulator for large institutions and small agencies focusing only on their specialized areas could do the job, given they have enough freedom and independence.