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Widespread Disappointment With Financial Reform

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Exactly one year ago, I wrote a piece entitled, “Financial Reform Bill Exposed As Hoax” wherein I expressed my outrage that the financial reform effort had become a charade.  The final product resulting from all of the grandstanding and backroom deals – the Dodd–Frank bill – had become nothing more than a hoax on the American public.  My essay included the reactions of five commentators, who were similarly dismayed.  I concluded the posting with this remark:

The bill that is supposed to save us from another financial crisis does nothing to accomplish that objective.  Once this 2,000-page farce is signed into law, watch for the reactions.  It will be interesting to sort out the clear-thinkers from the Kool-Aid drinkers.

During the year since that posting, I felt a bit less misanthropic each time someone spoke out, wrote an article or made a presentation demonstrating that our government’s “financial reform” effort was nothing more than political theater.  Last July, Rich Miller of Bloomberg News reported that according to a Bloomberg National Poll, almost eighty percent of those surveyed expressed “just a little or no confidence” that the financial reform bill would make their financial assets more secure.  Forty-seven percent believed that the bill would do more to protect the financial industry than consumers.  The American public is not as dumb as most people claim!

This past week brought us three great perspectives on the worthlessness of our government’s financial reform facade.  I was surprised that the most impressive presentation came from a Fed-head!   Thomas M. Hoenig, President and CEO of the Kansas City Federal Reserve Bank, gave a speech at New York University’s Stern School of Business, concerning the future of “systemically important financial institutions” or “SIFIs” and the Dodd-Frank Act.  (Bill Black prefers to call them “systemically dangerous institutions” or “SDIs”.)   After a great discussion of the threat these entities pose to our financial system and the moral hazard resulting from the taxpayer-financed “safety net”, which allows creditors of the SIFIs to avoid accountability for risks taken, Tom Hoenig focused on Dodd-Frank:

Following this financial crisis, Congress and the administration turned to the work of repair and reform.  Once again, the American public got the standard remedies – more and increasingly complex regulation and supervision.  The Dodd-Frank reforms have all been introduced before, but financial markets skirted them.  Supervisory authority existed, but it was used lightly because of political pressure and the misperceptions that free markets, with generous public support, could self-regulate.

Dodd-Frank adds new layers of these same tools, but it fails to employ one remedy used in the past to assure a more stable financial system – simplification of our financial structure through Glass-Steagall-type boundaries.  To this end, there are two principles that should guide our efforts to restore such boundaries.  First, institutions that have access to the safety net should be restricted to certain core activities that the safety net was intended to protect – making loans and taking deposits – and related activities consistent with the presence of the safety net.

Second, the shadow banking system should be reformed in its use of money market funds and short-term repurchase agreements – the repo market.  This step will better assure that the safety net is not ultimately called upon to bail them out in crisis.

Another engaging perspective on financial reform efforts came from Phil Angelides, who served as chairman of the Financial Crisis Inquiry Commission, which conducted televised hearings concerning the causes of the financial crisis and issued its final report in January.  On June 27, Angelides wrote an article for The Washington Post wherein he discussed what caused the financial crisis, the current efforts to “revise the historical narrative” of what led to the economic catastrophe, as well as the efforts to undermine, subvert and repeal the meager reforms Dodd-Frank authorized.  Angelides didn’t pull any punches when he upbraided Congressional Republicans for conduct which the Democrats have been too timid (or complicit) to criticize:

If you are Rep. Paul Ryan, you ignore the fact that our federal budget deficit has ballooned more than $10 trillion annually since the financial collapse.  You disregard the reality that two-thirds of the deficit increase is directly attributable to the economic downturn and bipartisan fiscal measures adopted to bolster the economy.  Instead of focusing on the real cause of the deficit, you conflate today’s budgetary disaster with the long-term challenges of Medicare so you can shred the social safety net.

*   *   *

If you are most congressional Republicans, you turn a blind eye to the sad history of widespread lending abuses that savaged communities across the country and pledge to block the appointment of anyone to head the new Consumer Financial Protection Bureau unless its authority is weakened.  You ignore the evidence of pervasive excess that wrecked our financial markets and attempt to cut funding for the regulators charged with curbing it.  Across the board, you refuse to acknowledge what went wrong and then try to stop efforts to make it right.

David Sirota wrote a great essay for Salon entitled, “America’s unique hatred of finance reform”.  Sirota illustrated how bipartisan efforts to undermine financial reform are turning America into – what The Daily Show with Jon Stewart called – “Sweden’s Mexico”:

On one hand, Europe’s politics of finance seem to be gradually moving in the direction of Sweden — that is, in the direction of growth and stability.  As the Washington Post reports, that Scandinavian country — the very kind American Tea Party types write off with “socialist” epithets — has the kind of economy the U.S. can now “only dream of:  growing rapidly, creating jobs and gaining a competitive edge (as) the banks are lending, the housing market booming (and) the budget is balanced.”  It has accomplished this in part by seriously regulating its banking sector after it collapsed in the 1990s.

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After passing an embarrassingly weak financial “reform” bill that primarily cemented the status quo, the U.S. government is now delaying even the most minimal new rules that were included in the legislation.  At the same time, Senate Republicans are touting their plans to defund any new financial regulatory agencies; the chairman of the House Financial Services Committee has declared that “Washington and the regulators are there to serve the banks” — not the other way around; and the Obama administration is now trying to force potential economic partners to accept financial deregulation as a consequence of bilateral trade deals.

Meanwhile, the presidential campaign already looks like a contest between two factions of the same financial elite — a dynamic that threatens to make the 2012 extravaganza a contest to see which party can more aggressively suck up to the banks.

Any qualified, Independent political candidate, who is willing to step up for the American middle class and set out a plan of action to fight the financial industry as well as its lobbyists, would be well-positioned for a 2012 election victory.


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The News Nobody Wants To Hear

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December 11, 2008

You can’t watch a news program these days without hearing some “happy talk” about how our dismal economy is “on the verge of recovery”.  You have to remember that many of these shows are sponsored by brokerage firms.  That fact must be taken into consideration when you decide how much weight you will give the opinions of the so-called “experts” appearing on those programs to tell you that the stock market has reached “the bottom” and that it is now time to jump back in and start buying stocks.  Similarly, those people interested in making a home purchase (i.e. millionaires, who don’t have to worry about getting a mortgage) want to know when the residential real estate market will hit “bottom” so they can get the best value.  If I had a thousand dollars for every time during the past six months that some prognosticator has appeared on television to tell us that the stock market has “hit bottom”, I would have enough money to start my own geothermal power utility.

People interested in making investments have been scared away from stocks due to the pummeling that the markets have taken since the “mortgage crisis” raised its ugly head and devastated the world economy.  If those folks believe the hype and start buying stocks now, they are taking a greater risk than the enthusiastic promoters on TV might be willing to disclose.

People just don’t like bad news, especially when it is about the future and worse yet, if it’s about the economy.  On Friday, December 5, the stock market rallied, despite the dismal news that November’s non-farm employment loss was the greatest monthly employment decline in 34 years.  More than half a million people lost their jobs in November.  Despite this news, all of the major stock indices were up at least 3 percent for that day alone.  Have all these people bought into the magical thinking described in The Secret?  Do that many people believe that wishing hard enough can cause a dream to become reality?

There is one authority on the subject of economics, who earned quite a bit of “street cred” when our current economic crisis hit the fan. He is Nouriel Roubini, a professor of economics at New York University’s Stern School of Business. He earned the nickname “Doctor Doom” when he spoke before the International Monetary Fund (IMF) on September 7, 2006 and described, in precise detail, exactly what would bring the financial world to its knees, two years later.  In this time of uncertainty, many people (myself included) pay close attention to what Dr. Roubini has to say by regularly checking in on his website.  On December 5, we were surprised to hear Doctor Doom’s admission to Aaron Task (on the web TV show, Tech Ticker) that his own 401(k) plan is comprised entirely of stocks.  Dr. Roubini explained that he is not in the “Armageddon camp” and that for the long haul, stocks are still a good investment (although currently not a good idea for investors with more short-term goals).  Upon learning of this, I began to wonder if the revelation about Doctor Doom’s stock holdings could have been the reason for the stock market rally that day.

Yesterday, I had the pleasure of meeting Dr. Roubini at a lecture he gave within staggering distance of my home.  I was able to talk to him about my concern over Federal Reserve Chairman, Ben Bernanke’s idea of having the federal government purchase stocks in order to pep-up a depressed stock market.  How could this possibly be accomplished?  How could the Fed decide which stocks to buy to the exclusion of others?  Dr. Roubini told me that the government has already done this by purchasing preferred shares of stock issued by the banks participating in the TARP program.  He explained that rather than purchasing selected stocks of particular companies, the government would, more likely, invest in stock indices.  Before I get to Doctor Doom’s other points from his lecture, I will share this photo taken of yours truly and Doctor Roubini (who appears on your left):

Doctor Doom with Me

Dr. Roubini told the audience that he believes this recession will be worse than everyone expects. During the next few months, “the flow of macroeconomic news will be awful and worse than expected”. He opined that people are going to be surprised if they think that the stock market “bottom” will come in mid-2009. He expects that by the end of 2009 “things will still be bad” and unemployment will peak at 9% in early 2010. He thinks that the consensus on earnings-per-share estimates for stocks during the next year is “delusional”. He anticipates risk aversion among investors to be severe next year. We are now in a global recession and this has caused commodity prices to fall 30%. He pointed out that commodity prices could still fall another 20%. He considers it “very likely” that between 500 to 600 hedge funds will go out of business within the next six months. As this happens, the stocks held by these funds must be dumped onto the market. With respect to the beleaguered residential real estate market, he pointed out that home prices could fall another 15-20% by early 2010.

The good news provided by Dr. Roubini is that the global recession should end by the close of 2009. However, he expects recovery to be “weak” in 2010. He surmised that the possibility of a systemic meltdown has been minimized by the actions taken at the recent G7 meeting and most particularly with the G7 resolution to prevent further “Lehman Brothers-type” bankruptcies from taking place. He concluded that this recession should be nothing like the Japanese recession of the 1990s, which lasted nearly a decade.

So there you have it:  The news (almost) nobody wants to hear.  You can say these are the predictions voiced by one man who could be wrong.  Nevertheless, given Dr. Roubini’s track record, I and many others hold his opinions in high regard.  Now, let’s see how this all plays out.

The Home Stretch

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October 27, 2008

We are entering the final week of the longest Presidential campaign in our nation’s history.  At the same time, the world economy continues to flirt with chaos and our nation’s equities market indices are diving at a faster pace than Superman’s swooping down from the sky to save Lois Lane from a potential rapist.  Some stockbrokers believe that an abrupt and decisive nosedive in the markets might have a cathartic effect and finally bring us to the long-awaited “bottom”, from which there would be only one place to go:  up.  Rock musician Tom Petty wrote a song about the death of his mother, called: Free Fallin’.  That song has recently become the theme for America’s stock markets.  The situation has become so bad that many fear it may be necessary for the feds to suspend equities trading until all of the nervous investors and frenzied hedge fund managers have a chance to gather their wits.  Would the government really intervene and close the stock markets for a day or more?

There is one authority who earned quite a bit of “street cred” when our current economic crisis hit the fan.  He is Nouriel Roubini, an economist at the Stern School of Business at New York University.  He earned the nickname “Doctor Doom” when he spoke before the International Monetary Fund (IMF) on September 7, 2006 and described, in precise detail, exactly what would bring the financial world to its knees, two years later.  As reported by Ben Sills and Emma Ross-Thomas in the October 24 edition of Bloomberg:

Roubini said yesterday that policy makers may need to shut down financial markets for a week or two as investors dump assets. Trading in futures on the Standard & Poor’s 500 Index and the Dow Jones Industrial Average was limited today after declines of more than 6 percent.

This week brings us more earnings reports and new housing starts that could send already skittish investors (as well as terrified hedge fund managers) on a “panic selling” binge.  Could this trigger a market shutdown by the government as predicted by Dr. Roubini?  If so, we may find the markets closed for the final days before the Presidential election.  The Republicans and their media trumpet, Fox News, would likely seize upon such a development, characterizing it as validation of their claim that the investing public fears a “socialist” Obama Presidency.  In reality, there would be no way to measure the impact of the election results on the equities markets under such circumstances.  If the markets were kept closed until after the election, there would be quite a number of investors, chomping at the bit to dump their portfolios during the hiatus, ready to do so as soon as the markets re-opened.  On the other hand, Stuart Schweitzer, global market strategist at JP Morgan Private Bank appeared on the October 24 broadcast of the PBS program, Nightly Business Report, and explained what to really expect about the impact of the Presidential election on the securities markets.  Schweitzer believes that regardless of who is elected, once we get past Election Day, there will be a sense of certainty established as to who will be making economic policy going forward into the new Presidential term.  This fact in itself, regardless of what that economic policy might become, will eliminate the element of uncertainty that breeds some degree of the fear in the hearts of investors.

If the stock markets really end up being closed during the final days before the election, we would likely see more havoc than calming.  The timing would prove too irresistible for conspiracy theorists to ignore.  Some would see it as a plot by the Republicans to conceal how bad the economy really is.  Others might see it as a ploy by “Washington elites” (a term used by some in reference to Obama supporters) to conceal widespread fear of putting a “communist” in charge of our nation.  The smartest course from here would be for the Federal Reserve Board’s FOMC (Federal Open Market Committee) to undertake a responsible, public relations role when it meets on Tuesday.  They should be ready to explain to the public what has really been happening in the markets:  an unregulated species of investments called “hedge funds” has been causing mayhem on the trading floors.  Many (if not most) of these hedge funds are going broke and they are attempting to secure a place in the line for Federal bailout money.  They have caused equities trading to function more like eBay:  the only market movement that matters over the course of any given day is what takes place during the final three minutes before the closing bell, when the hedge fund managers dump stocks.  On eBay, the winning bid for an item is usually made during the minute before an auction ends.  Unlike eBay, the stock market numbers can go up or down.  These days, the index movement prior to the closing bell is usually seismic (in one direction or the other).   It was never like this before.  These trading patterns often trigger pre-established “stop loss orders” to sell stocks, usually established by individual investors upon purchase of those stocks.  The result is an avalanche of “sell” orders at the end of the day.  The FOMC needs to explain this disease to the public and let us know the Fed is working on a cure.  Closing the markets in the final days before a Presidential election will not be a cure.  Such a move will just create a scab that will quickly be picked away by an investing public that needs to ease up on the caffeine and go out for a walk.

Will It Work?

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September 29, 2008

This is the question on everyone’s mind as they ponder the new “bailout bill”, officially known as the Emergency Economic Stabilization Act of 2008.  It is available for everyone to read on the Internet (all 110 pages of it), but most people are looking for answers to the most important questions:  Will it pass and will it work?

Just after midnight on Monday morning, David Rogers, of Politico.com, reported that the bill (which goes to the House floor on Monday and the Senate floor on Wednesday) was still facing resistance from both the right and the left, despite the support voiced by both Presidential candidates.  Republican Congressman Chris Shays of Connecticut was quoted in the article as saying that:  “For this to pass, a lot of people are going to have to change their minds”.  The following passage provided more light on the view of this bill from those House Republicans providing resistance to the measure:

Yet a closed-door party meeting Sunday night illustrated all the problems anew.  The session ran for hours, and while Minority Leader John Boehner (R-Ohio) said he would vote for the bill, he could not predict the number of votes he would have for it, and he famously referred to the measure as a “crap sandwich” before his rank and file.

Jackie Kucinich reported for TheHill.com that earlier in the day, Congressman Mike Pence of Indiana had sent out a letter to his fellow Republicans in opposition to this bill:

The decision to give the federal government the ability to nationalize almost every bad mortgage in America interrupts this basic truth of our free market economy …  Republicans improved this bill but it remains the largest corporate bailout in American history, forever changes the relationship between government and the financial sector, and passes the cost along to the American people.  I cannot support it.

The opposition to the bill from the Democratic side was discussed in another Politico.com article:  this one by Ryan Grimm.  Grimm’s article discussed an “intense” Democratic Caucus meeting.  He quoted Minnesota Congressman James Oberstar as describing resistance to the bill coming from across the complete spectrum of Democratic opinion, from liberal to conservative.  California Congressman Brad Sherman had met with Republican Darrell Issa before the meeting.  Sherman’s contribution to the Caucus discussion was described this way by Ryan Grimm:

Sherman spoke out against the bill during the caucus meeting, arguing that billions of dollars would flow to foreign investors, that oversight was lax and that limits on executive compensation were too weak.   Rep. Joe Baca (D-Calif.) said he was leaning toward a no vote, too.

The House vote on the bill is scheduled to take place after a four-hour debate, beginning at 8 a.m. on Monday.

Whether or not this bill will ultimately “work” is another question.  Paul Krugman, Economics Professor at Princeton University, wrote in the Sunday New York Times:

The bailout plan released yesterday is a lot better than the proposal Henry Paulson first put out — sufficiently so to be worth passing.  But it’s not what you’d actually call a good plan, and it won’t end the crisis.  The odds are that the next president will have to deal with some major financial emergencies.

Steve Lohr’s report from the Sunday New York Times, discussed the outlook for this plan, as voiced by Robert E. Hall, an economist and senior fellow at the Hoover Institution, a conservative research group at Stanford.  Lohr observed:

There was no assurance that the bailout plan would work as intended to ease financial turmoil and economic uncertainty.

Lohr’s article then focused on the opinion of Nouriel Roubini, an economist at the Stern School of Business at New York University:

The $350 billion to $400 billion in bad credit reported by the banks so far could eventually exceed $1.5 trillion, he estimated, as banks are forced to write off more bad loans, not only on more housing-related debt, but also for corporate lending, consumer loans, credit cards and student loans.

The rescue package, if successful, would make the recognition of losses and the inevitable winnowing of the banking system more an orderly retreat than a collapse. Yet that pruning of the banking industry must take place, economists say, and it is the government’s role to move it along instead of coddling the banks if the financial system is going to return to health.

A more unpleasant perspective appeared in an editorial published in the September 25 edition of The Economist:

If the economics of Mr Paulson’s plan are broadly correct, the politics are fiendish.  You are lavishing money on the people who got you into this mess. Sensible intervention cannot even buy long-term relief:  the plan cannot stop house prices falling and the bloated financial sector shrinking. Although the economic risk is that the plan fails, the political risk is that the plan succeeds.  Voters will scarcely notice a depression that never happened.  But even as they lose their houses and their jobs, they will see Wall Street once again making millions.

Whatever your definition of “success” might be for this plan, the experts agree that things aren’t going to return to “normal” for a long time, if ever.