June 18, 2009
On Wednesday, June 18, President Obama released his anxiously-awaited, 88-page proposal to reform the financial regulatory system. An angry public, having seen its jobs and savings disappear as home values took a nosedive, has been ready to set upon the culprits responsible for the economic meltdown. Nevertheless, the lynch mobs don’t seem too anxious to string up former Federal Reserve Chairman, Alan Greenspan. Perhaps because he is so old, they might likely prefer to see him die a slow, painful death from some naturally-occurring degenerative disease. Meanwhile, a website, Greenspan’s Body Count, has been keeping track of the number of suicides resulting from the recent financial collapse. (The current total is 96.) As usual, President Obama has been encouraging us all to “look forward”. (Sound familiar? . . . as in: “Forget about war crimes prosecutions because some Democrats might also find themselves wearing orange jumpsuits.”)
In reacting to Obama’s new financial reform initiative, some critics have observed that the failure to oust those officials responsible for our current predicament, could set us up for a repeat experience. For example, The Hill quoted the assessment of Dean Baker, Co-director of the Center for Economic Policy and Research:
However, the big downside to this reform proposal is the implication that the problem was the regulations and not the regulators. The reality is that the Fed had all the power it needed to rein in the housing bubble, which is the cause of the current crisis. However, they chose to ignore its growth, either not recognizing or not caring that its collapse would devastate the economy. If regulators are not held accountable for such a monumental failure (e.g., by getting fired), then they have no incentive to ever stand up to the financial industry.
The Wall Street Journal‘s Smart Money magazine provided some similarly-skeptical criticisms of this plan:
Influential bank analyst Richard Bove of Rochedale Securities believes the Obama rules will only add costs to the system and will not lead to more effective oversight. After all, a regulatory framework is already in place, Bove says, but the political will to enforce it has been absent — and that’s just the way Washington wants it. Indeed, the only truly aggressive SEC director since the Kennedy administration was Harvey Pitt, Bove says. “[And] when he got religion about regulation, he got removed.”
Dr. Walter Gerasimowicz of New York-based Meditron Asset Management is dubious about a number of proposals, especially that of expanding the Fed’s role. “What I find to be very disconcerting is the fact that our Federal Reserve is going to have extensive power over much of the industry,” Gerasimowicz says. “Why would we give the Fed such powers, especially when they’ve failed over the past 10 years to monitor, to warn, or to bring these types of speculative bubbles under control?”
Our government was kind enough to provide us with an Executive Summary of the financial reform proposal. Here is how that summary explains the “five key objectives” of the plan, along with the general recommendations for achieving those objectives:
(1) Promote robust supervision and regulation of financial firms. Financial institutions that are critical to market functioning should be subject to strong oversight. No financial firm that poses a significant risk to the financial system should be unregulated or weakly regulated. We need clear accountability in financial oversight and supervision. We propose:
- A new Financial Services Oversight Council of financial regulators to identify emerging systemic risks and improve interagency cooperation.
- New authority for the Federal Reserve to supervise all firms that could pose a threat to financial stability, even those that do not own banks.
- Stronger capital and other prudential standards for all financial firms, and even higher standards for large, interconnected firms.
- A new National Bank Supervisor to supervise all federally chartered banks.
- Elimination of the federal thrift charter and other loopholes that allowed some depository institutions to avoid bank holding company regulation by the Federal Reserve.
- The registration of advisers of hedge funds and other private pools of capital with the SEC.
(2) Establish comprehensive supervision of financial markets. Our major financial markets must be strong enough to withstand both system-wide stress and the failure of one or more large institutions. We propose:
- Enhanced regulation of securitization markets, including new requirements for market transparency, stronger regulation of credit rating agencies, and a requirement that issuers and originators retain a financial interest in securitized loans.
- Comprehensive regulation of all over-the-counter derivatives.
- New authority for the Federal Reserve to oversee payment, clearing, and settlement systems.
(3) Protect consumers and investors from financial abuse. To rebuild trust in our markets, we need strong and consistent regulation and supervision of consumer financial services and investment markets. We should base this oversight not on speculation or abstract models, but on actual data about how people make financial decisions. We must promote transparency, simplicity, fairness, accountability, and access. We propose:
- A new Consumer Financial Protection Agency to protect consumers across the financial sector from unfair, deceptive, and abusive practices.
- Stronger regulations to improve the transparency, fairness, and appropriateness of consumer and investor products and services.
- A level playing field and higher standards for providers of consumer financial products and services, whether or not they are part of a bank.
(4) Provide the government with the tools it needs to manage financial crises. We need to be sure that the government has the tools it needs to manage crises, if and when they arise, so that we are not left with untenable choices between bailouts and financial collapse. We propose:
- A new regime to resolve nonbank financial institutions whose failure could have serious systemic effects.
- Revisions to the Federal Reserve’s emergency lending authority to improve accountability.
(5) Raise international regulatory standards and improve international cooperation. The challenges we face are not just American challenges, they are global challenges. So, as we work to set high regulatory standards here in the United States, we must ask the world to do the same. We propose:
- International reforms to support our efforts at home, including strengthening the capital framework; improving oversight of global financial markets; coordinating supervision of internationally active firms; and enhancing crisis management tools.
In addition to substantive reforms of the authorities and practices of regulation and supervision, the proposals contained in this report entail a significant restructuring of our regulatory system. We propose the creation of a Financial Services Oversight Council, chaired by Treasury and including the heads of the principal federal financial regulators as members. We also propose the creation of two new agencies. We propose the creation of the Consumer Financial Protection Agency, which will be an independent entity dedicated to consumer protection in credit, savings, and payments markets. We also propose the creation of the National Bank Supervisor, which will be a single agency with separate status in Treasury with responsibility for federally chartered depository institutions. To promote national coordination in the insurance sector, we propose the creation of an Office of National Insurance within Treasury.
So there you have it. Most commentators expect that the real fighting over this plan won’t begin until this fall, with healthcare reform taking center stage until that time. Regardless of whatever form this financial reform initiative takes by the time it is enacted, it will ultimately be seen by history as Barack Obama’s brainchild. If this plan turns out to be a disaster, it could overshadow whatever foreign policy accomplishments may lie ahead for this administration.
Matt Taibbi Deserves An Award
June 25, 2009
Like many people, I found out about Matt Taibbi as a result of his frequent appearances on HBO’s Real Time with Bill Maher. Last spring, Matt appeared on Real Time to discuss his research into the global economic crisis and the resulting scheme of numerous bailouts engineered in response to each sub-crisis of this economic catastrophe. My March 26 piece: “Understanding The Creepy Bailouts“, quoted from Matt’s fantastic article for Rolling Stone magazine, entitled: “The Big Takeover”. (At that time, the “Big Takeover” link led to the complete article. Rolling Stone now provides only abbreviated versions of its published articles on line.) One important theme of Matt’s commentary was evident in this passage:
Matt has a unique way of discussing the extremely complicated, technical issues involved in the financial crisis, by breaking them down into understandable, plain-language points. Unfortunately, most mainstream journalists lack either the understanding or the courage (or both) to discuss our financial predicament in such a frank, informative manner. Take for example: Fareed Zakaria’s discussion of the economic catastrophe as it appeared in Newsweek under the title “The Capitalist Manifesto”. Nobody could to a better job of ripping that thing to shreds than Matt Taibbi himself. With his June 24 blog entry, he did just that:
Matt’s previous blog entry on June 18, focused on one of my favorite subjects: the hideous monster we have come to know as Goldman Sachs. I had written a piece about that entity on May 21, discussing how Paul Farrell of MarketWatch and John Crudele of the New York Post had been voicing the same suspicions I had been harboring about Goldman. After reading Matt Taibbi’s June 18 article, I enthusiastically sent the link to my friends. This stuff was just too good! Matt was laying it on the line in a way few others had the courage or the skill to do. I doubt whether many in the mainstream media will follow his lead. Here is one of the highlights from that piece:
If that weren’t enough, Matt pointed out that the upcoming issue of Rolling Stone would feature another of his reports — this one focused exclusively on Goldman Sachs. That issue (#1082-83, with the Jonas Brothers on the cover) is now on the newsstands. Matt’s article: “The Wall Street Bubble Machine” is best explained in the subtitle:
In case you are wondering how they’re going to do it again . . . Matt reports that it will be by way of the “Cap and Trade” program. Goldman has already positioned itself to serve as one of our government’s premier carbon credit pimps. Matt offered this explanation:
Matt’s “bottom line” paragraph at the conclusion of the essay underscores what I believe are America’s biggest problems: “lobbying” and “campaign contributions” (our tradition of legalized graft). Our government is not just one of laws . . . it is one of loopholes, exemptions and waivers. Those things cost money. The people who have the money to “invest” in such machinations, usually find themselves rewarded handsomely . . . at the expense of the taxpayers. Here’s how Matt wrapped it up:
Amen.