by Jerome a Paris
Mon Jun 15th, 2009 at 08:20:29 AM EST
In an article in this morning's Washington Post, two of the senior regulators most responsible for the current mess explain how, trust them, they'll do a better job this time round.
This Wall Street Journal helpfully provides context for several of the propositions on the table, but let me go through their article and comment on some items that I found interesting.
Over the past two years, we have faced the most severe financial crisis since the Great Depression. The financial system failed to perform its function as a reducer and distributor of risk. Instead, it magnified risks, precipitating an economic contraction that has hurt families and businesses around the world.
We have taken extraordinary measures to help put America on a path to recovery. But it is not enough to simply repair the damage. The economic pain felt by ordinary Americans is a daily reminder that, even as we labor toward recovery, we must begin today to build the foundation for a stronger and safer system.
The only damage that has been repaired, so far, is that done to players in the financial system: they have seen their balance sheets propped up by trillions in fresh liquidity to hide or even replace the toxic assets they had accumulated; they have seen their assets guaranteed by taxpayers, and they have suffered no meaningful penalty for their failures.
Indeed, even as the financial system is specifically designated as the source of the crisis, the primary goal today is still to rebuild the financial system rather than the econonmy. Incredibly, even the argument that ordinary people are suffering from the crisis is used to talk about rebuidling Wall Street rather than, you know, helping ordinary people...
This current financial crisis had many causes. It had its roots in the global imbalance in saving and consumption, in the widespread use of poorly understood financial instruments, in shortsightedness and excessive leverage at financial institutions. But it was also the product of basic failures in financial supervision and regulation.
savings and consumption... - this refers, almost explicity, to the theory made popular by Ben Bernanke of a "savings glut" in Asia and other parts of the world: they saved - and forced us to borrow that money and spend it on consumption. That theory, of course, is supposed to be flattering: "we did a service to the world, absorbing all their surplus savings, it's not our fault" - shifting the blame to others (the stingy Chinese and Japanese and Germans, who lectured us on our supposed irresponsibility and are now suffering from the crisis even more than we are, stupid export-addicted hypocrites that they are) and, more importantly, distracting from the core cause of this crisis: stagnant incomes, which pushed people to used debt (conveniently offered at low rates, thanks to the Fed's soft policies, and the "creativity" of investment banks) to prop up their otherwise declining standards of living.
Half a line about irresponsible, over-leveraged banks and the even more irresponsible regulators - without a mention that our two authors were amongst the people that created the current system (remember what Larry Summers' job was in 1999, when the Gramm-Leach-Bliley Act passed? or Tim Geithner's job over the past several years?) and cheered on as banks increased leverage (the easiest way to increase profits in a high-liquidity environment) and invented new products to almost-unanimous kudos from experts, politicians and central bankers who could not praise these risk-allocation instruments enough, then, and made sure that people who expressed reservations were shunned and treated as unserious, obsolete, bitter pariahs...
Of course, not a word on the fact that ever lower taxes on capital gains and high incomes provided skyrocketing incentives for insiders to game the system, create immediate "profits" that could be booked (and pocketed as bonuses or options gains) while leaving the aftermath for others.
And not a word to the fact that those that made their profits once during the boom were allowed (by regulators led by Tim Geithner) to reap a second serving in the form of $13 trillion of taxpayer money supposedly provided to limit the pain on others. I don't think that the financial world ever thought it could get a second bonanza in the middle of the crisis, but that's called "repair the damage"...
So, after such a flawed start, what do we get?
The proposed plan has 5 planks:
- a focus on systemic risk rather than individual failures;
- more attention to the non-banking financial world;
- more regulation of products destined to consumers;
- reorganising regulatory authorities to avoid conflicts;
- international cooperation.
While all of these are reasonable on their face, what will matter is what kind of teeth the regulations will actually have, especially given the successful lobbying track record of the financial industry, and the hand the current crew had in dismantling the regulations that has existed until a few years ago and which had mostly successfully functioned since put in place under Franklin Roosevelt.
Quite frankly, given their caving in on the regulation of OTC derivatives, the joke that the bank "stress tests" were (with the "worst case" unemployment rate lower than what today's number already is) and their unwillingness to consider problems through any other lens than that of the financial markets (ie, their belief that the economy can only be sound if financial markets work and dominate that economy - sorry, efficiently allocate capital to it), the omens are not very good.
Like all financial crises, the current crisis is a crisis of confidence and trust. Reassuring the American people that our financial system will be better controlled is critical to our economic recovery.
No word of the fact that highly disruptive financial booms-and-busts were part of the landscape until the 1930s, but had mostly disappeared until deregulation in the 80s brought them back with a vengeance.
Maybe the financial world will have trust and confidence in its faithful representatives inside the US government. But should the rest of the economy?
And, in the long run, when will financiers understand that they cannot endlessly capture an ever-increasing share of the pie without shrinking it, and that their prosperity ultimately depends on that of the economy?
Not yet, from the looks of it.