In today's New York Times, we witness a copy editor (person unknown) doing their bit -- by burying the lede on a
rather distorted story on former Federal Reserve Board Chair Paul Volcker's comments at the White House, yesterday -- to further the status quo's efforts to enable the too-big-to-fail banks to continue to run roughshod over the rest of the American public at levels never before witnessed in our country's history.
Even the frequently righteous Paul Krugman, in his op-ed column on Monday, in the same paper, all but outright tells us that attempting to put a saddle on the too-big-to-fail Wall Street behemoths is a waste of time.
Apparently, if one didn't know better, we're supposed to accept the fact it's okay for the six largest banks in this country to control
assets estimated to be in excess of 63 percent of our gross domestic product (GDP). (In 1995, the six largest banks had assets equal to 17 percent of our overall GDP.) And, most importantly, we're also supposed to accept the fact that there's little we may do to prevent those six banks from engulfing and devouring (to paraphrase an old Mel Brooks' line) an even greater share of our nation's assets going forward.
They already control our nation's equity markets and the legislative branch of our government, so what's the big deal? This is a reality-based blog, right?
I must've missed the memo.
Luckily, despite what we're reading in today's (and Monday's) New York Times, Paul Volcker, along with Delaware Senator Ted Kaufman and Congressional Oversight Panel Chair Elizabeth Warren, missed that memo, too. Come to think of it so did a lot of other folks (see list, below).
Here's this morning's NY Times. Notice the headline, then checkout some of the last few sentences of the story.
Volcker Optimistic for Financial Revamping This Year
By SEWELL CHAN
New York Times
March 31, 2010
WASHINGTON --
...In his speech, Mr. Volcker was critical of the broad growth in the financial services industry in recent decades. Finance came to represent an ever-greater share of corporate profits, even as average earnings for most American workers did not rise.
"The question that really jumps out for me is, given all that data, whether the enormous gains in the financial sector -- in compensation and profits -- reflect the relative contributions that sector has made to the growth of human welfare," Mr. Volcker said...
--SNIP--
...Mr. Volcker also warned that the government bailouts had left a huge "moral hazard" problem.
"There is an expectation that very large and complicated financial institutions will not be allowed to fail," he said. "Unless that conviction is shaken, the natural result is that risk-taking will be encouraged and in fact subsidized beyond reasonable limits."
The bills being debated in Congress would put responsibility for managing systemic financial risks in the hands of a council of regulators. Mr. Volcker said he was "a little skeptical" about the efficiency and effectiveness of giving that responsibility to such a council, but suggested that the idea could be made to work.
From a Guest Post at Naked Capitalism on Tuesday...
(DIARIST'S NOTE: Naked Capitalism Publisher Yves Smith has granted diarist permission to post diaries from her blog in their entirety here on Daily Kos.)
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Guest Post: Dodd's Financial "Reform" Bill Is Nothing but a Placebo for a Very Sick Economy
George Washington
Naked Capitalism
Tuesday, March 30, 2010
Washington's Blog
On March 3rd, Richard Fisher - President of the Federal Reserve Bank of Dallas - told the Council on Foreign Relations:
A truly effective restructuring of our regulatory regime will have to neutralize what I consider to be the greatest threat to our financial system's stability--the so-called too-big-to-fail, or TBTF, banks. In the past two decades, the biggest banks have grown significantly bigger. In 1990, the 10 largest U.S. banks had almost 25 percent of the industry's assets. Their share grew to 44 percent in 2000 and almost 60 percent in 2009.
The existing rules and oversight are not up to the acute regulatory challenge imposed by the biggest banks. First, they are sprawling and complex--so vast that their own management teams may not fully understand their own risk exposures. If that is so, it would be futile to expect that their regulators and creditors could untangle all the threads, especially under rapidly changing market conditions. Second, big banks may believe they can act recklessly without fear of paying the ultimate penalty. They and many of their creditors assume the Fed and other government agencies will cushion the fall and assume the damages, even if their troubles stem from negligence or trickery. They have only to look to recent experience to confirm that assumption.
Some argue that bigness is not bad, per se. Many ask how the U.S. can keep its competitive edge on the global stage if we cede LFI territory to other nations--an argument I consider hollow given the experience of the Japanese and others who came to regret seeking the distinction of having the world's biggest financial institutions. I know this much: Big banks interact with the economy and financial markets in a multitude of ways, creating connections that transcend the limits of industry and geography. Because of their deep and wide connections to other banks and financial institutions, a few really big banks can send tidal waves of troubles through the financial system if they falter, leading to a downward spiral of bad loans and contracting credit that destroys many jobs and many businesses.
The dangers posed by TBTF banks are too great. To be sure, having a clearly articulated "resolution regime" would represent steps forward, though I fear they might provide false comfort in that a special resolution treatment for large firms might be viewed favorably by creditors, continuing the government-sponsored advantage bestowed upon them. Given the danger these institutions pose to spreading debilitating viruses throughout the financial world, my preference is for a more prophylactic approach: an international accord to break up these institutions into ones of more manageable size--more manageable for both the executives of these institutions and their regulatory supervisors. I align myself closer to Paul Volcker in this argument and would say that if we have to do this unilaterally, we should. I know that will hardly endear me to an audience in New York, but that's how I see it. Winston Churchill said that "in finance, everything that is agreeable is unsound and everything that is sound is disagreeable." I think the disagreeable but sound thing to do regarding institutions that are TBTF is to dismantle them over time into institutions that can be prudently managed and regulated across borders. And this should be done before the next financial crisis, because it surely cannot be done in the middle of a crisis.
Fisher joints many other top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion, including:
* Nobel prize-winning economist, Joseph Stiglitz
* Nobel prize-winning economist, Ed Prescott
* Former chairman of the Federal Reserve, Alan Greenspan
* Former chairman of the Federal Reserve, Paul Volcker
* Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard
* Simon Johnson (and see this)
* President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)
* Deputy Treasury Secretary, Neal S. Wolin
* The President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, Camden R. Fine
* The Congressional panel overseeing the bailout (and see this)
* The head of the FDIC, Sheila Bair
* The head of the Bank of England, Mervyn King
* The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
* Economics professor and senior regulator during the S & L crisis, William K. Black
* Economics professor, Nouriel Roubini
* Economist, Marc Faber
* Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales
* Economics professor, Thomas F. Cooley
* Former investment banker, Philip Augar
* Chairman of the Commons Treasury, John McFall
Even the Bank of International Settlements - the "Central Banks' Central Bank" - has slammed too big to fail. As summarized by the Financial Times:
The report was particularly scathing in its assessment of governments' attempts to clean up their banks. "The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery," it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail.
This was dangerous because it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future.
Senators Ted Kaufman, Maria Cantwell, John McCain and others are also demanding that the too big to fails be broken up.
But Senator Dodd is trying to push through a financial "reform" which bill won't do anything to break up the too big to fails, or do much of anything at all. It's got a reassuring name and a nice, sugary taste ... but there's no real medicine in it.
For example, Dodd's bill:
* Won't break up or reduce the size of too big to fail banks
* Won't remove the massive government guarantees to the giant banks
* And won't even increase liquidity requirements to prevent future meltdowns
As Senator Ted Kaufman points out:
What walls will this bill erect? None.
*
Just this week, a Moody's report stated: "...the proposed regulatory framework doesn't appear to be significantly different from what exists today."
*
In sum, little in these reforms is really new and nothing in these reforms will change the size of these mega-banks.
Our economy is really sick, and the cure is well-known. But Dodd is offering nothing but a placebo.
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