I got this in my Inbox today. Do you have an opinion?
President Obama has announced a major reform of the US banking system which will set a limit on a bank’s size, force deposit-taking banks to divest themselves of any hedge funds or private equity funds they may own, and ban them from any subsequent speculative activities. He also wants to impose a levy on large financial firms: the riskier the activities of the bank, the larger the levy.
But is it based on sound economic thinking, or is it a piece of populist flim flam, at best a waste of paper, at worst positively dangerous for America and the world economy?
Friday, 29 January 2010
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7 comments:
Separating deposit banks and investment banks is a great idea, making the reserve ratio one to one is an even better idea, and returning control of the currency to congress is a fantastic idea.
Obama is not proposing the best parts though, just the first step. He also isn't planning to put any austerity measures on really big banks that own significant shares of the federal reserve system- it was his treasury appointee Tim Geitner who paid several investment banks 100% on derivatives they were holding while all other banks were forced to take deep discounts.
It is therefore just fake populist fluff foisted on a population that has little understanding of how the credit system works in the US.
If he is sincere in banking reform, banks would not be allowed to engage in risky activities at all- taxing them for doing it is not going to stop the harm that comes from doing it. This still leaves an avenue open for those banks to steal money from institutional investors such as pension plans, public and private, which still transfers wealth from the bottom of the sytem to the top.
Make no mistake about it, Obama is a banker's president. Bought and paid for with 4 times the banker money paid to his front running rival in the last election.
A couple of days ago I heard one of those artsy liberals in New York explaining on NPR that when the government fails to tax something that amounts to a subsidy for that activity. When the government wants to stimulate an economic sector it removes taxes from it- it allows that sector to use the money it made without the burden of confiscation. So if it works for some sectors to create employment and profit in those sectors, why would it not work in all? The simple answer is it would, but what this president is about is the same thing the last one was about; the transfer of wealth to friends and allies in economic sectors he wishes to protect from competition.
It's impossible to separate emotional and intellectual response to this.
The banks created the impossible vehicle, the 'securitised mortgage', sold this vehicle to other banks who sold it to other banks, and they all made huge initial profits and enormous bonuses. It was obviously a house of cards because it depended on the people at the bottom of this financial instrument, the homeowner, to continue to pay the mortgage.
This would have been fine if the mortgages they were paying had continued at an affordable rate, but mortgage salesmen sold discounted entry mortgages whose rates leapt to true rates after a couple of years. With prudent referencing and prudent selling this would not have been a problem, but people were sold mortgages they would never, ever be able to pay.
When they failed to make payments their homes were repossessed and sold on the open market at ever reducing prices. The law of supply and demand works both ways! As the underlying asset value fell so did the value of the alleged securitised mortgage. Where the value of homes crashed the value of the package of securitised mortgages fell through the floor.
Even a child can see that this was not good business. This was a scam, and the scammers should suffer.
Regrettably there are also a greta number of fine and upstanding folk, yes, including bankers, who were not responsible for this mess and who have also suffered.
Where prudence had been removed form the banking system a cavalier attitude of me, me, me, me took over. The majority of the banks who created securitised mortgages are US banks. They and their greed have caused the western world these huge problems. It is only right that the blame, the real blame, lands fairly and squarely in their shoulders.
This then gives us intellectual issues. The free market actually has worked. Part of the free market is various governments and their actions to reduce the impact of the crisis. But none of us is happy, to a greater or a lesser degree, with the outcome.
A true capitalist will argue that the market has corrected, with or without government interference, and that the status quo should prevail.
A true communist will argue that the wealth should never have been allowed to accrue to the banks and their employees in the first place and that the correction has not gone far enough.
Obama and his party seem to me to be broadly equivalent to the UK Conservative Party in the majority of their policies and instincts, and it seems logical that sufficient controls should be put into place to discourage a recurrence of the creation of bizarre and implausible financial instruments.
Me, I support the emotional concept of diverting bankers' bonuses to areas like Haiti, but that doesn't work either. Emotionally that is fine, intellectually the valid and valuable bank employees deserve performance related pay for doing a good job. Bonuses related directly to performance, personal and corporate performance, are an excellent incentive. So my emotional support for diverting those bonuses sucks!
I think Obama is taking a useful and bold step. It deserves to succeed. I have no idea whether it will
Bloomberg wakes up: http://www.bloomberg.com/apps/news?pid=20601039&sid=aaIuE.W8RAuU
When someone from Washington calls for my solution: I will tell them to tax the banks an extra 25% until unemployment falls to 5%. They figured out how to break it, let them figure out how to fix it.
It's an excellent first step. Following the Depression, Congress passed the Glass Stiegel Act to keep banks from risking other people's - and it also keep banks & investments houses from growing to big. It worked for 50 years.
The Act was repealed in the 90's, and Wall Street went on an unsustainable binge without regulation that finally crashed.
Obama's proposal is like Glass Stiegal Lite - but more is neaded.
I like the idea of performance based bonuses, but these bonuses were obviously not performance based - and they were excessive.
Obama should do whatever it takes to ensure that banking failures don't have wider repercussions.
A first step would be to separate commercial and investment banking. This is not as easy as it sounds. While it's a simple matter to ensure that no company engages in both activities, it would also be necessary to remove any indirect ties, which has a number of practical difficulties. I imagine this is one of the arguments used when Glass Steagall was repealed - that everything is so intertwined, the law had become redundant.
A good second step would be some meas to ensure that those who take the risks ar the same ones who suffer when the chickens come home to roost. Maybe return the investment banks to partnerships?
My point is about responsibility; personal, collective, corporate, social etc.
Elected representatives should take the majority of the blame for allowing the situation to get so far by failing to support the consitutional principle of enlightened self-interest and set an example for others to follow.
But politicians have largely become servants to their re-election funds than the people by whom and for whom they are elected to serve.
So 'bash the banker' is an unhelpful slangy phrase as it creates divisions where unity is needed. It plays to the nastiest angry sentiment and the lowest common denominator when it is necessary to encourage and enthuse the best instincts of everyone.
When the interests of different sections of society are seen as divergent then gaps are created into which some will fall, so Wall St, Main St and the average citizen consumer must start communicating better together or the problems will start building up again.
The simple fact is that political and constitutional reform needs to return to the agenda, but this causes huge problems since so much US identity is wrapped up in the 'perfection' of the constitutional settlement set out nearly 250 years ago.
For starters separation of the offices of head of state and head of government would make an immeasurably great improvement. Surely Republicans, Democrats and independents alike can unite against their own system of limited monarchy.
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