Monday, March 01, 2010

Why Financial Reform Is Stalled -

From this article there are two great comments:

I think that had the government allowed the failing firms to go under using bankruptcy courts instead of taxpayor bailouts, the lessons in moral hazard would do more for eliminating the corruption in today's financial system and allowed us to move on much quicker in rebuilding the economy. Sure, given the collapse of US and global financial system, it would have been painful at the start, but we'd already have been recovering and rebuildin but based on sound financial practices instead of a massive ponzi scheme.

As it was, our government tried to re-inflate an unsustainable system built on massive debt and leverage. There were over $600 trillion in derivatives created by firms, but only a fraction of those have been cleared. Since there isn't that much wealth globally, one would have to draw the conclusion that there's insufficient underlying assets attached to these products, and eventual collapse is inevitable. Which taxpayors will pick up the tab?

I don't know what would have happened if the government had nothing in September 2008, but I do know that the result would definitely not be what you claim -- Hoovervilles and soup kitchens. Before 1932, there were absolutely no social safety nets, such as Medicaid, food stamps and unemployment benefits; moreover, the foreclosure rate in the country was almost 20%. None of those conditions are present today. Would there have been more layoffs? Probably, but to think that the country would resemble 1930-1934 is absurd. Read about the Depression of 1920-1921 and the government's response: cutting spending. It led to the biggest drop in GDP ever in any year, but there was a swift and robust recovery shortly thereafter. Right now, we have no chance of seeing a robust recovery and will be lucky if the unemployment rate goes below 9% any time soon.
Note especially that $600 trillion number (which I haven't verified). Many analysis I've heard and read indicate that the worst may not even have happened yet, and that governments around the world, not just the US (Greece being a notable example) are still trying to "paper over" the difficulties. Doing a "reset" makes sense when there is a glitch... like rebooting your computer. But resets don't work too well after your computer has been struck by lightening (or maybe a slow rollover by heavy construction equipment would be a better metaphor as this problem was anything but sudden).

I note also today that there are appeals hearings going on for Jeffry Skilling the one person doing jail time in the Enron affair. That is of course after a series of suicides and stress deaths by the others that would be in a similar situation.

Right or wrong I think the Enron gang was tried in the court of public opinion and like the jailing of Martha Stewart, who probably did no more than high rolling investors do every day, but was "made an example of". The fact that so many of the Enron people were allowed to walk, and the rest died before sentencing rather took the edge off of this example-making.

But it is my hope that if (and I also hope it is an "if" and not a "when")this situation gets worse, we will have another, much larger round of example-making that will involve not only high rollers on Wall Street, in the banking and insurance sectors and even (if legally possible) their allies in government who made this much more costly collapse a possibility. The collapse itself is just "gravity" doing it's job, the key is to look for the individuals who knowing ignored the laws of financial gravity and set up up for the fall in the first place. If we had the same mindset to go after "those responsible" that we did in the Enron case maybe we should start thinking about who those people are. there are certainly more of them this time around and I think they include people in the banking sector, in the insurance sector and in the regulatory system as well as at least a few people in congress. Again, whether it's even possible to consider punitive measures against our elected representatives is questionable, even if it is shown they were in some way only acting in their own self interest. Look at what some of them have gotten away with so far.

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