Thursday, April 22, 2010

And This Will Fix Our Financial Problem?

As I look at the financial "reforms" proposed by Obama, it appears that there is precious little in the way of reform that is actually meant to address the issues raised by our financial crisis. My first question in that regard is how can Obama reform the financial system if we have not identified the problems at issue. Obama has established a commission to determine the causes of our financial break down. He wants reforms passed this summer, but the commission won't be reporting until the winter. So how the hell can he push through financial reforms months before that commission has completed its work and issued its report? Obama's push for financial reform before the commission issues its report makes a mockery of both.

Beyond that question, all of my issues with Obama's proposed financial reform are substantive. One, we know that much of the problem with the subprime mortgages came about because sub-prime loans were being bundled and given AAA ratings. This should be a central focus of financial reform, yet how that happened has been perhaps the most studiously ignored issue of the entire sub-prime mess. Indeed, the degree to which it has been ignored is making my spidey senses go tingling off the charts. On its face it appears that there has been massive fraud - and fraud that deeply implicates Fannie Mae. Moreover, having heard Barney Frank within the past year pressure Fannie Mae to upgrade the rating for certain loans, I really wonder whether this issue might not implicate some of our elected representatives also.

Two, it appears that our financial crisis came about one step removed from the sub-prime crisis. Besides apparent fraud in the bundling of tranches, you had derivatives designed to spread the risk - normally a good thing - but you also had recently enacted mark to market accounting rules that required institutions to show the value of their mortgaged backed securities as zero when the market for mortgages froze. Of course the value of the securities was not zero, but this rule caused untold chaos for those firms holding many securities - and it was what nearly froze the international credit market. Yet I see nothing being done to address those rare situations when mark to market becomes punitive and fails to give an accurate measure of the value of the securities being held.

Three, I supported the bailout of our financial institutions last year in light of the unique circumstances and the threat to credit - a meltdown that might have caused a true depression. That said, under anything short of such a unique set of circumstances, we should be not bailing out any financial institution. For capitalism to work, corporations need to be allowed to fail - whether they be AIG or GM. Yet Obama's proposed regulations give the government unlimited power to take over and bail out financial institutions and even establishes a slush fun to support such acts.

Four, Fannie and Freddie need to be completely privatized and put out of the reach of Congressional control. No one can argue that it was the demonic intersection of Fannie and Democrats that lay at the heart of our current fiscal woes. Yet they have now been, for all practical purposes, completely nationalized by the Obama administration.

Five, it was social engineering of credit qualifications that led directly to our current fiscal woes. Any financial reform should make color blind lending standards mandatory. Yet Obama proposes to put racially charged lending standards back into the front and center of our financial industry. That is anything but reform.

Six, someone needs to explain how heavily taxing banks and their profits will do anything to protect the banks customers, improve efficiency, or do anything other than further feed the trough at which at which our voracious socialist governments feed. Yet that is what is being proposed by the IMF:

Tough proposals to cut the world's biggest banks down to size by taxing their profits and pay were outlined by the International Monetary Fund tonight in an attempt to spare taxpayers another massive public bailout of the financial sector.

In measures more stringent than Wall Street and the City had expected, the fund called for the introduction of a twin-track approach to the three-year banking crisis that would both force firms to pay for any future support packages and raise new taxes on their profits and remuneration. . . .

Those are the issues I see. Michael Barone, writing at The Examiner amplifies several of them:

. . . The Dodd bill, however, has it trumped. Its provisions promise to give us one episode of Gangster Government after another.

At the top of the list is the $50 billion fund that the Federal Deposit Insurance Corp. could use to pay off creditors of firms identified as systematically risky, i.e., "too big to fail."

"The Dodd bill," Democratic Rep. Brad Sherman writes, "has unlimited executive bailout authority. That's something Wall Street desperately wants but doesn't dare ask for."

Politically connected creditors would have every reason to assume they'd get favorable treatment. The Dodd bill specifically authorizes the FDIC to treat "creditors similarly situated" differently.

Second, as former Bush administration economist Larry Lindsey points out, the Dodd bill gives the Treasury and the FDIC authority to grant an unlimited number of loan guarantees to "too big to fail" firms. Chief executive officers might want to have receipts for their contributions to Sen. Charles Schumer and the Obama campaign in hand when they apply.

Lindsey ticks off other special favors. "Labor gets 'proxy access' to bring its agenda items before shareholders as well as annual 'say on pay' for executives. Consumer activists get a brand-new agency funded directly out of the seniorage the Fed earns. No oversight by the Federal Reserve Board or by Congress on how the money is spent."

Then there are carve-out provisions provided for particular interests. "Obtaining a carve-out isn't rocket science," one Republican K Street lobbyist told the Huffington Post. "Just give Chairman Dodd and Chuck Schumer a s--tload of money."

The Obama Democrats portray the Dodd bill as a brave attempt to clamp tougher regulation on Wall Street. They know that polls show that voters strongly reject just about all their programs to expand the size and scope of government, with the conspicuous exception of financial regulation.

Republicans have been accurately attacking the Dodd bill for authorizing bailouts of big Wall Street firms and giving them unfair advantages over small competitors. They might want to add that it authorizes Gangster Government -- the channeling of vast sums from the politically unprotected to the politically connected.

That can boomerang even against the latter. Goldman Sachs employees gave nearly $1 million to the Obama campaign and $4.5 million to Democrats in 2008. That didn't prevent the Goldman from being shoved under the SEC bus. Gangster Government may look good to those currently in favor, but, as some of Al Capone's confederates found out, that status is not permanent, and there is always more room under the bus.

Ultimately, I see no reason to think that the financial reforms proposed by Obama will do a single thing to improve our economy. What a surprise, eh?


Ex-Dissident said...

GW, there is only one recurring theme throughout this bill: from each according to his ability to each according to his need. Each step in this bill rewards undeserving incompetents. It proposes further taxes that will allow the government to redistribute this money to their favored groups. It forces healthier businesses to pay for those businesses that are dysfunctional and it promotes business dysfunction to accommodate social engineering. In a way, this is the most transparent administration ever. Every thing they do, no matter how little is known about it, has the same goal.

OBloodyHell said...

> No one can argue that it was the demonic intersection of Fannie and Democrats that lay at the heart of our current fiscal woes.

Oh, they CAN argue it. Trust me, I could point you to such a dimbulb.

But if they do, they have their cranial container firmly ensconced in their rectal cavity. See aforementioned dimbulb.

suek said...

I don't pretend to understand economics to any depth, nor to fully understand the causes for the recent problems we've been having...however, I have a strong feeling that both of these articles have a good insight to the underlying problems.

I don't care how many laws you make - if you don't enforce them, you might as well be whistling Dixie...

OBloodyHell said...

> I don't care how many laws you make - if you don't enforce them, you might as well be whistling Dixie...

Indeed, sue -- you may recall that the Bush admin warned of the GSE's perilous financial condition back in 2003 and 2004, and a congressional inquiry was performed, which wound up castigating the guy in charge of identifying the problems while Barney "Weasel" Frank openly declared he saw nothing wrong, and "wanted to roll the dice some more" (The man is ON VIDEO saying that!) -- using OUR bankrolls. THEN he had the temerity to attempt to blame the lack of action on the Bush admin when the shit hit the fan...

I'm not a big fan of shooting politicians, but in his case I'd certainly make an exception.

GW said...

Ex-D - good points.

OBH - You are right about the argument. If our Congress critters on the right were not so utterly incompetent at getting their message out, then there would be no argument.

Suek - I have read those pieces. Thanks for the links. My perception is the author puts far too much emphasis on misconduct in the financial sector while ignoring the huge role of government in causing our financial downturn. Indeed, it was the proximate cause. As to enforcing existing laws, as I could not agree more.

As to breaking up the banks, I don't know if that is the answer so much as setting collateral requirements sufficiently high.