May 2010

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ON FINANCIAL SECTOR REFORM and REGULATION

 
By Peter Bearse
 
Is it any wonder that our economy is screwed up? -- When Congress
can’t even ask the right answers, let alone get to reasonable answers
on the need for reforms in the financial sector, or in Congress itself
-- so as not to screw up another sector of the economy. The key issue
which Congress avoids is distribution of power, not only between the
private sector and government, but within the private sector, too.
Avoidance has consequences. One is that government will continue to be
part of the problem because a Democratic Congress mistakenly assumes
that it’s the major part of the solution to any problem. Another is
that the economy will be rendered less dynamic. Government
intervention into any sector of the economy favors the financial
powers that be to the disadvantage of the smaller fry -- small,
community-based banks, small business and entrepreneurs. As I noted in
earlier releases, the big boys, on balance, destroy jobs; smaller
actors create them. An American economy guided by big government
bailing out big banks is in danger of riding on the same rails as
Japan from 1990 to about 2002 -- low growth and high inflation --
stagflation.”
 
Congress puts the country in danger when it sets to solving the wrong
problems. It often does so by overreacting to media headlines rather
than trying to get to the roots of problems. So, rather than finding
ways to get the financial sector to serve the real economy, Congress
comes up with “reforms” that serve the sector and itself. Why? --
because it starts with a misleading diagnosis: that the core problem
is that the burden of bailouts falls too much on taxpayers. Then it
starts down a misguided path guided by the influence of big money
contributions to help Members’ reelection. So, if you want to know
what’s happening with financial regulation -- “Follow the money!”
 
Thus, as in the case of the earlier un-healthy concoction carrying a
reform” label, we face a huge bill…
Ä        Whose implications for the future are poorly understood and too
little debated;
Ä        That does not eliminate either significant chances of future
bailouts, nor of taxpayers being put on the hook for them [The latter
is hidden in the section on FDIC “loans”];
Ä        Whose risk-management via governmental regulation threatens to put
dampers on the prime drivers of our economic progress --
entrepreneurship and innovation; and…
Ä        Whose solicitous care and favoritism for the big boys spells a big
imbalance in the economy: Investors will favor big banks and
corporations over small, community-based banks and more
entrepreneurial enterprises. The market and political power of the big
would grow. The corruption of Congress would increase, threatening the
foundation(s) of our Republic.
 
What features need to be included in a real reform package that would
finance real American enterprise, not a casino economy?   There are
eight (8):
 
v        Non-bank financial companies need to be regulated as banks if any
part of the corporation takes deposits.
v        “Standard” derivatives’ trading should be moved out of banks into
public trading exchanges. “Customized” trading can continue through
in-bank “desks“, but with federal agency oversight.
v        Securities’ underwriting and trading needs to be regulated, and
incentives provided, so that banks and other financial institutions
provide more patient money for business development, not incentives
for “flipping” investments to make quick bucks.
v        Existing financial regulatory agencies need to be consolidated,
trimmed and refocused rather than adding another, new agency to an
already cumbersome bureaucratic layer-cake.
v        The attitude that some big banks are TBTF -- “Too Big To Fail”
should be disposed of. Failed banks should be handled, as now, by the
FDIC. Bank corporations or holding companies should be allowed to fail
and/or be reorganized under bankruptcy statutes. Any expectation that
any banks will be “bailed out” through any other mechanism should be
put to rest.
v        Congress should recognize that the biggest banks are multinational
corporations. Thus, some provisions of American legislation designed
to alleviate “systemic risk” should be conditioned on trans-national
coordination, cooperation and sharing of burdens yet to be worked out
underBasel III.”
v        Capital reserve requirements of non-bank financial companies need to
be increased, significantly, and allowable leveraging (debt/equity
ratios) decreased.
v        Restore the “double liability” system that governed banks until the
FDIC was established in the 1930’s, whereby bank officers’ personal
assets would be liquidated to make depositors whole if a bank failed.
 
Republican Senators should stand fast against Democrats’ attempt to
ram through another bad bill, so that these and other improvements can
be made.
 
        PETER BEARSE, Ph.D., International Consulting Economist and
Independent-Conservative Reagan Republic Candidate for Congress in NH
CD 1, April 27, 2010. Comments welcomed by pjbearse@gmail.com and/or
603-382-8079.