Since frozen credit markets began to be covered by the media last fall, I keep hearing talking heads on TV say that this or that credit market needs to be loosened up – and I agree. Right now there’s not enough free-flowing capital in the system to promote general economic growth.
But I also hear economists and others saying the securitization market needs to be ginned back up. They seem to talk about securitization as if it yields the same economic value as, say, credit which should be going to small business loans. Paul Krugman’s column in the Times today got me thinking about whether or not a securitization free-for-all is what will really help the structural economy. Krugman points out that banking and insurance used to be “staid” professions. In the 1960′s financial services were 4% of GDP, now they are 8%. It’s obvious that economic activity benefited relatively few and brought us to the brink of collapse last year. Whereas if there were to be a doubling of manufacturing’s portion of GDP, everyone benefits – from the plant owners to the guys sweeping the floors at night.
Deregulation of financial services spawned big numbers, but for whom? I’m not sure how Obama Administration plans to take care of toxic assets and the other gremlins in our current economy get at the fundamental unfairness of the structural U.S. economy.
A little context from Krugman:
Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.
But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.
Today’s flailing about by Congressional Republicans while trying to get their stuff together on the budget is telling.
These poor folks haven’t figured out that we don’t really care what their plans or blueprints are to solve America’s biggest problems. They had their chance and they blew it. With the exception of allowing more permissiveness by bankers and brokers, President Barack Obama is doing what we elected him to do – big things like health care, a new energy future and long overdue tax breaks for the middle class.
The one thing they could be making political hay on but are as missing in action as Democrats, is the patent injustice in how Wall Street continues to be taken off the hook for totally screwing up the entire world economy. Perhaps they’re as beholden to the campaign cash that flows from the nation’s financial districts as the Democrats are – that’s the only plausible reason for such an unfair state of affairs.
My advice to Republicans goes like this: If you are serious about being the loyal opposition and doing something worthwhile for America, fight these bailouts. I don’t know a single soul in myown life that believes there is any accountability being sought from the AIGs and Citis of the world from the Obama Administration. The TALFs, PPIPs, TARPs and other assorted bailouts have one thing in common – when they fail taxpayers’ funds are gone. Even Treasury’s latest toxic asset program floats the private sector our money with no downside risk to investors.
Republicans have made a generation’s worth of headlines fighting the culture war, battling over ridiculous things like Terri Schiavo and homosexuality. How about if Republicans stood up for some values that truly all Americans believe in – fairness, level playing fields and consequences for companies that screw the entire country over.
The fact is, the GOP has no credibility on most public policy. However, there is a vacuum of representation in Washington for ordinary Americans and their money when it comes to bailing out the financial services industry. I would cheer a loyal opposition that doesn’t roll over and play dead for corporate bailouts even if they politically postured on everything else. I sure as hell wouldn’t become a Republican, but I’d at least respect the once respectable GOP.
Geithner Calls for Major Overhaul of Financial Rules, New York Times:
The Treasury secretary, Timothy F. Geithner, outlined the plan Thursday before the House Financial Services Committee, where he got a decidedly mixed reception. He said the changes were needed to fix a badly flawed system that was exposed by the current financial crisis. Mr. Geithner, in his opening statement, called for “comprehensive reform. Not modest repairs at the margin, but new rules of the game.”
“Very complex, very consequential, very difficult” Mr. Geithner called the changes that he said were necessary, and the sooner the better.
Included in the plan would be the establishment of one single agency “with responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities.”
Geithner Calls for ‘New Rules of Game,’ Bloomberg
“We have a moment of opportunity now” and “we need to act,” Geithner said. He also called for new standards for executive compensation practices “across all financial firms.”
The administration’s regulatory framework would make it mandatory for large hedge funds, private-equity firms and venture-capital funds to register with the Securities and Exchange Commission, subjecting them to new disclosure requirements and inspections by the agency’s staff. The SEC would be able to refer those firms to the systemic regulator, which could order them to raise capital or curtail borrowing.
The strategy also would require derivatives to be traded through central clearinghouses. And it would add new oversight for money-market mutual funds to reduce the risk of a run on those funds after a shock like last year’s failure of Lehman Brothers Holdings Inc.
The Treasury chief also said regulators should consider new rules requiring banks to set aside extra reserves during boom times to build up a cushion for economic slumps.
The PDF document below outlines the highlights of comprehensive financial services regulatory reform proposals announced by Secretary fo the Treasury Timothy Geithner on March 26.
Full Text: Treasury Secy Timothy Geithner Testimony on Financial System Regulation, House Financial Services Committee
(Source: U.S. Dept. of the Treasury)
Treasury Secretary Tim Geithner Written Testimony House Financial Services Committee Hearing
Thank you Chairman Frank, Ranking Member Bachus, and other members of the Committee. I appreciate the opportunity to testify about the critical topic of financial regulatory reform.
Over the past 18 months, we have faced the most severe global financial crisis in generations. Some of the world’s largest financial institutions have failed. Equity and real estate prices have fallen sharply, eroding the value of our savings. The supply of credit has tightened dramatically. Confidence in the overall financial system, in the protections it is supposed to afford for investors and consumers, has eroded. These financial pressures have intensified the recession now underway around the world.