Real Banking Reform and Capitalism
August 9th, 2010 - 10:09am
Filed under Economy
By: GN Member John Ridings Lee
The time has come to bite the bullet. Throughout the world there is growing support for massive change in the ways that financial systems operate as most countries view the current systems as the cause for the worldwide financial crisis.
The International Monetary Fund has often been discriminatory in the implementation of their obligations, mostly due to the pressure exerted by the G20 nations who dominate the membership of their board of governors. Most central banks have all operated to impose regulations, currency manipulations, trade barriers, and political influence to the advantage of their own needs without regard to how it impacts the globalized economy.
We are not talking about minor adjustments here, but rather a wholesale restructuring of the world's financial communities. We can no longer allow financial entities to develop new products that stay one step ahead of the government regulators and permit the obscene practice of the "greater fool" philosophy which has characterized the banks activities over the past several years and has been the root cause of the world wide recession.
In the United States you cannot even count the number of regulatory agencies responsible for overseeing the activities of the banks and financial entities. It is no wonder that the left hand never knows what the right hand is doing! Rose Marie Kushmeider writing for the FDIC Banking Review stated that the research department of the World Bank reported that at the end of 2002 at least 46 countries had already revamped their supervisory responsibilities for their financial institutions by adopting a single agency or set the machinery in motion to do so. Beginning with Norway in 1986, 22 countries have already consolidated into a single supervisory agency.
In the United States the Federal Reserve directly supervises only 12% of the banks and then only 25% of their assets. This small percentage does not effectively prohibit the banks from taking undue risks with the rest of their assets. Barney Frank and Christopher Dodd have demonstrated they are not capable of supervising Fannie Mae and Freddie Mac, so even quasi-private entities need better supervision. The Securities and Exchange Commission has done a woeful job of supervising Wall Street investment bankers.
Of course there will be tremendous opposition to restructuring the financial system of the United States. The banking lobby virtually regulates itself. The politicians move seamlessly between Wall Street and Washington, and any new restructuring will require Congressional Action.
Paul K. Kelly, the president of Knox & Co. maintains that this should start with reinstating a law with the spirit of the Glass-Steagall Act. The repeal of this act in 1999 allowed the commercial banks to become investment banks, and investment banks to become protected as though they were commercial banks. All the financial institutions set about to get involved in the marketing of insurance products, derivatives, credit default swaps, and many other sophisticated products that no one had any idea of the risk ramifications they presented.
Once each entity has determined in which part of the financial marketplace it wishes to be placed, it should clean up the books. Write off, or sell all the toxic assets so that their books reflect properly their capital position.
Then new capital requirements should be established that meet prudent investment risks. Non-banking corporations such as General Electric, Sears, and insurance companies should be forced to liquidate their banking activities.
We need to do this sooner than later. The benefits to the United States and its citizenry are numerous and our leadership will once again prove to the world that we have our financial house in order. Confidence in the dollar will return internationally. Confidence in the new system will spur activities in the business community and result in businesses once again gearing up for planned growth and the hiring of employees to meet that growth that will do more than any other activity to improve our unemployment situation. We need to establish products that each segment of the financial system can offer to their customers. One stop shopping in the financial institutions simply is impossible to manage, supervise, or regulate. It is extremely difficult to determine who is responsibility for fraud and deceptive practices, and then to prosecute them. This leaves depositors, investors, shareholders, and taxpayers holding the bag for the losses.
The only losers are the ones that caused the problem in the first place with their exotic risk taking, like Dick Fuhr of Lehman Brothers, who lost hundreds of millions of dollars yet he is extraordinarily wealthy personally, rewarded for those unwise risks he authorized even while he drove Lehman Brothers into bankruptcy.
Dominique Strauss-Kahn the Managing Director of the International Monetary Fund recently said: "if there is not a restructuring of the banking system, then all the money that you can put into monetary and fiscal stimulus will just go into a black hole." He states that the IMF has been through 122 banking crises and one thing is constant: until all of the losses have been recognized, not only from real estate, but also from other factors resulting from the downturn in the economy and only then can we expect much improvement in our globalized economy. Not until the banks have been cleaned up can we find any way for recovery.
Banks are important to Capitalism. Credit is important to Capitalism. But, the stacked deck we use today does not allow Capitalism to work properly. We need to be the world leader in being the first to allow the free market to work and lead the global economy out of the recession
Please add a comment
Leave a Reply