The "R" Word - What Does It All Mean?
No not 'R'ecession! I'm talking about the other 'R' word: 'R'egulation! Every economic panic has raised questions about regulation, and the current market debacle is no exception. Especially in an election year. As I'm writing this, Congress is looking into overhauling our nation's oversight of financial institutions.
The danger is that Washington will come out with a knee-jerk-reaction piece of legislation such as Glass Steagall or Sarbanes-Oxley. The former came out of the Depression and legally separated commercial from investment banking broker/dealer activities, under the presumption that riskier financial activity would place consumer depositors at risk, a risk that was never verified as a cause of the Great Depression. As markets evolved over time the law didn't make sense and became counter-productive to US banks; after some wrangling Congress finally repealed it in 1999. As for Sox, having grown out of the Enron and Worldcom scandals while the SEC was asleep at the wheel, well, that's another discussion.
But some legislation has been beneficial, such as those that established the SEC, to provide oversight to the markets and encourage more transparency. And the Federal Reserve Act, that established the Fed, centralizing our nation’s money supply and creating a more effective means to control monetary policy that remains a model for central banking around the world.
So what's next? Well, right now we have an 'alphabet soup' of agencies providing a patchwork of oversight, including the following:
1. FEDERAL RESERVE - bank holding companies and banks that are members of the Fed, also manages monetary policy and issues securities for the US Treasury
2. OCC - part of the US Dept of Treasury oversees nationally chartered banks
3. OTS - also part of the Treasury dept, oversees thrift institutions
4. FDIC - insures consumer bank deposits
5. SEC - supervises public exchanges
6. NASD (Currently known as FINRA) - supervises securities dealing activities
7. OFHEO - part of the US Dept of Housing & Urban Development, supervises government-sponsored entities such as Fannie & Freddie
8. FHA - also part of HUD, provides housing loans for lower-income
...not to mention each state's banking department.
Ok, got that?
The issue is, places like Bear Stearns or Lehman Brothers don't undergo the same level of scrutiny as banks that accept deposits. And that's probably a good thing given their role in providing innovation in the financial marketplace. Yet they have come to play an increasingly crucial role in effecting liquidity in the marketplace, which includes banks. So when Bear falls, it rumbles through to potentially destabilize the markets, and ultimately the economy.
So what's the solution? What I'm afraid of is all of these calls by politicians for MORE regulation; if anything just to show the public that they're doing SOMETHING to address the issue...ugh.
A better idea would be more EFFECTIVE regulation. There must be a balance between protecting the interests of the public/economy vs. stifling financial innovation that can lead to unintended consequences (inability to compete in world markets, market illiquidity, etc.).
I like the ideas put forth by US Treasury Secretary Paulson and Senator Chuck Schumer of streamlining all of these various financial regulators. Today's article in Bloomberg is titled, "Paulson to Propose New Financial Overseers, SEC-CFTC Merger", and aims to give the fed more power:
Treasury Secretary Henry Paulson is likely to call for the creation of new regulatory agencies with broad powers over lending, the securities industry and business conduct, according to the draft of a study he commissioned.The UK did this by establishing the FSA; an independent body that regulates the financial services industry in the UK. As of now, although each agency applies the same regulatory standards, the system creates tremendous inefficiencies, and the taxpayers deserve better.
The report, which recommends more power for the Federal Reserve, also proposes combining the Office of Comptroller of the Currency -- which dates back to the Civil War -- and the Office of Thrift Supervision into a single banking overseer.
The real question is this - if Bear Sterns were subject to the same level of oversight as a bank like JPMorganChase, would all of its troubles have been prevented? Would the Fed therefore not have had to come in and move the way it did?
Or maybe Bear should have managed its own risk better, in which case no amount of regulation would have prevented the firm’s potential meltdown. Their story is not over yet and more will unfold. Until then, Congress should hold off on passing another law until the root causes are fully understood, so that more effective regulation could be applied.
Posted by Jeff
Sun Mar 30th, 2008 06:08 PM
Beth,
I agree with you that more effective regulation and a simpler regulatory structure that puts more of the "same stuff" under one regulator would be helpful. However, I also think that the number of financial products and the arcana that has spread due to financial innovation has gotten ahead of any single entity's current understanding. Some regulatory oversight body needs to ellicit research from each regulatory body and self regulatory body into the funds flows and choke points in all the products/markets being regulated so that an understanding of how SIVs can tank money market funds and mono line insurer losses can cause auction rate securities to become illiquid is established in advance, instead of by market participants as things go pop. One of the scary elements of this credit crunch has been the unpredicatble ways it has spread from market to market and the shockwaves it has produced in areas that were backwaters in the minds of both the general public and even regulators. While there will still always be surprises in these 100 year floods - it's the nature of the beast - there shouldn't be so damn many.
Posted by Beth
Sun Mar 30th, 2008 08:34 PM
Jeff,
You make a very good point. A "one size fits all" regulatory body could risk excluding the subject matter expertise found under such groups as the CFTC or NASD.
That said, in the banking world there is a lot of overlap among agencies that evolved for political reasons that don't make much sense today. The question is how to better supervise the markets to avoid further systemic risk. One answer could be to regulate according to function (i.e. liquidity risk oversight) rather than industry area (i.e. consumer bank vs. broker/dealer).
Posted by Worried American
Mon Mar 31st, 2008 08:14 PM
Don’t believe one optimistic word from any public figure about the economy or humanity in general. They are all part of the problem. Its like a game of Monopoly. In America, the richest 1% now hold 1/2 OF ALL UNITED STATES WEALTH. Unlike ‘lesser’ estimates, this includes all stocks, bonds, cash, and material assets held by America’s richest 1%. Even that filthy pig Oprah acknowledged that it was at about 50% in 2006. Naturally, she put her own ‘humanitarian’ spin on it. Calling attention to her own ‘good will’. WHAT A DISGUSTING HYPOCRITE SLOB. THE RICHEST 1% HAVE LITERALLY MADE WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. Don’t fall for any of their ‘humanitarian’ CRAP. ITS A SHAM. THESE PEOPLE ARE CAUSING THE SAME PROBLEMS THEY PRETEND TO CARE ABOUT. Ask any professor of economics. Money does not grow on trees. The government can’t just print up more on a whim. At any given time, there is a relative limit to the wealth within ANY economy of ANY size. So when too much wealth accumulates at the top, the middle class slip further into debt and the lower class further into poverty. A similar rule applies worldwide. The world’s richest 1% now own over 40% of ALL WORLD WEALTH. This is EVEN AFTER you account for all of this ‘good will’ ‘humanitarian’ BS from celebrities and executives. ITS A SHAM. As they get richer and richer, less wealth is left circulating beneath them. This is the single greatest underlying cause for the current US recession. The middle class can no longer afford to sustain their share of the economy. Their wealth has been gradually transfered to the richest 1%. One way or another, we suffer because of their incredible greed. We are talking about TRILLIONS of dollars which have been transfered FROM US TO THEM. All over a period of about 27 years. Thats Reaganomics for you. The wealth does not ‘trickle down’ as we were told it would. It just accumulates at the top. Shrinking the middle class and expanding the lower class. Causing a domino effect of socio-economic problems. But the rich will never stop. They just keep getting richer. Leaving even less of the pie for the other 99% of us to share. At the same time, they throw back a few tax deductible crumbs and call themselves ‘humanitarians’. Cashing in on the PR and getting even richer the following year. IT CAN’T WORK THIS WAY. Their bogus efforts to make the world a better place can not possibly succeed. Any 'humanitarian' progress made in one area will be lost in another. EVERY SINGLE TIME. IT ABSOLUTELY CAN NOT WORK THIS WAY. This is going to end just like a game of Monopoly. The current US recession will drag on for years and lead into the worst US depression of all time. The richest 1% will live like royalty while the rest of us fight over jobs, food, and gasoline. So don’t fall for any of this PR CRAP from Hollywood, Pro Sports, and Wall Street PIGS. ITS A SHAM. Remember: They are filthy rich EVEN AFTER their tax deductible contributions. Greedy pigs. Now, we are headed for the worst economic and cultural crisis of all time. Crime, poverty, and suicide will skyrocket. SEND A “THANK YOU” NOTE TO YOUR FAVORITE MILLIONAIRE. ITS THEIR FAULT. I’m not discounting other factors like China, sub-prime, or gas prices. But all of those factors combined still pale in comparison to that HUGE transfer of wealth to the rich. Anyway, those other factors are all related and further aggrivated because of GREED. If it weren’t for the OBSCENE distribution of wealth within our country, there never would have been such a market for sub-prime to begin with. Which by the way, was another trick whipped up by greedy bankers and executives. IT MAKES THEM RICHER. The credit industry has been ENDORSED by people like Oprah Winfrey, Ellen DeGenerous, Dr Phil, and many other celebrities. IT MAKES THEM RICHER. Now, there are commercial ties between nearly every industry and every public figure. IT MAKES THEM RICHER. So don’t fall for their ‘good will’ BS. ITS A LIE. If you fall for it, then you’re a fool. If you see any real difference between the moral character of a celebrity, politician, attorney, or executive, then you’re a fool. No offense fellow citizens. But we have been mislead by nearly every public figure. WAKE UP PEOPLE. THEIR GOAL IS TO WIN THE GAME. The 1% club will always say or do whatever it takes to get as rich as possible. Without the slightest regard for anything or anyone but themselves. Reaganomics. Their idea. Loans from China. Their idea. NAFTA. Their idea. Outsourcing. Their idea. Sub-prime. Their idea. High energy prices. Their idea. Obscene health care charges. Their idea. The commercial lobbyist. Their idea. The multi-million dollar lawsuit. Their idea. The multi-million dollar endorsement deal. Their idea. $200 cell phone bills. Their idea. $200 basketball shoes. Their idea. $30 late fees. Their idea. $30 NSF fees. Their idea. $20 DVDs. Their idea. Subliminal advertising. Their idea. Brainwash plots on TV. Their idea. Vioxx, and Celebrex. Their idea. The MASSIVE campaign to turn every American into a brainwashed, credit card, pharmaceutical, love-sick, celebrity junkie. Their idea. All of the above shrink the middle class, concentrate the world’s wealth and resources, create a dominoe effect of socio-economic problems, and wreak havok on society. All of which have been CREATED AND ENDORSED by celebrities, athletes, executives, entrepreneurs, attorneys, and politicians. IT MAKES THEM RICHER. So don’t fall for any of their ‘good will’ ‘humanitarian’ BS. ITS A SHAM. NOTHING BUT TAX DEDUCTIBLE PR CRAP. In many cases, the 'charitable' contribution is almost entirely offset. Not to mention the opportunity to plug their name, image, product, and 'good will' all at once. IT MAKES THEM RICHER. These filthy pigs even have the nerve to throw a fit and spin up a misleading defense with regard to 'federal tax revenue'. ITS A SHAM. THEY SCREWED UP THE EQUATION TO BEGIN WITH. If the middle and lower classes had a greater share of the pie, they could easily cover a greater share of the federal tax revenue. They are held down in many ways because of greed. Wages remain stagnant for millions because the executives, celebrities, athletes, attorneys, and entrepreneurs, are paid millions. They over-sell, over-charge, under-pay, outsource, cut jobs, and benefits to increase their bottom line. As their profits rise, so do the stock values. Which are owned primarily by the richest 5%. As more United States wealth rises to the top, the middle and lower classes inevitably suffer. This reduces the potential tax reveue drawn from those brackets. At the same time, it wreaks havok on middle and lower class communities and increases the need for financial aid. Not to mention the spike in crime because of it. There is a dominoe effect to consider. IT CAN'T WORK THIS WAY. But our leaders refuse to acknowledge this. Instead they come up with one trick after another to milk the system and screw the majority. These decisions are heavily influensed by the 1% club. Every year, billions of federal tax dollars are diverted behind the scenes back to the rich and their respective industries. Loans from China have been necessary to compensate in part, for the red ink and multi-trillion dollar transfer of wealth to the rich. At the same time, the feds have been pushing more financial burden onto the states who push them lower onto the cities. Again, the hardship is felt more by the majority and less by the 1% club. The rich prefer to live in exclusive areas or upper class communities. They get the best of everything. Reliable city services, new schools, freshly paved roads, upscale parks, ect. The middle and lower class communities get little or nothing without a local tax increase. Which, they usually can't afford. So the red ink flows followed by service cuts and lay-offs. All because of the OBSCENE distribution of bottom line wealth in this country. So when people forgive the rich for their incredible greed and then praise them for paying a greater share of the FEDERAL income taxes, its like nails on a chalk board. I can not accept any theory that our economy would suffer in any way with a more reasonable distribution of wealth. Afterall, it was more reasonable 30 years ago. Before Reaganomics came along. Before GREED became such an epidemic. Before we had an army of over-paid executives, bankers, celebrities, athletes, attorneys, doctors, investors, entrepreneurs, developers, and sold-out politicians to kiss their asses. As a nation, we were in much better shape. Strong middle class, free and clear assets, lower crime rate, more widespread prosperity, stable job market, lower deficit, ect. Our economy as a whole was much more stable and prosperous for the majority. WITHOUT LOANS FROM CHINA. Now, we have a more obscene distribution of bottom line wealth than ever before. We have a sold-out government, crumbling infrastructure, energy crisis, home forclosure epidemic, 13 figure national deficit, and 12 figure annual shortfall. The cost of living is higher than ever before. Most people can't even afford basic health care. ALL BECAUSE OF GREED. I really don't blame the 2nd -5th percentiles in general. No economy could ever function without some reasonable scale of personal wealth and income. But it can't be allowed to run wild like a mad dog. ALBERT EINSTEIN TRIED TO MAKE PEOPLE UNDERSTAND. UNBRIDLED CAPITALISM ABSOLUTELY CAN NOT WORK. TOP HEAVY ECONOMIES ALWAYS COLLAPSE. Bottom line: The richest 1% will soon tank the largest economy in the world. It will be like nothing we’ve ever seen before. The American dream will be shattered. and thats just the beginning. Greed will eventually tank every major economy in the world. Causing millions to suffer and die. Oprah, Angelina, Brad, Bono, and Bill are not part of the solution. They are part of the problem. THERE IS NO SUCH THING AS A MULTI-MILLIONAIRE HUMANITARIAN. EXTREME WEALTH MAKES WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. WITHOUT WORLD PROSPERITY, THERE WILL NEVER BE WORLD PEACE OR ANYTHING EVEN CLOSE. GREED KILLS. IT WILL BE OUR DOWNFALL. Of course, the rich will throw a fit and call me a madman.. Of course, they will jump to small minded conclusions about 'jealousy', 'envy', or 'socialism'. Of course, their ignorant fans will do the same. You have to expect that. But I speak the truth. If you don’t believe me, then copy this entry and run it by any professor of economics or socio-economics. Then tell a friend. Call the local radio station. Re-post this entry or put it in your own words. Be one of the first to predict the worst economic and cultural crisis of all time and explain its cause. WE ARE IN BIG TROUBLE.
Posted by Beth
Mon Mar 31st, 2008 10:48 PM
uh - whatEver..
Posted by Vicky
Tue Jun 7th, 2011 06:11 AM
Such a deep ansewr! GD&RVVF
Posted by sseocdx
Tue Jun 7th, 2011 01:40 PM
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