Heading Off the Next Financial Crisis

[groovedaddy]

A public good is something that the free market tends not to provide on its own, to the detriment of society. Pollution laws and police departments are classic examples. In the case of finance — and of the crisis of the past two years — this missing good has been strong regulation. A weak system of regulation allowed Wall Street firms to take on enormous debt. Those debts let the firms make more and riskier investments than they otherwise could have, lifting their profits. But when the value of the investments began falling, the firms had little margin for error. They were like home buyers who made a tiny down payment and soon found themselves underwater.

It was tempting to let the banks fail. They certainly deserved it. But big bank failures often cause terrible damage. Credit dries up, and the economy can enter a vicious cycle of falling asset prices and job losses. That is what began to happen in 2008. To get credit flowing again, the federal government came to the rescue with billions of taxpayer dollars. It was a maddening story line: the government helped the banks get rich by looking the other way during good times and saved them from collapse during bad times. Just as an oil company can profit from pollution, Wall Street profited from weak regulation, at the expense of society.

If there has been a theme to the Obama administration’s disparate domestic policies, it has been to invest more in public goods. The administration has increased spending on schools, highways and scientific research and tried to play a more active role in energy policy and health care. “They’re all a necessary part of the network of what makes market economies work,” Timothy F. Geithner, the Treasury secretary, told me recently, “and we have not been good enough about doing them in recent years.” A big part of that network, Geithner added, is financial re-regulation.

To reduce the odds of a future crisis, the Obama plan would take three basic steps. First, regulators would receive more authority to monitor everything from mortgages to complex securities. This is meant to keep future financial time bombs, like the no-documentation loans and collateralized debt obligations of the past decade, from becoming rife. Second — and most important — financial firms would be forced to reduce the debt they take on and to hold more capital in reserve. This is the equivalent of requiring home buyers to make larger down payments: more capital will give firms a bigger cushion when investments start to go bad. Finally, if that cushion proves insufficient, the government would be allowed to seize a collapsing financial firm, much as it can already do with a traditional bank. Regulators would then keep the firm operating long enough to prevent a panic and slowly sell off its pieces.

http://www.nytimes.com/2010/03/28/magazine/28Reform-t.html?th&emc=th

[upi402]

1. "force" & "seize"?

Seems like we make rules that are not enforced or punished.
Seized, by taxpayers who give huge windfalls to the bad actors who get caught out in their bad actions? oh noes!

All I see is non-action in real terms, or our subsidizing the financial sector's destabilizing criminality by team Obama. This is no remedy but at great cost. No hope, no change, and at this point -no confidence.

My skeptical .02

[notesdev]

7. Rules? There are no rules

The only law left in this banana republic is the law of the jungle.

[jtuck004]

2. So we bailed out the architects of financial mismangement

to avoid, according to this article, "It was tempting to let the banks fail. They certainly deserved it. But big bank failures often cause terrible damage. Credit dries up, and the economy can enter a vicious cycle of falling asset prices and job losses. "

So now we are dealing with lack of credit, nearly no demand, falling asset prices and job losses, although the banks and finance companies do seem to have been able to give out pretty good checks and bonuses.

Good job!

[groovedaddy]

3. I would have loved to see a seperate system set up, run by the Fed government

and let the banks fail. It would have been a lesson to all not to trust those bastards AND the bailout money could have been used to subsidize this effort. Credit wouldn't have dried up.
But remember who was president and who was in control of congress. Once the process was started, there was no turning back. But the regulatory process could use some serious beefing up, with some razor sharp teeth! That can still happen.

[jtuck004]

4. Yes, I do know who was in control then...

and it would have taken a mountain of guts to say NO, we are not going to continue with this. You screw around with depositors money, you fail, and new people can take over what's left. That would have been a monumentally hard decision.

That would have thrown everything into a worldwide global panic. But then there would have been public support for spending a trillion dollars putting people to work, in school, and encouraging demand so businesses could create jobs. Instead we, well, you know...

Now there is little to no chance of wresting control of the banks and breaking them up (not to mention not enough public support)now that they have been re-fortified, which would probably have been our only best solution. I doubt we will see much in the way of really effective regulation, more like window dressing, given those making the decisions at this stage. I think they are all too close at the top.

The real problem is that we may still see the bottom of what would have happened, it just may drag out a very long time. By cushioning this it gives us the opportunity to address it, but while 27 million people have stayed unemployed, and we are still not creating net new jobs while everyone has been distracted by health care. None of the plans which might work toward job creation have been nearly big enough. Perhaps they are just hoping that the Boomers will go on social security, but since the vast majority don't have much if any retirement, (their homes were, but that's pretty much gone) we will have a huge number of people unable to exist on what is coming.

[Grand Taurean]

5. I opposed the bank bailouts.

"The deregulation of the last few decades has come in for a lot of blame for the current financial crisis. It deserves some blame, too. If Citigroup and Bank of America were still operating under the New Deal rules, they might not have flirted with bankruptcy. But take a minute to think about which firms had the biggest problems. They were the shadow banks: stand-alone investment banks like Lehman, Bear Stearns and Merrill Lynch; and other firms, like A.I.G., that were not banks at all. They were never fully covered by the New Deal regulation, and they were not the ones most affected by the deregulation"

Now the problem here is that AIG and their crime partner Goldman Sachs are still in business.
These big banks/voo-doo investment firms are parasites on the economy. They needed to fail as a means to clear their debt off the record(as the assets in question never had much value to begin with).
As long as CDO's and tax loopholes exist, there will be no solution to this problem.

[sendero]

6. What a joke...

..."Credit dries up, and the economy can enter a vicious cycle of falling asset prices and job losses"

That is EXACTLY what we have right now. This guy is a moron.

[dixiegrrrrl]

8. Moron indeed.

This is pro-business pablum for the masses.
The reporter used to write for Business Week.

[ixion]

9. The MSM missing the scope of the issue

which is that these banks still have yet to declare the value of their bogus loans. The commercial R.E. market is nearing meltdown, residential is nearing the next wave of defaults, and now the foundation is weakened, because we didn't just bail out the banks, we flooded their coffers with cash, which they promptly pocketed.

This isn't going to disappear using the usual bureaucratic flim-flam. This is a serious and fundamental economic issue that is going to come to a head no matter how much they try and spin it.