White House opposes three important financial reforms

[eridani]

http://readersupportednews.com/opinion/82-82/1898-white-house-should-stop-pandering-to-wall-street

The White House opposes three important financial reforms that have drawn bi-partisan support in the Senate. It should reverse course.

1. Require the Fed to disclose the entities it lends to. There's no reason the public should be kept in the dark about who benefits when the Fed departs from its traditional interest-setting role and chooses to provide credit (or in Fed parlance, "open its discount window") to particular companies or entities. To the contrary, a well-functioning capital market and a well-functioning democracy depend on full disclosure about who the Fed picks for such special treatment and why.

2. Require big banks to spin off their derivative businesses. Derivatives got us into the mess and Wall Street's biggest banks are still wielding them like giant poker games. That's because they're enormously lucrative for the banks. But they're also dangerous to the economy because bad bets can lead to meltdowns, especially if they're backed only by flimsy promises to pay up rather than real capital. The credit default swap business continues to be out of control. To this date, no one knows how big it is, where it is, and who has promised what.

3. Cap the size of the biggest banks. You don't have to be a rocket scientist to understand that the best way to reduce financial risks that could (and almost did in the fall of 2008) bring down the entire economy is to spread risk-taking over thousands of small banks rather than centralize it in four or five giant ones. The giants already account for a large percentage of the entire GDP. Because traders and investors know they're too big to fail, these banks have a huge competitive advantage over smaller banks. This advantage will make them even bigger in coming years, and make the economy even more vulnerable to them.

[BzaDem]

1. While I agree with most of these, here are their reasons for opposing them.

1. In the very short term, it could be very damaging to force the Fed to disclosed who it lends to in a crisis. That is because the Fed publicly lending to a bank in a liquidity crisis could cause a huge run on that bank (for transactions outside insured deposits) and cause the bank to actually become insolvent when it wasn't before. This was the reason Bush forced both healthy and crisis banks to take TARP money -- otherwise the crisis banks could have collapsed.

However, when the financial crisis is over and done with, there is no reason why the Fed shouldn't disclose everything. I think the White house supports this (don't disclose at the time, but definately disclose later).

2. The problem here is that if big banks (which the government has huge regulatory power over) can't trade derivatives, then all derivative trading will go to completely unregulated hedge funds. So the same trading will happen -- it will just happen at companies that the government can't monitor or regulate. Nothing prevends hedge funds from winding the debt up in ways that would cause their failures to be systemically risky. In addition, many non-financial businesses large and small use derivatives to hedge against commodity price fluctuations, and they want to trade with bigger banks that have a huge asset base (and therefore less of a chance of failing).

There are fixes for this though. One is to more heavily regulate any company that trades derivatives. Another is to increase capital requirements and lower leverage limits. There might be a very safe way to enact this provision.

3. Capping the size of the biggest banks might help a little bit, but it is a lot less helpful than most people think. A crisis can easily happen because of many small bank failures simultaneously. Just look at the Great Depression. That Depression wasn't caused/exacerbated by a single large bank failure. It was caused/exacerbated by thousands of small bank failures. Had none of these banks failed, the depression likely would have been far less severe. Furthermore, many small banks can still make up the same percentage of GDP. What is really needed is to in effect limit the size of the banking system (by making it less profitable through taxes and other mechanisms). Unfortunately that isn't in the bill to a significant extent.

[Usrename]

3. Maybe you can explain something to me.

What exactly is the purpose for having hundreds of trillions of dollars in derivatives?

They never existed before, why do we need them now?

Why do they amount to many time over what our GDP is?

[BzaDem]

5. They really do not amount to many times over what our GDP is.

It's confusing. Basically, company A can bet one billion on something, and another one billion on the opposite of that something. The total "notational" value of those two transactions is 2 billion. But in reality, nothing would ever be paid out, because the two bets cancel each other.

So the total "notational" amount is indeed many times over what our GDP is. But the total actual amount that could be paid out isn't even close.

Some uses of derivatives are important. A company that uses much of a certain commoditiy (say wheat) would like to plan its business around a relatively constant price of wheat. It doesn't want to have to keep changing its business strategy and behavior every time the price of wheat fluctuates. So it takes out a derivative that guarantees that the company will be able to buy wheat at a set price. It is used to hedge risk.

This is not to say that the use of derivatives shouldn't be regulated or curtailed. I'm just saying there are legitimate uses, and the total banning of them is not needed and would have adverse consequences. Harsh regulation on the big players is what is needed.

[Usrename]

6. I don't think they are necessary at all. They never have been.

They certainly don't stop the fluctuations in the price of wheat.

The whole argument seems at odds with itself. The banksters say that they deserve huge returns on investment because they are risking something (out of one side of their mouth) while also arguing that they deserve huge compensation for making risk dissappear (out of the other side). It seems like musical chairs to me, and the music is about to stop.


Have you seen this piece http://journals.democraticunderground.com/marmar/16331">"Nothing Sells Like Nothing" by Pete Karman?





This graph shows how these things have grown in the last decade:



http://www.occ.treas.gov/ftp/release/2009-34a.pdf

[Scuba]

2. No brainers, all.

[Bluebear]

4. The President has no role in crafting legislation!!!!11

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=102&topic_id=4373619&mesg_id=4373789