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What Financial Crisis?
Wed, 06/02/2010 - 00:00
The koan for our times might be: How can there be a devastating financial crash that produces no serious financial reform? Like all koans, this one is instructive because it forces us to contemplate the deeper reality that lies beneath superficial appearances.
In this case, we must confront our assumptions that our elected officials actually represent the people’s interests; that constitutional authority can trump corporate power in practice; and that the public sector and private sector are completely separate. Oh yes, there is one other naive belief being unmasked — that Barack Obama is an FDR or Lincoln for our time.
These truths are depicted in miniature by financial reporter Gretchen Morgenson’s account of the toothless financial reform bills now pending in the House and Senate. Her devastating critique in New York Times — exposes the utter inadequacy of the "reforms."
Even though the legislation checks in at 3,000 pages, both the House and Senate versions "would let Wall Street continue devising financial black boxes that have the potential to go nuclear," writes Morgenson. "And even if the best of both bills becomes law, investors, taxpayers and the economy will remain vulnerable to banking crises."
Why? There are many reasons, but one is that big banks want to continue to own the trading venues for exotic financial instruments. This allows them to shape the market, control how transactions are made, and gain access to valuable pricing information. These capabilities let traders inflate prices on derivatives at the expense of less knowledgeable buyers, who cannot compare prices on an open market. As Morgenson points out, auto dealers, airlines and hardware stores have to post their prices to customers and allow comparison-shopping. But for Wall Street, it’s perfectly okay to have opaque dealings.
Free-market economists always rail against the "inefficiencies" and "distortions" that occur in markets when government mandates rules to ensure fairness or social objectives like safety. But here, when sellers can deliberately prevent open pricing, we barely hear a peep from the guardians of "free markets" even though the lack of open pricing not only caused distortions and inefficiencies in market decisionmaking, it caused a worldwide recession.
Wall Street lobbyists have won a change in the congressional bills that would allow firms to continue to make deals on derivatives over the phone, instead of through open markets that have explicit disclosures of prices. Wall Street prefers trading in the shadows because it knows it can extract higher prices from customers and investors who can’t shop around. This in turn masks the investor ripoffs, over-leveraging by firms, and overall risks to our financial system.
As if this were not enough, the pending legislation is likely to eliminate a provision that would prohibit financial firms from receiving any taxpayer bailout money. So even though we taxpayers cannot mandate the terms of responsible derivatives trading (thank you, Congress!), we will nonetheless be on the hook for any irrationally exuberant risk-taking that occurs. And it surely will.
Perhaps the most alarming single fact cited by Morgenson is the increasing role that taxpayers are now expected to play in providing safety nets to Wall Street (while the social safety nets for people who need food and housing get shredded). In 1999, according to a Federal Reserve Bank official, only 18 percent of the nation’s financial institutions were covered by implied federal guarantees. By the end of 2008, 59 percent of the financial sector was backstopped by you and me. A "free market" indeed!
So derivatives will still be traded as usual. The large financial institutions will continue to be "too big to fail." And the power wielded by Wall Street continues to metastasize, corrupting Washington policymaking on an even larger scale.
The financial crisis had one silver lining: it finally exposed free market ideology as a fraud. This revelation has not, however, loosened the financial sector’s grip on our democracy. And it is exposing the promise of "change we can believe in" as a sham. A well-liked president, who promised to change the ways of Washington, is actually fighting progressives from imposing tougher reforms on Wall Street.
How can there be a financial crash with no financial reform? Because the financial elite have captured Congress and the Obama Administration, and both are cynically protecting their own short-term, self-serving interests — the very ones that got us into this mess in the first place.
This may get to the heart of the matter: Enclosures of the commons are tenaciously difficult to reverse when the enclosers have so thoroughly corrupted civil authority. If Wall Street were a special case, it might be less depressing, but in the past year alone we have witnessed Toyota’s massive evasion of a dangerous safety defect, the Massey coal company’s fatal mining disaster, and the BP oil spill in the Gulf of Mexico. Has any really been adequately investigated or held accountable? These occasions ought to be “teachable moments” about our political culture. Instead we hear only tepid statements of concern and canned denunciations from Congress and President Obama.
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