Monday, June 15, 2009

Obama officials outline financial reforms



Every time I think they're about to blow it, royally, they come up with something good. I know that "free market fundamentalists," who nearly destroyed our economy, will be calling this the end of capitalism, however, I am not of the camp who things regulating a totally unregulated financial sector is a bad thing.

Some points I like:

Reduced reliance on credit-rating agencies will also be proposed, said the piece.

This is excellent news! Rating agencies have way too much influence and they are completely out-of-paradigm anyway, causing their pronouncements to be that much more destructive. There should be ZERO need for reliance on them, as far as I am concerned, but even if we get reduced reliance, that is a good thing.

"All derivative contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse," according to the op-ed piece.

Hopefully this will mean more oversight of speculative activity in sensitive materials, like oil and food. They didn't explicitly mention ending or putting limits on speculative activity or altogether banning pension funds and other passive, "long-only" investors from owning commodities, but at least this is a step in the right direction. Have you noticed how the clueless media is now calling the doubling in oil prices a "demand-driven" phenomenon? Yeah, demand for futures contracts. There's 13 million people out of work and the media's telling us that equates to more oil and gasoline demand?? It's speculation and it's the Saudis setting prices higher.

Here's how I feel (and I am just echoing the words of Warren Mosler, here):

Back in 1972, 2.6 million homes were built in this country and if you wanted a mortgage you went to your commercial bank for it. The bank originated the loan and serviced it. Bankers made salaries not much higher than civil servants and Americans bought homes, cars, appliances, took vacation trips and pretty much had and did all the things we have and do today.

Fast forward to 2006--the peak of the housing boom--and a time when the financial sector looked entirely different. Bank loans comprised only about 25% of all credit. Rather, credit flowed from unregulated intermediaries that dealt in risky, unstable, and hard to understand instruments.

Well, guess what? We built the same amount of homes (but our population is now 300 million, not 200 million like in '72), sold slightly more vehicles (whoopee!), but only used 80% of our industrial capacity compared to 86% back in the early 70's.

Why do we need the financial sector in its current form?

Answer: WE DON'T!!

Whether or not the Obama Administration understands that or not, I don't know. (Actually, I doubt it.) However, they are moving in the right direction.

"The financial sector is more trouble than it is worth." -Warren Mosler

P.S. Oh yeah, one more thing: In 2006 the financial sector earned 40% of all corporate profits in America, compared to single-digit percentages back in the 70's. That's way too much money to a sector that contributes nothing of real value to the economy. Get rid of it! Just keep the banks.

7 comments:

googleheim said...

Do you think it would be better if Obama and the administration come out and say to the Republican'ts :

"you want us to cut the stimulus spendins, you want us to do what Roosevelt did in 1937, you want us to balance the budget???"

and follow up with

"fine, we'll do it at your bad, your ownership Mr and Miss Republican't"

and then proceed and watch the market crash again and all them little green sprouts start shrivelling ...

then pull a big stop on that and tell them "no, i don't think we can do that - we ain't Republican't"

balance the budget ? stop the stimulus ?

Mike Norman said...

Goog, that might be a good tactic, if only Obama and his team understood our monetary system. They don't! Unfortunately, that means they will end up following the same playbook as the fiscally conservative Repubs.

googleheim said...

i forgot that caveat -

that I am "hoping" that is

what they are doing -

otherwise they are messing with the

recovery ..

mortgageangel88 said...

Mike,
Since the Treasurys approval last week it seems likely at least $70billion of TARP funds will be repaid. And plenty of journalists (and I also use the term lightly) are making a really, really big deal out of it too. "The financial sector is showing signs of recovery." and "The banks have so far 'been able' to raise blahblahblah billion.." Raised money? I don't remember that. I remember the mark to market bar was lowered to mark to model. Has any one figured out how much TARP money would have been needed if they'd just relaxed the accounting rules?
(sigh)

Mike Norman said...

Angel,

The fact that banks have been able to raise billions is evidence that investors understand the banks will be able to "earn" their way out of their troubles. That would have been the case anyway with or without TARP if the gov't understood the banking system, which is its own construct.

Requiring banks to hold some mandated level of capital when they are agents of the government (funded with taxpayer-guaranteed deposits) is redundant and makes no sense.

Paying back TARP means nothing other than allowing bankers to resume earning huge compensation.

If I lend you cash for your business to cover operating needs and you pay it back, what net gain has occurred? If anything interest has been paid to the gov't (the lender), which is income that could have accrued to the private sector. How is that a net gain for banks or for the economy as a whole? Yes, it allowed many of them to continue as ongoing concerns, but that should have been the case regardless. They are "backed" by the gov't.

Therefore, one could argue that TARP precluded bank insolvencies and failures, however, if policymakers understood the banking system the banks never would have been facing that situation in the first place.

googleheim said...

Just out of not knowing

what is the relation of the temporary super expansion of the monetary base last fall with that of the creation of the TARP credits available to banks ?

I do know that the monetary base expanded by fed actions last fall in protocol of elastic currency theory which boils down to preventing run on the banks making the taps dry.

But we did have a run on the investment banks, the securities and commodities markets

AND THEN a run TO the U$D dollar

then the Forex swaps occurred which only NORMAN pointed out for the most part where the Fed raked in some serious profit.

that is why Schiff lost big time, and why Frischberg was saved by the Norman theory of Capacity.

Frischberg is confirming the Norman Theory of Capacity daily albeit with very sugar coated and neutral approach.

Viva la Capacidad !

mortgageangel88 said...

Crazy, isn't it?