Friday, June 18, 2010

Financial Reform is a Dirty, Corrupt Process

While many, including myself, labor and desire financial regulatory reform in the United States which will protect the American public, defuse systemically risky financial companies, provide a practical liquidating process of multiple financial companies during a financial crisis, and enter the 21st Century with respect to the need for fiduciary duty and how that is distinct from a watered down wolf in sheep's clothing fiduciary standard.

What can be said of a country that will not even debate the need for fiduciary duty and the ethically incompatible functions of selling financial products?  In the United Kingdom, Canada, and Australia is illegal to provide financial advice and sell financial products.  Period.  Are they more civilized or more democratic or just more pro consumer protection oriented than regulators and congressmen in the United States?  Are their regulatory agencies more conflict free and less corrupt than the United States?  In the United States not even the main line bloggers think fiduciary duty is worth discussing.  I have made my position very clearly and I have not minced words.

It is more popular to talk about "too big to fail" when the topic should actually be the "systemically dangerous".  Obviously, a Volcker Rule which addresses financial companies of any size which are systemically dangerous is necessary.  The fight for an independent consumer financial protection agency is lost with its imprisonment in the Federal Reserve.  Stripping commercial banks of derivatives, private equity, and hedge fund trading and product development is fundamentally necessary.  Taxing financial companies for excessively risky behavior is perceived as too much to ask; after all, it might actually curtail excessive risky behavior and limit the compensation of investment bankers/traders who live to devour the competition much less the unsophisticated.  If, during a financial crisis multiple financial companies need to liquidated or restructured simultaneously, we are doomed, because the resolution process proposed in the United States addresses single companies and will not work if initiated. 

Stiglitz has recently listed what financial reform should do and what it is not doing in a recent article.  He shows that the House and Senate versions are both inadequate, the pressures of the financial lobbyists, and the need for a resolution process, and reforms to prevent another financial crisis like one we continue to experience.  He falls into the "too big to fail" myth while he has written about systemically dangerous as the proper term, because it is not about size; it is about excessive risk and being a systemic threat.  But, then, he also falls into the fiduciary standard trap.  Perhaps he is just trying to be inclusive in an attempt to promote reason.  His article covers a lot of territory with little substantive argument in an attempt to show the problem and the need for solution.

Exemplifying the extreme focus on what many consider "the" important issues, Rortybomb compared the House and Senate versions of resolution authority, bank capitalization, derivatives, and auditing the Fed only.  He does mention he is also concerned at the loss of the ratings companies being subject to an independent agency which assigns raters to debt issuances and auto dealers exempt from consumer protection disclosures.  What he does not mention is fiduciary duty, the consumer financial protection agency, the exemption of many small banks, and the provisions which make the largest banks more powerful than before the current crisis. 

The inadequacy of the Orderly Liquidation Fund is well discussed in this article by Jennifer Taub on The Baseline Scenario.  The proponents of the financial elite want no part of any law which would actually make the financial elite pay for their mistakes, when the losses can be so conveniently dumped on the American public in a pious contrition towards the unspoken state of corporate socialism.  The Baseline Scenario has many other posts on financial reform.

The attack upon any type of Volcker Rule which addresses the issue of systemically dangerous financial behavior is unrelenting.  Rortybomb, which is an excellent source on financial reform, recently wrote about how any form of the Volcker Rule is not being taken seriously in the Conference process.  Some congressmen are concerned that stripping private equity, derivatives, and hedge fund activities from banks will put them in unregulated entities.  Are they being obstructionist?  Without divorcing commercial banks from trading excesses, we will be primed for the next financial crisis and nothing will stop it.

Do we live in a corrupt society?  Do we desire a society feudalistically dominated by financial corporations?  Is the general welfare of the people a dominant concern or just a phrase which money from financial lobbyists allow congressmen to ignore?  Do we need to go back to the Constitutional mandate of a U. S. Representative for every 30,000 citizens and have a larger lower House like other developed democracies, like the United Kingdom?

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