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U.S. senators Christopher Dodd, D-CT, and Bob Corker, R-TN, have fashioned a compromise on stalled banking regulation that straddles divisions over establishing a financial consumer protection agency and addresses unwinding too-big-to-fail firms.
The deal deftly divides lawmakers on both sides of the aisle in the Senate, as well as in the House of Representatives, which passed its plan for financial reform in December.
By engineering gridlock in the nation's capitol, lawmakers seem determined to stall any meaningful overhaul of financial-markets regulation. But rather than counting on backsliding into the status quo to grease the wheels of economic recovery, the overhang of unresolved and ineffectual legislation threatens long-term investor confidence and desperately needed public protections.
The deal deftly divides lawmakers on both sides of the aisle in the Senate, as well as in the House of Representatives, which passed its plan for financial reform in December.
By engineering gridlock in the nation's capitol, lawmakers seem determined to stall any meaningful overhaul of financial-markets regulation. But rather than counting on backsliding into the status quo to grease the wheels of economic recovery, the overhang of unresolved and ineffectual legislation threatens long-term investor confidence and desperately needed public protections.
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By proposing a protection agency helmed by the U.S. Federal Reserve, the Senate has compromised President Barack Obama's call for an independent financial consumer protection agency.
Arguments against establishing such an agency included fears of expanding bureaucracy and interference into free-market access to credit.
However, the compromise to establish a protection agency under the Fed doesn't address the spreading bureaucracy of that institution. And worse, opponents of the Fed point to how the central bank mishandled its already-existing oversight authority of banks, the banking system and loose-interest-rate policies that helped precipitate the housing bubble and credit crisis.
Fed bashers further point to the controversial power of bankers who run the Fed and the inescapable fact that the Federal Reserve System is a network of private banks acting as an independent arm of the U.S. government. Giving the Fed consumer-protection powers to safeguard the public from unscrupulous moneymen is like having a wolf guard the proverbial henhouse.
We need to ask our lawmakers why they aren't in favor of an independent financial protection agency and why they are granting bankers status as our shepherds.
The Senate's handling of too-big-to-fail companies that, when insolvent, threaten the financial system and economic prosperity amounts to a hall pass for bullies to continue roaming America's business corridors.
If banks fail, the Federal Deposit Insurance Corp. (FDIC) is there to pay off insured depositors and unwind failed institutions. It doesn't matter how big any bank is: If the FDIC doesn't have the money to make depositors whole, the federal government is there as a backstop.
The Senate, while completely bypassing the need to address too-big-to-fail banks - how firms get that big and how they threaten systemic Armageddon - chose instead to focus on what to do about too-big-to-fail companies that are not banks, but pose massive systemic risks.
Rather than address how bank holding companies, bank subsidiaries, or other non-bank capital markets and financial-oriented institutions can be restrained from growing to a size that threatens calamity, the Senate wants to give the FDIC authority to facilitate the oversight or unwinding of these companies via a type of bankruptcy process.
The compromise supposes that regulators would have options to force an FDIC-controlled dissolution of teetering giants, but only in agreement with the Fed's board, a council of regulators, and the Treasury secretary.
But, of course, in such an emergency, where the failure of one or more giant institutions would threaten America's economic life, regulators may deem it necessary to facilitate bridge loans and any manner of other government guarantees to keep bloated, insolvent and risky private companies alive for the greater good of the U.S. economy - not to mention the companies' handsomely paid executives.
In other words, the compromise efforts in the Senate are nothing more than backsliding into the status quo that serves the entrenched interests that got the United States, and the world, into the mess the financial system continues to face.
The same arguments surround both of the proposed compromises that have been circling in the public debate over how to safeguard the complex financial system we all rely upon to create job opportunities, keep banks safe, and maintain the web of financial systems that underpin our capitalist democracy.
Washington gridlock is too often engineered by compromises that stymie the kind of meaningful changes that will threaten entrenched interests.
Free markets and democracy both need to be safeguarded. While most of us seem to be comforted by a standing military, with an established command-and-control apparatus at the ready to defend our way of life, not enough of us are willing to support safeguarding our free markets with a sensible regulatory apparatus to ensure our economic freedom.
America is a magnificent and ever-evolving experiment in establishing rights and safeguarding freedom. We change laws all the time. It is now time to change the laws and regulations that have failed us and threaten our prosperity.
We must demand that our legislators change existing laws and regulations to better safeguard our economic future. And we have to make them painfully aware that if we don't get those changes - or if we get changes and unintended, unforeseen consequences arise - lawmakers, presidential administrations and even presidents themselves will be held accountable.
Our elected officials serve at our pleasure: As the world changes and crises arise, they must manage their way through an appropriate evolution - or face a justifiable revolution at the polls.
[Editor's Note: R. Shah Gilani, the author of this essay, is a retired hedge-fund manager who is also a well-known expert on the global credit crisis. His commentaries and analyses have been read by millions of readers, and syndicated to hundreds of other Web sites across the Internet. Gilani most recently wrote about the dangers of brokered deposits - labeled as "hot money" by insiders - and described how Wall Street's shenanigans are threatening to smother the U.S. economic recovery.]
News and Related Story Links:
Arguments against establishing such an agency included fears of expanding bureaucracy and interference into free-market access to credit.
However, the compromise to establish a protection agency under the Fed doesn't address the spreading bureaucracy of that institution. And worse, opponents of the Fed point to how the central bank mishandled its already-existing oversight authority of banks, the banking system and loose-interest-rate policies that helped precipitate the housing bubble and credit crisis.
Fed bashers further point to the controversial power of bankers who run the Fed and the inescapable fact that the Federal Reserve System is a network of private banks acting as an independent arm of the U.S. government. Giving the Fed consumer-protection powers to safeguard the public from unscrupulous moneymen is like having a wolf guard the proverbial henhouse.
We need to ask our lawmakers why they aren't in favor of an independent financial protection agency and why they are granting bankers status as our shepherds.
The Senate's handling of too-big-to-fail companies that, when insolvent, threaten the financial system and economic prosperity amounts to a hall pass for bullies to continue roaming America's business corridors.
If banks fail, the Federal Deposit Insurance Corp. (FDIC) is there to pay off insured depositors and unwind failed institutions. It doesn't matter how big any bank is: If the FDIC doesn't have the money to make depositors whole, the federal government is there as a backstop.
The Senate, while completely bypassing the need to address too-big-to-fail banks - how firms get that big and how they threaten systemic Armageddon - chose instead to focus on what to do about too-big-to-fail companies that are not banks, but pose massive systemic risks.
Rather than address how bank holding companies, bank subsidiaries, or other non-bank capital markets and financial-oriented institutions can be restrained from growing to a size that threatens calamity, the Senate wants to give the FDIC authority to facilitate the oversight or unwinding of these companies via a type of bankruptcy process.
The compromise supposes that regulators would have options to force an FDIC-controlled dissolution of teetering giants, but only in agreement with the Fed's board, a council of regulators, and the Treasury secretary.
But, of course, in such an emergency, where the failure of one or more giant institutions would threaten America's economic life, regulators may deem it necessary to facilitate bridge loans and any manner of other government guarantees to keep bloated, insolvent and risky private companies alive for the greater good of the U.S. economy - not to mention the companies' handsomely paid executives.
In other words, the compromise efforts in the Senate are nothing more than backsliding into the status quo that serves the entrenched interests that got the United States, and the world, into the mess the financial system continues to face.
The same arguments surround both of the proposed compromises that have been circling in the public debate over how to safeguard the complex financial system we all rely upon to create job opportunities, keep banks safe, and maintain the web of financial systems that underpin our capitalist democracy.
Washington gridlock is too often engineered by compromises that stymie the kind of meaningful changes that will threaten entrenched interests.
Free markets and democracy both need to be safeguarded. While most of us seem to be comforted by a standing military, with an established command-and-control apparatus at the ready to defend our way of life, not enough of us are willing to support safeguarding our free markets with a sensible regulatory apparatus to ensure our economic freedom.
America is a magnificent and ever-evolving experiment in establishing rights and safeguarding freedom. We change laws all the time. It is now time to change the laws and regulations that have failed us and threaten our prosperity.
We must demand that our legislators change existing laws and regulations to better safeguard our economic future. And we have to make them painfully aware that if we don't get those changes - or if we get changes and unintended, unforeseen consequences arise - lawmakers, presidential administrations and even presidents themselves will be held accountable.
Our elected officials serve at our pleasure: As the world changes and crises arise, they must manage their way through an appropriate evolution - or face a justifiable revolution at the polls.
[Editor's Note: R. Shah Gilani, the author of this essay, is a retired hedge-fund manager who is also a well-known expert on the global credit crisis. His commentaries and analyses have been read by millions of readers, and syndicated to hundreds of other Web sites across the Internet. Gilani most recently wrote about the dangers of brokered deposits - labeled as "hot money" by insiders - and described how Wall Street's shenanigans are threatening to smother the U.S. economic recovery.]
News and Related Story Links:
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Tags: Bob Corker, Chris Dodd, Consumer Protection, Consumer Protection Agency, FDIC, Federal Reserve System, Financial Reform, Hot Money, Too Big to Fail
The finance industry comprises of 3 distinct entities – Banking, Insurance and Investments. Each is distinct in that it serves its own unique purpose, has its own business model, has its own unique interests and caters to a different customer need etc…. These businesses should never have been allowed to inter-mingle (shifting assets of one business to the other) and this has been the cause of our financial downfall. They have never self-regulated, they have abused the system routinely, invented complicated financial products that only their creators understand!
If I want to simply find a life insurance product then I want nothing to do with banking. If I simply want to put my money in a savings account or get a business loan, I want to deal with my bank and not an investment company or an insurance company. If I choose to gamble my savings then I will go to an investment company and want nothing to do with a banker or an insurance company. So on and so forth…..so these three financial institutions mingling and playing with customer assets and gambling someone else's money away is a no-no in my book…they are totally accountable for the losses they create (especially our bank deposits and insurance products)!!!!!!
It is time to break up these businesses back to what their original intent was – that of serving unique and specific customer need (as stated above). They should also have their own unique set of regulatory requirements and watchdogs to make sure nothing unethical happens. It is as simple as that.
Excellent analysis. Can permission be granted to send specific essays, such as this one, to our elected representatives here in Maryland as well as send it to a few friends that would send it to their elected representatives as well.
At present I understand there is a prohibition to reprint or distrbute or transmit by electronic or other means; I also consider using your essay as the basis of comment without proper reference to your work is not ethically correct.
May I respectfully suggest a "tag line" at the end of an essay authorizing the transmittal to elected representative.
Keep writing, I enjoy your work. Best regards,
R. Kayea
Well written article!
If you put it in the form of a letter to the law makers, I am sure there will be people who would sign and send the letter, maybe with some changes, to their respective law makers, before the elections. HT
Mr. Gilani, unlike many conservatives who wish to see the status quo continued which will lead to another crisis down the road, offers excellent reasons why the Federal Reserve powers must be divided, and placed in agencies controlled by the government, and not in a blend of banking interests which have never acted solely on behalf of their clients and customers. Consumer protection in the form of uniform mortages, needed refinancing when inflated home values fall below market values, separatuion of investment banks from commercial banks, and increasing the support of credit unions will probably never occur under the Fed. These are efforts that must be made independent of the Fed.
Amen!
Mr. Kayea,
Please feel free to forward any of my articles to whomever you choose.
The echo of democracy reverberates in the music of the collective voices of engaged citizens.
Thank you for adding to our harmony.
Shah Gilani
RS Gilani has produced an excellent article that would make an excellent work document to provide Congressmen with a sensible strategic plan.
Unfortunately all public servants from the Pesident to his advisors, and the Congressment seem to remain in Washington to listen to Lobbyists from the Banks, the Medical Profession, and the Pharmaceuticals. They seem ignorant about their voters' needs.
I think we should ship all congressmen back to their home districts where they could listen to their voters, be out of reach of lobbyists, and could run congress with Internet Weibinairs just as many of us are doing. Washington has become a "Cesspool" of selfishness and vanities.
We're supposed believe that the banks are going to regulate themselves. That is like allowing a fox into the chicken house and trusting it not to kill any chickens. Nothing will get fixed in Washington until we get campaign contributions and lobbying under control. That is what stops banking reform, health care reform, or anything else from happening that might help people instead of corporations.
George Soros has recently concluded that the Feds should have nationalized those too big failed institutions ; that would be a typical socialist ( ie. communist or One World Order ) solution .