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.
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:
- Money Morning:
Senate's Proposal Calls for Fed to Increase Its Role in Consumer Protection
- Money Morning:
"Financial Reform" Just Camouflage for Wall Street's Latest Power Play
- Money Morning:
How "Hot Money" is Wrecking the U.S. Banking System…
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
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