Dave Yost: The next big vote
While some think things are moving too fast, many people are convinced that our government better keep moving. The Bush administration ignored many areas but we now have a very smart president who has an agenda; most of which was planned and in fact promised during the election campaign. Other things, such as the much-needed action on financial regulations, are a result of what we learned since late 2008.
Imagine yourself being in President Obama’s shoes a year ago. You are a brand new president and the whole world’s economy is melting at your feet. All you can do is take advice from “experts” who have been there. The president wisely put some key people in charge of Treasury and on his Council of Economic Advisors that had some idea what was going on. Were they all innocent of prior involvement in this mess? Probably not! As a check on things, he pulled in good old Paul Volcker; a guy some might consider an ancient scholar. Volcker was the head of the Federal Reserve during the Carter and Reagan administrations. Compare this with President Bush’s second Treasury Secretary, Mr. Snow, whose prior job was running a railroad.
As the White House and Congress dealt with the recession, the House passed a Wall Street Reform bill aimed at preventing such a financial disaster from happening again. The Senate came up with their version of a bill earlier this year. These extremely important bills are also, in the minds of some economic experts like Paul Krugman, a good step, but still not enough to right the wrongs that have been done to the American public. As you read this story, this is about to be the next big vote.
By pure coincidence, my wife and I had decided to sell our home in the Chicago suburbs in early 2007. We were trying to sell a house in a recession that we did not know had started and ended up losing a ton of money when it was finally sold on the very week in 2008 that our then Treasury Secretary Paulson was handing congress a $700 billion plan to bail out the financial industry; a plan that took all of three pages. The aftermath of that experience was a turning point in my education.
After reading many articles on the crisis, I started to research who or what entity was responsible for making the subprime situation a crisis. Of all the blame that has been focused on the various parties who contributed to this massive meltdown, it is clear that the crisis that triggered this recession has at its origins a certain rather small group of people. These individuals, while at their desks in major Wall Street firms and among the biggies at what is known as the shadow banking world, all had a part in tanking the system. At a minimum, they knew way before 2007, that the rest of us were in for a fall; a very big one. Another fellow, a Mr. Falcon who headed the government oversight group that watched Fannie Mae, was screaming about the housing agency’s derivative investments in 2003. The White House tried to get him fired.
In addition to the prior administration’s game of denial, there were two main events that directly led to this mess. One was the repeal of the Glass-Steagall Act, a Depression era law that kept banks and investment houses separate. This set the stage for the second; the introduction of magic little derivative tricks like stacks of mortgage-backed securities with the arcane name “Collateralized Debt Obligations” and investment “insurance” called “Credit Default Swaps” that could protect the most compulsive gambler from losses. None of this stuff is regulated today. While the subject of financial derivative products goes far beyond a short story, it suffices to say that a totally unregulated investment bank should not be allowed to toy around with our savings and pension funds in such a way that risks a collapse of the whole financial system. Rating agencies should not get paid by the firms that put together the products that are rated. The SEC should not be an arm of a political party. The recent SEC fraud charges against Goldman Sachs, the biggest player on Wall Street, clearly demonstrates how they played this game.
A handful of Wall Street math geniuses were fudging the system by both investing in financial products derived from mortgages and when things went south, shorting the swaps that insured these products. The swap business alone ran in the tens of trillions of dollars. How many people do you know who had a credit swap arrangement that would protect them against loss of value on their home? Without these swaps, none of the banks, Wall Street brokerages, or hedge funds could possibly have gambled the store away. These swaps, by the way, started taking off in the early 2000s under the watchful eye of a completely Republican SEC staff and the Bush administration excuse of an economic team.
We may eventually get to the point where the public understands who should be blamed for this crash, but its not going to be easy. Economists like Krugman are arguing the case that regulations must be put in place to stop these games. He takes the position that it’s not sufficient to just break up the big firms; the ones labeled “Too Big to Fail,” since a hundred smaller banks and firms can do just as much damage if left to run rampant. Financial derivative products must be regulated or dropped completely. Even our current Federal Reserve head, Ben Bernanke, is supporting regulatory changes that can rein in some of these firms. Regulations, mind you, also need to be enforced. Financial reform certainly needs to be passed but it also needs more teeth that it has at the moment. By the way, Mr. Volcker is very big guy (6’7″), a very patient fly fisherman, and did get his 10 cents in.
Dave Yost is a retired engineer and opinion writer, now living in Silverthorne and Williams Bay, Wisc.
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