A New Financial Foundation: Reaction
Today, we had the pleasure of a long article published in the Washington Post penned by no less than the dynamic duo: Geithner and Summers (listed in that order?).
Over the past two years, we have faced the most severe financial crisis since the Great Depression. The financial system failed to perform its function as a reducer and distributor of risk. Instead, it magnified risks, precipitating an economic contraction that has hurt families and businesses around the world.
Oh, and by the way, we are both largely responsible for the ill-conceived deregulatory bank-friendly policies that got us into this mess.
We have taken extraordinary measures to help put America on a path to recovery.
Since everyone knows that the way out of a credit crisis is to artificially extend credit at irrationally cheap levels.
This current financial crisis had many causes.
The authors being two big ones.
It had its roots in the global imbalance in saving and consumption, in the widespread use of poorly understood financial instruments, in shortsightedness and excessive leverage at financial institutions. But it was also the product of basic failures in financial supervision and regulation.
But please don’t think we had anything to do with that.
In recent years, the pace of innovation in the financial sector has outstripped the pace of regulatory modernization, leaving entire markets and market participants largely unregulated.
Thanks to us.
First, existing regulation focuses on the safety and soundness of individual institutions but not the stability of the system as a whole.
This is actually a thinly veiled attempt to RELAX regulation. The idea is similar to that adopted by Basel II and new rules allowing margin requirement be set at the portfolio level rather than the individual security level. Diversification helps. So when you group things together, the apparent risk is decreased allowing for additional leverage. Nice try.
The administration’s plan will impose robust reporting requirements on the issuers of asset-backed securities; reduce investors’ and regulators’ reliance on credit-rating agencies; and, perhaps most significant, require the originator, sponsor or broker of a securitization to retain a financial interest in its performance.
I’m sorry to be the one to break it to you, but the guys at Goldman are smarter than you. They will find a way around this.
All derivatives contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse.
What is your definition of a “derivative”? Does a credit default swap count?
We will lead the effort to improve regulation and supervision around the world.
Can you hear those Chinese college students laughing again?
Like all financial crises, the current crisis is a crisis of confidence and trust.
As long as the two of you have any say at all in policy matters, I know I will not experience anything remotely like “confident and trust”.
Reassuring the American people that our financial system will be better controlled is critical to our economic recovery.
Can you hear the unemployed graduating American college students laughing this time?
By restoring the public’s trust in our financial system, the administration’s reforms will allow the financial system to play its most important function: transforming the earnings and savings of workers into the loans that help families buy homes and cars, help parents send kids to college, and help entrepreneurs build their businesses. Now is the time to act.
It is too bad that the only solution you are capable of seeing is easy credit. Easy credit is what got us into this mess. Easy credit will not get us out of it. I don’t know what is so complicated about that concept that you cannot get it into your head. This is America. We don’t need and we don’t want your easy credit. If we let the big banks fail, would the availability of credit disappear? No way. Give me a break. That is fear mongering on your part to scare policy makers into excessively banker friendly policies. No. If every big bank failed tomorrow, there would almost immediately spring up 100s or 1000s of small banks in their place. There is great money to be made these days in opening a bank IF you would let competition play its course. Currently, the playing field is unfairly stacked against the small banks. I am tempted to start a bank myself. That is, if I thought you weren’t unfairly propping up economic sink holes.
To get this country back on its feet, we need entrepreneurs not oligarchs.
The history books will not make light of your misguided policies. The sooner you are both out of the picture, the sooner we can get back on the road to recovery.