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The Daily Capitalist: The New Deal v. 2.0
Welcome to the New Deal v. 2.0.
President Barack Obama, as expected, said Monday that we are entering into a new regulatory phase of financial markets. Readers of The Daily Capitalist already knew this was coming back in August 2008. I called it the Financial Risk Commission, but its official name will be the Consumer Financial Protection Agency.
I think Obama is the new Great Communicator. He has a way of putting things that seem so reasonable. Who could object to “common-sense rules?” Sometimes his professorial tone falls flat, as it did with his Wall Street audience Monday, but his pitch wasn’t to them but to the American people. “The old ways that led to this crisis cannot stand,” he said. As we know the “old days and old ways” are always bad (unless we’re talking about our parents and our childhood), and these new very reasonable “rules of the road” must be good.
This new Consumer Financial Protection Agency legislation will do three things. First, it will establish “common-sense rules” to prevent this economic crisis from reoccurring. Don’t ask me what this means since it wasn’t spelled out other than “we ought to set clear rules of the road that promote transparency and accountability.” Just expect harsher regulations and capital requirements so capitalists don’t cheat us again.
Second, this new agency will apparently be similar to the Homeland Security Department in that it will oversee the various regulatory agencies and “rationalize” regulatory oversight so that this one agency will be responsible for guarding against financial risk. There will be no more regulation “shopping” by those firms able to choose less invasive regulators. All financial companies will be subject to the new rules, but harsher rules will apply to the “too big to fail” companies that threaten “systemic risk.” Hedge funds will be regulated under these rules. They will also set up a “resolution authority” that will have the power to liquidate nonbank failed firms. This is done to “put an end to the idea that some firms are ‘too big to fail.’” Do you hear that, AIG and Citigroup?
Lastly, there will be no place for capitalists to run as we coordinate these new financial regulations internationally. There are already new Basel rules coming out that increase bank capital requirements, for example.
I would expect that there will be another “czar” appointed to head this new agency. This financial czar will be given extraordinary powers by this new legislation, effectively allowing him/her to create new rules and regulations that extend the powers of the new agency to all phases of financial activity. Perhaps it will be Barney Frank? Janet Yellen? Richard Fuld?
In March, I wrote a follow-up piece to my original article on financial risk regulation, in which I outline the possible areas of new regulation, and it is pretty accurate. I suggest you read it to get a good perspective on this. I pointed out that innovation in the financial markets will just move to other centers of finance where the reach of the G20 may not be as powerful — Mumbai, Dubai, Shanghai and Singapore.
Don’t expect systemic risk to go away, since they don’t really understand that they are the major cause of it.
Before I forget, I wish to remind you that Obama says he has “always been a strong believer in the power of the free market.”
— Jeff Harding is a principal of Montecito Realty Investors LLC. A student of economics, he has a strong affinity for free-market economics. This commentary originally appeared on his blog, The Daily Capitalist.
» wrote on 09.14.09 @ 08:40 PM
This might be a good start to “First, it will establish “common-sense rules” to prevent this economic crisis from reoccurring.”
Subprime loans that were the root of the financial crisis. Those (in power) who pushed for those risky loans to be made ARE THE ONES WHO SHOULD BE HELD ACCOUNTABLE.
In the meantime, thanks to the alternative media (not the MSM of course!) the Senate can’t ignore this wildfire:
http://www.latimes.com/news/nationworld/nation/la-na-acorn15-2009sep15,0,3037782.story
» wrote on 09.15.09 @ 06:00 AM
For a little perspective on this issue, Google “Wall Street Crooks”
» wrote on 09.15.09 @ 06:08 AM
Places like the financial products division of AIG are at the root of the problem. They created the credit default swaps which effectively utilized thesame mortgages as collateral multiple times with various cash flows. This type of engineering, combined with no oversight or visibility is at the heart of the collapse. Many of the off market derivatives today are still unregulated along with various exotic hedge funds thanks to Phil Gramm and the Commodies Futures Act. THESE ARE THE PEOPLE THAT SHOULD BE HELD ACCOUNTABLE and the ones the teabaggers should be protesting against. They took about $500 billion of subprime loans and created a $63 trillion dollar problem. They caused the meltdown of the financial markets by significantly enlarging a relatively manageable subprime problem(less than 5% of all home loans). I have yet to see any of these Wall Steeters go to jail.
All of this needs to come under regulatory control and some practices eliminated. There needs to be enforcement of the Sherman Anti-Trust Law and the Glass-Steagell Act reinstated. There should no longer be naked or uncovered positions that result in systemic risk. We have to have rules that are enforced and a mechanism to liguidate non-financial instutions such as GM. The system needs serious revisions because right now “To Big to fail” can easily happen again.
» wrote on 09.15.09 @ 07:08 AM
The financial crisis is the result of people purchasing bad loans, that on top of spending what you don’t have for over 5 decades by the American economy. The libs want to put all the blame on Wall Street firms and they are culpable, but in the usual liberal way you must absolve anyone that is not a republican or a corporation of any wrong doing, including democrat leaders. In that respect, don’t count on Obama or the democrat leadership for solutions, just finger pointing and CYA.
Now that the great ponzi scheme, formerly known as the American economy has collapsed, we should be looking at ways to reverse the 50 year trend of outsourcing wealth generation to cheap labor markets and making up the difference in borrowing and speculation. Despite the horribly institutionalizing and spirit killing policies of socialism that have crept into our culture the last 6 decades there is still a considerable amount of American exceptionalism and rugged individualism to fire up a resurgence of American industrial might. But unleashing the brains and brawn of this resurgence will not happen as long as Obama and his team of merry socialists are at the helm. That means 4 more years of listening to whiners, nanny lovers and tyrant appeasers until this guy is voted out and his south Chicago mobsters are dragged out of DC, kicking and screaming.
Local and Dexter will, of course, continue bashing and insulting their fellow citizens while defending the chief architect of our demise. No problem, as more and more news about Obama and his heinous associations come out and his socialist policies are exposed people will see the true colors of the liberal left in all its hypocrisy. Once they are gone (I suggest going to Europe, since they are more the left’s flavor) we will rebuild our country again, smarter, stronger and exceptional in every way, done our way.
» wrote on 09.15.09 @ 07:30 AM
Read the suggested article which stated: “This regulation scheme will be similar to SEC rules governing the issuance of securities but companies will be required to meet strict rules regulating risk-taking, risk management standards, and will be held to “high capital and liquidity standards.” but I also heard discussion of regulating the futures markets by the CEC, (Commodities Exchange CommissionI believe)? Apparently this is a seperate regulatory body set up by the Agriculture community in Chicago to regulate agricultural “futures” and has now grown to regulate stock futures as well? There was heated discussion about merging the two (SEC & CEC) and creating one regulatory oversight agency. The politicos, including Barney Frank made the point that this will never happen because it is politically unpalatable! However, is it time for our politicians to quit running from the hard work and reform our financial regulatory system to protect American citizens from ruin. Is this a “gap” that needs to be filled? Is this indeed what needs to be done? Perhaps the author could address the question in a future article.
» wrote on 09.15.09 @ 10:43 AM
You all just dont get it. It is the monopoly of the federal reserve, interest rate policies, the governments crazy tax policies, and the concept of too big to fail that cause risk taking and economic bubbles to happen.
The elephant in the living room is the federal reserve. GET A CLUE!
Regulation is like treating a cancer patient for a runny nose. We need to address the real problem with our financial system!
» wrote on 09.15.09 @ 10:44 AM
government has no accountabilty.
» wrote on 09.15.09 @ 11:42 AM
Harding is right on many issue details, but wrong overall.
Last year’s almost catastrophic world markets crash happened because of ten years of non-stop de-regulation and watering down of market safeguard laws and checks.
The idea that he, and many of Wall Street’s multi-millionaired “bonus” babies, still
don’t want improved oversight after all that’s happened in the last year is absurd.
Even 3 years ago, we still had a Big Three in Detroit. Still had Lehman Bros., Bear
Stearns, Merrill Lynch as worldwide financial forces. Still had AIG privately owned and managed ... as an “insurance” company. Still had FannieMae and FreddieMac as lenders for home-loans.
Harding can not reasonably expect taxpayer bailouts for most of America’s biggest
banks, biggest brokerage houses, biggest real estate finance & insurance firms, and
Detroit, to rescue them from their greed-a-holic, high risk speculations, and not
also expect America’s taxpayers to seek LEGAL assurance that this sort of crap will not happen again anytime soon.
Some of what’s needed is simply legally rebuilding the firewalls erected by Teddy
Roosevelt, FDR, and others, in answer to the Panic of 1907-08 and the Depression.
Some is filling “gaps” created by new, computer driven, infernally complex investment items like “credit default swap derivative funds”, that fell betwen the
cracks of existing regulatory agency oversight, and almost swamped the whole boat.
A lot of it involves cutting through the smoke-filled back room “turf” where
lobbyists, reg agencies, congressional oversight committees (who get tons of PAC
contributions from the lobbyists) get CONSOLIDATED into few, sleeker, more efficient, transparent agencies, with clearer, less-overlapping authority.
That should be pretty do-able without harming our free market orientation.
» wrote on 09.15.09 @ 03:39 PM
Publius, I almost agree with you. Perhaps you can tell me what the deregulation was that led to this economic crisis. I would like to know. I don’t believe it was the repeal of Glass-Steagall that caused anything, and Bill Clinton agrees with me. But, I would agree with you that a big part of the problem is the “smoke filled back rooms” you point out. My view is that the process shouldn’t be politicized. And my view is that there should not have been, should not be now, and should never be in the future, any bailouts. Publius, how many times do I have to say this to you.
Todd, you got it right the first time!
Of course, common sense sound good. But I don’t think Messrs Obama, Geithner, and Summers know what it is in this case.
Thanks for the comments.
» wrote on 09.15.09 @ 08:09 PM
The unions who are killing business, and now Government—Own the liberals in charge—
Overtaxed—Taxpayer
» wrote on 09.16.09 @ 09:23 AM
I simply don’t believe you really oppose bailouts, Mr. Harding.
I have no doubt you tacitly favor bailouts when they save your bacon, but you don’t want to publicize the fact of your bailout support. The only way I can judge is if you post all your (and your firms’) financial transactions for 20 or 30 years and let me see if you benefitted from the AIG, Citi, etc bailouts, or from the debacles of Moody & S&P ratings.
You haven’t, so I’ll continue to conclude your front is `no bailouts’ while the foundation of your and your firms wealth is bailouts and regulation that favored you.
No doubt the crisis of 1 year ago found its origins in the Reagan administration and gradually was amplified in a bipartisan manner throughout the intervening years. No doubt bad actors like Washington Mutual and AIG shopped for regulators like OTS that couldn’t possibly cover all their extreme behavior.
And no doubt that a far greater number of US banks played it honest and safe, with, unfortunately, fewer assets. The new regulations will punish those innocent banks for the extreme behavior of the bad actors.
However, why did Canada not suffer the gyrations our banks have experienced? Huh?
Oh boy, financial markets in Mumbai or Shanghai… those are countries where periodically the people really rise up and really torture rich folks like you, Jeff Harding. Perhaps you and the other financial exploiters can’t wait to face a people’s trial across from 18-year olds dressed in black shouting Maoist slogans.
» wrote on 09.16.09 @ 09:25 AM
You cannot trust the snake oil salesmen like Jeff. Montecito Realty Investors do what for the common man? Oh yeah, their clients are the rich people who live in the hills.
Jeff is no capitalist. He is a banker. Do not confuse the two.
Steve Jobs is a capitalist. He actually is in charge of a company that makes things.
The financial sector is there for making the economy less volatile. To put capital into entrepreneurs (the real capitalists) that need it. But look what happens when you give them more power and less regulation. They waste it on short term “profits”. That is why derivatives exploded after the repeal of Glass-Steagall. Successful business like Apple thrive in spite of the misallocation of assets not because of the financial sector.
They don’t understand risk yet they give out Nobel prizes to people like Merton and Scholes. These Nobel winning economists then make a company called LTCM. Guess what happened to that company? It “had to be rescued” by the banking consortium called the Fed. Yet the ideas of Scholes and Merton lived on. They still have the Nobel prizes. Glass-Steagall was overturned after the LTCM went belly up. The GFC was inevitable.
If you want to learn the real theory of how the economy works then you need to learn some Minsky and Keynes.
http://www.boston.com/bostonglobe/ideas/articles/2009/09/13/why_capitalism_fails/
Sorry right-wingers. ACORN does not have the power of AIG, Citibank, BofA, the GOP, Goldman Sachs, et al.
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