Saturday, January 23, 2010

Yes We Can...Reform Wall Street

It looks like the long overdue correction in stock prices is here. The Dow Jones Industrial Average dropped about 5 per cent in the past three trading days. The stock market has been overvalued for many months, why has it begun falling now?

That can be answered by the wailing and gnashing of teeth you hear emanating from the casino owners on Wall Street. The bankers are upset that President Obama may actually do something to limit the gambling casinos run amok that are known as "banks".

Saying that "never again will the American taxpayer be held hostage by a bank that is too big to fail," President Obama has proposed for banks to be banned from trading on their own accounts and from "owning, investing in or sponsoring" hedge funds and private equity groups.

The most egregious examples of trading on their own behalf comes from Goldman Sachs, who not only routinely frontruns orders from clients, but who was heavily betting against subprime mortgage products which they aggressively sold around the world to clients as highest-quality "AAA" products.

It looks like President Obama is finally taking advice from the only 'adult' among his team of economic advisors - octogenarian former Federal Reserve chairman Paul Volcker. He has been an increasingly vocal critic of the administration's proposed banking reforms, which were no reforms at all. It looks like President Obama has finally invoked the 'Volcker rule' in dealing with Wall Street banks.

Mr. Volcker raised interest rates to unheard of levels to combat the very high inflation levels of the 1970s and early 1980s. Yes, it was painful medicine. But it was necessary. After inflation was crushed, the nation enjoyed years of solid economic growth and a strong US dollar.

I am pleased to see President Obama take advice from someone who has an intricate understanding of financial markets, but who does not kowtow to Wall Street's every wish, unlike his other economic advisors.

Look at Treasury secretary Tim Geithner, who while head of the New York Federal Reserve - which is supposed to oversee Wall Street - four times forced troubled insurer AIG to NOT disclose details of how certain parties (Goldman Sachs) received 100 cents on the dollar for derivative contracts when they should have gotten next to nothing. Why did Mr. Geithner not want those details disclosed to the public who was footing the bill?

Hopefully, Mr. Geithner is on his way out, along with Federal Reserve chairman Ben Bernanke who may not be re-confirmed as Fed chairman by the US Senate. As discussed in prior articles, Mr. Bernanke has given Wall Street untold billions of free money at zero per cent. Where is the zero per cent money for the rest of us?

Of course, the big question is whether any true reform, ala the 1930s, will actually happen. After all, reform measures must pass through Congress where both parties seem to have been bought and paid for by Wall Street.

I believe what we need to see is each of the big banks being 'separated' into two distinct entities. The first would be a 'utility' - a basic, simple bank (like in the old days) which takes deposits, make loans locally to consumers and small businesses. This 'utility' should be backed fully by the US government.

The second entity would be the 'casino' portion of these large banks. Let the traders and gamblers do what they want - if they win, they win, but if they lose, they lose. Absolutely NO government support! And limits should be placed on the leverage they use - back to the 'old' leverage ratio of 10-1, not the crazy 50 or 100 to 1 they used to get into such deep trouble in the first place.

The only hope for real reform of our financial industry may be if enough 'regular citizens' raise heck with their Congressperson. Politicians love one thing more than money and that is power, so they will do anything - even the right thing - to get re-elected.

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