Could There Be Another Financial Collapse? Yes, If the Banks Block Financial Reform
- March 16, 2011
- 4 comments
- Posted in Banks & Banking, Government, Investing, Latest Posts, The Economy
Is Wall Street reform already dead? The bankers and other gazillionaires are back in the driver’s seat, in Washington D.C. For you and me, that means taking a more conservative stance with our personal money. Unbridled speculation and financial deceit brought us the Great Economic Collapse of 2008. If the new Congress undermines the Dodd-Frank reform law passed in 2009 – and it has a good start – it will happen again.
Americans are too worried about their income and jobs to think about how fast the moneybag bosses reasserted their rule over Congress. As long as they’re effectively in charge of federal legislation, it pays to hold your spending down, build your savings up, and – at older ages – invest more of your money for steady income after you retire. Oil shocks and shocks from the nuclear tragedy in Japan will pass. But the financial world will never stablize until the the global gamblers – in the form of our bullying too-big-to-fail banks and other perps – are finally brought to heel.
At the moment, the dominant conservatives in Congress aren’t reversing the Dodd-Frank reforms. Instead, they’re cutting the budget in ways that will stop those laws from being carried out. Framing the hit job as “budget cutting” sounds good to taxpayers. In fact, these cuts are good only for Wall Street, not for Americans at large.
First up is the Commodity Futures Trading Commission (CFTC), a federal regulator so esoteric that gutting it will be a cinch. How could the average voter even understand what it does, let alone worry about whether Congress is taking its powers away? Yet here lies the beating heart of what led the financial system to implode.
The CFTC oversees trading in complex financial futures. Under the Dodd-Frank law, it now has authority over most of $600 trillion market for derivatives, which was previously unregulated. Derivatives are the complicated instruments that ratcheted up the risk in various types of mortgage securities, insured municipal bonds, and other products during the credit bubble. When that market failed, due to harebrained speculation, it brought down Lehman Brothers, laid AIG low, and almost destroyed all of our major banks.
Dodd-Frank created a new trading structure to minimize the risk of massive future failures, and gave the CFTC enough money to create and manage it.
The House GOP plan not only takes away the CFTC’s new spending authority, it slashes its current budget by 34 percent. That leaves the commission with the responsibility for limiting dangerous financial manipulation but without the funds and personnel to do the job. Arranging for it to fail is a deliberate act. “A lot of us voted against and oppose Dodd-Frank,” Sen. Richard Shelby (R-AR) told the website, Politico. “Obviously, we’d repeal it. So I certainly don’t think we should rush to implement it.”
“That would be a tragedy,” says Brooksley Born, chair of the CFTC in the late 1990s and a member of the Financial Crisis Inquiry Commission, which examined the causes of the 2008 collapse. Unregulated derivatives played a significant role in bringing it on. Born had warned of the danger, during her CFTC years, but was rebuffed. Failing to regulate these markets again “exposes the American people and the economy to another catastrophe,” she says.
Next in line for a mugging is the Securities and Exchange Commission, which was also given new authority and a higher budget to police the market, protect investors, and uncover financial fraud. When the commission failed to catch Ponzi-schemer Bernard Madoff, Congress called hearings and ripped the Bush-era SEC officials apart. Now, the Republicans want to cut $41 million of the SEC’s new spending authority. That will hinder its ability to carry out reforms, including inspecting hedge funds, overseeing the tainted credit rating agencies (the ones that took huge fees for giving AAA ratings to garbage securities), and registering derivatives not covered by the CFTC.
Could the SEC be managed better? Yes – any organization can. Can the SEC do “more with less,” as budget cutters love to say? No. Plenty of Americans had their personal budgets cut in this past recession. Ask them if they’re doing “more with less.”
Doing less to police Wall Street’s rebounding casino culture is exactly what Shelby and the rest of the GOP have in mind. They’ve done it before. Cuts to the SEC’s budget in the late ’00’s forced staff declines of 10 percent (which affected enforcement activities) and cut the commission’s investment in tech by about half, says Barbara Roper, director of investor protection for the Consumer Federation of America (CFA) – at a time when wild financial manipulation was sowing the seeds of the Great Recession.
Cutting the SEC’s spending doesn’t even reduce the federal deficit. The commission levies fees on the financial industry, which go to the U.S. Treasury. Congress decides how much of that money to pass on to the SEC. Starting in 2012, any cut in Congressional funding for the SEC has to be matched by a cut in fees, so the Treasury won’t gain a nickel. The only beneficiaries will be the manipulators and crooks, not the American taxpayer.
During the original Dodd-Frank debates, the House and Senate both approved a provision giving the SEC an independent budget, so that it could make long-term plans without having Congress jerk its chain. It got lost, mysteriously in the Senate, during final negotiations. Sen. Richard Durbin (D-IL) says he’ll fight for the SEC’s budget today (although he didn’t fight hard enough in 2009).
The attack on the CFTC shows that it needs independent funding, too. The big-bank cartel that runs the derivatives market made $30 billion on trading positions called “swaps” last year. They can afford a small transactions fee.
The CFA and the Council of Institutional Investors joined with ShareOwners.org last month, to launch a web-based campaign to inform the public and protect the CFTC and SEC from budget cuts (big institutional investors, such as pension funds, hate the anything-goes casino culture that wrecked their portfolios, along with yours).
“People don’t know what’s at stake,” Roper says. “So many cuts have been proposed for so many worthy programs that these aren’t cuts getting a lot of attention.” The GOP even voted to cut $2.1 million from the Treasury Department’s Financial Crimes Enforcement Network.
But taking the cops off the financial beat will harm everyone trying to save and invest, or counting on future income from a job. So stay sober about your spending and saving. In a banker’s world, only they and their buddies get rich.
Read More:
The House Slashes Consumer Protection: Is it Obeying the Law?
Tags: CFTC, Commodity Futures Trading Commission, Dodd-Frank, SEC, Securities and Exchange Commission. financial reform
Jane,
I agree with you.
The question is where do you invest in this casino economy?
Jim B
I follow traditional patterns — diversify, in a way appropriate for my age, while keep the money I need for basic expenses safe. Boring, but with the best results over the long run.
It would seem that banks should be in favor of measures to level the field and increase investor confidence, but not if they are rewarded for irresponsible behavior. Where do the senators from NY stand on this matter? Is there a shelter for prudent investors if another crash comes to pass or will we all go down again?
NY Senators both back Wall Street reform, consumer financial protection, and decent enforcement budgets. In the House, NY Dems support enforcement, too, NY Republicans want to cut the enforcement budget down. It’s a party-line thing.
Banks don’t want anyone interfering with their freedom to behave however they want. Your only guaranteed shelter is Treasury securities, which will always pay interest and principle when due, and insured CDs. But they cut off your chance for investment growth. It’s a conundrum.