ON FINANCIAL SECTOR REFORM and REGULATION

By Peter Bearse

Is it any wonder that our economy is screwed up? -- When Congress

can’t even ask the right answers, let alone get to reasonable answers

on the need for reforms in the financial sector, or in Congress itself

-- so as not to screw up another sector of the economy. The key issue

which Congress avoids is distribution of power, not only between the

private sector and government, but within the private sector, too.

Avoidance has consequences. One is that government will continue to be

part of the problem because a Democratic Congress mistakenly assumes

that it’s the major part of the solution to any problem. Another is

that the economy will be rendered less dynamic. Government

intervention into any sector of the economy favors the financial

powers that be to the disadvantage of the smaller fry -- small,

community-based banks, small business and entrepreneurs. As I noted in

earlier releases, the big boys, on balance, destroy jobs; smaller

actors create them. An American economy guided by big government

bailing out big banks is in danger of riding on the same rails as

Japan from 1990 to about 2002 -- low growth and high inflation --

“stagflation.”

Congress puts the country in danger when it sets to solving the wrong

problems. It often does so by overreacting to media headlines rather

than trying to get to the roots of problems. So, rather than finding

ways to get the financial sector to serve the real economy, Congress

comes up with “reforms” that serve the sector and itself. Why? --

because it starts with a misleading diagnosis: that the core problem

is that the burden of bailouts falls too much on taxpayers. Then it

starts down a misguided path guided by the influence of big money

contributions to help Members’ reelection. So, if you want to know

what’s happening with financial regulation -- “Follow the money!”

Thus, as in the case of the earlier un-healthy concoction carrying a

“reform” label, we face a huge bill…

Ä       Whose implications for the future are poorly understood and too

little debated;

Ä       That does not eliminate either significant chances of future

bailouts, nor of taxpayers being put on the hook for them [The latter

is hidden in the section on FDIC “loans”];

Ä       Whose risk-management via governmental regulation threatens to put

dampers on the prime drivers of our economic progress --

entrepreneurship and innovation; and…

Ä       Whose solicitous care and favoritism for the big boys spells a big

imbalance in the economy: Investors will favor big banks and

corporations over small, community-based banks and more

entrepreneurial enterprises. The market and political power of the big

would grow. The corruption of Congress would increase, threatening the

foundation(s) of our Republic.

What features need to be included in a real reform package that would

finance real American enterprise, not a casino economy?  There are

eight (8):

v       Non-bank financial companies need to be regulated as banks if any

part of the corporation takes deposits.

v       “Standard” derivatives’ trading should be moved out of banks into

public trading exchanges. “Customized” trading can continue through

in-bank “desks“, but with federal agency oversight.

v       Securities’ underwriting and trading needs to be regulated, and

incentives provided, so that banks and other financial institutions

provide more patient money for business development, not incentives

for “flipping” investments to make quick bucks.

v       Existing financial regulatory agencies need to be consolidated,

trimmed and refocused rather than adding another, new agency to an

already cumbersome bureaucratic layer-cake.

v       The attitude that some big banks are TBTF -- “Too Big To Fail”

should be disposed of. Failed banks should be handled, as now, by the

FDIC. Bank corporations or holding companies should be allowed to fail

and/or be reorganized under bankruptcy statutes. Any expectation that

any banks will be “bailed out” through any other mechanism should be

put to rest.

v       Congress should recognize that the biggest banks are multinational

corporations. Thus, some provisions of American legislation designed

to alleviate “systemic risk” should be conditioned on trans-national

coordination, cooperation and sharing of burdens yet to be worked out

under “Basel III.”

v       Capital reserve requirements of non-bank financial companies need to

be increased, significantly, and allowable leveraging (debt/equity

ratios) decreased.

v       Restore the “double liability” system that governed banks until the

FDIC was established in the 1930’s, whereby bank officers’ personal

assets would be liquidated to make depositors whole if a bank failed.

Republican Senators should stand fast against Democrats’ attempt to

ram through another bad bill, so that these and other improvements can

be made.

       PETER BEARSE, Ph.D., International Consulting Economist and

Independent-Conservative Reagan Republic Candidate for Congress in NH

CD 1, April 27, 2010. Comments welcomed by pjbearse@gmail.com and/or

603-382-8079.