Bankers? More like wankers…

October 1st, 2009

I don’t understand people who say President Barack Obama has taken on too much — he has neither created nor chosen the issues; the problems he faces precede him, and he has decided to resolve them.

That being said, the President is not having much success regulating the financial industry, and as is custom, the industry is taking advantage.  

Looking back about 15 months, as Nobel-prize winning economist Paul Krugman recently pointed out, macro-economists were thrilled with themselves and the job they were doing. They truly believed that there were financial markets in place that accurately regulated and priced assets.

Then the capital markets froze, Lehman Brothers crashed, and all hell broke loose. The Dow crashed and the biggest banks in the world realized, virtually overnight, that they needed billions of dollars from the federal government or they would go belly-up; an action that in all likelihood would have sent the world economy into a free-falling, sustained depression.

Largely this happened because bank executives are hugely rewarded for short-term profits, yet there are few repercussions for the down-the-road effects of action taken to earn those short-term profits, so the executives take massive risks to earn massive profits. Oh yeah, they did that with your (or your parents’) invested money.

A year later the Troubled Asset Relief Program money is being paid back and President Obama is being credited with the stimulus bill bringing our economy back from the brink, but the banks are going back to business as usual, with one addition: they are fighting financial regulation tooth and nail.

Markets were hardly regulated before the Great Depression. The first recession in America was in 1797, just ten short years after the ratification of the U.S. Constitution, and continued regularly until the Depression.

Roosevelt took action and regulated markets, which held the financial/insurance industry to less than four percent of GDP even in the bull-market years of the 1960s; but once Reagan deregulated markets and the insurance/financial sectors of the economy shot up to eight percent of GDP. Then Clinton decided it was a good idea not to subject financial derivatives to the scrutiny of the SEC. This crash was inevitable, because greed is hard to overcome. When a company can return investment profits of 40 percent annually without lifting a finger, there is little incentive to hold back.

So the markets crashed, and as the president has said, “we were on the brink of disaster.” And it doesn’t seem like the financial industry learned anything from this. They are back to taking investment risks, this time largely with money printed by the fed, which will greatly expedite the rate at which it will become inflationary. They are also back to bundling and trading, just life insurance policies this time instead of mortgage-backed securities.

All of this is leading to an increased urgency that the president pass financial regulation. The industry needs to know that both this administration and the American people are serious about making sure nothing like this will ever happen again.