Remember when George stood outside a blue-lit government building in Louisiana after Hurricane Katrina and pledged to rebuild New Orleans and address the problem of race relations in America?
Remember when Dick Cheney assured the country that the war in Iraq would last no longer than a couple of weeks, tops?
Now we have the grand announcement that the “most sweeping change in banking regulation since the Great Depression” has been initiated by the Bush administration.
Sure it has.
If we know anything about our fearless leader at this point it is this: The more noise and hoopla that accompanies an announcement, the less likely it is that anything is actually happening.
Basically, the ‘new’ package of ‘regulations’ consists of giving the Federal Reserve the right to monitor investment banks and hedge funds, but no right to directly intervene unless the financial system appears to be in danger of major and imminent meltdown. You know, kind of like things are already, right now.
Forgive me for stating the obvious, but if the Fed was still capable of preventing a financial meltdown of the entire US financial system, wouldn’t it be doing that right now?
So far, the Fed has been reacting to Wall Street volatility like a teenage girl in the midst of a messy breakup with an arrogant boyfriend. You just want to shake her and scream, “Oh for God’s sake dump him! He’s not worth it!” But you can’t, because teenage girls live in a world of their own, and so does the Federal Reserve.
The Federal Reserve was created in 1913 to prevent bank runs on private lending institutions. The Fed itself is a combination private & governmental entity that is not accountable to the American public. Its board of Directors is appointed by the President of the US; its stock is held by a number of private US banks.
A good description of what the Federal Reserve does is found in the book The Federal Reserve in Plain English:
“Just before the founding of the Federal Reserve, the nation was plagued with financial crises. At times, these crises led to “panics,” in which people raced to their banks to withdraw their deposits. A particularly severe panic in 1907 resulted in bank runs that wreaked havoc on the fragile banking system and ultimately led Congress in 1913 to write the Federal Reserve Act. Initially created to address these banking panics, the Federal Reserve is now charged with a number of broader responsibilities, including fostering a sound banking system and a healthy economy.”
The current instability in the economy is being caused once again by bank runs and the threat of bank runs, but this time the banks in question are investment banks and hedge funds, which are not under the control of the Federal Reserve.
It might seem logical then that putting these investment banks under the watch of the Fed will solve the problem, but that is an empty gesture for a number of reasons.
First of all, at this point we have absolutely no indication one way or the other whether the Fed’s current actions are helping to stabilize the economy or making a scary situation even worse. Secondly, and more important, the Fed is not likely to be effective in regulating investment banks over the longterm, even if it can pull us out of the current crisis.
Many economists and market insiders have pointed to the creation of a “shadow banking system” comprised of investment banks, brokerage firms, and various hedge funds, for the purpose of helping large financial institutions skirt banking regulations and make huge profits doing illegal things, or things that ought to be illegal but aren’t quite. That is how the current subprime mortgage crisis came about.
Investment banks took packages of subprime mortgages and chopped them up into new packages to back Structured Investment Vehicles, or SIVs. A structured investment vehicle (SIV) is a fund which borrows money by issuing short-term securities at low interest and then lends that money by buying long-term securities at higher interest, making a profit for investors from the difference (http://en.wikipedia.org/wiki/Structured_investment_vehicle).
When commercial banks realized that the assets backing the SIVs were going bad, they wanted their money back pronto. This kicked off the current liquidity crisis and amounted to a run on the investment banks that issued the SIVs. While it is tempting (and easy) to blame the subprime mortgage crisis on poor people who take out bad loans and don’t pay them back, when you look at the big picture what you see is a kind of greed orgy taking place in the stratosphere of high finance. The phrase “pigs at the trough” springs to mind.
Corporate America found a way to get around the Federal Reserve Act once, and they will again, and again. Remember that the Federal Reserve Board is appointed by the President of the United States—You know, the same guy who put Halliburton is charge of supplying the Iraq War and rebuilding New Orleans. Who knows how many billions of taxpayer dollars have disappeared already into the gaping, ever-hungry maw of slobbering Halliburton? We may never know.
One thing is certain: Until these guys are out of office, NOTHING will change in regard to the financial sector. Nothing. Nada. Zip. What we need is regulation, real regulation, and real corporate accountability. Any fool can see that financial institutions are completely out of control. (Have you tried calling your bank or mortgage company lately?) And now a bunch of chickens are hovering over America, looking for someplace to roost. (What a weird visual that makes!) It’s kind of like a chickensh*t crapstorm.
Don’t expect it to look any prettier any time soon. Finally, the President has come to the rescue by putting the fox in charge of the hen house.
But I better go now, before I drown in corny aphorisms.