“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” – Henry Ford
After consuming close to eight pages of 11 font double spaced text you’ll be relieved to find that I have nothing more to say about Systems Theory and its use in explaining how the global financial system performed a Triple Lindy over the past year. I do, however, have the following ideas on how to fix it and on how to prevent similar catastrophes from happening again (don’t worry, there will be all kinds of other financial disasters in the future due Capitalism’s endless ability to screw people).
1) Sensible Regulation – New does not necessarily mean better. Our elected politicians and the bureaucrats they supposedly oversee need to remember this. The first step towards a more sensible approach to regulating financial markets would be to repeal the Gramm-Leach-Bliley Act. In case you’ve never heard of it, it’s often referred to as the Gramm-Leach-Bliley Financial Services Modernization Act. Haven’t heard of that either? Well I’m not surprised because it received little attention in the press and its Republican sponsors and the Clinton administration wanted it that way. In 1999 GLB essentially repealed the Glass-Steagall act, a depression era law that, along with creating the FDIC, outlawed the ability for banks to own other types of financial companies like insurance companies and securities dealers. Glass-Steagall was seen as a good idea because depository institutions (commercial banks) are run differently than speculative institutions (securities dealers) for a number of reasons. The two best I can think of are 1) losses from securities speculation cold put a drain on deposits and 2) people managing deposits must be risk averse whereas people managing securities must seek out risk and manage it to provide an adequate return. In short, the ancients believed (because they had been burned so many times) that it was not a good idea to have your savings account in the same place where Fred from down the street was doubling down on Amalgamated Mining and Pet Food. Separating risked base investment from deposits makes a lot of sense and enables tighter regulation of securities (including derivatives) without smothering savings.
2) Uniform Lending Standards – Enforceable standards to protect both borrowers and lenders. The Mortgage Bankers Association (MBA) has proposed a “new federal regulatory framework” that would establish uniform national lending standards to replace the dog’s breakfast of current state and federal laws. The proposal also calls for the creation of a Federal Mortgage Regulatory Agency (FMRA). I’m OK with this as long as people like Barney Frank and Phil Gramm are kept away from the agency through the use of permanently installed shock collars.
3) Sensible Monetary Policy – There’s that word again. Why is it so hard to be sensible? First off, common sense ain’t so common (and you can quote me on that). Second, sensibility is subjective. I don’t think it’s sensible to shrink human heads but there are people in New Guinea who would call me shallow and elitist for thinking it so. Sensible, in this case, means using monetary policy to control the money supply to meet specific and economic objectives like keeping inflation under control, not as a tool to increase home ownership or inflate stock market performance.
4) Stop Investing in the Spread – I saved this for last in the hope that I could come up with a snappy title playing on the word spread (no such luck) and to try to form an articulate presentation of an idea (strike two). So here’s the rambling version short of a cute pun. Over the past three decades as financial markets have been deregulated and globalized there has been a great benefit delivered to our economy even after accounting for risk and the occasional recession. However, most of that benefit has gone to a very small number of people and has been focused on the short term. One could blame the success of hedge funds or the growth in size of mega-banks but I believe in comes down to where investment capital is going, not how. Simply put, we need to revive investing in things that create lasting value. This is not an easy task as the returns are not always as quick and as substantial as they are when you can make a quick buck shorting Sun Microsystems. What built our economy and national wealth was creating products and services that Americans and the world wanted to buy. Each year (present one excepted) Wall Street’s share of our economy rises. In the short term this looks good but is not healthy in the long term because making money off of making money does not add to our productivity as a nation. Investment in technology and process is needed to boost productivity and increased productivity provides tangible wealth. We need a strong banking and financial services sector in the economy but it should not be dominant. How we achieve a balance is tricky. We cannot rely on a centralized industrial policy as the federal government would surely mangle it. We can look to what has been present during past booms as indicators of success: relatively low taxes and inflation, divided government (one party in the Whitehouse the other controlling Congress), and government investing in tangible assets (the military, space exploration, infrastructure) to name a few.
Looks like we have a long way to go…