Sing along now with the late Karen Carpenter and our own King Banaian:
Several weeks ago I noted that [the] one thing the stimulus package (or any of the proposals that so far have come from the Obama Administration) would [not] generate is trust.
Spot is pretty sure that’s what the professor meant to say, anyway. Professor Banaian apparently stopped his newspaper subscriptions and quit reading on the Web, or he might have seen articles like this:
After devoting money and time in search of a rescue for the ailing banking sector, President Barack Obama on Wednesday demanded tough new regulations to keep financial institutions in check and avoid future Wall Street meltdowns.
Obama pressed key lawmakers to overhaul the nation's financial regulatory scheme to restore "accountability, transparency and trust in our financial markets." He specifically called for a system that would monitor the risks that institutions can take.
"We can no longer sustain 21st century markets with 20th century regulation," Obama said after meeting with Treasury Secretary Timothy Geithner and the chairmen and top Republicans of the two House and Senate committees charged with writing new regulatory legislation.
Or maybe this:
Just a week after his inauguration, Barack Obama's plans to regulate the financial industry are starting to take shape.
Nothing definite has been put together yet and whatever does evolve must get through Congress and possibly hostile Republican opposition. But it is clear that an entirely new level of regulation seems likely.
The efforts are coming from several fronts. One proponent is former Fed Chief Paul A. Volcker, who is a senior member of Obama's economic team and leader of an international team to recommend new finance rules. Another is led by U.S. Rep. Barney Frank, head of the House Financial Services Committee. Yet another comes from staffers at the Federal Reserve. Holding things up is the appointment of Treasury Secretary designate Timothy F. Geithner who finally may be approved today.
Here are some chief areas of possible new regulation:
* Credit ratings agencies. New rules are possible to eliminate conflicts whereby ratings agencies such as Moody's and Standard & Poor's have helped companies structure financial instruments and then rated them.
* New standards for mortgage brokers. The SEC may become more involved in supervising underwriting standards.
* Trading credit default swaps. This would be done through several exchanges which are now being created and the new transparency would allow easier regulation.
* Forcing companies to back their exotic derivatives. One problem with deeply-troubled American International Group was that it was never required to put up any money to cover the derivatives it created. Firms would be required to do so.
* Rethinking sky-high leverage. It used to be that the SEC kept banks' leverage rates in a reasonable 12 to 1 range. In 2004, the agency let banks go to 33 to 1 which was toying with danger. More leverage could be required. [Spot thinks they mean less leverage or more capital could be required.]
* More extensive registration and regulation of hedge funds. Registration has been voluntary and the Bush Administration shunned hedge fund regulation. That is likely to change.
How will this engender trust, Spotty?
It will cut way back on the amount of blue sky and worthless paper that all the would-be grifters out there can sell.
But won’t that cut into economic growth, Spotty?
You’re being ironic, aren’t you, grasshopper? Very good.
But no less a light than Alan Greenspan – the engineer of our choo-choo to oblivion – said just recently that we have to be careful about regulating financial services:
However, the appropriate policy response is not to bridle financial intermediation with heavy regulation. That would stifle important advances in finance that enhance standards of living. Remember, prior to the crisis, the U.S. economy exhibited an impressive degree of productivity advance. To achieve that with a modest level of combined domestic and borrowed foreign savings (our current account deficit) was a measure of our financial system's precrisis success. The solutions for the financial-market failures revealed by the crisis are higher capital requirements and a wider prosecution of fraud -- not increased micromanagement by government entities.
Now, here’s a guy who’s going to be mentioned on the same breath as Herbert Hoover and Smoot and Hawley telling us to go easy on all the fakirs and confidence men, or their magic show may be somehow impaired. It apparently hasn’t dawned on Uncle Alan yet that it is the “important advances in finance” that got us into this mess in the first place.
The Securities Act of 1933 and the Exchange Act of 1934, and the Glass Steagall Act (which divided commercial and investment banking, the repeal of which is one of the lasting legacies of Dick Armey, John McCain’s senior economic advisor; Jesus we dodged a bullet there) all grew out of the same impulse to make financial services more transparent, and more, well, real.
So, the professor’s concern is a real one, but in the professor’s case, how genuine?
You knew the answer to that one, didn’t you boys and girls? He ridicules the Treasury Secretary for being interviewed on a national news program to try to explain what is going on. He reads an ancient religious text (while whistling “Under the Double Eagle,” no doubt) that tells him that the government is doomed to fail. This is the same guy who gave a thumbs up to the TARP program when W was the president and Hank Paulsen was the Treasury Secretary.
Spot can almost hear Banaian, like El Rushbo, rooting for failure.