We've heard much of it: Mortgage backed securities i.e. bonds, touted as spreading the risk for high-risk, would-be home owners to abet home owning, but relieving the lending banks of the risk of default by off loading that risk to the bond holders. Credit default swaps, called swaps after intense lobbying by the big banks to avoid the name "insurance," to avoid being required to hold reserves against prospective losses. Rating agencies paid by the very companies whose credit-worthiness they rate. The finance committees of both Houses of Congress that, according to Bill Moyer's journal, received $120,000,000.
Names should be named: Alan Greenspan explained to Congress recently that he had no effective influence on Congress. But he and Larry Summers successfully helped block in Congress a Clinton Administration effort to investigate the derivatives market. No influence? My foot. Greenspan lobbied for giant Pimco after he stepped down as Fed Chairman, to save a class of Fannie May bond holder's bonds. One wonders just what fee was earned. Larry Summers earned several million consulting for a hedge fund while President of Harvard. He is President Obama's Economic Advisor. If he now favors "regulation", where was he when he argued to Congress against investigating the derivative market? It seems no one was responsible. No one. Greenspan, Summers, our Treasury Secretary, the presidents of the big banks. Our Titans were, well, so persuaded of their world view, or so greedy, that they were blinded. But look at the havoc they have wrought. Is that accepting responsibility? Is that "leadership?" Is that moral? I don't notice that the answer is "Yes."
But we too: Those who did borrow money for homes who should have known they were poor risks for repayment bear moral responsibility too.
Yes we need regulation. For example the banks have started microcredit at enormous interest rates. Is this legitimate compensation for risk, or just greed because the microcredit market will bear it? And still derivative trading is largely off screen, hidden, non-transparant, while derivatives that may be the famous economic equivalent of weapons of mass destruction can proliferate unchecked and with little or no insight into their dangers alone or used together. For example, a substantial fraction of trading now occurs entirely among computers outguessing one another. We have no idea of the stability or instability of these coupled algorithmic systems, nor the effects on stability of yet another trading algorithm added to the community of trading algorithms.
Yet regulation, if Congress and the Administration have the wisdom to conceive good regulation and the gumption to impose it, will not be enough.
You see, perhaps the most salient fact is this: In 2007 something like 25% of total US corporate profit was in one industry - the financial industry that makes no mops, drives no trucks, builds no ships. Do we need banks, including those large enough for national and international business? Of course. But how big is big enough? Is there big enough below the "too big to fail" level? Would reducing the sizes of our dwindling number of vast banks reduce their undue influence on Congress? Smaller banks can make the same mistakes and failed during the Great Depression, but at least are not likely to spend $120,000,000 lobbying the House and Senate Finance Committees.
But why so much profit? Mike Brown, former Chairman of NASDAQ has permitted me to give his theory. Fast cycles. Suppose it takes you fifteen years to conceive of a new business and bring it to success for an Initial Public Offering or to sell the company and realize your earmings for your 60 hour weeks. Now consider making the same money in a few hours of millisecond trading via a hedge fund on Wall Street. Brown's argument is that money flows from long to short cycles for earning money.
The vast flow of money into the financial sector has sucked it out of Main Street which desperately needs those funds.
The answers would seem to be beyond regulation. The Obama Administration is seriously considering a high tax on the profits of big banks. That seems a very useful idea. If the big banks cannot so readily make vast profit, maybe money will flow back to Main Street. Perhaps the sprawling, egregious influence of the same banks over our public life will dwindle. That seems a good idea, since, now, thanks to the Supreme Court, they are legally individuals whose money is free speech.
It is time for We the People to rise up and speak. Loudly, now. Benjamin Franklin was right, We The People will get the government we deserve.
The financial crisis is poised to proliferate again. The banks, in particular the too big to fail big banks, continue their activities largely unchecked. Profits in the financial sector were about 25% of total corporate profits in 2007. That flood of money is needed on Main Street, not Wall Street. It is time for We The People to speak.