What’s Wrong with the Financial System in Eight Minutes

By James Kwak

Yesterday I was at a conference on “New Ideas for Limiting Bank Size,” hosted by the Fordham Law School Corporate Law Center. Simon gave the keynote speech over lunch. It’s actually the first time I’ve seen Simon give a presentation; we’re rarely in the same city at the same time.

I don’t have video of yesterday, but Mike Konczal linked to video of the presentations, including Simon’s, from last week’s all-star conference, “Make Markets Be Markets,” hosted by the Roosevelt Institute. You can see sneak previews of a few charts from 13 Bankers. You can also see eight-minute presentations by other luminaries such as Elizabeth Warren, Frank Partnoy, Joe Stiglitz, Rob Johnson, and Mike Greenberger.

22 thoughts on “What’s Wrong with the Financial System in Eight Minutes”

  1. Tried linking here earlier this month from:

    https://baselinescenario.com/page/2/ (“After the Hamilton Project” 3/3/10 @ 8:08 am )

    To:

    http://makemarketsbemarkets.org/

    Then:

    http://makemarketsbemarkets.org/?utm_source=Institute+Master+List&utm_campaign=9791881344-Announcing_Make_Markets_Be_Markets3_1_2010&utm_medium=email

    But:

    Couldn’t download the complete PDF “Make Markets Be Market:” (est 164 pp); however, the report can be accessed piecemeal (by topic): Introduction, Doom Loop, Fannie & Freddie, Regulatory Incentives, Rating Agencies, Consumer Protection, Glass Steagall, Securitization, Off Balance Sheet, Derivatives and Resolution. [And….not feeling so bad about my (distance) glasses after seeing Simon at the podium for 8:18 minutes.]

  2. Ahem James, you had recommended this seminar in another Baseline post and I signed up. Excellent in general. A lot of economic heavyweights angry and frustrated at their inability to change the current financial systems and prevent another meltdown. I’ve watched the round table discussion and Simon and Warren so far. I had no trouble downloading or viewing anything.

    Fergetabout the “sneak preview” of the charts and don’t blame your eyes Beth, the charts were not really legible, in Simon’s video presentation and not included in his written report. Frustrating, especially since Simon says, well, you’ve all seen this chart..

    Time out! I went back to his report and looked in the footnotes. His talk was originally given at The London School of Economics and if you go to THAT report, you can see the graphs that were illegible in the MMBM Roosevelt presentation. Here’s the link:

    Click to access cp300.pdf

    A quote from Simon: “The danger this system poses is clear. With our financial system now well-oiled
    to take on very large risk once again, and to gamble excessively, can we be sure that we can continue this cycle of bailing out eventual failures? At what point
    will the costs be so large that both fiscal and monetary policies are simply incapable of stopping the collapse?”

  3. I watched several of the presentations. Impressive. Unfortunately, as characterized by more than one speaker, both the administration (led by Summers to be sure in this area) and Congress (substantially bought, paid for, lobbied, etc.) are against real effective reform. What will pass for reform will not be effective, and nothing will change. Lots of energy expended, but guaranteed not to be seen by the general populace on any “main stream” media, and, much was so academic that the public (much like its response to the complexity of health care reform) probably would not understand enough to know what was right or wrong. Guys like Soros and Buffet, captured or located somewhere in the dysfunctional system tend to get air with negative sound bites on isolated points, and make government obfuscation and inaction more possible. Until the “doom loop” is repeated, real reform won’t happen, because that revolution can’t succeed without the crippling of the next tier of populace, those currently employed and living a good upper middle class existence. Only when that happens (they are sophisticated enough to understand the problem) can real reform take root.

  4. Unforunately, the reformers are the same people that broke the system. They will be “terraforming” entire populations, redistributing into charter cities, connecting the cities with high-speed Siemens trains, watching the movements of everyone on cctv and through massive taps on all communications and through citizen-level surveillance ala infragard. They couldn’t do it through military might in the 40’s (or maybe that wasn’t the plan anyway) but they’ve sure done it now by bringing the entire global economy to its knees. Phase 1, the demoliton is nearly complete. The plans for the foundation are presumably ready to go, and we have folks like Richard Sennett and Saskia Sennet who have been doing the academic heavy lifting for the shape that the new path will take. We will see ruthless efficiency. One hopes that the new efficiency doesn’t come at the expense of human life as it did before. I suspect it will.

  5. D.C. is courtier heaven, and our ‘betters’ are now entitled. Gonna be a long fight.

  7. My fuzzy math, corrected (est 120 pp). The Baseline poser below reminding, (and linked) the original appearance of “The doomsday cycle” (CentrePiece Winter 2009/10) – although only having read sections of this version, I did read the complete “Doom Loop” by Simon and Peter in Make Markets Be Markets, and having reviewed Elizabeth Warren’s and Frank Partnoy’s articles and presentation this morning. Though, a few comments on a couple of the topics: 1) Credit Rating Agencies & Regulations: In this particular article, t was argued that there is a monopoly on the rating agencies (Moody’s, S&P, and Fitch) thus compromising arms-length ratings on the bond industry – what Mr. White describes as “inertia incumbency.” I didn’t read anything else in his article to suggest, these agencies are also in the business of making money and are of competing services (generating business from Wall Street firms), thus influencing the agency’s better judgment (as we all now know). Suggestions were offered at the end of the article, and I would suggest adding the proposal of either creating or modifying the top rating companies as non-profit; 2) In Ms. Warren’s report, she addressed one of the main components of CFPA “opportunity to revolutionize consumer credit by promoting simple, straight-forward contracts that allow consumers to make better informed choices.” The legalese in mortgage, credit, loan contracts are (probably) written to discourage understanding and legal recourse; the loan industry already have it figured out, knowing that the average consumer(s) do not (and does not) want to spend their valuable time reading pages of fine print. It is troubling to see consumers signing off on mounds of paper they barely understand and/or willing to take the time to read through (much less, be educated on); and, 3) Bring Transparency to Off-Balance Sheet Accounting. Any fond memories of Eron(?)

  8. déjà vu –

    “The social burdens caused by war included the huge war debt, made worse by the monarchy’s military failures and ineptitude, and the lack of social services for war veterans. The inefficient and antiquated financial system was unable to manage the national debt, something which was both caused and exacerbated by the burden of a grossly inequitable system of taxation. Meanwhile the conspicuous consumption of the noble class, especially the court of Louis XVI and Marie-Antoinette at Versailles continued despite the financial burden on the populace. High unemployment and high bread prices caused more money to be spent on food and less in other areas of the economy. The Roman Catholic Church, the largest landowner in the country, levied a tax on crops known as the dîme or tithe. While the dîme lessened the severity of the monarchy’s tax increases, it worsened the plight of the poorest who faced a daily struggle with malnutrition. Internal customs barriers caused serious problems for internal trade[2], as well as periodic grain shortages.”
    (http://en.wikipedia.org/wiki/The_French_Revolution)

  9. Great talking heads from Make Markets be Markets.

    Judge Stanley Sporkin: “Who made the decision to pay AIG 100 cents on the dollar? I want to know.”

    Apparently no one wants to own up.

  11. “And sometimes, critics say, Obama’s just a part-time populist. The differences in tone can be jarring – and infuriating to his liberal supporters. Obama in December fired shots at “fat cat bankers,” then told bankers at the White House the next day he didn’t mean to vilify anyone or dictate their pay. He denounced the “twisted logic” of big Wall Street bonuses, then suggested recently he doesn’t begrudge the mega-buck payouts.”

    “Populism isn’t something that you pick and choose to emphasize when it’s helpful to moving your legislative agenda. It’s something that you try to live every day in the way that you talk about issues and the way that you relate to people,” said Rep. Bruce Braley (D-Iowa), who is chairman of the Populist Caucus.

  12. Thanks for the video links. It looks like the message from this conference is falling on deaf ears in the White House and Congress. Too bad.
    On another related note, here’s one from todays NYT: Are these particular private equity guys really the scumbags they sound like? Raiding a good company like this shouldn’t be legal.

  14. i was trying to get some action with this article over @ naked capitalism, but no takers. my daughter has been teaching TPG’s david bonderman pilates for 10 years. he is a very nice man socially. he lets me ride my mountain bike on his 2500 acre resort property high in the elk mountains. it is dead drop gorgeous mountain terrain, best in the world. but honestly he does have blood on his hands. kinda caught between a rock and a hard place to seriously accuse him of anything to his face. he probably wouldn’t continue his pilates lessons and she really needs the money.

  16. I have not ridden in that area in a long time. I love it there. I think the last trail we rode was the 401. Used to camp along Cement Cr. Road.

  20. If you don’t believe these privaty equity people are predators, check out Josh Kosman’s book, The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis. Chilling!!

  22. Initially I thought you misspelled poster but in retrospect I can see why you would call me a poser. I sometimes prefer a more casual style than a formal one but by and large the style on this blog is more formal and I do appreciate that. Baseline is one of the best blogs on current economic issues that I’ve run across, with very few off topic or incoherent posts. I’ve barely posted on it as macro-economics is not my forte, but I read it often and find it informative and I use it to broaden and sharpen my own thinking on complex subjects.

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