After “Financial Reform”

By Simon Johnson

Informed opinion is sharply divided about how the next 12 months will play out for the global economy. Those focused on emerging markets are emphasizing accelerating growth, with some forecasts projecting a 5% increase in world output. Others, concerned about problems in Europe and the United States, remain more pessimistic, with growth projections closer to 4% – and some are even inclined to see a possible “double dip” recession.

This is an interesting debate, but it misses the bigger picture. In response to the crisis of 2007-2009, governments in most industrialized countries put in place some of the most generous bailouts ever seen for large financial institutions. Of course, it is not politically correct to call them bailouts – the preferred language of policymakers is “liquidity support” or “systemic protection.” But it amounts to essentially the same thing: when the chips were down, the most powerful governments in the world (on paper, at least) deferred again and again to the needs and wishes of people who had lent money to big banks.

[to read the rest of this article, on Project Syndicate, click here]

46 thoughts on “After “Financial Reform”

  1. How can anyone not on the take promote this prima facie absurd and obscene notion of a “jobless recovery”? By definition there’s no such thing.

    We are entering the Second Great Depression. Nothing could be more fake than this momentary stock bubble and the fraudulent “profits” the insolvent banks report (just a way of labeling stolen taxpayer money to justify then stealing it on a personal basis as “bonuses”).

    The only thing which could have mitigated the Depression would have been letting the bubble deflate, jubilating the debts, and eradicating what was left of the finance parasite once it was allowed to collapse. The Bailout simply guaranteed that the eventual collapse would be as painful as possible, and all to enable as much robbery and power concentration as possible in the interim between the Bailout’s inception and the final deflation.

    This was nothing but history’s greatest financial crime. And there is no “recovery”, only phony numbers goosed by accounting fraud and theft.

  2. Well said! Hits the nail on the head.

    I’m deeply disappointed in President Obama’s about-face on breaking up the financial behemoths. I suspect that the problem begins with the trio of moles from Goldman Sachs: Larry Summers, Tim Geithner and Robert Rubin. These three, of the Wall Street Tribe, see things from their tribe’s perspective, not from the perspective of our nation. Obama is not strong on economics and has chosen his financial advisors and Treasury Secretary poorly. That doesn’t excuse him, merely defines the root of the problem from a management perspective.

    No doubt these people ingratiate themselves to the President,(in this regard Larry Summers reminds me of George Tenet)an effective tactic for maintaining influence over a person who is continually criticized by friends,reviled by foes and faced with an overwhelming number of crises. I’ve been in a similar position as a CEO, so I empathize with his situation, none the less he’ll be further crippled as President if he doesn’t listen to real friends in the economic community who will tell him what he needs to hear instead of providing false comfort in a sea of hostility.

  3. “So what is the problem with the policies of 2007-2009, and why can’t we just plan on doing something similar in the future if we ever face a crisis of this nature again?”

    Perhaps a more straight-forward answer than that provided here:

    Whitney’s is must reading.

  4. Seems to me that the financial reform is going to be too little, too late as the Dems were focused on passing their health care agenda and thus spent their political capital there instead of on financial reform. A squandered opportunity as the the inputs into the medical system (us humans) are declining in value (more obese, more problems, more expensive to keep alive) which will overwhelm the promised benefits of reform. As they say in programming, garbage in, garbage out.

  5. Recognize that the previous post was a bit off topic so to make up for it, I want to put in my support for this post’s point that this is a GLOBAL crisis – in China too (less so India – higher interest rates, more controlled capital markets). However, at least China (and Australia and NZ) are raising rates, trying to stem the runaway credit creation and bubbles that exist in their economy. China has relatively strict (though with regulatory capture at the regional level) control on its financial system as do the Aussies and Kiwis (and the Canadians for that matter). Our (and Europe’s and Japan’s) problems may still drag them down but they have a fighting chance. An interesting comparison also is India which has a tightly controlled banking and capital market system and high interest rates (e.g., 10-year govt bonds at 7.6%, about twice the US rate). While we cannot do much to help the world in breaking up the too-big-to-fail banks outside our boarders, we can set the example about doing it inside our borders.

  6. It is not just a question of the next crisis. It is a question of the institution of a two track system: really worthy individuals are serviced by the state, and the People, in such a way that the rest of society, and of the economy are left destitute. The civilizational purpose for banks, investing saved money, and creating money for the worthy projects in the real economy, have been turned upon their heads.

    Instead the system has been perverted to create a new aristocracy.

    One has to distinguish the banks, as institutions to be saved, and the top officers of the holding companies of these banks, who, in conspiracy with said officers, manipulated the notions of risk and even profit, so that they could get ever more power for themselves and their attending puppets in politics.

    Once the People paid for the banks, as it did, the People ought to have owned them, change their management, and force them to lend to the real economy, instead of doing fake trading among themselves in conspiracy with the government, to show what are fake profits. Those profits are fake, because the fiduciary duty of banks, in the fractional reserve system, is to create money for the real economy, not profits in the derivative universe.

  7. Pleased forgive my frankness, but you know I can’t stop myself.

    This is why I like Kwak better than Johnson, and why I have always felt in my mind this is more Kwak’s blog, even though Johnson provides a lot of name recognition to it. I just don’t like that feeling Simon Johnson often gives me that this blog (Baselinescenario) which I hold dear in my heart, is like some ugly worm he is putting on a hook to use as bait for magazine articles or the millionth book reference when it’s portrayed clearly in the upper right.

    I would have actually preferred a one sentence post notifying us of the topic and a link. It’s less insulting to our intelligence that way. I like the car salesman who lets me walk around the lot for awhile, yuh know??? Not the guy who asks me “Now what would I have to do to get you to buy a car today?” or tries to sell me “rustproofing” after we agreed to the price.

  8. We’re not using all OUR make-it-up, puerile peon good-vibe political “creativity” – anyone remember the computer generated dude called something-Headroom…?

    Time to pull Headroom out as a template for what “the people” will be sold as the best pre-fab option for a Prez of USA in 2012/16…

    And why stop with “prayer”? Use more stare at goats “metaphysics” – get a Ghost Whisperer/Channelor (there’s one on the city’s payroll here in AZ)

    to contact, on the other side, the 11 people who died on the rig – they’re the ones who have the EXACT details of what happened right before uttering the classic last words ,” oh sh-t”.

    Send the memo to the OILgarchy and PlutoRats PR departments – “….one of the reasons we don’t know is because the people who do know were there and they always die in the accident …”

    What a precious resource “Sully” is, huh? And the Apollo 13 crew…

    Cultural touchstones are important – last lines in The Wrecking Crew huddles all the atoms together into the light (I just used to refer to “conservatives” as the kind of hooligans who start a fight as a way to not pay their bar tab.)

    Sure we all got our guns strapped on, all we need is a date for a high-noon shoot out – but wait, who’s on which side…?

    “Whenever there was a choice to be made between markets and free people – between money and the common good – the conservatives chose money. It’s time to make them answer for that.”

    Btw – yes, they DO have a “god” – The Supreme Being they call him – and the BURNING RELIGIOUS question in the lunatic “power” asylum as polite conversation among the people who legalized torture is “why is there suffering in the world?”

    Acting today in the role of the “foreign power” referred to in the Declaration of Independence is the Federal Reserve Board.

    – cue audience clapping –

    For the code-talkers among us – use your health insurance for new glasses – “No outside influence can ever be brought to bear upon their policies, and their oath of allegiance is ONLY to the Paradise Trinity.”

    Not to the Supreme: More misery for others = more money for ME ME ME

    Apologies to those who have no idea what I’m talking about. Consider your self lucky not to have been assigned to asylum duty.

  9. First: why isn’t Mr Johnson’s article replicated
    here? Using my Firefox browser, I have to read the
    article elsewhere, and comment on it here. Is Mr
    Johnson getting entangled in copywrite issues?

    Second: I raise again the alarm. Pete Peterson
    is again on the warpath. We all know, I’m sure,
    that deficit spending, mostly on Soc Sec and health
    care, is driving our debt through the roof. “A
    million dollars a minute”!!!! “Every child born
    today will be presented with a bill for $XYZ(*)
    upon his emergence from the womb!!!!”
    (*) Insert your own scary number here .

    And our prezzie has appointed a commission. (ex)-
    Senator Simpson, Erskine Bowles, etc, to solve this
    looming crisis of American bankruptcy, and “everything
    is on the table”. One hears that the table bears
    prominently the following dishes:
    Social Security privatization;
    huge Medicare/aid cuts;
    perhaps even the latest health care reform benefits.

    (I haven’t heard mention of returning to the
    pre-Reagan progressive income tax schedule, or
    a sales tax on NYSE stock sales, or a cut in our
    $2billion/WEEK wars. Maybe my hearing ain’t good)

    Anyway: Peterson and crew are coming at us.
    “Financial Reform” has a multitude of guises.

    Best wishes,

    Alan McConnell in Silver Spring MD

  10. “And it worked – in the sense that we are now experiencing an economic recovery, albeit one with a disappointingly slow employment rebound in the US and some European countries. So what is the problem with the policies of 2007-2009, and why can’t we just plan on doing something similar in the future if we ever face a crisis of this nature again?

    “The problem is incentives – what bailouts imply for attitudes and behavior within the financial sector.”

    I certainly agree that an important problem is bad incentives, which are hardly new, but have been exacerbated by the bailouts. “Too Big To Fail” has been policy in the U. S. since the 1980s, and practice in the developed world since the early 19th century. Furthermore, the privatization of profits and socialization of costs, of which the Too-Big-To-Fail policy is an example, has been a feature of modern capitalism for a long time.

    I am bothered, however, by the statement that it is “the” problem with recent policies. Perhaps we have to swallow bailing out the oligarchs whose misdeeds contributed mightily to our economic woes, but why are we ignoring the millions of people who are suffering through no fault of their own? If anything deserves to be called “the problem” with our policies, it is the shameful and unjust neglect of the victims of the crisis. One irony is that it would be both cheaper and more productive to put millions of people back to work than it was to bail out the oligarchs.

  11. E=mc^2 & “Time Dilation Factor” – what the frack do they have in common with todays post? #1) Mass (TBTF) cause gravity (that giant vacuum/sucking sound from every citizens pocketbook)? ; #2) Mass (TBTF) seeks or is pulled where time(delta ‘risk/profits’= $$$)is least? ; #3)The larger the mass(TBTF), the least time ($$$)is? ; #4)Spacetime (terrestrial volume/$$$) is curved (ratio via risk/profits) to the curvature(ratio via risk/profits radicalized) of the mass(TBTF)? ; #5)Without mass (TBTF), time($$$)is not curved (risk/profits). ; #6)Without momentum (centrifugal force-field via rational exuberance)near a mass (TBTF), space(volume)is not curved (ratio via risk/profits)….Thus – Time ($$$) is least, where gravity *{Influenced only by Mass (TBTF) only} is most! Here’s the fun part – Time Dilation is when time ($$$) becomes equal to Mass (TBTF), that’s where the “Buck Stops” literally, in our “Money Universe”- all that we know stops to exist! Finally – Relativity is not meant to be tinkered with, by the minds of children – it has “Absolute” defining consequences? Thanks Simon, and James

  12. Very insightful. I get the feeling lately that he is sad. Partly perhaps because it is so unjust for the public to blame him for the oil disaster — but also perhaps because when he gathered his team at the beginning he made some wrong choices which are now almost impossible to reverse — and he knows it.

  13. My only quibble with Simon’s argument is the timeline. The ability to take advantage of the guarantees that come from being “too big to fail” is completely separate from the willingness to do so. Willingness to take risk will take longer to come back than most people think.

  14. Don’t sweat it, Russ. The closer we are to a genuine, undeniable Depression, the sooner we have a chance for a an actual angry uprising and some real change. Bring on that deep double dip “recession”.

  15. Annie: Far-fetched may be my themes, but open your mind to some of their possibilities.

    First, sorry for if John Bannon or myself offended you the other day.

    Religion and economics along with politics can make for abrupt discussions.

    I am a older student in the AARP club so my thoughts are with challenging depth placed into get everyone to think of the possibilities.

    You asked John Bannon for an answer to a theory that I had been throwing around and had answered in the college circuit John had commented on, but not within this forum.

    It is your question to Economics of Life Maintenance based upon the laws of physics or the lack of a law.

    Know the “I am” as in your life is equal to the perfection of the “I am” of the Creator in the word of “Teleios”.

    Teleios is universal in the equation of the human economics factor of life maintenance of accepting all the good with the bad; as too be considered perfect does apply to every physics law to date and yet unveiled to the human condition of the world as we know it today.

    You might be comfortably surprised, it might not change the Oppression or possible conditions personally you are experiencing within this existence, but if it helps take away despair, anger and frustration to become at peace with the Creator of “God” or also known as “I am”, than it is worth the journey.

    Since I am an economist and financial student trying to become a Professor I will repeat often. You can survive many of these days coming ahead and the challenges placed upon you financially, health, the raw facts of what makes us a human soul.

    I say this because when you can just say yes to “I am” of yourself as an equal to the Creator who invites, and enjoin His “I am” within Teleios being an answer to the equation of human life experiences, you will have found the answer to life.

    Answers to life through trusting, with all of your heart, mind, thought, and soul, you have just entered the ability to adapt to survive the passion of changes within the decay of Man moving away from God.

    This God is who has invited you back to himself as you are perfect at all times within his eyes to be forgiven when you place the trust in him within the simplicity of Teleios. I kept it simple instead of the formulaic math that the quant’s and professors like to read and compare theories.

    The next steps are open to the facts, that you can make the best without making the greed and fear a problem. This is where one can mark always and have the market edge over those who seek the ruin over those with that as their unconscious mission. This is all about moral, ethical, and morals with the loss of virtues that continue to erode our nation and many other nations around our world.

    This is the time to stand up and make a change individually first, then within your family, to invite back a calmness of knowing a creator that can be part of your daily life and bring yourself and the ones you love to live within their means.

    It is that simple, it starts first from there; and it goes forward. I call it as certainly a call too many to step up and start, “Paying it forward” mentality. A paying forward of helping your neighbor as this builds a village to a nation to a global world of sustainable growth as I think we all seek under the equation of incorporating the Creator of “God” back within or lives.

    As far as investing and winning in the stock market, just try to take risk and make it a smaller portion of what is considered a manageable risk. Know what risk means. I have said this before Annie and I will keep saying again.

    What is a manageable risk was asked before, but what is risk to you personally or to a world in change?

    Risk defined for those who think they know the answer as I have written before.

    It is when you feel you are no longer afraid that anything can ever be taken away from you. I call it the house always wins if you think of yourself as the house.

    It is the end of the story in the Bible that the best example of risk is given, if it’s a book you have ever read. The bet has already been set and the hedge is set as the house wins in the end as the Creator of “I am” also known again as “God”.

    The smart minds can run the options and all the numbers in the markets and this is OK.

    It is considered wrong though when they take measures to scheme and take as seen through, PONZI and all the other conditions that have now have occurred causing the world of MA & PA to become open to Coase Human Oppression Economics.

    We know God in the equation will equal a social order that will consume with a sense of not wanting it all and living more within their means.

    The Risk for the market bets are taken care of through taking emotion out and entering the math of “no greed” and “no fear”. Just what is needed to get what is too establish the life style within an actable social order of a creator that would be within the equation.



    Best way I know of explaining of being on the side of risk when it comes to the ultimate side of risk. Eternal, Risks…

    May you keep yourself or your families calm, in what seems a sea of storms…

    Peace as I am Out of Here for Now Annie, but I enjoy reading many of your comments as they stand on the principals of protecting and reason for MA & PA who may be seeking directions, but never count out God as one to send them toward…

    James Gornick

  16. @Ted K, I don’t get your gripe. So instead of one sentence he gives us a couple of paragraphs–a bit more information to let us decide if we want to bother migrating to another web site to continue.

    Why is that a problem? To me, a one-liner with a link would be like a salesman telling me he has one car to offer me, take it or leave it, and I can’t even go look at it on the lot.

    As for being promotional, I have the impression, though I have not maintained any counts, that James Kwak has done more promotion of 13 Bankers on this site than Simon Johnson has.

  17. “To me, a one-liner with a link would be like a salesman telling me he has one car to offer me, take it or leave it, and I can’t even go look at it on the lot.”

    But is the car rust-proofed? :-)

  18. After 18 years of asylum duty, let me explain to the neophytes just learning about what – and worse, who – (yikes!)

    “they” really think they are

    and why James Gornick has selected my existence as an excuse for his holier than thou stand at this moment in time.

    He knows I’m the real deal.

    The only thing that they HATE more than fairness – or in this case letting labor just keep their fruits – is that whiff of JOY and LOVE.

    Which brings me, and maybe some of you all, to ponder whether it’s worth letting microchips for “personal” e-gadgets continue to suck up the silica and “rare earth” minerals that could be going into solar arrays

    AND lightening management…?

    Between Gornick and “oregano” reminding us today that the internet is “progressing” to a sycophant toilet of “site ownership” –

    it’s an easy choice to cut back on “personal” gadget production in favor of energy GENERATING “stuff”…

    Just another way to consider how to “live within one’s means” :-)

  19. So sorry to see you actually in your entire candor are what you preach, but do not flatter the community or history, as you are not the real deal as you came to preach in your prior message to all. The real deal becomes you are proclamation what you think you place upon another.

    This becomes the self-fulfilling one than that only you could wear such a mask as the community Asylum inmate. You’re not any watchdog, nor have you or I the rights to place such a name or title as I repeal this title as even to mark you or anyone else with Neophytes or any other slander or mudslinging it seems you are bent on to draw in. For I continue to leave you to your mask you wish to choose.

    Your use of Neophytes is a perfect choice actually to look within the mirror of your statement and find that you are the one standing there. If you dare to call any whom you think yourself greater or a judge as your credentials do not hold the muster or the glitter.

    Your tack in carrying the torch that seems flawed too make such statements of empty words as I must now contend, I must of misread you as I had accepted you as any other commenter of thoughts and ideas to add and never take away. I must have read many of your comment posts and other works as mistaking their true nature of frustration and anger, as certainly you will need to earn these rights back for this reader and most likely many others.

    Just accept we are all equal in this community and the world wide web of places to seek wisdom and banter, but some always think themselves greater as you have shown this to be your true mask today, I am glad John did not answer your thought provoking question from the other day and that I did.

    You were given a perfect key to unlock the relations of what many come to seek. This may stay well hidden for you as I hope it may become learned that the answer was true; Teleios that many should fear far more you than many whom or I may post thoughts long after these fade within the history of storage and memory of posts.

    You do not hold any honors now by this writer as I must start anew and as all get to start over again, so it will be with you…

    “Oregano”… or anyone else does not deserve your wrath of what you tried to sell and I found it bit interesting for all to learn for the last time, the mask it seems you have looked in the mirror and worn to try to place on others that mask would not fit. The term originated in Greek meaning, something “newly grafted or grafted on”. It was originally applied to those recently initiated into the Eleusinian or other ancient Greek mysteries. Plato commented concerning them, “There are many wand bearers (the wand being the badge of the initiated) but few mystics”.

    In early Christianity, neophytes were the newly baptized catechumens. Often they were considered to be less likely to stand firm against paganism than their older Christian brethren Hence the term became slightly tainted.

    St. Paul forbade the ordination of neophytes or novices for one year. (1 Timothy 3:6) The Third Council of Aries (524) held that the newly baptized who became candidates for holy orders had to undergo a one-year probation period. The Catholic missionaries still refer to newly converted pagans or disbelieves as neophytes.

    In occultism, a neophyte is looked on more as an apprentice rather than an inferior. A neophyte may be considering a helper or assistant to an adept. The assistant learns by aiding the adept and by studying related materials suited to the area of occultism that he wishes to peruse.

    An elaborate order of the increasing process of the neophyte was once seen in the secret Hermetic Order of the Golden Dawn. The process included an eleventh grade for the Neophyte and then ten grades or degrees that compared to the ten sephiroth of the Tree of Life of the Kabbalah. The degrees were structured into three Orders: Outer, Second, and Third. The person advanced according to his acquired knowledge.

    An example of an apprentice neophyte is often seen as the assistant to a magician. Such a person assists the magician in his magical work. The person also may be a student of magic. When the magic is sexual in nature, if the assistant is male, he may supply the magician with sperm when the magician cannot produce enough. Aliester Crowley frequently used assistants in such a manner.

    Annie, take off the mask and let it go as the real deal is not who you think you are if for one minute, you think of me or anyone else as seen through the words above as Neophytes than you must again place the mask upon yourself.

    Only you can take the mask off Annie….

    I can only tell you to let it go and let “God”…

    Peace I am out of here for now : – )
    James G.

  20. Mr. Johnson wrote:

    “Informed opinion is sharply divided about how the next 12 months will play out for the global economy.”

    “I have found power in the mysteries of thought,
    exaltation in the changing of the Muses;
    I have been versed in the reasonings of men;
    but Fate is stronger than anything I have known.”

    Euripides (484 BC – 406 BC), Alcestis, 438 B.C.

  21. Roubini: RMB Appreciation the Key to Avoid a Double-Dip

    June 16,2010 – ChinaStakes – excerpt

    “The world has just seen how strong China’s exporting juggernaut is: export growth surged to +48.5% year on year in May. What story do the stronger than expected data tell? Market rallied at the news since it was interpreted that the global demand is not eroded by the sovereign debt crisis , so much so that it is accommodating China’s recovering exports.

    But the flip side of the story is that China is coming back to its good old days before the financial crisis: excessive manufacturing capacity will provide too much supply and contribute too little demand to the world economy.

    The world economy has not been able to get rid of the curse of double-dip recession so far. It is in a deeply-rooted dilemma:

    if the stimulus is kept too long, the advanced economy would be in trouble of debt crisis, if EU and US exit from stimulation too soon, it would be back into recession due to inadequate demand. And the situation has been compounded by weak external demand.

    Nouriel Roubini, Professor of Economics at the Stern School of Business, New York University, and Chairman of Roubini Global Economics, said:

    “Overspending countries are now retrenching, owing to the need to reduce their private and public spending, to import less, and to reduce their external deficits and deleverage.

    But if the deficit countries spend less while the surplus countries don’t compensate by savings less and spending more especially on private and public consumption then excess productive capacity will meet a lack of aggregate demand, leading to another slump in global economic growth.”

  22. Simon, God love you, you must be so tired of wiping your own spittle from your countenance for having spent so much time expectorating into the gale. There is no more proof necessary. We are living in an absolute plutocracy easily competitive with Russia during the middle and late years of Soviet governance. Oh sure, we have a free press, but Huffington just isn’t enough. While the main stream media (part of the plutocracy) spends time taking extreme positions (without supporting documentation, I might add), our non-representative elected officials are twiddling their thumbs and ignoring reality in favor of raising money and support for their next campaign.

    Think of it like this. BP is now hated as a corporate citizen who has wreaked havoc by their irresponsible actions. They are being dragged through the mud. They will pay a heavy price, and may, in fact, not survive the results of their plutocratic participation. Bad luck. This could have happened to any of the monstrous petroleum megaliths, and we know it. MMS did not play favorites, they cut everyone in the business infinite slack. BP will be made and example of, and, after a few months and much rhetoric, it will be back to business as usual for the petroglyths. The public outrage, however will not, ultimately generate what should happen on reform of their business arena. We can already hear the empty words being spoken in every part of our government, but their will be no real effort to bring sanity to the issue of long term energy production and its negative effect on our environment if not recast.

    This is much like Wall Street reform (and health care reform): lots of sound and fury, signifying nothing. Maybe, one day, before our world collapses from public apathy and ignorance, we will get it right. Doubtful, but possible.

    There is a broad hew and cry for a Constitutional Convention to alter, perminently, the ways in which we elect our representatives. This is gaining momentum. Will it happen? Not much chance, but, maybe. If it gains sufficient interest and support in the press, it could happen. It certainly will beat a violent revolution, which, at this point seems not so far fetched, since the many millions out of work now are less likely to find productive employment anytime soon. And, I happen to agree completely with the earlier blogger who said, basically, that the term “jobless recovery” is as much of an oxymoron as jumbo shrimp.

  23. Could we just have moderators blow away any religious discussion on here in the future? It’s 100% off topic every time.

  24. Fate is just the uncoordinated deterministic actions of millions of different entities combined with billions of other small, deterministic events in to a large equation that is, for the moment, impossible for humans to compute the results of in advance. It is completely deterministic in the end. We just have a looooooong way to go before we can accurately account for every minor detail in our predictions.

  25. Why are we even bothering with financial reform anyway, as far as I can tell, 50% of the crisis resulted from regulatory bodies not doing their job anyway. Especially with regard to the collapse of Lehman.

    I have a better solution don’t reform, in fact, don’t even regulate, just enforce one simple mandate – force large and other institutions trading in risky assets to purchase CDS contracts on themselves from the government in an amount equal to the value of their total capital each year. That way we can all just go to sleep at night expecting that there will always be boom-bust cycles, but hopefully over time such an insurance mechanism would smooth them out. Part of Treasury’s function would be to rate these CDS securities. That would do away with agency problem of putting too high a rating on, since the government – like an insurance company would be incentivized not to pay out. On the bank and asset management side the incentive to take on excessive risk would be lower – the cost of doing so would include the cost of insuring against the damage that could potentially be caused if things go wrong.

    Sounds like a crazy idea, but at least it would resolve having to debate the reforms and laws which will have no teeth and won’t solve any problems of incentives anyway.

  26. After Social Security is gone, will there be anything left? Or will the Immortals have ended their sport with us?

  27. I think its fair to remind all that whilst a number of our global regulators were asleep at the wheel for most of the first decade of this century – its really hard to regulate the financial services sector if most of its actions were actually outside the remit of the regulators themselves.

    If we could actually be bothered to regulate all activities that the financial services engage in, including the ‘infamous’ shadow banking sector, we may actually avoid another train wreck, that the legislation presented to Congress fails to address this issue, as in many other countries, another financial meltdown cannot be more than five years away.

    Whilst the big boys are back to their habits of pre-2008, small well run banks and mutuals are suffering, as are savers.

    Clamp down on excessive pay in Wall Street and the City of London, make bank shareholders responsible for all loses their banks incur and forcefully apply all existing regulations – which may lead to quite a few prosecutions – and you may see a change in behaviour.

    However, as William Black, Will Hutton and numerous other commentators have explained, its business as usual and that means gambling on derivatives and plying the CDS game.

    Given the size of both these markets, one bad bet could result in the pile of cards collapsing and dragging the World economy into the greatest depression its ever known – in which case, I doubt living in a Walled City will save you from a staving mass of the middle class and working class intent on hoisting bankers heads on pikes.

  28. “Incentives” – one big incentive that lit the fire under this tender, IMO, was the cut in the capital gains tax. If it were true that investors were INVESTING, and not just speculating, it might have legitimacy, but to reward the wealthy for getting wealthier, without producing squat for the Commons, is the cruelest lie we’ve been told in 30 years. Wall St. is merely a casino and the bosses are fleecing the rest of us and getting obscenely rewarded for it. The bail-outs were just the most recent and most visible “incentives”.
    As long as $=Power, we’re well and truly screwed.

  29. I agree, 3-D. Not enough people were hurt badly enough by the 2008-2010 part of this economic turmoil to get politically active, and force real reform from their representatives. Perhaps the collapse after the next cycle will wake people up. If so, bring it on!

  30. Reform is just another word for no leadership and more of the same. TBTF is just another way of saying No Change.
    The few job losses at the top that would have corrected everything was never implemented, so we are left with the “my survival is your survival” group at the top while everything else is diluted to contrived “REFORM” by the processing committees of the polit bureau assigned to sterilize the damages of our Financial Services Virus.

    FTDs? Financially Transmitted Diseases!

  31. The Ratings business…I like that! So perhaps we can get a Hollywood version of regulation based on ratings “PiG” “R” and triple X finance instruments?
    This of course would replace AAA standards and would represent real reform???

    Reform is just another word for no leadership and more of the same.
    TBTF is just another way of saying No Change.

    The few job losses at the top that would have truly corrected everything was never implemented, so we are left with the “my survival is your survival” group at the top while everything else is diluted to contrived “REFORM” by the processing committees of the polit bureau assigned to sterilize the damages of our Financial Services Virus. FTD? Financially Transmitted Disease!

  32. And meanwhile, if you’re Jane Q. Public, it’s getting increasingly common to get thrown in the hoosgow for debt. From the Minneapolis Star Tribune:
    Whether a debtor is locked up depends largely on where the person lives, because enforcement is inconsistent from state to state, and even county to county. (Sandi here: You can say that again; if it’s Greenwich or the Upper East Side of Manhattan, you won’t be.)

    In Illinois and southwest Indiana, some judges jail debtors for missing court-ordered debt payments. In extreme cases, people stay in jail until they raise a minimum payment. In January, a judge sentenced a Kenney, Ill., man “to indefinite incarceration” until he came up with $300 toward a lumber yard debt.

    I suspect the only reason there isn’t more hell being raised about this is because it’s not commonly known. If it could make it on to Fox News, maybe………..

  33. It’s “scary” to witness the pure hatred of “religious” rationalizations for theft and murder, isn’t it?

    It should be TERRIFYING to everyone that such people now lay claim to possessing some kind “mystery”

    above and beyond their own rationalizations (go figure)

    about the necessity for maintaining TBTF.

    Anyone want to continue to let the inmates run the asylum?

  34. It’s a racket – the “investor” who built the jail keeps coming around to collect what’s owed…just another “fee” structure…

  35. ‘There is no more proof necessary.’

    My words!

    ‘We are living in an absolute plutocracy easily competitive with Russia during the middle and late years of Soviet governance.’

    And it hurts like hell.

  36. People in the know expect collapse and are saying so privately. That is what is driving the sale of gold. What we see today is mass denial and a refusal to even acknowledge the writing on the wall. I think the rotten state of the economy is being dramatically understated intentionally by economists and political elites.

    “Others, concerned about problems in Europe and the United States, remain more pessimistic, with growth projections closer to 4% – and some are even inclined to see a possible “double dip” recession.”

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