Today’s Foundation, Tomorrow’s Crisis: The Geithner-Summers Proposals

http://baselinescenario.com/2009/06/15/todays-foundation-tomorrows-crisis-the-geithner-summers-proposals/

"1. Their view: Regulation is overly focused on safety and soundness of individual banks. Reality: There was a complete failure of safety and soundness supervision. This must be fundamental to any financial system – without this, you’ll get mush every time.
2. Their view: “A few large institutions can put the entire system at risk,” so we need a system regulator. Reality: you need to control the behavior of large institutions, more than a few of which got us into this mess. If you can’t come up with a proposal to prevent them from taking system-damaging risk (and there is nothing in today’s article about this), then break them up. The article mentions penalties for being large - higher capital and liquidity requirements for larger banks; we’ll see the details in/after Geithner’s speech tomorrow, but I am not holding my breath for anything meaningful.
3. Their view: All large firms will be subject to consolidated supervision by the Federal Reserve and there will be a council of supervisors. Reality: we have plenty of layers, up to “tertiary” regulators (and beyond, in some senses) and there is already enough opportunity for regulatory arbitrage. What prevents the biggest banks from capturing or manipulating regulators? There is no mention in today’s document of the extent to which everyone, including the authors, believed in the big banks’ risk management abilities last time – and continue to rely on the advice of their people today.
4. Their view: The originator “of a securitization” will be required to “retain a financial interest in its performance.” Reality: It was a big unpleasant shock when everyone realized that Lehman, Bear Stearns, and others had retained a large exposure to dubious financial products, some of which they had issued. We are back to the Greenspan fallacy here – if financial firms have an incentive not to screw up on a massive scale, they won’t."

for more, see my blog Potpourri http://random-potpourri.blogspot.com/

Previous Economy's Organization.

Why I remember how it was the American way. We got rid of that pesky Glass Steagall; we initiated the wondrous Credit Modernization Act, and we were like the first white men on the shores of a New World.

Granted the natives got chewed up a bit, but most have been willing to continue cheerleading for Obama, even as it looks like more BailOuts might be needed.

And even if they aren't, the prognosis is that it will all come undone again. There is enough money thrown into the Wall Street financial center so that the ride's momentum could go on for even another thirty six months. But eventually it will grind to a halt.

And what's wrong with that? So what if the middle incomed will never once regain (not even over the course of their remaining lifetimes) what they had since the nineteen fifties on. Ben Stein has explained this several times - those good times were simply a "blip" of prosperity the like of which was never seen before. And the middle incomed have no right to expect that things accomodate another such blip! For Geithner and Summers are to rule this era, as President Obama knows what is good for us Americans.

And although our love for the President may not allow us to heat our homes or feed our kids, at least we will still be able to catch him on TV talking about his good buddy Tim, and about how hard Hank Paulson used to work. (Assuming we have the electricity for the TV.)

Putting the Federal Reserve in charge of the banking system is like putting the fox in charge of henhouse security.

Putting the Federal Reserve in charge of the banking system is like putting a narcotics dealer in charge of a drug rehabilitation center.

The Federal Reserve was a chief architect and chief enabler of the Ponzi schemes that caused the stock market boom-and-bust and the real estate boom-and-bust.

The Federal Reserve is essentially a private corporation of bankers set up to control the U.S. economy for their own profit by manipulating the interest rates and the money supply.

The only real solution is to reinstate New Deal regulation of the banking system, such as the Glass-Steagall Act, and replace the corporate-dominated Fed with a regulatory agency responsible to the government.