Saturday, July 14, 2012

Wall Street sleaze keeps growing

Just when you thought Wall Street couldn't sink any lower - when its excesses are still causing hardship to millions of Americans and its myriad abuses of public trust have already spread a miasma of cynicism over the entire economic system - an even deeper level of public-be-damned greed and corruption is revealed.

Sit down, and hold on to your chair.

Consider the most basic services banks provide you: You put your savings in a bank to hold in trust, and the bank agrees to pay you interest on it. Or, you borrow money from the bank and agree to pay the bank interest on the loan.

We trust that the banking system is setting interest rates based on its best guess about the future worth of the money. And we assume that guess is based, in turn, on the cumulative market predictions of lenders and borrowers all over the world (including central banks) about the future supply and demand for the dough.

But suppose our assumption is wrong. Suppose the bankers are manipulating the interest rate so they can place bets with the money you lend or repay them - bets that will pay off big for them because they have inside information on what the market is really predicting, which they're not sharing with you.
Read the rest here.

It must be a chilly day in the sulpherous pit because I actually agree with Robert Reich about something. I supported the repeal of Glass Steagall back in the 90's because it was anti-free market. I now accept that I was wrong. Institutions that are as big and powerful as the major banks have become are a threat to liberty and the financial security not just of the United States but quite possibly of the world. Glass Steagall needs to be reinstated and existing antitrust legislation needs to be strengthened to allow the Feds to break up any bank or other corporation that is "too big to fail."

The banks in particular have in just the last four years demonstrated an absolutely breathtaking disregard for the law, and have suffered almost no significant consequences. There has been a shocking parade of one bank related scandal after another. At some point one must conclude that we have a systemic problem when such  institutions are permitted to operate with near impunity while thumbing their noses at the law.

Enough! Reinstate Glass Steagall and break up the mega banks.


Anonymous said...

Oh come now, John!

Were you really that naive? Did you really think that "free-markets" exists? Especialy for banks?

I think you need to think very deeply, very deeply, about all this.

Quit having a compartmentalized mind, ( spirit here- material there), and see that it's all a unity that needs to be in harmony.

One can't have economics separate from morality and morality here means simply fair play.

Anonymous said...

I am not sure what the other anonymous is implying - if it is that free markets are desirable for finance, then that is just craziness. Markets are like salt: you need some in the system or you will die. But an all salt diet will kill you. A healthy diet is going to regulate salt intake carefully. (Not original, btw, but very true.)

In any case, John's statement is great as far as it goes. Most derivatives need to be made flat illegal.

Michael said...

Here is a post on this subject from Washington's Blog:

I, too (like John) have come to the conclusion that the deregulation of the 1980's and 1990's was wrong. The problem is, that classical liberal economic theory rest upon a lot of unconscious, unexamined assumptions. One of these is that everyone has a conscience and has empathy. That is what Adam Smith assumed in his Theory of Moral Sentiments. Smith described empathy as "fellow feeling."

Unfortunately, we now know that this assumption is false. We know that there are a minority of people without a conscience. They flourish best in large, impersonal institutions, where there is a lot of anonymity, and where the ground rules change all the time. That describes Wall Street.

In small communities, or in large, stable institutions, where people know each other, and where leaders rise through the ranks slowly, psychopaths tend to be spotted and thwarted, which limits the damage they can do.

So, yes, we need Glass-Steagall and we need strong antitrust legislation. We need these to destroy the environments in which psychopaths flourish. Dispatching alligators one at a time won't do the job - we need to drain the swamp.

All social sciences and economic theories need to be updated and adjusted to account for the existence of psychopaths, and need to explain how they can be kept away from positions of power and influence. Otherwise, we will keep having "boom and bust" cycles of societal development and collapse.

Visibilium said...

Society continues to subsidize banking risk through the FDIC and the Fed's lender-of-last-resort guarantees. Too big to fail? Yank the guarantees and watch how the balance sheets shrink.

Antitrust and Glass Steagall do nothing to address the problem.