As you have herd it said before, sometimes you must step out from the trees to see the forest. So lets do that in a 20 year step back and see how this mess evolved and where it may lead.
The Banks with the aid of the Federal Reserve wanted to get much of the regulation that was keeping them from making money (so they said) and over the years in several steps they got what they wanted and much more as they were allowed to By-Pass Anti-Trust laws and merge and acquire others to get bigger and bigger.
Much of this regulation removed was simple like how much capitol (real money reserves) they need to have with respect to the amount of loans they have out and that is assuming lower risk loans. normally it would have been 20% reserves. That is $20 in cash for every $100 they lend. This reserve level I am told has gone down to as low as 2% and the loans have been very high risk. This is also why your savings account pays no interest, they don’t need your money to back their loans or at least up front.
This level was cut down over the years and almost eliminated after Republicans took over congress and the White House. The premise was they would and could manage themselves respectfully without the need for the Government to tell them what they could do.
To put extra nails in the coffin, Banking Regulators budgets shrank so the Government did not have the capability to watch the many complex products they were making out of thin air and falsely rated by those who’s Business it was to rate the quality of the products created.
If you care to take the time to look back at the reasons many of the regulations were on the books in the first place, you will find that they have mis-behaved many times before that put our nation in peril. It takes a bunch of time and money to put regulations in place so they were not there for no reason, the Nation paid the price to get them once.
So we gave them everything they lobbied our Congress for and look what they did with it in such a short time!
So NOW…. here we are having bailed out the banking system again and what has changed.
Banks can now borrow money from the Fed at 0% interest and have been lending most of it to adventures overseas. This is why China, India, France and Germany are not feeling this as bad as the U.S. as capitol markets are flowing. This was to provide liquidity to the U.S. market not overseas markets. And Taxpayers are paying the FDIC to insure these loans that do not benefit them in the slightest way. So if I have this right…
We borrowed money from China to prop up the banks that we make the money available to for free and they and they lend to to ventures in China but backed by the American Taxpayer ? I want a piece of that action!
Congress is about to take up regulations of the banks again. But how can the people get good regulation when 1/3 of Congress is up for re-election and these guys want their campaigns funded.
I am very weary when Representatives and Senators talk about re-structuring the system. This usually means they want to provide smoke and mirrors to allow a much more politically controlled version of what we had and probably benefits to the Banks that we will not realize until its to late (gotcha again).
A fix is a simple concept. Just put back the regulations we had and add some for those things that were not covered and put some more oversight and penalties for those that break them. A higher standard for those that could threaten the entire system so if they want to be that big and powerful, it comes with a price.
To go a bit further, I do not see why the banks can not be charged a variable rate for the money they get from the Fed based on credit risk just like they do to people ! I bet they would not like it and I also bet as long as there is non-political oversight we would not have a problem again.
A bit further yet, no bank should be allowed to take 0% Fed money for foreign lending without explicit consent of Congress (holding someone elected accountable) or let them pay a normal market rate for it if the money is not destined for the U.S. . A deadline for Banks to pay the TARP money back or be broken into pieces and sold off to someone who is not to big to fail.
“What we have here is Corporate Socialism” because the banks have not changed their behavior knowing the Federal Government and the American Taxpayer will be there to bail them out again because they are so big, they threaten the entire system of the world not just what is most important, our economy.
They have but one more chance to get REGULATION right because one more blunder like this and we will find ourselves being a very small economy with a very large debt and that will have the most historic consequences for National Security as well as the American Dream.