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The Simplest Solutions That Will Never Happen



September 18, 2009 – Comments (2)

We've walked too far down this reflation road to avert another massive systemic meltdown. Period.

But... it's never too late to lessen the blow.

Paul Volcker has been stepping to the plate a bit more recently to voice his preferred strategy for addressing the crisis, and his approach of course differs fundamentally from that being executed at present. Perhaps they thought they could appoint him to the chairmanship of the advisory committee as some quaint tip of the hat to yesteryear, but instead they may discover they've inserted a large thorn into their side. It would appear that Volcker is no longer sitting quietly on the sidelines while a former FED president leads our Treasury into insolvency just to prop up Goldman Sachs and the other pillars of our failed financial paradigm.

We don't need slap-on-the-wrist reforms through pay caps or government clearing of derivatives, we need a paradigm shift. We need the brokerage houses stripped of their ability to make and manipulate markets ... we need a level playing field. We need a reinstatement of the strict separation between banking and brokerage activities that was instated by Glass-Steagall after the First Depression. As I pointed out in comment #2 of this post the other day, Paul Volcker has issued the call for re-drawing that very logical line of separation, but so far we've heard nothing from the Administration to suggest that such a move may come. 

Here's an interesting discussion of Volcker's recent stance, and his upcoming testimony before Congress.

Consider this twisted tangent... now that we're into these institutions for trillions of dollars, they can argue that we need for them to be able to generate enormous profits from our easy money policies in order to get back on their own two feet. Huh!?! See how circular that logic is? Peter Schiff said it exactly right on CNBC yesterday morning ... what we really need is the return of truly free markets ... without them we can never declare our economy on sound footing. Manipulated markets, whether that manipulation is achieved through brokerages or through our government (presently both) creates a mine field of malinvestment ... guaranteeing horrendous cycles of boom and bust rather than the sustainable growth our nation may otherwise have been able to produce if permitted to flourish with a hands-off approach.

Again ... I have never wavered in my opposition to the federal interventions into this crisis. Any outcome would have been preferable to where we're headed now with the same culture in financial power, similar leverage in place, but this time with exponentially more debt in place to ensure the deteriorating purchasing power of our currency. THAT is why I stood on the Capital lawn on the eve of the TARP vote appealing to our nation to block the bailout and all other interventions that Bernanke and his ilk are presently celebrated for enacting. That celebration will be revised to consternation when the next crisis rears its head ... that much I promise you. Bailouts, like quantitative easing, are like Pringles ("once you start, you can't stop").

Volcker wants to pull Goldman Sachs and other brokerages from the trough of free money (like they need it!) that they were granted access to as an emergency measure last Fall, and he wants banks to shed their proprietary trading activities. Ouch ... that would be a hit in the pocket for banks ... no more trading the markets with other peoples' leveraged capital? What ever would we do? 

Therein lies the problem. Banks are not banks anymore. They don't even retain an ounce of interest in fulfilling their traditional role as lenders because they know full well the reality of the financial future facing consumers and businesses in this country ... after all, they created that bleak future! They're happy to take your deposits and lever them up to place into the trading pot. But your 10X-leveraged savings is chump change to them now ... they have all the free money from the Fed they could ever dream of thanks to the crisis interventions ... and with sophisticated supercomputers locking in their trades moments before the first humans can participate, they ensure their collective monopoly on profits on their terms! We can make some money investing, but only when it suits their proprietary interests. 

Banks need not be granted the authority to trade in anything accept as an agent of your wishes with your specific capital. If they must employ fractional reserve banking to create capital for lending once the trough of free money has been repealed, that's one thing ... I don't expect that time-honored tradition to chance. But since when is it considered essential for banks to leverage our deposits to fund proprietary trading activities that net them billions of $ in gains from a fixed playing field? This is the part that must change before any changes to the status quo can be termed: "reform".

Not only do we need a return to Glass-Steagall, but we need Glass-Steagall on steroids. End all proprietary trading by all financial institutions (Yes! Including the brokerage houses!), and then we might indeed be on the path to reform and an even more elusive word: recovery. Even if such reform is achieved, the real challenge is ensuring that those provisions are not repealed over time by the powerful financial lobby the way G-S was repealed. Without an unfaltering scrutiny of the people that never forgets the lessons of these two depressions, history will be destined to repeat itself once more, and our grandchildren will inherit both our debt and the consequences of generational memory loss.

Sadly, I believe this is a pipe dream. The financial houses are powerful crack addicts ... we might be able to get them to give up heroin, but they'll defend their crack tooth and nail. These are powerful institutions ... powerful enough to seal the fate of this nation. Don't stand by and let that fate be one of poverty and pain. Let your voice be heard. Demand REAL reform of the financial institutions, and be sure to let your elected representatives know how strongly you feel ... and that your future vote will hinge on such a crucial issue. They're addicted to the same crack, so you may not find a welcome audience, but then you always still have your future vote.

My heart aches for the misdirection of our great country, and longs for real reform.  Fool on!


2 Comments – Post Your Own

#1) On September 18, 2009 at 10:53 AM, russiangambit (28.91) wrote:

> Volcker wants to pull Goldman Sachs and other brokerages from the trough of free money (like they need it!) that they were granted access to as an emergency measure last Fall, and he wants banks to shed their proprietary trading activities. Ouch ... that would be a hit in the pocket for banks ... no more trading the markets with other peoples' leveraged capital? What ever would we do?

Exactly. Glass -Steagall is the only thing that saved US banking system from the complete meltdown all these years given the complete lack of fear in our banking institutions. It reminds me very young children who are not afraid of anything simply because they have no idea what to be afraid of. They need to be pretected from themselves.

MS pulled down on elverage this year, after the crisis, while GS didn't. As a result MS underperformed and GS is proclaimed the industry leader. So now MS is taking on more risk as well. It will again end in bust unless the allowed leverage is limited.

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#2) On September 18, 2009 at 11:41 AM, outoffocus (23.05) wrote:

I'm gonna use fractional reserve reccing to lever my 1 rec 10 times and give you 10 recs (while keeping the rec profits for myself). That sounds fair right?

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