Monday, April 26, 2010

More Handouts to WallStreet

Leading up to the financial crisis we saw the government manipulating markets by socially planning interest rates through the fed, which created excessive growth in the housing market and speculation. Even after warnings by economists about the dangers of the current stance of monetary policy, investors continued to take on more risk, partly because they knew the fed would attempt to engineer a soft landing once the bubble burst, partly because government sponsored organizations like Freddie and Fannie would continue to take on more of private sector risk, and partly because of regulatory mandates that such as the community reinvestment act ( which economists warned us about from the beginning).

Despite Wall Street being the most regulated industry in the U.S. economy, these government interventions led to one of the worst financial meltdowns we've seen since the depression. In response, the government implemented a bailout scheme (TARP) which has enraged voters across the country. This was despite many alternative solutions such as speed bankruptcy or debt to equity conversions.

Now, congress is planning a financial reform package. While commentators are claiming that this is a way to 'punish' Wall Street and prevent the next crisis (based on the false assumptions that the crisis was due only to excessive greed and very complicated derivatives), it is nothing of the sort. It is nothing more than another handout staked on taxpayer dollars.

In a recent article from Bloomburg news we find the following:

"Government rules will establish quasi-monopolies, and discourage competition. In exchange, the affected firms will be exposed to constant bureaucratic meddling, but will have the ability to manage this by influencing political appointments.. The Dodd bill will establish a set of companies that will be implicitly established as too big to fail, or TBTF. These firms will, according to Plosser, have an advantage: “when stock and bondholders of TBTF firms win, they profit, but when they lose, they become eligible for a government bailout.This will lower the cost of capital for the firms so designated, since lenders will understand that the U.S. government will be there should calamity ensue. If you lend to a little guy, you lose if he runs into trouble. If you lend to a big guy, you get your money back from taxpayers."

And we see that Goldman Sachs' stock prices continue to climb and we have yet to address the root causes of the financial crisis. Instead, it has become an excuse for doling out more political favors at the taxpayer's expense, and forwarding political agendas. In other words, more of the same failed policies that led to the crisis in the first place. Lots of ideas are on the table for responsible reforms, such as changing capital requirements,convertible debt arrangements, and cranking down on discretionary monetary policy. But these reforms don't as easily enrich special interests by picking winners and losers by having government reduce their competition and guarantee their profits.

1 comment:

tagskie said...

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