Jan 22 2010
Thoughts on Financial Reform
Just some random thoughts on the financial crisis. Actually, there is a lot. Not sure if I can link them altogether. Otherwise, I would be doing something else for a living.
1. A very good article on WaPo about the different reform ideas advanced by Geithner and Volcker. The core of Geithner’s theme is to put a requirement on reserves. Volcker’s is stiffer by shifting back to Glass-Steagall.
2. The article also says,
government guarantees designed to spur lending by letting banks borrow cheaply were instead funding banks’ speculative investments and fueling soaring profits
I was amused while reading this part. I can imagine how maddening this must be to Geithner: on the one hand, he’s taking the flak for protecting the status quo on Wall Street. On the other hand, the very people he’s protecting just can’t stop undermining his position.
3. I have my own doubts on whether it is possible to go back to Glass-Steagall. The input I received was very mixed. I still remember the momentum behind the drive to repeal it in the 1990s. The way it was portrayed in the media was that it was out-dated. The repeal itself seemed like just a formal recognition of what “everyone on Wall Street” already knows. Then I heard Chris Dodd saying voting for it was one of his biggest regrets, which implies he had other choices or repealing G-S wasn’t that inevitable.
4. I don’t know enough about Volcker. But I really liked his idea of nationalizing the big banks during the crisis (early last year). It seemed fair and reasonable. But Volcker doesn’t have many supporters in the establishment. Yet there has to be some balance between being the best solution and being a likely solution.
5. Another source of doubt (about going back to Glass-Steagall) comes from my earlier thoughts on adding a tax to all financial transactions so that the public has a control nub to turn. After some thoughts, now I am not sure that is workable solution. There are so many types of “financial transactions” that it is really hard to demarcate what is speculative transaction and what is not. In a way, it comes back to the difficulty of defining Mark-to-Market rule in GAAP guidelines.
6. If it is hard to discriminate “speculative” from “non-speculative”, isn’t it equally hard to separate commercial banking from investment banking? Like what do you with the deposit in a commercial bank? You have to invest it somewhere. Do you allow a commercial bank to buy financial products or to use a middleman to manage the capital? And how do you define a “financial product?”
7. I may not be asking the right questions. But at the same time, I am not convinced either that putting the firewall back up is a proactive way to stop speculation once for all. After all, we tried it before.
8. The GOP’s idea–don’t intervene on the means, but set an clear boundary on the outcome, then the market will correct itself, doesn’t fly either. Garrett from NJ was saying, if you tell the banks that there is not a public safety net, they will behave. That is a pretty lame presupposition. Not even Greenspan is on board this time.
9. So it becomes somewhat an intellectual challenge, kind of like, how do you treat cancer? Cancer cells are normal cells gone rogue. Credit/market liquidity is kind of like that: you need a vibrant source of credit for the economy. But some times, the source (i.e. Wall Street) produces so much liquidity that causes bubble (tumor).
10. Maybe that is why financial reform appears so appealing but so difficult to carry out. It is like when people see cancer, they think it is a disease. But it is not (at least not in the sense that the body is attacked by external organisms). It is part of us, like aging.