Curious Capitalist

Time’s Foroohar Responds to Treasury: Our Financial System Is Not Stronger

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Photo-illustration by Ji Lee for TIME. Photographs from Getty Images. Bull: Jan Cobb Photography. Confetti(2): Brian Hagiwara, Lauren Nicole

It seems that the Treasury Department is in agreement with the core premise of TIME’s cover story this week. In a blog posted on the department’s website Friday, Deputy Assistant Secretary for Public Affairs Anthony Coley notes that while “unprecedented actions” were needed to prevent financial collapse in 2008, there is “still more to do to protect taxpayers, consumers and our financial system” before we can honestly say that our economy is no longer at risk. As I put it in my piece: “The truth is, Washington did a great job saving the banking system in ’08 and ’09 with swift bailouts that averted even worse damage to the economy. But it has done a terrible job of re-regulating the financial industry and reconnecting it to the real economy.”

To respond to some of the key points Mr. Coley raises:

1. While the creation of the Consumer Financial Protection Bureau was a great step forward, it hasn’t changed the underlying business model of many of the largest banks, which still make the majority of their profits from trading operations rather than plain vanilla lending. Nor has it hindered the ability of Wall Street to continue to take opaque trading risks that compromise the integrity of our financial system. Many of these risks are due to loopholes in Dodd-Frank created by vigorous banking industry lobbying.

(MORE: The Myth of Financial Reform)

2. While Dodd Frank has, as I write in the piece, created “something of a roadmap” to wind down banks, most experts believe that it’s still unclear how the rules would work in practical terms, especially given that the biggest banks are now larger—rather than smaller—than they were before the crisis. The majority of reform minded economists believe that breaking up banks to make them both simpler and smaller is the best way to reduce risk in the financial system.

3. To that point, while it’s true that the US banking system is relatively small as a percentage of GDP compared to Europe and Japan, the US financial sector is not. What’s more, the size of the global shadow banking sector has actually grown by $5 trillion since before the financial crisis, reaching a whopping $67 trillion in 2011, according to the Financial Stability Board. (For more, please see page eight of this report.)

4. While I agree with Mr. Coley’s assertion that many—though, it must be said, not all—of the largest banks have offloaded risky assets and increased the level of risk-absorbing capital since the crisis, it’s important to consider context. Raising Tier 1 capital by 70% may sound impressive, but it has been raised from a base of almost nothing relative to risk—which means that this “accomplishment” still leaves much work to be done. For a broader understanding of new national and international capital requirements and how easy it is to game them in order to provide the illusion of financial stability, I would encourage readers to look at FDIC vice-chairman Thomas Hoenig’s April 2013 speech entitled “Basel III Capital: A Well-Intended Illusion.

5. On derivatives, I agree that a tremendous amount has been done to bring risky trades into the light since the financial crisis. And as I mention in the piece, nearly all of the credit for that goes to CFTC chairman Gary Gensler. Were it not for former Treasury Secretary Geithner’s decision to exempt foreign exchange derivatives from the Dodd-Frank rules, I believe we’d be even further along in this process.

I think the key point of difference between Mr. Coley’s view and my own is that while it’s true that banks may individually be stronger than they were before the crisis, our system as a whole is not. Banking has not been re-moored in the real economy. And until it is, I fear that our recovery—and ultimately our economy—will continue to be at risk.

18 comments
ninjaman1234xxx
ninjaman1234xxx

Politicians are only politicians because its a job.  Being a public servant is not being a public servant.  Its only just a job to most of these incompetent people and will never be more than that.  They will continue to make our existence more confusing and inefficient so they are perceived to be needed even more.  WAKE UP PEOPLE.  IT STARTS WITH DISAGREEING WITH ALL THE MONKEYS AT WORK THAT LIVE LIKE SHEEP SLAVES AND THEN PARLAY THAT ENERGY INTO YOUR IMMEDIATE FAMILY SO EVERY CONVERSATION ABOUT TRYING TO BE HAPPIER BECOMES CONTAGIOUS.  

JosephVignolo
JosephVignolo

Goodbye Bedford Falls, welcome to Pottersville. Google it.

JosephVignolo
JosephVignolo

I was downtown the other day. There are young kids down there panhandling for food money and teenagers sleeping in cars. Welcome to America.

jglugla@mail.com
jglugla@mail.com

It is a damn fine economy for the banksters, Wall Street greed masters and all of those who have made billions shipping jobs overseas. For the rest, it is a WalMart economy.

Adam_Smith
Adam_Smith

"The majority of reform minded economists believe that breaking up banks to make them both simpler and smaller is the best way to reduce risk in the financial system."

I am glad to hear it as that has been my own thought as well. Unfortunately, the politicians listen to the bankers, not the economists. Which group do you suppose makes the greater campaign contributions? I suggest that those reform minded economists be more public and vocal in their conclusions as they may be blamed for not giving sufficiently clear advice when the next financial crisis occurs.



DeweySayenoff
DeweySayenoff

There is only one thing that will stimulate the economy: Bottom up spending,

Capitalism is pretty simple.  Money lubricates the machine.  

It was thought that top-down (supply-side) economics, making things cheaper or reducing the prices, stimulates spending.  In only a certain case, it does.  But when an economy is stagnant, and money isn't circulating from the bottom up, it doesn't matter how low the prices go.  No one is going to buy those products or services because they don't have enough money to blow on things they don't absolutely need.

It was thought that by giving businesses (and the wealthy) money that they would then use that to create jobs.  What they did instead was use it to finance moving jobs out of the country so they could make more profit.  It worked out very well for them until they raised the standard of living in those other countries, so now there's more pressure in those countries for higher wages and the companies are back where they were before they left.  (It was a stupid move for them and they're realizing it now.)  But the flip side of that  was businesses would use the money to hire more people who would then have the money to spend and that spending would stimulate the economy.

It doesn't work out that way in real life.

Even the most dense business person knows you do NOT create jobs in a business that has no increased demand for their goods and services.  Quite the opposite, in fact.  You must FIRST have the increased demand BEFORE you hire new people, and there's ALWAYS a long lag between the increase in demand and the increase in hiring.  Businesses want profits and will work their reduce-sized staff to death to keep it until productivity falls all to hell and they HAVE to hire new people.

This is how it works in real life.

Businesses today are FLUSH with cash.  So much so, that they're not demanding loans.  Banks, therefore, use their cash to invest and pay their investors (rather than the people who deposited their cash with them in the first place).

So there are only two ways to create new spending: 1. Increase the minimum wage.  2. Decrease taxes on the middle class and poor and offset that decrease by increasing the taxes on the wealthy.

Both business and the wealthy can more than afford these moves.  For example, six members of the Sam Walton family, who created Sam's Club and Wal-mart, between them collectively control MORE WEALTH than 125 million of the poorest Americans.

By doing this, bottom up spending is stimulated.  Paying less taxes puts money in the pockets of working Americans.  Paying a higher minimum wage does the same thing.  When working Americans get money, they tend to spend it and with that many working Americans get that much money and spend it in as many places as they are, demand for the goods and services of business with leap, and job creation will be stimulated.

We used to have a reasonable balance between the wealthy and the poor.  We no longer do today.  The economy is stagnant because there is not enough bottom up spending to get it going.  The money is circulating between the wealthy, banks and business.  It's not circulating among those who actually spend enough of it in enough places to get the economy going again.

Until that stagnation is addressed, this economy is what we will have FOREVER.  And the only way to do that (at least without bloodshed) is to stimulate bottom-up spending by reliably putting small amounts of discretionary spending money in the pockets a large number of people.  If everyone in the country had, say, $2000 more that they could just spend on things, that would put over 625 billion dollars into the economy every year.

Talk about an economic jump-start...

And that can ALONE be accomplished by shifting the tax burden onto those who can most afford it.  Adding a minimum wage hike on top of that would put an extra trillion dollars and more into the economy.

This is the only solution to our stagnant, fragile economy short of revolution.  Money isn't circulating from the bottom up.  And like an engine, with money lubricating the workings, only bottom up spending keeps a capitalistic economic engine running.  Unfortunately, I don't see this happening because those who have it all (well, 94% of it at least) would rather watch the world collapse than pay it back to those who helped them get so much in the first place.

louie2nd
louie2nd

The banks and big oil run America. Especially the banks. Knock them out of the speculative world of trading and force them back into lending. Then take on health care costs in this country by mandating LOWER prices. Today. 

MarcHandler1
MarcHandler1

Thanks to Ms. Foroohar for keeping this story alive. Obama came to power promising to fix this and hold the bad actors responsible. His failure to do either is the greatest failing of his administration. This sets the stage for the next financial collapse -- the next wave of Americans losing their homes and jobs while Wall Street prospers at their expense. Please continue to follow up on this story; public pressure is the only (slim) chance of rectifying this.

AnnDogar
AnnDogar

Ms. Foroohar has it correct.  She makes some excellent points.  Phil Angelides, who chaired the Financial Crisis Inquiry Commission, affirms much of what she says.  The Treasury, instead of reacting defensively, should carefully consider what journalists and other guardians of the public's interest have to say.  Remember how Brooksley Born was maligned when she tried to expose Shadow Banking.  We all owe a debt of gratitude to superb journalist such as Ms. Foroohar. 

JosephVignolo
JosephVignolo

@jglugla@mail.com I was in Wal Mart once (shame on me). I was talking to a Wal Mart employee who said something interesting. She said, "I come in here and buy some of my food and my kid's clothes. But that's it. I don't have enough money to buy anything in any of the other departments like electronics, housewares, or home improvement." So the people that work at Wal Mart don't have enough disposable income to buy any non-essential stuff at Wal Mart. Does that tell you something?

JosephVignolo
JosephVignolo

@DeweySayenoff You are exactly right. A very accurate and well written piece. A healthy economy is a balance of supply and demand. This economy is way out of balance because there is way too much supply and not enough demand. Henry Ford addressed this when he raised his worker's pay from $.50 to $5 a day. It gave them the disposable cash to buy cars from him plus a lot of other stuff. It created a thriving middle class that the current crop of financial assassins are trying so hard to destroy.

Openminded1
Openminded1

@louie2nd Do not leave out insurance company's that make billions on odds in there favor using the actuaries that that are on there payrolls as there guiding lights.

JosephVignolo
JosephVignolo

The only chance of rectifying this is torches and pitchforks.

JosephVignolo
JosephVignolo

@MarcHandler1 The "bad actors" own Mr. Obama. He is a Bilderberger. Google that if you don't know what it means. They installed him where he is and he does what they tell him.

JosephVignolo
JosephVignolo

@AnnDogar Thanks for mentioning Brooksley Born. She tried to blow the whistle on all the fraud in the derivatives markets before it took the economy down. And who was the head obstructionist that blocked her? Why it was the maestro himself. Alan Greenspan. The beady-eyed little worm and chief banker-criminal himself. He should be thrown in jail, or better yet stripped of his last penny. Then make him work in a McDonald's flipping hamburgers for the rest of his life for minimum wage. And let's see some pictures of him all covered with grease from cleaning the frialator.

DeweySayenoff
DeweySayenoff

@AnnDogar "... journalists and other guardians of the public's interest..."

Inasmuch as I admire idealism, the fact is journalists are paid by the very people who run the country.  It is those people (not the government) who decide what will and won't be said.  Someone can shout all they want to on the Internet, but if no one listens, it doesn't matter if they shout truth or drivel.

So in the media - at least here in the United States - we are held in thrall to those who own the media and their peers.  We have the puppets of the billionaires battling with the puppets of the millionaires in Congress over possession of the few scraps that the 6% (it used to be 7%) of the rest of the country has managed to hang on to.  The wealthiest 20% of the country owns 94% of the country's wealth.  The top 1% now control almost 20% of of it.  And they are the ones who own the media in the country.

In 1980, the wealthiest 20% only controlled about 64-65% of the country's wealth.

So like I said, idealism is fine, but we're never going to see any reforms by EITHER side (the rightists oversaw most of the legislation that allowed this transfer of wealth from the middle class and poor to the wealthy, and the leftists aren't able to do squat about it because the rightists won't let anything be done) because the powers that own our country won't let them happen.  They want their power and they're going to hang onto it.

And no amount of writing by anyone is going to change that