Dallas Fed President: Financial Crisis Will Happen Again
Here’s a 40-second video clip to remind all of us that the largest “banks” are much larger than before the 2008 crisis, and are not only too big to fail, but they are too big and complex to regulate and to manage. http://to.pbs.org/Jf3MgT
[Transcript] “So we know this [financial crisis] will happen again, the question is will the taxpayers be held hostage once more, if we have such concentration within so few hands, again, five banks have 52% of all the deposits in this country. Is that healthy or not? Our thesis in the Dallas Fed is that this is not healthy. It gives them such enormity of scale and complexity that it’s very hard for regulators to penetrate that complexity and I would argue, having been a former banker, in the real world by the way, not just at the Federal Reserve, makes them extremely difficult to manage, because of their size and their scope.” (Richard Fisher, President Federal Reserve Dallas)
After years of researching this very subject, I’m now working weekly with a small group of informed citizens who are trying to do something about this.
We are hoping to spawn a nationwide social media campaign that will lead to citizens and their representatives becoming far more educated about how the financial system is engineered in favor of these big concentrated casino banks — and simple steps that could be done to change things. (Simple, but nearly impossible now given the billions of dollars of campaign donations and lobbying expenses the financial sector will use to stave off any real reform.)
We are hoping that we can find other like-minded groups and that our collective efforts could lead to the kind of rapid reform that the book “Throw Them All Out” and the 60-minutes expose on PBS did last year. The book was published in November. PBS aired the expose on November 13. Just months later the STOCK act — prohibiting the abhorrent but generally accepted practice of trading public stocks on insider Congressional knowledge. Now that was awesome to watch. Congress’s 10% approval rating hadn’t been enough to change their behavior, but being outed by PBS and a carefully researched book that showed how members from both parties had been trading on insider knowledge for years was enough. They were shamed into acting and acting quickly.
If enough light is shined on the corruption of our financial-political complex, and the fictitious (and harmful to the real economy) nature of most of the profits within the banking (i.e. high-stakes gambling) sector are more widely understood, perhaps a similar outcome could occur.
The last attempt at financial reform was an utter failure — too big to understand, too weak to matter. I spent a lot of time following that process, including time in Washington DC watching the conference committee finalize the bill. As is typical, no one had time to read the bill until after it was passed. What we ended up with was a 2,000+ page mass of confusion and mountain of complexity. And we ended up with very little actual reform.
What we need is short, simple, understandable. Former Supreme Court Justice Sandra Day O’Conner said a few years ago in Salt Lake City that part of the genius of the U.S. Constitution was it’s brevity. She compared it to the length and complexity of the European Constitution (signed but not ratified by all member states back in 2004-2005) which I have since found out is 70,000 words long, fifteen times longer than the U.S. Constitution. The Cato Institute reported years ago that few people in Europe had read and fewer understood because of its “impenetrable language.” http://bit.ly/JiLQQ4
I love the brevity and simplicity of the Glass-Steagall Banking Act of 1934. It was about 26 pages long (depending on which format you read) and cleanly separated risky investment banks from federally insured commercial deposit banks. You couldn’t be both until regulators over time eroded and finally the Congress completely killed Glass-Steagall in 1999.
Today our massive, complex financial institutions combine deposit-taking, lending, mortgages, credit cards, investment banking, securitization, proprietary derivatives betting, high frequency trading, and all kinds of sophisticated speculation (aka hedging) on interest rates, currency exchange rates, commodities and equity futures, and credit default swaps within massive, highly leveraged, poorly regulated multi-national corporations which no one — even executives with decades of experience in one type of banking or another — can fully understand or manage.
I’ve watched and read many of hours of testimony of bankers and regulators answering questions from members of Congress and the Financial Crisis Inquiry Commission, and I’ve also spoken personally with a former executive of one of the largest banks, and I’m telling you it is impossible for any human (let alone the poor folks in the risk management divisions) to understand what goes on within these corporations that process trillions of dollars of transactions and trades daily.
Is it any wonder that every year or two a “rogue trader” brings down a huge institution or sovereign? Or that cities and counties around the world have gone bankrupt because they entered into derivatives transactions that they didn’t understand. Or that MF Global could go bankrupt just months ago — the 8th largest bankruptcy in U.S. History — and lose billions of dollars from customer accounts because regulations didn’t exist to separate customer accounts from proprietary accounts, or if they did, they weren’t followed. Our financial institutions are 1 part traditional bank (to have the appearance of doing good for Main Street) and 2 parts casino. They make the majority of their profits from their derivatives businesses. We need enough Americans and legislators to understand that the casino part is sucking the real economy dry.
Where will the next crisis start? What company will have a breakdown in their risk management processes allowing another rogue trader to bring it to its knees? It’s hard to predict where the next crisis will start, because the current system is so concentrated and so complex, as Dallas Fed President Richard Fisher says.
Complexity is our biggest enemy. Simplicity should be our best friend.
Simplicity will be the only means to eliminate Too Big To Fail (just break up the big banks already!), separating them into individual entities with a charter to do one thing or another — not everything. Think of Teddy Roosevelt, the Trust Buster, breaking up the railroad and oil monopolies. That turned out to be good for the country and good for the stockholders too.
Simplicity will help us reduce the risk of a global financial catastrophe that is rearing its ugly head again, with Greece and Spain and Italy and the inevitable contagion that will spread to the rest of the world, worsening our economies and our well-being, resulting in a lot of unnecessary and undeserved human suffering and misery.
“Do not give children dynamite sticks, even if they come with a warning label. Complex financial products need to be banned because nobody understands them, and few are rational enough to know it. We need to protect citizens form themselves, from bankers selling them “hedging” products and from gullible regulators who listen to economic theorists.” – Nassim Nicholas Taleb in “The Black Swan” (2007)
Let me know if you want to join a citizen hangout on this topic. If you did, let me know how many books on the “Financial Crisis Reading List” you have read so far. http://bit.ly/tOxrcv
My guess is that 99% of us haven’t read a single one of these books — which is why we are living under a corrupt financial-political system.
Becoming truly informed is the principle prerequisite for participating in our effort. The more you study, the more involved you will want to be, and the more excited we will be to have you join the cause.