Archive for Friday, March 19, 2010

Bank controls

The nation’s banking system needs more, not less, oversight and supervision.

March 19, 2010


More and more observers are pointing in disgust to the fact so many big banks, among them disgraced agencies which helped create a lot of our economic troubles, are now prospering while people continue to lose jobs and face financial ruin.

Something is grievously wrong with this picture and it is important that Congress does not contribute to continuing the national misery. With that in mind, it is crucial to heed chairman Ben Bernanke’s request to let the Federal Reserve keep all its banking oversight powers to help the central bank guide our economy.

The U.S. Senate is now making efforts to scale back the Fed’s role in overseeing the nation’s banks. Laxity in controls for banking profligacy contributed to the mess we now have to dig out of. It is obvious that time and again there was a failure to use the available controls to rein in some of the outlandish economic activities that helped bring about this massive recession. Now that there is an awareness of the need to exercise proper controls to prevent new disasters, it would be foolish to weaken the instruments at hand.

Bernanke says that policymakers factor data they get from the Fed’s role as the bank regulator into their decisions on interest rates. He adds that banking policies give the Fed insights into the health of the entire banking system. And even though some major banks seem to be pulling out of trouble, many others are still hurting while jobless citizens are suffering along with them.

Saying he wants to overhaul the nation’s financial regulatory structure, Sen. Chris Dodd, D-Conn., Senate Banking Committee chairman, is offering legislation that would strip the Fed of its power to supervise state-chartered banks and bank holding companies with assets of less than $50 billion. That would leave the Fed supervising 35 of the biggest bank holding companies. It currently oversees about 5,000 bank holding companies, about 850 smaller banks that are both state-chartered and are members of the Federal Reserve System and some foreign banks operating in the United States.

Recent history indicates that there should have been far more oversight and intervention of the banking business as things deteriorated. Bernanke has said a number of times that the Fed “was wrong” in not cracking its whip much sooner in a number of instances. At this point, there is a need for more oversight rather than less to prevent new and harmful abuses.

For all its flaws and errors, the Federal Reserve’s oversight of banking policies and actions inspires more confidence than a politicized Congress with its long list of bad political performances, some of which played a major role in the billions of dollars lost in housing loans.


toe 4 years, 1 month ago

The thrifts started the government on bank bailouts. It is continued since the 80's. The failures of banks are transferred to the taxpayer. What a great system we have here.


paulette2 4 years, 1 month ago

These current problems are the result of bad policies by the Federal Reserve since the election of Ron Reagan and the rise of Allen Greenspan in the 1980's.....

Where are the 'gatekeepeers' of the public trust?

1994 was a pivotal year in 'deregulation' as later proved by ENRON

Gregory Van Hoey performs an admirable service in shedding light on a neglected element of the federal securities regulation enforcement regime.1 He convincingly shows how "causing" liability can provide a viable mechanism for reaching parties who are only secondarily responsible for a securities law violation.2 Van Hoey's analysis is especially important in light of the United States Supreme Court's elimination in 1994 of private actions for aiding and abetting securities fraud.3 This Comment explores some of the possibilities of causing liability with reference to the Enron disaster. Consideration of the principal "gatekeepers'" failures graphically illustrates the importance of this form of secondary liability.

At the heart of the Enron scandal was a group of exceptionally ambitious executives seeking to create a new kind of energy company.4 At its peak, Enron reported annual revenues of $100 billion and employed over 20,000 employees.5 Fortune ranked the company as high as seventh on its "Fortune 500" list.6 We now know, however, that this edifice was an intricate house of cards built on a foundation of sham transactions and accounting manipulations. When the frauds surfaced during the fall of 2001, the structure quickly collapsed, leaving investors, employees, and customers with billions of dollars in losses. How could a company that was the poster child for innovation and entrepreneurial success fall so far so fast? How could so many people have been deceived?

It turns out that Enron was not unique. Since its fall, revelations of accounting impropriety and insider corruption at WorldCom, Tyco, Adelphia, and other companies continue to come to light. Major corporations are issuing earnings restatements at a higher rate than ever before, including 270 in 2001 alone.7


Liberty_One 4 years, 1 month ago

feeble, the guy was running the central bank when we had a massive banking crisis. He was warned time and again and he ignored these people. It's one thing to be wrong, but he's ignoring these same people yet again, leading us to yet another crisis. What other word than moron describes a person who stubbornly continues to do the wrong thing over and over? That or he's so thoroughly corrupt he'll allow himself to look like a fool in order to benefit his banking buddies. Either way this guy should not be in charge of a Dairy Queen nevertheless the economy of the United States.

And don't throw his creditials in my face. Just watch him any time he comes befores Congress. Ron Paul makes him look like a fool every time.


feeble 4 years, 1 month ago

The arrogance of Liberty_One calling Bernanke a moron is astounding. It may well be that he is wrong, but most definitely not a moron. He graduated summa cum laude from Harvard and received a PhD from MIT.

Maybe the free market apologists on this thread show go spend sometime with Greenspan's mea culpa.


Liberty_One 4 years, 1 month ago

BigPrune (anonymous) says…

"Are the banks actually loaning any money yet?"

More lending isn't what we need, we need to start saving. Borrowing money from Asia to buy asian goods isn't a recipe for success. Cheap credit isn't the cure but real savings, real investment and real production.


BigPrune 4 years, 1 month ago

Are the banks actually loaning any money yet?


Liberty_One 4 years, 1 month ago

camper (anonymous) says…

"I hope that President Obama can get some legislation passed to prevent the same crisis from happening."

That'll probably happen, but it won't do any good. We can prevent another crisis from happening the exact way this one did through regulation, but regulations won't prevent the next crisis. The problem is the malinvestment that is caused by the cheap credit policy of the federal reserve. This time around, too many people were invested in housing. In 2001 the malinvestment was the internet stock bubble. Cheap credit leads to this kind of malinvestment because otherwise unworthy business ideas can receive funding.

Preventing the old crisis from happening again is easy. Preventing the next one requires getting rid of the fundamental problem: the central bank's cheap credit policy and the debasement of the dollar.

BTW, the same people who predicted the housing bubble and crash say the next crash is coming in a few years and it's going to be a dollar crash. This could be the big one that leads to a ten to fifteen year depression.


camper 4 years, 1 month ago

In my mind the SEC failed too. There were other lending institutions who bundled up home loans and created financial instruments out of them. They got passed around like hot potato's and insured by folks like AIG at the gamble that home values would continue to rise. It was a huge bubble and not many realized it was going to burst sooner or later (me among them).

The 1st dominoe to fall was rising gas prices. Soon there were many who struggled to pay $4.00/gallon gas and found it difficult to keep up with mortgage payments. Unlike the home loan origination scheme, I give myself credit on this one. After filling up for $65 bucks one day, I scratched my head and said to myself "man, sooner or later we're going to have to pay the piper for this one". Such a drastic rise in a consumer commodity could not be without some future consequence. Further declines in manufacturing, job outsourcing, and rising health care costs also contributed to foreclosures. And this cycle repeated itself culminating in the disasterous financial crisis.

We saw a historic boom and bust economic cycle. It is the responsibility of regulators to oversee this, but somehow it is hard to do much when things are going good. Ironic that the SEC was created in response to Wall Street speculation and fraud that contributed to the 1929 depression, yet they were very much responsible for the 2008 debacle.

I hope that President Obama can get some legislation passed to prevent the same crisis from happening. Though new loopholes and schemes will surely be found, let's atleast solve the financial derivative problem...if nothing else.


Paul R Getto 4 years, 1 month ago

L.O.: You make some good points, and this is a complex mess. A well-known candidate for president said much the same thing in the summer of 2008. There is more trouble coming, and lots of nasty contracts will roll over in the next few months and years, perhaps causing more heartburn and anguish. While all of us like to keep 'government off our backs' (except for the R's who want to be in doctor's offices, bedrooms and the marriage license bureaus around the country) clearly the efforts to deregulate the financial industry promulgated by both parties at various times have not done much to level out the system. I'm no financial expert, but it appears the last crisis resembled the crash of 1929, when the money men turned the system into a slot machine and were allowed to gamble with other people's money and only had to put up 10% of their own to play in the casino. When their gaming strategies fail and the taxpayers have to pony up the difference, it created stress for all of us. As for incompetence, I don't have an answer, GW got reelected (thanks, perhaps, to the software engineers in Ohio) after he proved himself incompetent in two BS wars and a couple of other critical areas. The American people appear to be quite forgiving, they do.


Liberty_One 4 years, 1 month ago

The problem is the central bank. Giving it more power is the last thing we should do, especially with a moron like Bernanke in charge. This guy, who has access to all the economic data on our economy, was caught completely off-guard by what happened in 2008. People like Ron Paul, Peter Schiff, Tom Woods, Walter Block and Bob Murphy warned Bernanke this would happen and he ignored them. Just a few weeks before the collapse he was saying how strong the economy is!

The central bank is a soviet-style central planning organization, controlling interest rates and the supply of money, one half of our economy. These people completely failed to see the recession coming. What makes anyone think they deserve more power when they've proven themselves to be so completely incompetent?


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