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A surprising citadel of that second-guessing is at the International Monetary Fund, where researchers this week concluded that the rescues “only treated the symptoms of the global financial meltdown.”

The researchers, Stijn Claessens and Ceyla Pazarbasioglu, warned that “a rare opportunity is being thrown away to tackle the underlying causes. Without restructuring financial institutions’ balance sheets and their operations, as well as their assets — loans to over-indebted households and enterprises — the economic recovery will suffer, and the seeds will be sown for the next crisis.”

EDITORIAL COMMENT: We keep hearing about how things are getting better. The government wants consumer confidence to improve despite the fact that consumers have little or no money or credit to spend anymore. The housing market and consumer spending were the clear drivers of our economy for decades and now both are in serious trouble. The “fix” that is in play is merely creating the stage for a new round of crises that will harder to solve than the last catastrophe because the credibility of title in any commercial transaction, much less a home purchase, has been undermined. Without addressing the issue of massive fraud, and without addressing the issues created by that fraud in people’s lives, the Courts, recording offices, and the marketplace, we are kidding ourselves if we think that anything is really better.

The massive agencies created by dozens of nations to monitor the world economy and the U.S. economy in particular, are all saying the same thing. We have not fixed anything. The situation looks increasingly worse with each step we take. The large-scale implications of the impending disasters are infinite. Corrections that would have been forced on virtually any other country in the world, and which indeed are being effectuated are being ignored here in the U.S. because the message and media is controlled ultimately by those who benefit from the current status quo. The Banks own the place and are effectively making all major decisions using the same shortsighted thinking that got us here in the first place.

Back when I was on Wall Street, individual people were at risk of loss if they did something stupid. It didn’t stop them from being stupid and losing money but it hurt when they goofed. People owned the investment banks not shareholders. Now the mega banks are owned by shareholders who are at best very remote from management decisions and who take the loss along with third parties injured by bad decisions and fraudulent behavior. The simple fact is that the people in management of these banks have absolutely nothing to lose if the bank goes belly up — they get paid more than anybody in history, they have accumulated wealth beyond imagination and if the bank hits a wall, goes under, and the financial markets are left in pieces they figure that they personally will still be just fine — and the sad thing is they are right.

We have created a system in which the marketplace and government has no vehicle to hold the people responsible for horrible decisions and disastrous consequences. Every economist in the world knows it. But the traders don’t care because as long as they keep trading paper back and forth creating the appearance of economic activity, they get paid. They are literally paid to maintain the illusion.

We are all paying for this nonsense and our children and grandchildren will pay dearly for the mistakes we are making today — if we continue to apathetically stand by and watch government and industry drive us into a canyon. The longer we listen to Wall Street’s message and myth, the longer we allow politicians to act according to ideology that is likely to get them re-elected without regard to whether the country will even survive, the closer we come to the end of our fifteen minutes of fame. The great experiment will be over — with the conclusions drawn by historians that democracy was not such a great idea after all. People are not trained to be citizens and U.S. citizens are without the information, education and motivation to make things right. If we don’t change our course, history will prove that autocracy or even dictatorship works better than the use of democratic principles.

Crisis Is Over, but Where’s the Fix?



When the financial system began to crumble more than three years ago, the world rushed to rescue it. Country after country went deeply into debt to keep banks afloat and prevent a deep recession from turning into something worse.

It worked. This week was the second anniversary of the nadir of the crisis. Most stock markets around the world are at least 75 percent higher than they were then. Financial stocks, which led the markets down, have also led them up.

At the time, rescuing seemed more important than reforming. The world economy was breaking down because of a lack of financing. Trade flows collapsed, and companies and individuals stopped spending. It seemed clear that halting the slide was critical.

But the world has changed since then. The economic recovery in most developed countries is stuttering at best, and governments are struggling with their own finances. It is time for remorse and second-guessing.

A surprising citadel of that second-guessing is at the International Monetary Fund, where researchers this week concluded that the rescues “only treated the symptoms of the global financial meltdown.”

The researchers, Stijn Claessens and Ceyla Pazarbasioglu, warned that “a rare opportunity is being thrown away to tackle the underlying causes. Without restructuring financial institutions’ balance sheets and their operations, as well as their assets — loans to over-indebted households and enterprises — the economic recovery will suffer, and the seeds will be sown for the next crisis.”

There have been reforms, of course. The Dodd-Frank law in the United States is now being put into effect, albeit by regulators that the new Republican majority in the House of Representatives seems determined to starve of resources to do the job. Banking regulators around the globe have agreed that much more capital is needed by banks, but stricter requirements are coming very slowly out of fear that abrupt changes will reduce bank lending when it is needed the most.

More capital is clearly needed, but it may not be nearly enough. “If we ask them for more capital, and they are too big to fail, they can take even more risk” after they raise additional capital, Y. Venugopal Reddy, a former governor of India’s central bank, argued at an economic conference sponsored by the I.M.F. this week. He added that he was worried about institutions that were “too powerful to regulate.”

One of the questions economists were asked to address at the conference was, Does the financial system have social value?

A few years ago, that question would not have been asked at the International Monetary Fund. If it had been, the responses would have been as unanimous as might be expected if a gathering at the Vatican were to consider whether religion was a good thing.

Now, there is no such unanimity. It is clear that there are functions of the financial system that must be performed, among them the allocation of capital and the setting of prices. But there is at least a suspicion that a significant part of modern finance has no real value for anyone except the participants.

Adair Turner, the chairman of Britain’s Financial Services Authority, spoke with wonderment of the huge volume of stock trades now made by computers using algorithms to rapidly trade in and out. Some traders, he said, were using what they called “predatory algorithms,” whose sole purpose is to exploit a weakness in some other trader’s algorithm and get it to make an unprofitable trade.

“It is quite difficult to work out the social benefit of that,” he said.

And of course, there is also the fact that the financial system did not accomplish what it was supposed to do. “At the core of these functions is the ability to find and set the right price, including the extent to which it reflects risk,” Antonio Borges, an I.M.F. official and former vice chairman of Goldman Sachs International, told the conference. “This is not really a question of financial sophistication, of complex products or greedy bankers. It is a question of getting the prices wrong.”

He added, “It is unbelievable how wrong they were.”

There is general agreement that many of the assumptions economists and others made before the crisis — about the rationality of markets, about their ability to measure risks and about the proper role of monetary policy — were largely wrong, or at best oversimplified. But there is far less unanimity about what to do about it. International cooperation was impressive in dealing with the immediate crisis. Now it is splintering, and banks are threatening to move operations to areas they deem friendlier to them.

In retrospect, it is clear that the bailouts came with too little pain for those responsible. Bondholders who financed banks that failed largely escaped pain. That was true even in Ireland, where the bailout would have led to a default of government debt had Europe not stepped in. It is still not clear how Ireland will pay its national debt, but the bank bondholders did fine.

At the time, of course, there were fears that forcing bondholders to suffer would lead to the collapse of banks that could have survived. Those fears seemed reasonable to me then, and still do. But little progress has been made in setting up mechanisms to assure that any future crisis can be dealt with in a different way. There is talk of restructuring bank balance sheets to assure that debt is automatically converted to equity just when equity seems to be worth little, but that is unlikely to happen unless regulators force it, and it is far from clear what price investors would demand.

Moreover, as Mr. Turner noted, it is important to somehow assure that those who would suffer from such a conversion are not themselves so leveraged that a crisis would be intensified. Something like that seems to have played a role in Europe’s decision to avert a Greek national default. Most of the Greek debt was owned by European banks, and it was doubtful that they could afford to take the losses.

Perhaps the most important error made early in the crisis was a decision by Henry Paulson, then the United States Treasury secretary, to put pressure on big banks to accept bailouts whether they needed them or not. The idea was to avoid making acceptance of such money a scarlet letter that would in itself alarm depositors and investors. It seemed to make sense.

But it also meant that it was not clear which managers had led their banks over — or at least close to — a cliff. There was an unmet need to establish the principle that, in Mr. Reddy’s words, “When the profits are good, you take your bonus. When something goes wrong, you go out and somebody else comes in.”

The principle is particularly important because regulatory failures may be inevitable. If multimillion-dollar bank bosses do not see a crisis looming before it is too late, can we be sure regulators who work for far less will be more prescient? Markets clearly did a horrid job of allocating capital, but there is no particular reason to think governments would do better.

Even if regulators somehow did design a perfect regulatory system, it would not last, simply because clever bankers would eventually find ways around it, just as people find ways to evade taxes, forcing tax law writers to constantly make changes.

“Every decade or so,” said Paul Romer, a senior fellow at the Institute for Economic Policy Research at Stanford and now a visiting professor at New York University, “any finite system of financial regulation will lead to systemic financial crisis.”

If he is right, it is all the more important that ways be found to assure that the costs of the next financial crisis — in failed institutions and lost economic growth, not to mention government borrowing — will be far lower. It is hard to conclude much progress has been made in accomplishing that goal.

4 Responses

  1. Politicians are running scared. Goes back to the old story — if a boat is sinking — who are going to save?? The answer was the person who could influence and save other lives – not in the boat.

    Politicians have (wrongly) determined that the banks can save the most lives — that is — keep the fraud alive for the benefit of who the banks might otherwise save. And, that DOES NOT meaning saving foreclosure victims.

  2. neidermeyer
    “hundreds of millions will die from starvation and the rest will be thrown back to a life similar to perhaps 1900” yes you have covered the “plan”.
    have you read the “iron mountain” study [1954 i believe]
    miss information is the greatest propaganda tool ever conceived , truth in plain sight deemed a “hoax”
    Much like the history lessons “spoon fed to generations of lemmings”
    Early 1900’s edward bernays – sigmond freud nephew ..bernays the original mind F@#K – use the subconscious to control the masses.
    Edward Bernays – Wikipedia, the free encyclopedia
    Edward Louis Bernays

  3. I am afraid they, or at least some of “they”, understand all too well, in fact, it is exactly what they want… otherwise why the whole monetary scam vis-a-vis the fed. How could any politician that was not involved be ok with the current system where by we borrow money from the fed with no hope of ever paying off the debt that is thus created. How can an entity, that is so enmeshed in the financial system be so wholly unanswerable to anyone, let alone the very people that they portend to “serve”. And we play right into their hand when we get distracted by their little sideshows like Wisconsin. too big to fail???? more like too big to be allowed to continue to treat us like slaves!!!!!!!!!!!!!!!

  4. I don’t think the politicians, the only people that realistically can force the necessary changes, really understand that if the banksters don’t go down in flames the entire world will. We will have a halt to world trade with no reliable currencies available,,, hundreds of millions will die from starvation and the rest will be thrown back to a life similar to perhaps 1900 when trade occurred but not at anywhere near the pace we demand today.

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