Tuesday, June 29, 2010


Let's say you have an alcoholic in your circle. At first they were fun to have at parties. Then they started going to extremes, every day. The blackouts and passing out begin. It gets ugly. They finally do something really stupid, but not "illegal" in the eyes of the law. They say they're open to participating in a recovery program. Do you applaud the alcoholic's recovery program because they switch to beer and wine, and then pass out only once or twice a month?

Well, apparently, this is what passes for a successful 12 step program if we look closely at the financial reform bill being considered in Congress now. In one of the better reviews of the financial reform legislation pending before Congress, this post from Richard Smith at nakedcapitalism.com offers one of the most incisive and quick reads on the tone of the reform bill.

For Smith there's little doubt that the primary problem centers around our "shadow" banking system, where consumers have been able to find virtually unregulated credit from private investors (for home loans, for example). This shadow banking system has grown so large that it's $16 trillion asset base is now larger than our "normal" commercial banking sector's (not quite $13 trillion), and is the essence of what Kevin Phillips called the "financialization" of the American economy.

One of the key issues according to Richard Smith centers around what the shadow banking system counts as assets, and how they should be counted and regulated. Should "holdings in other banks’ debt" count? What about "capital arbitrage"? The financial sector wants looser rules on asset oversight and regulation. After all, the more assets they can list, the more money they can lend. As you can imagine, the legislation in front of Congress now has become so diluted with lobbyist driven "reform" that Richard Smith writes: 

So where does that leave us with our shadow banking reforms? Well, we have a modest tweak to bank capital requirements, of unknown efficacy (Collins) and a bunch of new committees, mostly in the Fed. The mountain has laboured, and brought forth a mouse.

To be sure, there's much to be said about financial legislation being the deepest banking reform we've seen in generations. This much is true. But the flip side of that coin is that we've done nothing but deregulate over the past 30+ years (even the S&L debacle was an asset protecting bailout).

An alcoholic switching to wine and beer, and then passing out only a few times a month, isn't saying much. Neither is financial reform that has become so diluted and open to manipulation that it "seems to have been drafted by the Monty Python crew" in Congress.

I've written about the proposed legislation often, so I won't add anything else to Smith's points. But read the post. Even though it may appear a bit jargon-filled for some, it's a good one.

- Mark

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