Financial Schizophrenia

Now that we are all done with health care reform and there is no more controversy on the matter........well perhaps not. There is of course, more business to attend to in our democracy. For the consideration of the Senate of the United States, we have financial reform! The all-encompassing amoeba of politics, finance reform is an issue that everyone seems to be interested in, and no one seems to be able to define.

For the last 18 months, the universal signs of evil were the denizens of Wall Street demanding and receiving bailouts, then giving themselves bonuses of staggering proportion. For the last 18 months, the idea that something had to be done about the greed, hubris, and audacity of the captains of finance has been embedded in the conscious of Democrats, Republicans, and Tea-Partiers alike. Surely this is an issue for which our democracy could find quick consensus and decisive action. Yeah, right!

As a nation, we can't figure out what we want done about our financial system, primarily because most of us don't know what the heck really happened. Thinking honestly about yourself, before September of 2008, did you know what a derivative was? Had you any notion of the Glass-Steagall Act or its importance in the world of finance (or that it had been gutted by deregulation in 1980 and 1999)? Did you understand the "linkage" between Wall Street and Main Street that was so often referred to in the election of 2008 and its aftermath? For my own part and in a display of embarrasing honesty, I knew very little of these facts.

I think that this debate would benefit from the introduction of some of those basic facts that most of us miss, thus the integration of one of the RM's staples, a list, or rather, three lists. First, the three causes of the financial crisis (please note the lack of gratuitous political blame):

1. Sub-prime loans (often with little to no documentation), issued to irresponsible (mostly middle-class) homeowners, issued by non-depository institutions (i.e. Countrywide and Ditech), and sold to the secondary market.
2. CDS, or credit default swaps. These are insurance policies bought be institutions to cover assets that they DO NOT OWN. Imagine you and four other people buying insurance on your Mom's house...who gets paid when it burns down?
3. The elimination of the barriers that forbade big banks from owning other financial institutions (like, big insurance firms; AIG anyone?)

Financial poison at both ends (sub-primes and CDS), both valued in the trillions of dollars, and allowed to mix and marinate becuase of the repeal of Glass-Steagall barriers; this is the recipe for disaster. The good news is that this is a problem most easy to fix.......in other countries maybe. Here, it is a different story; party-line Democrats want to create an agency, party-line Republicans want to deregulate more (and probably lower taxes..that does seem to be their universal fix-a-flat), bank-lobbied Democrats and Republicans want to spike the party punch with freebies for the industry, and Tea-Partiers want to yell at folks. This is a mess, so here is my second list:

1. The Democratic bill that passed the House, and the Democratic bill that cleared the Senate Finance Committee both suck.
2. The Republican concepts for both bills mostly sucked.
3. At least one Congressional staffer who was writing the House bill, left the House after finishing his work to take a position with the lobby he was writing regulations on in the bill.
4. Any chance of getting the two parties together on legislation that most of the country wants in some form, went out of the window when Senator John "Country First" McCain took his toys and went home to pout (this in response to health care passing).
5. The guy pushing the legislation in the Senate (Chris Dodd) is in the banking lobby's pocket. He is a lame duck who will need a job next year; "Wells Fargo on the line for you, Senator Dodd"

I suppose I am a little bitter on this folks, but we all have a right to anger on this issue. The people of this democracy need to refuse the typical bait that is already chumming the water; "big government is regulating too much", "all corporations are evil and must be punished". This much is clear; Ayn Rand and Alan Greenspan were WRONG! The markets cannot govern themselves and their failure is a threat to our nation. Also, the kill the bankers crowd is also wrong. Our economy depends on the free flow of capital, and over-regulation can cripple that flow. So what should be done?

Hear is my humble idea:

1. Make the sale of mortgages to the secondary market, without full documentation and/or equity plus insurance that equals 100% of the value, illegal. Don't bother making this a regulatory step; make it criminal for mortgage officers and managers to engage in such activities.
2. Do not recognize credit default swaps in the United States; if your institution trades in them, then it will be forced to accept the full burden of default. If your firm is unable to meet said burdens, then its officers will face fines and mandatory prison sentences. Again, don't regulate when you can use criminality to enforce the holding of risk.
3. Mandate that all institutions clearly state the effective annual interest rate for all products; this includes payday loan shacks, credit cards, auto financing and the like. To clearly state means that the font size and lettering explaining the effective annual rate must be the largest on the advertisement, whether that advertisement is in print, internet, t.v., or at retail point of sale. The rate must be the clearest spoken words in radio spots as well. Market all you want...but do it with integrity, then if someone wants to be a fool it is all on them.

These three steps mandate nothing more than the acceptance of responsibility by firms, institutions, and consumers. They are simple, to the point, and rather inexpensive...I am of course fond of my plan. However, I would love to hear YOUR plans for financial reform. The comment section is ready for your brilliance, and the nation needs your ideas.

The Rational Middle is listening...