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15 September 2009



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Obama Proposes New Regime on Wall Street

September is a month of sad anniversaries in New York City. On Friday, MSNBC rebroadcast its coverage of the Al Qaeda murders at the World Trade Center that occurred 8 years earlier. The same day, CNBC (its financial sister network) ran a special series of discussions and reports on the bankruptcy of Lehman Brothers and the financial collapse of which it was a part a year ago. Last week, President Obama visited the Pentagon to remember all those slain by Usama bin Laden's henchmen and vowed to catch the madman. Yesterday, he was at Federal Hall in Manhattan, telling Wall Street that greater regulation was needed to keep excessive risk-taking in check. While catching UbL would provide a great boost to the cause of justice, reining in the excessive risk-taking on Wall Street will prove far more important to the future security of the US.

Mr. Obama's speech began with a list of those wounded or killed in action last year. Lest the world forgets, they were Lehman Brothers, Merrill Lynch, AIG, Washington Mutual, and Wachovia. A week earlier, Fannie Mae and Freddie Mac were effectively nationalized, and of course, Bear Stearns led the way to the financial graveyard. Today, the landscape on Wall Street is as different as that of Verdun in before and after photos.

The problem that the US government and other authorities must address stems from an inherent flaw in free-market capitalism. Under such an economic system, those firms that aren't delivering what the consumer wants go under while those that do grow and grow. No one questions the justice of that. Yet, as the winners get bigger, their size undermines the efficiency of the market, which depends on low or no barriers to entry. Taking as an example, computer operating systems, one can see the validity of trying to launch a new one in 1980, but with Microsoft as it is now, there is no point in a commercial rival launching a start up operating system to challenge Bill Gates' bloatware in 2009.

In finance, this has led to firms becoming "too big to fail." A modern economy can function without a steel industry or a car industry. Japan does just fine without an indigenous source of oil. Brazil is an emerging power that has little need of a software industry. Scandinavians aren't starving despite little arable land and lousy climatic conditions. However, no modern economy can function without a healthy financial sector. It is the grease that makes the machinery of a modern economy work. And if a big financial firm fails, its counter-parties (those firms that take "buys" for its "sells" and vice versa) are also at risk.

Mr. Obama proposed, and rightly, a consumer protection agency to make loans and financial products more transparent. He also proposed a resolution power to wind up failed firms in an orderly fashion, much as the Federal Deposit Insurance Corporation has for banks. This is great as far as it goes. Yet, he fell short of truly fixing the problem in a once-and-for-all sense. He needs to grasp the leverage (gearing for speakers of British) bull by the horns. A year ago, banks were loaning out $40 for each $1 of deposits they had. Various derivatives traders were regularly operating with 30:1 leverage. A simple rule of 10:1 or less for a firm across the board would help immensely.

Of greater concern, though, he shied away from the Standard Oil solution -- breaking up those firms that are "too big to fail." Mergers and acquisitions have been allowed that should never have been permitted, and the economy suffers from too few players. Bear and Stearns should have gone their separate ways. Henry, Emanuel and Mayer Lehman should have parted company. Merrill and Lynch needn't have the same office. Politically, the moment probably came and went last December, and the unfortunate transitional period between the election and the inauguration may have doomed the US to another generation of inadequate change.

And here's a dangerous idea that will get this publication branded "socialist," (it isn't; it's skeptical anarchist with a Bakuninist slant). Perhaps finance is too important to leave in private hands. Perhaps, it is like electricity and water, best handled as publicly regulated utilities. Wall Street might stop producing billionaires under such a system, but it also might start making better, safer, more conservative moves in investment.

© Copyright 2009 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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