Global Financial System: Dangerous and Dysfunctional
Posted by Larry Doyle on September 20, 2013 8:55 AM |
I truly appreciate reading the work and gaining the wisdom of those with informed insights and opinions.
Where do I always find people of this ilk? At one of my favorite stops while navigating the economic landscape: Project Syndicate.
While various and sundry lapdogs from both sides of the political aisle and others well-schooled in the inner workings of the Wall Street-Washington incestuous thoroughfare are touting how our financial system has been reformed, let’s go down a less traveled path and see what a noted observer has to say on this topic.
Anat Admati, professor of Finance and Economics at the Stanford Graduate School of Business, and co-author (with Martin Hellwig) of The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It, leaves little to interpretation in writing:
Five years after the collapse of Lehman Brothers triggered the largest global financial crisis since the Great Depression, outsize banking sectors have left economies shattered in Ireland, Iceland, and Cyprus. Banks in Italy, Spain, and elsewhere are not lending enough. China’s credit binge is turning into a bust. In short, the world’s financial system remains dangerous and dysfunctional.
Worse, despite years of debate, no consensus about the nature of the financial system’s problems – much less how to fix them – has emerged. And that appears to reflect the banks’ political power.Why is it that our global economy is struggling to regain its footing?
Simply put, lending and economic growth have suffered since 2007 because highly indebted financial institutions could not absorb their losses, not because of regulations that sought to reduce their indebtedness. The regulations in place when the crisis erupted were both inadequate and inadequately enforced, and the reforms proposed since then do little better.
What is the core of the problem and what should be done about it?
Flawed regulations further distort weak banks’ behavior – for example, by biasing them in favor of making loans to governments or investing in marketable securities over lending to businesses. Regulators too often tolerate, and sometimes support, weak banks, denying the reality of their dire condition. This is counterproductive.
Instead, regulators must take forceful steps to unwind zombie banks and compel viable banks to rely more on equity markets, where risk is traded and priced, to become stronger. Banning payouts to shareholders and requiring banks to raise funds by selling new shares would bolster them without restricting their ability to lend. Banks that cannot sell their shares at any price may be too weak to survive without subsidies. Such banks are dysfunctional and must be unwound.
And to those like Tim Geithner, Ben Bernanke and Larry Summers among others who do everything to prop up the banks under the guise that the economy will follow?
Some say that banks are inherently special, because they allocate society’s savings and create liquidity. In fact, banks have become special mainly in their ability to get away with so much gambling at others’ expense. Nothing about financial intermediation justifies allowing banks to distort the economy and endanger the public as much as they do.
Unfortunately, despite the enormous harm from the financial crisis, little has changed in the politics of banking. Too many politicians and regulators put their own interests and those of “their” banks ahead of their duty to protect taxpayers and citizens. We must demand better.
Indeed we must demand better. I welcome waging this fight — and it is a fight — and taking on the pols and regulators on this topic in my upcoming book.
What do others think?
Please pre-order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, that will be published by Palgrave Macmillan on January 7, 2014.
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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.