Monthly Archives: March 2009

Hazel Henderson on the New Financiers

Futurist and economist Hazel Henderson’s recent post, titled, The New Financiers is well worth reading. Here is an excerpt:

“…the new financiers will be the high-level information and knowledge brokers – and they will aggregate the new research on global change processes and lead in structuring the deals now creating the growing green economy.” Today information and media drive markets.

These new financiers are already operating unseen by traditional Wall Streeters and asset managers. They are largely invisible to current financial players and governments because information is their prime currency; rather than money. The new deal-makers value the role of honest, well-managed currencies that remain dependable stores of value and mediums of exchange. Money is a special kind of information, not a commodity in itself, but rather a brilliant invention of the human mind. When backed by real-world goods and service, as well as strong contracts, money can accurately track and score human ingenuity, productivity and transactions interacting with the natural wealth of resources of our home: Planet Earth.”

How Might Credit Clearing Be Used to Make International Trade More Rational and Fair?

Clearing works at any level to settle claims – (1) among banks to settle claims arising from their clients’ check transactions, (2) among companies and individuals engaged in trade to offset their accounts payable against their accounts receivable, and (3) among nations to settle international trade balances. The first of these is well established and generally understood. The second is what occurs within grassroots mutual credit clearing systems (like LETS) and the commercial “barter” or trade exchanges that have proliferated around the world and are now enabling billions of dollars of cashless trading to take place every year. These private initiatives provide the inspiration and the prototypes that are now being scaled up and interconnected to make for more a efficient, secure, and equitable transaction infrastructure.

The third, which requires action at the highest levels of government, has been done on a bilateral basis (like barter) but the potential for multi-lateral clearing of trade balances has yet to be seriously considered. Is there sufficient vision, will, and independence of action at that level for anything useful to be done? That remains to be seen.

The present global financial order, which was largely established at Bretton Woods toward the end of World War II, is based on dollar dominance and exploitative initiatives that are managed through the intuitions that were forced upon the world at that time (the IMF and World Bank). I’ve not made a detailed study of the proposals that were made then, but according to a recent article by George Monbiot in the Guardian (UK), the Bancor proposal of John Maynard Keynes might deserve a second look. The article is titled, Keynes is innocent: the toxic spawn of Bretton Woods was no plan of his, and I encourage anyone who has an interest in this subject to read it. According to Monbiot, “The economist’s dream was blocked for an IMF serving the rich. Reforms proposed by G20 leaders are too little, too late.”

The details of the plan as described in the Guardian article may not be entirely to my liking, but it may be a good starting point for negotiations among a few enlightened governments to create an independent system for managing trade among themselves.  – t.h.g.

UPDATE: I have since found an IMF document that purports to present the details of the Keynes Plan. I’ve not yet studied it in any depth, but it can be downloaded here.

Weissman-12 Corrupt Deals Caused the Multi-Trillion Dollar Financial Meltdown

$5 Billion in Lobbying for 12 Corrupt Deals Caused the Multi-Trillion Dollar Financial Meltdown

By Robert Weissman, Multinational Monitor. Posted March 9, 2009.

$5 billion in lobbying to Congress got the finance industry lucrative legislative favors that paved the way for Wall Street’s devastating collapse.

What can $5 billion buy in Washington?

Quite a lot.

Over the 1998-2008 period, the financial sector spent more than $5 billion on U.S. federal campaign contributions and lobbying expenditures.

This extraordinary investment paid off fabulously. Congress and executive agencies rolled back long-standing regulatory restraints, refused to impose new regulations on rapidly evolving and mushrooming areas of finance, and shunned calls to enforce rules still in place.

“Sold Out: How Wall Street and Washington Betrayed America,” a report released by Essential Information and the Consumer Education Foundation (and which I co-authored), details a dozen crucial deregulatory moves over the last decade — each a direct response to heavy lobbying from Wall Street and the broader financial sector, as the report details. (The report is available at: Combined, these deregulatory moves helped pave the way for the current financial meltdown.

Here are 12 deregulatory steps to financial meltdown:

1. The repeal of Glass-Steagall

The Financial Services Modernization Act of 1999 formally repealed the Glass-Steagall Act of 1933 and related rules, which prohibited banks from offering investment, commercial banking, and insurance services. In 1998, Citibank and Travelers Group merged on the expectation that Glass-Steagall would be repealed. Then they set out, successfully, to make it so. The subsequent result was the infusion of the investment bank speculative culture into the world of commercial banking. The 1999 repeal of Glass-Steagall helped create the conditions in which banks invested monies from checking and savings accounts into creative financial instruments such as mortgage-backed securities and credit default swaps, investment gambles that led many of the banks to ruin and rocked the financial markets in 2008.

2. Off-the-books accounting for banks

Holding assets off the balance sheet generally allows companies to avoid disclosing “toxic” or money-losing assets to investors in order to make the company appear more valuable than it is. Accounting rules — lobbied for by big banks — permitted the accounting fictions that continue to obscure banks’ actual condition.

3. CFTC blocked from regulating derivatives

Financial derivatives are unregulated. By all accounts this has been a disaster, as Warren Buffett’s warning that they represent “weapons of mass financial destruction” has proven prescient — they have amplified the financial crisis far beyond the unavoidable troubles connected to the popping of the housing bubble. During the Clinton administration, the Commodity Futures Trading Commission (CFTC) sought to exert regulatory control over financial derivatives, but the agency was quashed by opposition from Robert Rubin and Fed Chair Alan Greenspan.

4. Formal financial derivative deregulation: the Commodities Futures Modernization Act

The deregulation — or non-regulation — of financial derivatives was sealed in 2000, with the Commodities Futures Modernization Act. Its passage orchestrated by the industry-friendly Senator Phil Gramm, the Act prohibits the CFTC from regulating financial derivatives.

5. SEC removes capital limits on investment banks and the voluntary regulation regime

In 1975, the Securities and Exchange Commission (SEC) promulgated a rule requiring investment banks to maintain a debt to-net capital ratio of less than 15 to 1. In simpler terms, this limited the amount of borrowed money the investment banks could use. In 2004, however, the SEC succumbed to a push from the big investment banks — led by Goldman Sachs, and its then-chair, Henry Paulson — and authorized investment banks to develop net capital requirements based on their own risk assessment models. With this new freedom, investment banks pushed ratios to as high as 40 to 1. This super-leverage not only made the investment banks more vulnerable when the housing bubble popped, it enabled the banks to create a more tangled mess of derivative investments — so that their individual failures, or the potential of failure, became systemic crises.

6. Basel II weakening of capital reserve requirements for banks

Rules adopted by global bank regulators — known as Basel II, and heavily influenced by the banks themselves — would let commercial banks rely on their own internal risk-assessment models (exactly the same approach as the SEC took for investment banks). Luckily, technical challenges and intra-industry disputes about Basel II have delayed implementation — hopefully permanently — of the regulatory scheme.

7. No predatory lending enforcement

Even in a deregulated environment, the banking regulators retained authority to crack down on predatory lending abuses. Such enforcement activity would have protected homeowners, and lessened though not prevented the current financial crisis. But the regulators sat on their hands. The Federal Reserve took three formal actions against subprime lenders from 2002 to 2007. The Office of Comptroller of the Currency, which has authority over almost 1,800 banks, took three consumer-protection enforcement actions from 2004 to 2006.

8. Federal preemption of state enforcement against predatory lending

When the states sought to fill the vacuum created by federal non-enforcement of consumer protection laws against predatory lenders, the Feds — responding to commercial bank petitions — jumped to attention to stop them. The Office of the Comptroller of the Currency and the Office of Thrift Supervision each prohibited states from enforcing consumer protection rules against nationally chartered banks.

9. Blocking the courthouse doors: Assignee Liability Escape

Under the doctrine of “assignee liability,” anyone profiting from predatory lending practices should be held financially accountable, including Wall Street investors who bought bundles of mortgages (even if the investors had no role in abuses committed by mortgage originators). With some limited exceptions, however, assignee liability does not apply to mortgage loans, however. Representative Bob Ney — a great friend of financial interests, and who subsequently went to prison in connection with the Abramoff scandal — worked hard, and successfully, to ensure this effective immunity was maintained.

10. Fannie and Freddie enter subprime

At the peak of the housing boom, Fannie Mae and Freddie Mac were dominant purchasers in the subprime secondary market. The Government-Sponsored Enterprises were followers, not leaders, but they did end up taking on substantial subprime assets — at least $57 billion. The purchase of subprime assets was a break from prior practice, justified by theories of expanded access to homeownership for low-income families and rationalized by mathematical models allegedly able to identify and assess risk to newer levels of precision. In fact, the motivation was the for-profit nature of the institutions and their particular executive incentive schemes. Massive lobbying — including especially but not only of Democratic friends of the institutions — enabled them to divert from their traditional exclusive focus on prime loans.

Fannie and Freddie are not responsible for the financial crisis. They are responsible for their own demise, and the resultant massive taxpayer liability.

11. Merger mania

The effective abandonment of antitrust and related regulatory principles over the last two decades has enabled a remarkable concentration in the banking sector, even in advance of recent moves to combine firms as a means to preserve the functioning of the financial system. The megabanks achieved too-big-to-fail status. While this should have meant they be treated as public utilities requiring heightened regulation and risk control, other deregulatory maneuvers (including repeal of Glass-Steagall) enabled them to combine size, explicit and implicit federal guarantees, and reckless high-risk investments.

12. Credit rating agency failure

With Wall Street packaging mortgage loans into pools of securitized assets and then slicing them into tranches, the resultant financial instruments were attractive to many buyers because they promised high returns. But pension funds and other investors could only enter the game if the securities were highly rated.

The credit rating agencies enabled these investors to enter the game, by attaching high ratings to securities that actually were high risk — as subsequent events have revealed. The credit rating agencies have a bias to offering favorable ratings to new instruments because of their complex relationships with issuers, and their desire to maintain and obtain other business dealings with issuers.

This institutional failure and conflict of interest might and should have been forestalled by the SEC, but the Credit Rating Agencies Reform Act of 2006 gave the SEC insufficient oversight authority. In fact, the SEC must give an approval rating to credit ratings agencies if they are adhering to their own standards — even if the SEC knows those standards to be flawed.

From a financial regulatory standpoint, what should be done going forward? The first step is certainly to undo what Wall Street has wrought. More in future columns on an affirmative agenda to restrain the financial sector.

None of this will be easy, however. Wall Street may be disgraced, but it is not prostrate. Financial sector lobbyists continue to roam the halls of Congress, former Wall Street executives have high positions in the Obama administration, and financial sector propagandists continue to warn of the dangers of interfering with “financial innovation.”

More Drum Beats for a Single Global Currency and a Global Central Bank

The global financial and economic crisis continues to deepen. Bankruptcies, unemployment, and home foreclosures are up, while incomes from wages, interest on savings, and investments are being squeezed. At the same time the money supply is being inflated by deficit spending to finance massive bank bailouts. A major increase in the cost of living will eventually follow.

The bankers and politicians who caused the problem in the first place are asking the people to trust them and accept more of the same medicine. Their plea is essentially this: “Give us more power, give us more money, and let us further centralize an already over-centralized system.” A global central bank and an eventual single global currency are what they have in mind.

A recent article by Paul Joseph Watson pretty clearly lays it out.

Bubble and Bust, Nothing New

The pattern of bubble and bust created by the political money central banking system goes back a long way. This BBC photo essay, The Road to Hooverville, provides a graphic story of the first big cycle under the Federal Reserve.