We Need More Financial Sector Regulation

I read an editorial in The Economist about the recent “Occupy Wall Street” movement.  I find it interesting that the author took the liberty of editorializing about several symptoms of the 2008 financial crises without adequately addressing the cause.

The author talks about the need for more economic stimulus to get people back to work and to reduce unemployment.  Youth unemployment in the U.S.A. hovers around 17%, in the European Union around 20%, and in Spain youth unemployment is over 46%.  Are you starting to get an idea about why people are upset and are protesting?

People can’t get credit.  Housing prices are still depressed and some analysts even forecast they may go lower.

I think the author completely misses the point: most all of the problems we are currently facing are a direct result of the lack of regulation of the financial industry over the past decade in the U.S.A.  The epicenter of the 2008 financial crises was clearly located in the U.S.A.  Financial corporations and their powerful lobbyists were ‘chipping away’ at financial regulations over the years – most notably the “Glass-Steagall Act”.  Read about the Glass-Steagall Act here: http://en.wikipedia.org/wiki/Glass–Steagall_Act

Our elected officials did not do enough to rein in “financial innovation” and the result has been a melt-down of the financial markets around the world.

When I was enrolled in business school, we learned in the Money and Banking course that financial corporations are always trying to innovate – to find ways to earn more money and circumvent current regulations.  Government’s role is to monitor and control this financial innovation by enacting legislation to regulate the financial industry.  I believe this is where our elected officials let us down.  They did not adequately regulate the financial industry.  We also learned about “moral hazard” – the tendency for human beings to make mistakes and to do things that are immoral, unethical, or illegal.  In other words – the greed factor.

When I was in college I wrote a term paper on “The Great Depression.”  I had no idea we would be on the cusp of such an event in my lifetime.  Our forefathers enacted regulations to compartmentalize the financial industry, to separate investment banking from commercial banking, insurance companies from investment firms.  After a major provision of the Glass-Steagall Act was repealed in 1999, the co-mingling of investment banking with other financial services was once more allowed.  By the way the sponsors of the bill the repealed this aspect of the Glass-Steagall act were all republicans.  No surprise.  The result has been a repeat of the financial catastrophe of 1929.

People if you are not concerned about this issue, you should be.  Basically governments around the world have taken on the debt from the failed gambles of the financial industry.  We, our children, and our grandchildren will have to pay for their folly for years to come.

We absolutely need to stimulate the economy to get people back to work; but if we fail to enact laws to appropriately regulate the financial industry, then we are destined to repeat this terrible period in our history again.

Look at wha’t s going on in Europe.  The financial industry is putting the Euro zone countries into “play”.  Let’s see if I have this right.  The financial industry causes a global financial crises.  Governments protect financial institutions (with tax payer’s money) claiming they are “too big to fail”.  These countries are now experiencing higher borrowing costs, lower credit ratings and huge budget deficits.  Now these same financial institutions are making money betting against these countries.  When are our elected officials going to say “STOP” and put the hammer down on the financial industry?  Is this “wag the dog” or what?

 

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