Most thoughtful observers agree that Wall Street's crazy casino
culture contributed mightily to last year's global financial crisis,
and the economic meltdown that followed.
By manufacturing impenetrably complex debt bombs that promptly
exploded in the hands of unwary investors, Wall Street's pocket-lining
paper shufflers brought the financial system to its knees.
While Wall Street is already back to its old ways, racking up huge
profits and doling out big bonuses, American taxpayers are stuck with
the tab. They'll be paying the price for years.
Given their key role in creating the mess, one might assume the
obscenely well-paid suits on Wall Street would be willing to clean up
their act. But that's like believing in the Tooth Fairy.
The major banks quite enjoy the status quo, and why shouldn't
they? They get to take big risks with public money, and when they screw
up, their losses are covered by Joe and Jane Q Public. It's a
heads-I-win, tails-you-lose deal.
So it's no surprise the banks are forking out big bucks -- $1.4
million US a day, Bloomberg reports -- to fight or water down the
massive financial reform package that's winding its way through the
U.S. Congress.
In the end, whatever legislation emerges is likely to be a dog's
breakfast of half-measures that sidestep or fail to adequately address
the central issues. I'd love to be wrong, of course, but the signs
don't look promising.
Since Goldman Sachs, JPMorgan Chase, Citigroup, Morgan Stanley and
other financial giants are huge contributors to both the Republicans
and the Democrats, both parties are beholden to the very banks they're
ostensibly going after.
It makes for great political theatre and talk show fodder, of
course. The politicians get to huff and puff and pretend they're
getting tough on the "fat cat" bankers -- as President Obama surely
will in a major speech in New York today -- even as they continue to
play footsie with their benefactors.
In this battle between the high-powered, well-heeled interests of
Wall Street and the increasingly disenchanted, homeless and jobless
folks on Main Street, I'm betting the suspender brigade will prevail
yet again.
That's not to say there aren't some fairly simple, straightforward
fixes for the very serious regulatory gaps that got Wall Street into
deep doo doo in the first place. Here are three simple ideas that could
have been included in the financial reform package, but weren't:
- Banks that are too big to fail are clearly too big, period. If
the U.S. won't allow its financial giants to go bust -- a principle
that's hard to dispute, since the assets of the six largest U.S. banks
equal more than 60 per cent of GDP (Gross Domestic Product) -- they
should be forced to spin off divisions or break up, just as Standard
Oil and American Telephone & Telegraph did in past decades.
So set a cap on bank-asset size, and force banks that exceed that
limit to shrink. One U.S. financial writer suggests a cap of $400
billion, or about 2.5 per cent of U.S. GDP. Assets above that benchmark
would be taxed.
Wall Street hates this idea, naturally, and argues it's either
unnecessary, or too tough to pull off.
Nonsense. All those math geeks who created CDOs and
God-knows-what-else are surely smart enough to figure out how to do an
IPO.
- Annual executive compensation -- whether in the form of cash or
stock -- should also be capped at a clearly defined level, to
discourage the inordinate short-term risk-taking that's so pervasive on
Wall Street.
Corporate execs and compensation consultants -- who get paid by,
uh, the same execs they advise (no conflict there, I'm sure) -- insist
that it's incredibly complex to measure fair pay, and a pay ceiling
would be hopelessly simplistic.
Hogwash. Here's a simple way to address that. Set a yearly pay
limit of, say, $5 million -- as one U.S. financial writer suggests --
and require shareholders to approve any packages above that level. If
the execs perform, and shareholders are duly rewarded, higher pay
shouldn't be an issue.
- Wall Street investment houses like Goldman Sachs don't make
their huge profits by lending money to small and mid-sized businesses.
That's left to the commercial banks.
Goldman is a trading juggernaut. Through its so-called prop
trading activities, it moves huge blocks of stock in the blink of an
eye, making tiny profits on enormous volumes. Its high-speed
electronically-driven trades give it a huge edge over regular retail
investors.
None of this adds value to the real economy, or helps regular
businesses to expand or hire staff. It's a giant money-sucking
mechanism that benefits a privileged few.
Solution: Impose a small tax on such transactions.
"You can't make it illegal, because market-makers have always used
their order-flow knowledge as part of their business, but you can tax
it enough to make it unprofitable," argues Martin Hutchinson of the
Permanent Wealth Investor.
"The margins on this business are tiny, so a tax of five cents per
share on equities and equivalent amounts on bonds and derivatives
should be ample, and one cent would probably be enough."
As a further advantage, such a tax would "tilt the playing field"
away from program trading, and back toward more socially and
economically useful activities, he says.
Now, that's what I'd call a revolutionary concept.
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