As the federal bailout of financial institutions (and a few other industries) continues, there continues to be a dearth of information about the way trillions of dollars of federal funding is being used, especially through the Federal Reserve's emergency lending powers. Big Banks are getting federal funds, foreclosing on homeowners, and raising fees every which way and back. Credit card banks send out dozens of mailers to get people to take out new credit, while gouging their customers at every opportunity. Congress still hasn't passed a law permitting modification of home mortgages in bankruptcy, the one most obvious solution to the housing crisis/credit crunch/Great Recession that would help ordinary people the most. Congress also hasn't yet enacted the kinds of major regulatory reforms of the financial system (real and "shadow") that need to be enacted to prevent Big Banks from causing another global market disruption the next time that their greed gets out of hand.
So I agree with Doggett (D-Texas), who said at the House Budget committee testimony of Fed Chair Bernanke today,
While the $700 billion financial bailout that congress approved last September has been the subject of public scrutiny and debate, the Federal Reserve is apparently committing three times as much public money through its emergency lending powers. This use of expansive emergency powers relying on a vague statutory provision that hasn't been used in almost 70 years is not normal. We need to shine a light of transparency on this process, and we must do it now because the confidence of the American taxpayer, our public debt, and our economy are at stake. While independence and secrecy may be important to the Fed's normal operations, we need a canary in the coal mine." Doggett Press Release
See more on this video clip of Doggett and Bernanke, available here. In response to Doggett's questioning, Bernanke claims that the Fed is being transparent in terms of programs, collateral accepted and borrowers, but Doggett notes lack of specific information about use of funds. Also see earlier discussions between Doggett and Bernanke on the beginnings of the TARP program, available here.
After my refreshing break, I am more convinced than ever that the following actions are required to get the financial system on track to prevent similar market disruptions in the future:
1) Bust up the Big Banks through reinvigorated anti-trust actions against quasi-monopolies in areas of significant innovation and market reach (electronic communications--Microsoft; financial institutions--Citi, Goldman, etc.);
2) Bring all derivatives (credit default swaps, CDOs and synthetic CDOs, mortgage "grantor trust" securitizations, OTC and customized) under the control of a single, powerful regulator that has an incentive to regulate and an interest in accountability and transparency. To be effective, regulation must include all customized products entered into between any banks, shadow banks or insurers, which should be accounted for and revealed timely in an open framework as a step in discouraging the risky speculation that drives the market in the direction of the speculators;
3) Regulate the shadow banking system as banks with capital reserve requirements and leveraging restrictions while removing the preferential treatment of compensation that the hedge funds and equity funds have enjoyed . (How can it make sense to encourage the shadow banking system to buy the toxic assets off bank books, with a very tiny equity stake and the rest made up by Fed funds and guarantees, with the shadow banks getting the lion's share of the profit for the mouse's share of the equity? Just break up and close the damned banks with too much garbage on their books, and sell the waste for whatever the market says it is worth.)
4) Make the TARP and Fed emergency lending programs fully transparent and publicly accountable, including imposing more restrictive guidelines for banks that get any federal funds: bank impositions of higher charges should be carefully scrutinized to prevent rent-taking subsidized by taxpayer monies and bonuses (and compensation in general) should be designed to decrease risky behavior rather than incentivize it.
5) Pass a law to permit modification of mortgage loans in bankruptcy. This is still the single most important step to allow ordinary Americans to get out from under the crushing burden of debt and resume ordinary lives. If Congress has not got the guts to do this against the drivel rationales for not doing so sold to them by the Big Bank lobbyists, Congress should resign en masse.
6) And throughout all this mess (including the auto company bankruptcies), apply this rule: no bondholder is entitled to get more from the Federal government processes than the bondholder paid to purchase an asset.
I'm not the only one who sess the current regulation of banks, and proliferation of "too big to fail" banks, as a problem, of course. For more on the banking problems at the heart of the financial crisis, see Arthur Wilmarth's article on SSRN, The Dark Side of Universal Banking: Financial conglomerates and the Origins of the Subprime Financial Crisis, 41 Conn. L. Rev. 963 (2009). He says the following in his abstract:
Current regulatory policies—which rely on “market discipline” and LCFIs’ internal “risk models”—are plainly inadequate to control the proclivities in universal banks toward destructive conflicts of interest and excessive risk-taking. As shown by repeated government bailouts during the present crisis, universal banks receive enormous subsidies from their status as “too big to fail” (TBTF) institutions. Regulation of financial institutions and financial markets must be urgently reformed in order to eliminate (or greatly reduce) TBTF subsidies and establish effective control over LCFIs.
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