Financial Regulation: UK Activism vs Laissez-Faire US

19 December 2009. By David Caploe PhD, Chief Political Economist, EconomyWatch.com.

19 December 2009. By David Caploe PhD, Chief Political Economist, EconomyWatch.com.

19 December 2009. By David Caploe PhD, Chief Political Economist, EconomyWatch.com. While it wouldn’t take much to have a more activist response than the downright laissez-faire – and, consequently, increasingly irrelevant – approach of the Obama administration to the on-going and, indeed, steadily deteriorating economic / financial situation, the UK government of Gordon Brown – and his surprisingly cogent and active Chancellor of the Exchequer [Treasury Secretary] Alistair Darling – are at least doing something, albeit not too much either.

Over the protests of bankers in the famed City of London, the British government announced in mid-December that it was going to place a tax of 50 percent on bonuses to bankers of more than L25,000, or about $40,000.

Interestingly enough, not only would British banks be affected, but so would the UK-based subsidiaries of Wall Street firms – and the tax would impact ALL financial institutions, not simply those that had taken government bailout money.

Not surprisingly, London-based bankers from both the UK and US have howled in protest at the move – but at the same time, several of them noted that it wouldn’t be hard to maneuver around this seemingly swingeing move.

[quote]

An official briefed on the administration’s reviews of Wall Street compensation said the government made a similar effort 20 years ago to tax bonuses — without success. “They simply got around the law by giving all sorts of perks and deferred compensation,” the official said.

“There are so many ways for a bank to hide its risk exposure,” said Jon Danielsson, a professor of finance at the London School of Economics. “Taxing profits or bonuses will have no impact on risk-taking behavior.”

“I don’t think this proposal will bring any benefit at all, except perhaps to accountants and tax experts who make their living advising how to get around it,” said David Charters, a London-based financial executive and author of the novel “Trust Me I’m a Banker.”

[/quote][br]

From an American perspective, the pathetic point is how even such a basically symbolic gesture apparently can’t even be considered in the current ideological framework – despite a real economy that is visibly getting worse with each passing day.

Indeed, Joseph Stiglitz – Nobel Prize winner and our candidate for US Treasury head, instead of the amazingly inept Tim Geithner – commented that, while he approved of the move, if it were tried in Washington, it would be unlikely to get very far, as K Street lobbyists for the banking industry would argue it would hurt the efforts of an industry still “in recovery,” so to speak.

How such an argument can be taken in any way seriously – either in principle or in view of the literally HUGE bonuses that too-big-to-fail [aka TBTF] banks like Goldman Sachs, Citigroup, Morgan Stanley et al have already announced – is a sad indication of the depths to which US public discourse has sunk, both in general and in relation to the unconstrained actions of the big boys of the finance sector.

A perfect example of this is a New York Times headline proclaiming “House Approves Tougher Rules for Wall Street” – the only problem being, when you actually read the article, it becomes quickly apparent that these “new” rules are anything BUT tough.

The first point is it barely passed: 223 to 202, with ALL Republicans and 27 “centrist” [read, “direct tools of the banking and insurance lobbies”] Democrats voting against it – so much for the robustness of a Democratic majority.

[br]

Even more depressing and significant, on the two most important issues any “reform” of financial industry regulation must confront –

doing something serious about a) the disastrous skein of housing foreclosures, and b) the derivatives that caused a containable problem in the sub-prime housing market to mushroom into a global financial and economic crisis –

the House actually went backwards.

While it had previously voted to make it possible for bankruptcy judges to re-structure mortgages – thus helping keep people out of foreclosure and, hence, making it at least potentially possible for them to avoid bankruptcy altogether – this time, apparently heeding the pleas of the “ailing” banking industry, the House left that crucial element out of the final package.

Of course, its prior incarnations had all been killed in the Senate, where banking lobbyists rule supreme – but at least previously, the House made an effort to do something to help people in trouble, and make the Senate, correctly, look like the bad guys.

Now, however, things have gotten so bad that the House won’t even pretend to help out homeowners in distress – confirming yet again the regressive drift of American “thinking” about the political economic crisis in which it is enmeshed.

Similarly, these so-called “tougher” regulations do little, if anything, to increase the transparency of the derivatives that, as Saint Warren Buffet has so aptly called them, are best understood as “economic weapons of mass destruction.”

[quote]

Rather than subject all over-the-counter derivatives to open trading, the bill would subject such derivatives only if they were traded between Wall Street firms, or with a major player like the American International Group.

[/quote]

That is, companies that have already profited hugely from their derivatives trading in the past, and have secured for themselves – being “too big to fail” – government guarantees that they won’t suffer from any such deals that should, as at least some inevitably will, turn sour.

[quote]

But the transactions between dealers and customers will remain largely hidden, so customers will not be able to compare the prices they are being charged with the prices charged to other customers.

[/quote]

So much for transparency in financial transactions – but, hey, what difference does it make anyway???

[quote]

Despite the House action, final legislation is not imminent. The Senate is still developing its own measure for debate early next year and any Senate bill is likely to differ substantially from the House measure …

[/quote]

Indeed it is likely to “differ substantially,” as it has every year for the past several – which is probably why the House figured, “ah, why even bother?”

Which is only one more indication of how – even in the aftermath of a near-global financial meltdown caused by its careless greed, and the face of a domestic economy that is spiraling ever downward – Wall Street now dominates Washington to an extent that, as we have noted before, would make even Karl Marx at his crudest blush with embarrassment.

Most painful example ??? How about the way the heads of Goldman Sachs / Morgan Stanley / and Citigroup couldn’t manage to show up for an alleged White House “summit” about banking and the economy.

Let’s let NYTimes Deal Book columnist Andrew Ross Sorkin tell it in his words, in a piece entitled “Wall Street Bankers Put Obama on Hold”.

[quote]

President Obama didn’t exactly look thrilled as he stared at the Polycom speakerphone in front of him. “Well, I appreciate you guys calling in,” he began the meeting at the White House with Wall Street’s top brass …

He was, of course, referring to the three conspicuously absent attendees who were being piped in by telephone: Lloyd C. Blankfein, the chief executive of Goldman Sachs; John J. Mack, chairman of Morgan Stanley; and Richard D. Parsons, chairman of Citigroup.

That awkward moment on speakerphone in the White House, for better or worse, spoke volumes about how the balance of power between Wall Street and Washington has shifted again, back in Wall Street’s favor.

Now that Citigroup has given back its bailout money — and Wells Fargo announced late on Monday that it would, too — whatever leverage Washington had over the financial services industry seems to be quickly eroding.

[/quote]

It would all be too funny – if, in the real world these titans of Wall Street rarely touch, people weren’t brutally suffering as a result of the callousness and greed of the banking AND political elites.

And it wouldn’t be too hard for them to actually find that suffering, if they had a mind to, because homelessness is now hitting hard the suburbs of the Greater New York – aka, Tri-State – Metro Area in a way not seen since the Great Depression.

[quote]

On Long Island, Nassau County officials have seen the number of people seeking shelter rise by 40 percent compared with this time last year, while in Suffolk, the number of families seeking shelter for the first time rose by 20 percent.

In Connecticut, in an annual one-day survey taken in January, the number of people in emergency shelters was 33 percent higher than the year before.

And at the Bergen County Housing, Health and Human Services Center’s new building … officials say their 90 beds have been occupied almost continuously since last month.

“We used to see really hard, down-and-out people only, and now we’re seeing a lot of people who just are kind of in trouble and don’t know anything about the safety-net system,” said Mary Sunden, who manages the shelter.

“They’re just kind of running out of money and they’re getting evicted or they’re getting an eviction notice and don’t know what to do.”

[/quote]

But I guess there’s no reason for urgency, at least as far as President Obama and his pals on Wall Street are concerned.

[quote]

Homelessness is rising in the suburbs because of an influx of poorer residents living in uncertain situations, high concentrations of homeowners battered by the foreclosure crisis, and economies that are largely dependent on small businesses that are reeling from the lack of available credit. …

… unemployed homeowners are losing their properties as they exhaust severance pay and other benefits and still cannot find work.

And among renters, many of the newly homeless have been evicted either because their buildings have gone into foreclosure or because landlords suddenly need to house members of their own families.

“We were dealing for so long with the subprime-mortgage and predatory-lending crisis, but now what we’re seeing is a greater percentage of those losing their jobs” among the newly homeless, said Connie Lassandro, director of housing and homeless services in Nassau County.

“We thought we were getting things under control, but the job losses are now creating a second wave of foreclosures. You can’t save a home if there’s no income.”

[/quote]

Indeed.

David Caploe PhD

Chief Political Economist

EconomyWatch.com