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December 13, 2009

Financial Regulation Isn’t Partisan

Posted in: Conservatism,Corporate greed,Economy,Financial Crisis

Bankster-by-Confetti-(flickThe title is a near quote from Senator Bob Corker of Tennessee on Nashville public radio last week. It is the kind of statement we Tennesseans learned to expect based on his background in business and state government: he was the finance commissioner under the last Republican governor, and was realistic and conservative financially. He left the State in reasonably good condition.

I’m a partisan too, but I absolutely agree that financial regulation isn’t a partisan issue. So, we could get regulation done on a bipartisan basis, yes? Not really. Every single Republican and 27 conservadems voted no on the financial regulation bill that just passed the House. Here’s the explanation given by one no voter to the Wall Street Journal:

Republicans countered that the Democrats’ plan would create huge government bureaucracies, stifling access to credit. “Their bill will continue the destruction of jobs in this country,” said Rep. Scott Garrett (R., N.J.).

That isn’t an argument: it’s a negative ad in a hot election. No one thinks we need more consumer credit from the unrepentant financial institutions who dragged us down into the Great Recession. Anti-government free marketers in both parties are so buried in their ideology they feel free to ignore reality. Here’s a fact: consumers don’t want credit. What they want is to work off their debt and increase their savings. The people who want credit are small businesses. Some need credit to operate, and some need credit available so their clients can finance their purchases. That is a problem Garrett and his ilk won’t face, because it would require regulation of banks.

Everybody except their mothers distrusts the people who run the financial giants, as David Wessel tells us in the Wall Street Journal:

Bankers need to be more candid and self-critical about what they got wrong and what they are going to do differently as a result — not small steps, but big ones. They need to distinguish clearly between financial innovations that enrich only bankers and those that enrich the entire society, and then convince the rest of us that the result of this crisis is that they are going to do less of the first and more of the second.

But the banksters got all kinds of special treatment in the House bill. One of the loopholes is for certain derivatives, called commodity swaps, bought to hedge costs by actual businesses (as opposed to financial parasites). Suppose an airline wants to hedge its fuel costs. It could use the commodity markets in a regulated and transparent transaction. Or it could buy commodity swaps from any of the giant banks. Commodity swaps are transactions in which the airline and a bank swap the risk of increases and decreases in the price of a commodity, in this case perhaps airline fuel. The airline pays the fixed price, and the bank pays the variable price. The swap might be based on the spot price. If the spot price at the close of business at the end of the relevant period is above the fixed price, the bank pays the difference to the airline. If the spot price is lower, the airline pays the difference to the bank. This is an unregulated, undisclosed transaction.

On Seeking Alpha, Adam White estimates that about 16-21% of a all derivatives are exempted in this loophole. He points out that the corporations love the off-balance sheet financing they get out of the loophole. I assume both Wall Street and the up-scale end of Main Street will both game this system mercilessly, among other things hiding their overall exposure from investors. And what’s to stop a business with a bucket of swaps from fiddling with the commodities markets to push the price in a direction that favors them on the swap? The pseudonymous Adam Smith in The Money Game describes the cocoa market, where Hershey, M&M and Nestle play with small investors, the mice:

Hershey has only to lean on the market and the mice are mouse pâté.

P. 217. That may be too easy, but I’m sure that the loophole is a playground for the greedheads.

So, what facts justify opposition to serious regulation of financial markets? Don’t ask Corker. It’s embarrassing, for me even if not for him, to hear smart, knowledgeable people talk nonsense.

Bankster image courtesy of Confetti


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