"Financial innovation" means the invention of "devices" by which the members of the investor class can make more money. I'm, of course, not speaking about small-time investors, either. Anyone who believes that small-time investors have a place at Wall Street's table is uninformed and unobservant. Small-time investors are carrying the dirty plates to the kitchen.
"Financial innovation" also means instability, as "creative" MBAs from the Ivy League invent arcane financial devices that are no more than gambling chits. Average citizens and investors can not, and are not supposed to, understand the obscure logic of the financial industry.
Mr. Obama has a very difficult row to hoe. It is faith that has disappeared, and appointing people to power who are themselves partially responsible for the loss of that faith is not a good idea, whether those people are Democrats or Republicans.
Here's the nub. In the financial industry, does it matter whether one is a Democrat or Republican, or are BOTH Democratic and Republican members of the financial class simply trying to maximize their profit at the expense of others?
My suspicion is that "Democrats" such as those mentioned in your editorial are "Democrats" in name only. At heart, they WANTED derivatives--and they still do. They are not the kind of people who would be willing to admit that they were wrong, just like our outgoing President.
Our lleadership has failed. Why should we trust replacements chosen from the same class of leaders? And how can we find leaders outside that class? Does Mr. Obama REALLY have any choice, or must he continue to play the game that has created a recession that is seemingly sliding into a depression, something our financial leaders have been telling us was impossible.
Rubin was wrong. So was Clinton. And the list does not stop there.
— marik7, wailiku, hi
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Regulating the $500 trillion dollar beast of the OTC derivatives market and effectively and efficiently overseeing that activity to ensure compliance would be a gargantuan effort, requiring unprecedented international cooperation by legislative bodies, regulatory agencies and justice departments. Every single country will have to fight battles with their own banks and hedge funds until consistent regulations were established. It's a pipe dream. Where will the money for this effort come from? Even if it were possible, it is many years down the line.
More effective and achievable steps would be to re-impose Glass-Steagall, place a ban on the use of leveraged derivatives instruments, and end the practice of securitization of consumer debt. If you think that's radical, I have these words for you: $7.5 trillion in taxpayer dollars. Great Depression II.
Unfortunately, I see no reason to believe that President-elect Obama or the supplicant members of Congress will find the courage to impose regulations that go against the wishes of their benefactors at financial institutions or the hedge fund world. This past election cycle, for instance, Obama received more money from hedge funds than any other candidate for president. I won't hold my breath waiting for him to truly rein in their gambling.
"It could be that the people whose actions contributed to the mess are best equipped to clean it up," is one of the most preposterous suppositions I have ever read. Following that logic, why not reappoint Greenspan? Madoff knows a lot about how things work, let's put HIM in charge. Or how about those guys that used to run LTCM. They won a Nobel Prize. They must have learned an enormous amount from their mistakes.
Seriously, Obama's choice of Lawrence Summers as economic advisor, and his pending appointments of Gensler(!), Geithner(!), and Schapiro were devastatingly clear messages to financial interests that only surface reforms were in store. Summers is a former hedge fund manager. Geithner has stated very clearly in the past his belief in "self-regulation". At least Alan Greenspan has publically admitted his error, in that regard. Mr. Geithner has yet to do so.
With respect to regulation of hedge fund activity, Geithner, in his keynote address to the 8th Annual Risk Convention in New York in 2007, called the goal of transparency of hedge fund activity "unachievable". He went on to say "We are not likely to ever be in a position where we have the capacity to identify the source and estimate the probability of future financial shocks."
Forgive me, but that's just not acceptable.
This is not a "mess" to be cleaned up. It is a once in a century global financial disaster that has driven the country to the brink of another Great Depression. The people responsible should be driven through the streets in shame, barred from ever working in financial institutions again. Instead, in Bush-like fashion, they are being promoted.
It is depressing beyond belief to have to look that fact in the face.
— joe (new york), New York
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There are two problems with rules.
1. Since business is complex, rules will necessarily be complex, not simple. Take a rule limiting how much a financial institution can borrow. Well, what is 'borrowing'? Capital structures are complex, and their are many ways to get money, some of which may or may not be classified as borrowing. You would have to read through the 1000-page contract and then consult with numerous lawyers and accountants, and even then it would be a judgment call that would be vigorously disputed by all parties.
2. Outright swindlers like Madoff like rules. They have books that conform to these rules, and present them to auditors with a smile. This regulatory regime makes investors trust the swindlers all the more. But eventually, someone discovers that their beautiful books that have pass the rigorous audit bear no relationship to reality.
— Jonathan, NYC
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The most important missing person in this scene was Brooksley Born. A Clinton appointee as the chair of CFTC, she foresaw the mess coming in OTC nonregulated derivatives, especially CDS's. Rubin, Summers, Levitt and Greenspan all insisted she was wrong. Rubin and Summers approached Phil Gramm, then chair of Senate Banking, and asked him to derail Born's proposals. He did, with the assistance of Gensler, as you point out. Born resigned. What else could she do? Thus Cassandra was repeated and those who fail to learn from history are doomed to repeat it. The question now is, how many times? You should look at Born's history closely, before, during and after her sojourn at CFTC. You will surprise yourself at what you find. If Obama had the slightest good advice on who to consult on Wall Street's failures this time he would have sought her out long ago.
— john MacFarlane, Denver
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The only permanent fix would be to prevent all speculation on stocks. I know, speculation has been with us for a long time but it also has caused numerous crashes in the 19th and 20th Centuries. Only the crashes are getting more severe as wily people have found ways to circumvent controls and to speculate without their own money. And of course the government didn't help when it did away with or weakened regulations imposed after the 1929 crash.
One simple rule would do the trick: Permit the purchase of stocks only with your own money, the full amount. If the buyer can borrow the necessary money from a bank, so be it but then he owes the money to the bank and they own the stocks if he cannot repay the loan. The "wealth" generated between the last crash and 2008 was only a bubble, backed by no real values. That's why the government is on the wrong track when it attempts to recover this imaginary wealth.
— R.H. Schumann, Bonn, Germany
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The "economy" failed [again] not because of some flaws in the regulatory regime -- indeed it succeeded! The results deemed failure are due to the underlying model - capitalism which is not sustainable in our necessarily socialized 7-Billion Humans world.
Just as anyone who played the game Monopoly knows, there is an inevitable outcome where one and only one player ends up owning all of the utilities, railroads, properties, houses and hotels. Fewer and fewer can afford to traverse the board on a $200 "Pass Go" payday. We can change the "rules" for rolling the dice and banking -- but NOTHING will change the outcome.
Whether a Tragedy of the Commons or the multitude of thought experiments and empirical analyses, the underlying Capitalism principle will fail. Regulation only delays that inevitable outcome. Regulation comes instantly under attack by the forces incentivized for progress -- that is moving faster toward that inevitable result. The "incentive" feature of the capitalist model is at once the sole advantage and certain undoing.
We will again pour in taxpayer debts and reset the board -- but unless we change the fundamental game, the result will be the same.
You can a lead a horse to water, but that won't fix a broken leg -- you still have to shoot the beast (thirsty or not). The "free-market capitalism" leg is broken and unbendable. Do the right thing and shoot.
— freedata, Long Island NY
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During the campaign, people said that Barack Obama moved to the center from the left. He actually started out in the center and moved to center-right. I voted for him hoping for the best, but now I'm not so sure. I was against Hillary Clinton because she was a big cheer leader for her husband's ill-conceived pushing of NAFTA, and I was afraid that if she became president we would be in for more voodoo economics. (They sure didn't stop with the end of the Reagan presidency.)
Here we go again. Obama has picked almost everyone who led us down the weedy and rutted garden path of deregulation. The powers-that-be in this country won't be happy until we are turned into a feudal state. Just like Clinton before him, he is a conservative Republican in a Democrat's suit.
The American people must start taking back control. One thing that might make the thieves in Washington and Wall St. wake up is if all the small investors (that's most people) take all their money out of the stock market and put in in CDs. Anyone who invests in the stock market these days should have his/her head examined.
I have lost hope in Obama's "change" even before he takes office. I was suspicious of his thought processes when he announced his prescription for universal health care still included the use of insurance companies instead of an expansion of Medicare. There is no way that we can afford universal care using profit-making entities as middlemen.
I now am hoping that the present generation of young people will see the light and lead us into a social democracy. I was hoping for the start of that with the election of Obama, but all I can see now is an administration that will continue to give all the prime rib to those who already have it, and throw a few neck bones to the rest of us hoping we'll be grateful and shut up.
— Carole A. Dunn, Ocean Springs, MS
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I'm a 61-year old woman who until recently had saved enough to retire at 62 so I could return home to care for an elderly parent who can no longer live alone. I have relocated to do just that but now face the grim prospect of having to return to work, somehow, and undoubtedly for a fraction of the pay I earned in my previous career. My guess is I will have to work for another 9-10 years, doing God knows what.
Some version of this is nightmare is staring millions of retirees, or the nearly-retired, smack in the face. Think about being in your 60's and having to start over with some kind of career or at least some kind of job, all because an unfathomably corrupt financial system has destroyed the nest eggs of millions of hard-working people who did everything right, living within their means and saving for retirement.
The greatest country on earth? I am furious and ashamed to be an American, given the level of corruption that has finally brought this country to its knees. Will Obama be able to put a dent in this government-sponsored, utterly dishonest system that helps a tiny few achieve mind-boggling wealth?
The appointments are not encouraging. But I suppose we have no choice (other than suicide) but to hold out the hope that American financial corruption will be viewed with honesty for what it is, now that it has brought the country to its knees.
— Mel, Tampa
