Thursday, July 19, 2012

Foxes guarding the henhouse

Whenever you get a loan of any type, such as a mortgage or credit card, it comes with an interest rate attached, and unless you happen to be the next Unabomber chances are that if you are an adult citizen of the United States you have needed a loan at some time or another. On the other side, if you have some money you do not immediately need to cover some sort of expense (and unfortunately the number of folks for whom this is true diminishes daily) you will stash some of it in a checking or savings account at a bank or credit union (the latter if you are smart and have any social consciousness). Hopefully such an account will be interest bearing, and you will be able to take advantage of what Einstein once called the most powerful force in the Universe. But no matter what your financial position happens to be you need to be outraged by the recent interest rate fixing scandals that have recently come to light. As Elizabeth Warren's excellent opinion piece details, this fraud robbed everyone. If you have made a financial transaction at some point since 2006, some of your money went to people it shouldn't have, borrowers were paying more than what the market said they needed to, and savers received lower returns on their investments than the market said they deserved. Democrat or Republican, 1% or 99%, you were robbed. Individually, maybe the amount you got taken for was not all that much, but when you talk about hundreds of millions of people making trillions of dollars worth of transactions the amounts are staggering. Maybe none of the loans you have are pegged specifically to the LIBOR, which changes daily, but many other less variable rates (such as the Federal Funds rate) take it into account, and if one of those benchmark rates can be systematically manipulated to favor the institutions that help set it, so can any other.

If we learned anything from the crash of 2008, it was that the deregulation of the financial sector that began in the early 1980s and kicked into high gear in the late 90's and early 00's was a really bad idea. Safeguards that protected ordinary consumers were weakened, complex financial instruments were marketed and sold to people that did not understand what they were getting into, and financial institutions were allowed to make bets with other people's money that they had previously been barred from making. The heads of the big banks, hedge funds, and brokerage firms assured us they knew what they were doing, and that they could police themselves effectively. We all know how that turned out. Thing is, most of the deregulation that enabled the crash has yet to be undone. The foxes are effectively still guarding the hen-house, and as the rate fixing scandal and the recent antics at JP Morgan Chase make abundantly clear they cannot be counted upon to look after anyone's interest but their own. Not only do the offenders on Wall Street get away unpunished, the worst of them are given bonuses, stock options, and golden parachutes.

The beefing up of FDIC guarantees was a good first start. The Dodd-Frank legislation is not perfect, but a step in the correct direction, even more so if could actually be fully implemented. The Consumer Financial Protection Bureau is a long overdue agency and if it ever can exercise the powers it was in theory granted we might see some meaningful positive change in the financial sector. In a somewhat better world than this the esteemed Ms. Warren would be running the CFPB instead of running for the Senate, but if she is elected this fall that somewhat better world would become more probable. In the meantime, let us at least put a farmer with a gun in front of the hen-house that contains our collective nest egg.


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