Posted by Shyam Moondra
Republicans are being urged by the Senate Minority Leader Mitch McConnell to oppose the financial industry regulations as proposed by the Obama administration, just as they opposed the health care bill. McConnell says he wants the new regulations to prevent any future financial crisis but his tactics suggest that he is out to kill any new regulations of the Wall Street. His motive is suspicious given that he and other Republicans have been showered with handsome campaign contributions by the banks and hedge funds. He believes that by playing this double game, Republicans will be well positioned in the upcoming mid-term elections in November. He is dead wrong, just as he was on the health care legislation. The people have nothing but contempt for banks because of their greed and any-thing-goes attitude. Recent polls show that as many as 90% of the people view the financial sector negatively. They vehemently opposed the $700 billion government bailout funded with taxpayer's money at a time when individual citizens were losing their homes and jobs. It's a political mistake to take the side of the Wall Street against the Main Street in an environment where the hate for the banks is so deep rooted in the minds of the people.
McConnell wants a blanket statement put in the new financial reform bill saying that the government would never again bailout the financial sector. When it comes to governing, you never say never and limit your options in case of national emergency. In 1971, bailout was instrumental in saving Lockheed, which is a thriving defense contractor today. In 1975, the federal government bailed out New York City that saved jobs and saved the city from chaos that would have ensued if the city were allowed to go bankrupt. Last year, if the federal government hadn't bailed out the large banks, we would have had depression with unemployment running as high as 25%. Therefore, rather than saying that bailout should never be an option, we should focus more on preventing the circumstances that could lead to the need for bailouts.
The essential elements of any reform for the financial sector must include:
· De-linking the risk taking and excessive compensation.
· Higher capital ratio requirements for the banks and close monitoring of these ratios. No more 20:1 leverage that some banks have had immediately prior to the collapse of the credit markets.
· Restrictions on proprietary trading by banks, as proposed by Paul Volcker. Banks should not be allowed to own or finance hedge funds.
· Close monitoring of trading in innovative derivative products that today is normally done off exchanges without any regulations.
· Increased enforcement of the laws against market manipulation by banks and hedge funds. More powers should be granted to SEC, FDIC, and CFTC.
· A strong mechanism to protect the consumers from predatory practices of the banks.
The financial crisis, which led to the economic meltdown throughout the world, is a global phenomenon. Unless financial reforms are implemented worldwide, a repeat of the financial calamity is inevitable, given the interconnectedness and interdependence of the financial institutions around the world. If the U.S. implements the proposed reforms but other industrialized countries do not, then the U.S. banks will be put at a disadvantage vis-à-vis major banks of other countries in a fiercely competitive global arena. President Obama needs to provide more leadership in making sure that financial reforms are implemented universally and not just in the U.S.
The Republican election strategy of frustrating any financial reforms is unlikely to sit well with the voters, given their intense dislike for the financial institutions. The people in fact want serious reforms and restrictions on how the banks make money and treat their customers. McConnell made a mistake on the health care bill and now he is about to make the same mistake on financial reforms. The best strategy for the Republicans would be to replace their current leaders in the Congress and at the RNC.
