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February 16, 2017 | The [Painfully Slow] Return to Reason in Banking

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel (www.venablepark.com) Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog: www.jugglingdynamite.com

The last 20 years have been one for the history books of financial madness and mayhem, the next chapter in Galbraith’s essential “A Short History of Financial Euphoria” and Kindleberger’s Manias, Panics, and Crashes.

With the final loss and damage still yet to be tallied, one thing is clear:  the world will be digging out of this reckless debacle for many years to come. Sure the brain-fevered, unable to admit (or see?) the error of past ways, are still manning the media and advising households, business and government.  But slowly [painfully so], thinking people are coming to their senses once more, one by one. What’s the saying? “When you find yourself in hell, keep going.

This week we receive more postcards from the edge, courtesy of two clear-eyed Fed converts who are banging the drum on necessary reforms.  The first is former Dallas Fed insider Danielle DiMartino Booth’s new book Fed up: An Insider’s Take on Why the Feberal Reserve is Bad for America (gee, do ya think??)  DiMartino Booth makes some practical, intelligent recommendations that include:

  • Congress must remove the second ‘maximizing employment’ goal and leave the Fed with just a price stability mandate.
  • get the Fed out of the business of trying to compel people to borrow and spend and re- institute a focus on shoring up capital and savings in the banking system and households.
  • set a minimum floor of at least 2% on the overnight rate needed to sustain the banking system, and never go under it.
  • Limit the number of academics at the Fed and bring in others who work in the outside world and have seen the mess that financialization has wrought for workers and savers.
  • Restructure the Fed Districts to reflect the diverse interests in America’s economy, why should Wall Street dominate the Fed, not main street?

Another intelligent admission and recommendation comes courtesy of President of the Federal Reserve Bank of Minneapolis and a participant in the Federal Open Market Committee, Neel Kashkari, who writes Make Big Banks Put 20% Down–Just like home buyers do.  Financial CEOs say capital requirements are already too high, but the facts suggest otherwise:

“Capital is the best defense against bailouts. Although capital standards are higher than before the last crisis, they are not nearly high enough. The odds of a bailout in the next century are still nearly 70%. Large banks need to be able to withstand around a 20% loss on their assets to protect against taxpayer bailouts in a downturn like the Great Recession, according to a 2015 analysis by the Federal Reserve. Unfortunately, regulators have taken it easy on the large banks, which today have only about half of the equity they need.

There is a simple and fair solution to the too-big-to-fail problem. Banks ask us to put 20% down when buying our homes to protect them in case we run into trouble. Similarly, taxpayers should make large banks put 20% down in the form of equity to prevent bailouts in case the financial system runs into trouble. Higher capital for large banks and streamlined regulation for small banks would minimize frustration for borrowers. If 20% down is reasonable to ask of us, it is reasonable to ask of the banks.”

All very sound deduction that is needed and should be implemented immediately.  Of course it’s also directly in opposition to what the financial sales companies want.  On that I am reminded of this quote attributed to former Fed Chair Paul Volcker (in Payoff: Why Wall Street Always Wins by Jeff Connaughton):

“You know, just about whatever anyone proposes, no matter what it is, the banks will come out and claim that it will restrict credit and harm the economy…It’s all bullshit.”

Such a relief to hear people call bullshit on this self-serving, destructive cartel that continues to suck the real economy dry, and inflict so much harm on all of us.

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February 16th, 2017

Posted In: Juggling Dynamite

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