Will Wall Street mess us up again? At this point, bank on it

Congress is still struggling with the problem of what to do to try to prevent another financial market meltdown like we had last summer. It is hampered by members' lack of understanding of the underlying issues and strenuous efforts by banking lobbyists to get the least possible change. Although most Hawaii banks are prudent, and thus in good financial shape, the leaders of thousands of banks still don't get it. They still think the crisis just happened, but was not their fault, and they're still eager for quick profits even under the same conditions that produced the meltdown. This is what you, and Congress, and bankers themselves, need to understand about the situation. Don't worry, you'll be able to follow it, because I won't need a single number to outline it. Ready? Here we go. Financial institutions today see loans and more exotic financial instruments as products to be marketed and sold, with sales people compensated with bonuses tied to sales. They are human. They do what it takes to maximize their bonuses. CEOs of these institutions, who are compensated with bonuses tied to profits and stock prices, accept these sales, persuading themselves that the risk is acceptable. They are human. Nothing will change this except rules that change the behavior. And no rules will change the behavior except rules that reduce the profit motive. Regulating specific financial instruments won't work because financial institutions will then invent new financial instruments that circumvent the rules. Congress is trying very hard to control this - the Senate draft of regulatory legislation runs to more than 1,000 pages - but it won't work because banks know banking better than Congress does. So what do they do? The whole of the banking business is based on margin. Banks lend out money that you deposit and make a profit on it while you're not using it. They are required to keep a certain percentage of money on hand, for people who need their own money and ask for it, but it is not 100%. It is not 50%. It is not even 20%. The solution to this crisis is to raise the margin requirements for exotic financial instruments, and apply this to anyone who sells them whether they are an actual bank or not. That's it. Nothing less than this will reduce risk for real, and nothing more is necessary. Financial institutions will make less profit if they have t0 keep more money sitting around. But if all of them have to do it, they won't have to explain to shareholders why they're being more prudent than a competitor and thus reducing dividends. I think other countries can be persuaded to go this route because it doesn't actually tell financial institutions what they can or can't do. It doesn't prevent invention of new financial instruments. It simply imposes a uniform rule that reduces risk. Tell me where I'm wrong. If we don't do this, we will one day have another financial meltdown. Even the current one can rekindle. We have more than 8,000 banks in America of which a tenth have enough non-performing loans to be in danger of failing,, and more than 100 have failed in the past year or so.

 

 

Comments

[Michael]

What would you say if Wall Street spoke in Pidgin?
I enjoyed your part in PBS Pidgin. I understand both and prefer to speak Proper English. I after all am not Pidgin American.

Brings back the Movie Wall Street with Michael Douglas. Buying out of Blue Star to make it go bankrupt and make money off it failure. Makes me wonder why a CEO makes more than the company is worth?

[AJ McWhorter]

Speaking of Wall Street, there is a sequel being made as we speak with Michael Douglas reprising his role of Gordon Gekko. It should be interesting to see how old Gordon is doing these days, did he make out like a bandit or did he lose a ton of money in the markets. We'll see when it comes out.