Category Archives: economics

Regulating Wall Street

wallstreet

Can we afford to mess with Wall Street? Isn’t it like the tick tock heartbeat that keeps our Capitalist economies alive? I picture an endless cycle of regulatory action and Wall Street vengeance. The whole idea of an index of economic health that is built around putting down a bet on whether a company or commodity will turn a profit strikes me as a ridiculously unstable structure on which to base an economy or my retirement income. However that is the system we have.

As the Industrial Age moves on to distant corners (from us) of the globe the Stock Market has experienced ever more volatility and is less and less under our control. American companies do not have factories in America, they don’t pay taxes in America, but they still hold places on the American Stock Exchange (and other Stock Exchanges). And, although for many years our Stock Market pretty much set the pace around the world that is no longer as true. There are Stock Markets in a number of countries that can send shock waves through ours.

The “creative” way that the stock brokerage companies in America met the changes in the industrial scene in America should have been and probably were illegal. However, even if they were not sure about whether or not what they were doing was illegal they knew it was risky. Perhaps it was not illegal because no one ever actually thought of doing something as stupid as bundling up bad mortgages with good mortgages and rating the whole bundle according to the best mortgages in the bundle. What is clear is that someone at these stock brokerages knew that these bundles reeked and that there might/would be financial repercussions. This does not even touch the illegality of the banks and mortgage companies that offered these mortgages in the first place.

Our economy obviously can’t take too much of this kind of “black hat” creativity. We watched in horror as banks foreclosed on house after house forcing Americans to scramble for new living arrangements and sometimes creating whole neighborhoods of empty houses. The Stock Market took a nose dive. My pension (and those of many other Americans) took a nose dive. Employment took that same dive. Without the TARP I don’t think we would have pulled up before we hit rock bottom. Without the stimulus we may have already had the revolution we could still be headed for.

It stands to reason that the argument that we might have to regulate Wall Street, make some rules about what it is legal to do and what it is not legal to do has gained lots of traction. This is what many Americans like about Elizabeth Warren and Bernie Sanders. We are justifiably angry at greedy hedge fund operators and mortgage companies for almost destroying the American economy and we don’t just want reform, we want punishment. Hillary Clinton has also said that some regulation is necessary although she does not hook into people’s anger and does not seem to want to tar and feather the perpetrators and run them out of the finance business. Mostly we would be happy if they had to give us back what we lost as a result of their adventures in edgy economics.

But as for the future, for me, and perhaps for you, there are questions. First of all, since no one could have foreseen the bundling and sale of those stinky mortgages (hold your nose) can we ever foresee every new ploy these people, who must make money or die, can create? Second, can the American Stock Market provide the secure investment structure and the secure economic base America needs any more at all? How would America function without a Stock Market? Perhaps some economists could discuss this among themselves and allow us to listen in.

Can we overregulate the Stock Market and crash it? How do we choose the exact regulations that will protect us from illegal profiteering and yet will allow the Stock Market enough room to keep ticking along? If the SEC is unable to oversee the market can we whip it into shape without putting a straitjacket on the market?

Although I hate what brokerage firms did to us to attempt to make money from bad mortgages, I go back to my very first question – can we afford to mess with Wall Street? And if so, how much? I think we are afraid, we are very afraid, because we are not sure about the fragility of our economy and the entire global economy. I have a gut feeling that we should buck up the economy before we decide about large scale regulation of the Stock Market or even perhaps the “Big Banks” despite our very real anger and our desire to send a tough message through punishment. I also have a gut feeling that effective oversight is important to stop truly risky financial strategies that could still be invented by both the Stock Market and the banks. Everyone needs to keep an eye on our pressure cooker financial crucible that is the Stock Market and the banks.

So I am feeling that I need more information about exactly what regulation would look like and what the effects of any regulation or various regulatory measures might be. This is a time when we need to look to our economists. We also need to remember that economics is hardly an exact science and that economists have differing points of view on these matters which may be influenced by famous economists, or by their politics, or both. What we decide, even after input from the field, will still require a final judgment on the part of each of us. Please you economics geeks, use simple language that we can all understand and perhaps some scenarios like the ones they used in the film The Big Short to illustrate your points.

By Nancy Brisson

(Disclaimer: you may or may not believe this but I wrote this on Saturday, February 6th 2016. When I listened to Meet the Press on Sunday and to the discussion of these matters between Hillary Clinton and Chuck Todd it was just serendipity that I had just written this post. The only change I made to this post after hearing their conversation was to add this note.)

Two Paths Diverged – Who’s Right?

Suppose we had never had a TARP bailout and a stimulus? What would our economy be like right now? What do economists have to say about this? Take a minute and go back to those times in 2008 when everything seemed to be crashing. Would it have been the brave path to just sit tight and let it happen? Follow that chain of events in your mind. I know it is difficult to imagine what our economy would be like if we followed that other path, but try. Would our recovery be further along now? Would unemployment numbers be down and employment up in such a scenario? I can’t do the math, but someone out there probably can. Perhaps the economists can write us a word picture of where we would probably be right now.
Apparently some feel that the economy would have been much worse for much longer; that these laws stopped the recession. These programs were not enough to grow the economy but they at least did no harm. Others feel that these programs were extremely harmful to America. Not only did they increase the debt and the deficit, they also did not allow the market to solve its own problems and get us out of this recession in the way that laissez-faire capitalism rebounds on its own (sort of organic economics?). Should we have let the big banks and investment companies fail? Should we have let GM go under? Should we have done nothing to help people who were facing foreclosure? Would the economy have gone into a true and deep depression if we did that or would we have been healthier when it was all sorted out? Were these financial groups too large to fail, or is that all wrong?
Can you guess why we are all confused by this? Apparently even economists do not agree about this? Our politicians are as divided as we are. It is clear that we can only choose one path to repair our economy at a time. We could have had three years to see if the Democrats had a good solution, but we could not because our House of Representatives was opposed to these approaches. Now we are asked to try the Republican solution, but we are unsure whether that is the approach that will give us the best economic results. So we will sit at the spot where the two paths diverge and do nothing and we will hope that the best solution is to do nothing new and let the knots in our economy work themselves out.
We really have little choice right now, but it is difficult for those of us who agree with the Democrats ideas about jump-starting the economy because it looks like the Republicans will get to try again with an approach that Democrats and I believe has already been tried and which has failed. And to Democrats it looks like Republicans have accomplished this by being “poor sports” and ideologues and by using extreme stonewalling tactics. There is a lot of anger behind all of this. Republicans are angry because of the “high-handed strategy” that Obama used to pass the Affordable Care Act. They are still so angry about this that they cannot be trusted to be objective about the plan. The Democrats are angry that the Republicans have used their “pit bulls” to scare people into believing that if they don’t vote Republican America will never be the America we know and love again.
We the people have lined up behind the party of our choice and we find that we are divided into almost totally equal camps. Are we going to let the Supreme Court decide our election once again? We are in the position of being damned if we do and damned if we don’t (in other words, neither party can really satisfy a majority.) We chose Obama in 2008 and then we got scared and sent the Tea Party to Washington to stop the Democrats cold. Chances are we will stop anyone who goes to Washington from going down either economic path, because we don’t know which plan is better. There are experts who attest to each path. We can’t really go down both paths, although we could perhaps choose a middle path.
Does anyone have an argument so compelling that it will help us make the most effective decision? Is it just a case of an economic cycle that will probably work itself out no matter which path we take? We are trying to solve global economic issues with kitchen table economics. Republicans are so passionate in their belief that they know what to do. Does their passion mean they are right? I just don’t think so. Whatever they are saying right now, they are the party that wanted to dismantle and/or privatize the social safety net. They don’t believe in climate change. They don’t believe that our planet is experiencing any environmental problems. It is difficult to believe that they have the correct answer on the economy when they seem so clueless in these other areas. Anyway, if you are an economist and you have been down that other path in your mind, please share the journey with us, the economically challenged.