Tuesday, April 9, 2013

How to Prevent the Next Financial Collapse

The newest scheme that the financial industry has devised to avoid transparency is something called a “deep pool.” Apparently these trading pools have popped up all over the place.  According to the New York Times, on some recent days as much as 40% of trades occurred in such pools, which are totally unregulated and secret.  This has given pause to many.  In Canada and Australia, rules have been passed to limit such off-exchange trading.  But the SEC has shown no inclination to do so.

There appears to be no end to the ingenuity of the industry to come up with products and devise trading mechanisms that will be to its advantage.  But as we have seen all too well, those products and mechanisms can pose grave risks to the economy and the welfare of millions of Americans.

Because the impact and size of the financial industry has grown exponentially from what it was decades ago, and because the risk of its actions are broad-based, the time has come for government to change the way in which the industry is regulated.  The current system pretty much gives the industry freedom to do as it wishes with some after-the-fact regulation.  Instead, the system should be changed to one where a new product or a new mechanism must be first approved by the government before it is put to use.

We do this for the pharmaceutical industry because of the damage that drugs can have on people.  It is done in other industries where environmental impact statements are required before a project can go forward.  The damage from the financial industry’s risky products and destabilizing mechanisms can be, as we have recently seen, even more toxic.  Yes, this would be a pain in the neck for the industry and pose a considerable restraint on its activities ... but that’s just the point.  Such restraint is needed.  And we have seen that it cannot effectively be applied after the fact.

The financial industry has proven that it cannot be trusted to regulate itself.  There are far too many people at positions both high and low who are not ethical and will do anything to make a buck, regardless of its potential risk to the nation’s economy.

In addition, Glass-Steagall must be re-enacted.  This law, which was passed in the 30s to separate commercial and investment banking activities, served us well for 60 years.  But the industry and the Republicans didn’t like it, and so it was repealed in the late 90s and unfortunately signed into law by President Clinton.  

It is the repeal of this law which allowed the monster firms ... those too big to fail ... like Goldman Sachs and JP Morgan Chase to develop and pose the risks that caused the 2008 financial near-collapse.  And those same risks continue to be posed today, as the various efforts to rein in the industry’s actions have been ineffectual at best.  Despite the rhetoric of the Obama administration, not much has changed in this area since pre-2008 days.

Our country is at grave risk.  Congress must act to protect the people from future financial catastrophe.