Opinion

The Great Debate

Lowering risks from large, complex financial institutions

– Robert R. Bench, a former deputy Comptroller of the Currency, is a senior fellow at the Boston University School of Law Morin Center for Banking and Financial Law. The views expressed are his own. –

Financial institutions inherently are fragile.

As intermediaries, they are exposed to both exogenous and endogenous threats. The 2007-2008 financial crisis was caused by endogenous forces.  Simply, financial institutions were poorly governed, taking-on extreme liabilities and gambling them into high risk activities.  The meltdown of the financial system fed contractionary forces into the real economy, causing our “great recession,” creating negative exogenous loops back into financial institutions.

The roots of the financial crisis were poor underwriting of credit.  However, the crisis happened because that credit risk was amplified through abusive underwriting, distributing, and trading of debt-backed financial instruments.  The abuse was driven by “heads I win, tails you lose” compensation schemes.  Wall Street won, Main Street lost.

Reform of the financial system requires restoring the social utility of deposit-taking institutions while eliminating the casinos within them.  The Volcker-Obama proposals move in that direction, by limiting the degree of gambling at deposit-taking companies.  In essence, Volcker-Obama addresses the very basic question: What do we want the financial institutions to do for society?  We do not want them focused on fast profits through proprietary trading.  We do want them focused on how to finance the needs of households, commerce, and governments.

We need to separate the “financial markets industry” from the “financial services industry.”  The former complicates and confuses the latter when both are located in one financial services company.  Market trading makes for an active balance sheet and exponentially increases counterparty interconnectedness.  Unless walled-off or spun-off, regulating and supervising financial holding companies is difficult.  The financial services industry culturally  is a public utility, essential to our modern way of life, which is why we rescue it when trouble appears.  Unless we separate proprietary trading from the public utility, the high-roller financiers continue to free-ride the taxpayer.

Obama disappoints on bank reform

— Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission. The views expressed are his own. —

President Obama announced he wants to prohibit banks from forming hedge funds, private equity funds and trading securities on their own accounts, and he wants to limit the size of banks and financial institutions generally.

Hedge funds, private equity funds and proprietary securities trading did not cause the banks to get into trouble, and the size of banks did not cause the credit crisis.

America, terrorists and Nelson Mandela

berndforblog- Bernd Debusmann is a Reuters columnist. The opinions expressed are his own -

Woe betide the organization or individual who lands on America’s terrorist list. The consequences are dire and it’s easier to get on the list than off it even if you turn to peaceful politics. Just ask Nelson Mandela.

One of the great statesmen of our time, Mandela stayed on the American terrorist blacklist for 15 years after winning the Nobel Prize prior to becoming South Africa’s first post-Apartheid president. He was removed from the list after then president George W. Bush signed into law a bill that took the label “terrorist” off members of the African National Congress (ANC), the group that used sabotage, bombings and armed attacks against the white minority regime.

The ANC became South Africa’s governing party after the fall of apartheid but the U.S. restrictions imposed on ANC militants stayed in place. Why? Bureaucratic inertia is as good an explanation as any and a look at the current list of what is officially labelled Foreign Terrorist Organisations (FTOs) suggests that once a group earns the designation, it is difficult to shake.

Fed’s wondrous printing press profits

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– James Saft is a Reuters columnist. The opinions expressed are is own. –

Now finally we see what it takes to be a profitable bank with no capital worries and secure funding: own a printing press.

Sadly, since it is the Federal Reserve showing record $46 billion profits last year we have to conclude that, though it is a fool-proof plan, it’s not really scalable.

American intelligence and fortune-telling

berndforblog

– Bernd Debusmann is a Reuters columnist. The opinions expressed are his own —

Hot on the heels of  what President Barack Obama called a potentially disastrous “screw-up” by the civilian intelligence community, here comes a devastating report on shortcomings of military intelligence in Afghanistan, by the officer in charge of it. He likens the work of analysts to fortune-telling.

The report is highly unusual both because of its almost brutal candor and the way it was published, outside military channels. Even more unusual: the three authors hold out journalistic skills as models to emulate for gathering and putting together intelligence.

The Underwear Bomber and the war of ideas

- Bernd Debusmann is a Reuters columnist. The opinions expressed are his own -

Who is winning the war of ideas between the West and al Qaeda’s hate-driven version of  Islam?

It is a question that merits asking again after a  23-year-old Western-educated Nigerian of privileged background, Umar Farouk Abdulmutallab, attempted to murder almost 300 people by bringing down a Detroit-bound airliner on Christmas Day with  explosives sewn into the crotch of his underpants.

The administration of President Barack Obama, averse to the bellicose language of George W. Bush, has virtually dropped the  phrase “war of ideas.” But that doesn’t mean it has ended. Or that Obama’s plea, in his Cairo speech this summer, for a new  beginning between the United States and Muslims around the world  has swayed the disciples of Osama bin Laden, whose 1998 fatwa  (religious ruling) against “Jews and Crusaders” remains the  extremists’ guiding principle.

Obama, drugs and common sense

bernddebusmann.jpg– Bernd Debusmann is a Reuters columnist. The opinions expressed  are his own –

Barack Obama, January 21, 2004: “The war on drugs has been an utter failure. We need to rethink and decriminalize our marijuana laws…we need to rethink how we’re operating in the drug war. Currently, we are not doing a good job.”

Amen to that!

Since President Richard Nixon first declared war on drugs in 1969, seven successive administrations have spent billions upon billions on eradicating drug crops abroad, blocking shipments at the country’s borders, and enforcing tough drug laws at home. They failed to curb demand or throttle supplies.

Burning borrowed money in America’s wars

— Bernd Debusmann is a Reuters columnist. The opinions expressed are his own. —

The Pentagon has an evocative term for the level of spending on a war: burn rate. In Afghanistan, it has been running at around $5 million every hour for much of the year. The burn rate will begin going up next week when the first of an additional 30,000 U.S. troops arrive.

Once they are all in place, the burn rate is estimated to exceed $10 million an hour, or more than $8 billion a month. Much of that is literally burned — in the engines of American jeeps, trucks, tanks, aircraft and power generators. On average, each of the 183,000 soldiers currently deployed in Afghanistan and Iraq requires 22 gallons of fuel a day, according to a study by the international accounting firm Deloitte.

Unemployment to stay above 10 percent in 2010

morici– Peter Morici is a Professor at the Smith School of Business, University of Maryland, and former Chief Economist at the United States International Trade Commission. The views –

The economy continues to bleed jobs, even as GDP rebounds. Employment may be a lagging indicator, but job losses should have abated by now even if a lot of new jobs are not being added.

Coming off a deep recession, GDP growth should have been much stronger than the 2.8 percent recorded in the third quarter. A poorly conceived and badly executed stimulus package and the failure to correct structural problems that caused the Great Recession are holding down growth.

War and Peace, by Barack Obama

Bernd Debusmann– Bernd Debusmann is a Reuters columnist. The opinions expressed are his own. –

It is a timeline rich in irony. On Dec. 10, Barack Obama will star at a glittering ceremony in Oslo to receive the 2009 Nobel Peace Prize. That’s just nine days after he ordered 30,000 additional American troops into a war many of his fellow citizens think the U.S. can neither win nor afford.

Whether the sharp escalation of the war in Afghanistan he ordered on December 1 will achieve its stated aim – disrupt, dismantle and eventually defeat al Qaeda in Afghanistan and Pakistan – remains to be seen. But one thing is certain: more troops equals more fighting equals more deaths — of soldiers, insurgents and the hapless civilians caught in the middle. Not exactly a scenario of peace.

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