February 18, 2011

$6 Trillion in play: derivatives markets

Posted in Finance Reform, GOP, immigration, role of government, U.S. Economy tagged , , , , , , , , at 10:32 am by realitytax

Reuters is reporting on a ploy to stall the re-regulation of derivatives markets as proposed by the Dodd-Franks financial reform bill. GOP strategists are now asserting that rushed rule-making can’t become a higher priority than economic analysis, so we ought to slow down and (finally) do the sort of analysis that might have prevented the market crash and the resulting recession (if only we hadn’t let Wall Street insiders write their own rules for so long.)

signing of Dodd-Franks billAs I discussed earlier this week elsewhere, the provocatively-titled Wall Street Journal article “Study: Strict Derivatives Regulation Could Cost 130,000 Jobs” echoing the “government regulations hurt business” talking-point has been yet again defused — this time by professors John E.  Parsons and Antonio S. Mello, who pointed out, “It’s always possible to ignore the system-wide purpose of a regulation and claim it is costly due to the burden it imposes…”

“We have regulations controlling immigration, restricting tobacco and alcohol sales, establishing speed limits, and prohibiting the use of dangerous materials such as lead paint. We embrace regulations about what can’t be in our drinking water, and insuring we have the freedom to practice religion unfettered by the preferences of government agencies…

…laws about everything from voter registration to verifying the safety & efficacy of drugs because we know we can’t simply trust everybody to do the right thing if there’s no referee…

…the GOP has been persuaded to slow down the process of reforming Wall Street’s greedy, self-serving behaviors.”

Thomas A. Hayes

We’ve seen what happens on Wall Street without adequate oversight and regulation(s): the markets crashed, foreclosures destroyed home values, the economy went into a tail-spin. As if that wasn’t bad enough, the trickle-down effect is that millions of our friends and neighbors are unemployed at precisely the time when their highest-value asset, their home, has collapsed.

Compare the amount of money we’re talking about to the debt-ceiling or the budget for the entire U.S. Government. On Wall Street, in the derivatives market alone, $600 trillion is in play. That’s why the players, and the Chamber of Commerce, are lobbying so hard to be left alone, and trying to scare us with more jobs lost.

“…there is ‘no upside’ to imposing margin requirements on end users, said David Hirschmann, who heads the U.S. Chamber’s Center for Capital Markets Competitiveness.”

Victoria McGrane, from her article
Wall Street Journal February 13, 2011

Recovering our standing as the world leader in agriculture and industry, and creating the millions of jobs our country needs, won’t be enough to keep Wall Street greed from ruining our economy. We abandoned a “free market” approach to firefighting, because the profit motive led to really bad outcomes for the people that fire companies were supposed to protect. There are countless examples of systems that operate better in terms of the “common good” when we don’t let snake-oil salesmen operate unfettered in pursuit of their individual profit.

I’ve been pondering whether or not our financial markets can “create prosperity” other than for Wall Street insiders. It’s certainly not what the evidence suggests they’ve done lately; it’s hard to see an “upside” (to borrow David Hirschmann’s term) to heeding those with the most to gain by slowing down reforms when they’ve shown such willingness to abuse the system.

It’s harder still to trust the tired old assertions about government regulations being nothing more than interference that “burdens small business” which can be, and have been, so quickly, thoroughly debunked by simple logic.

This is not Somalia. The citizens of the United States don’t want an end to government; we want a return to the ideal that good government works “for the people” not the fatcats who game the system for profit at the expense of the majority of fair-minded, hard-working people. We want solutions, not sound-bites.