Recent events support financial regulation reform

In a fortuitous turn of events the SEC has decided to make a public announcement of a legal action based on things they have known about for at least a year in the Goldman Sachs case. Sure they had to study the case and try and convince themselves it might be winnable. It took some time, I'm sure. We can't help but notice how helpful for the progress of the party in power it is to put out some bluster on this right about now, while the financial reform legislation is about to come up for a vote in the Senate. That should be a good thing even if the SEC decided the case really is not winnable. It at least yields something useful from the time they have put in on this up to now. It may be all we really ever get out of it. A bunch of lawyers are sure to do well with it, but as for the rest of us I'm not so sure. I predict that when all is said in done many years hence the Status Quo will be largely undisturbed.

You see, my cynical alter ego knows that the rich will continue to get richer and that this is probably just another PR stunt that admittedly does involve some pain and even some financial loss for one of the great representatives of the rich. But the net effect will not be that the rich actually lose anything, they will just appear to lose for a while for political reasons. The banks are still being given cheap money to speculate with in the financial markets by the Fed on a huge scale. We have been funding what amounts to a dollar carry trade with the 0-0.25% money available at the Feds discount window. This normally happens on a smaller scale and at a somewhat higher interest rate, but since the banks have needed bailing out the size of the operation has been increased. If you pay any attention to the quarterly earnings reports you know that banks are reporting record profits, but it is all coming from their trading desks. They are still taking huge losses on the traditional banking business of making loans. Goldman Sachs is making a killing during this Great Recession. Of course, they don't really make loans, they are just a bank holding company so they can qualify for the Feds cheap money.

One thing to realize is that even in "normal" times, the manipulation of interest rates by the Fed serves to keep rates lower than historical norms during free market periods of our history. This has the effect of overstimulating the economy, of favoring investment in interest rate sensitive industries, and of providing relative economic advantage to the large entities which can deal with the Fed directly. It inherently favors big business over small, and leads to what otherwise would be unrealistically cheap products being produced in large quantity, which in turn leads to over consumption, and the associated higher levels of waste/pollution as a side effect. Put more simply, this type of economic management just leads to Too Much Stuff. With too much emphasis on activities that require low interest rates and/or high levels of liquidity for profitability we are more vulnerable to large scale business contractions and layoffs when interest rates rise or the Fed otherwise tightens liquidity conditions. And over all, the value of the dollar declines. It is less noticeable while the price of stuff doesn't rise, or even falls, due to the scale of production, but it does happen, is happening. The rich don't mind that we play this game because this form of economic management provides them with so many nice investment opportunities that it makes up for the decline in the value of the dollar.

Now you are privy to what my cynical alter ego knows. The people who are winning this game aren't interested in changing it in any material way. We ordinary citizens will have to get up very early, as they say, to stay on top of this and see to it that we get more than just the appearance of meaningful rule changes. We will have to know the rest of the story, including about the role of the Fed, and the NY Fed in particular, in how this game is played. I mean, is it reasonable to believe that when a body run by the elite of the banking industry is charged with regulating the banking industry that there isn't going to be just a bit of a bias in favor of their industry? Those favors can take many forms, many of which only financial experts could understand. But if we don't even take the initiative to find out what they are up to, then what chance do we have of understanding?

To that end we have been lobbying the local political party organizations to come out in support of the bills in Congress which call for the first real audit of the Federal Reserve. It has been a long time since any substantive changes have been made to the Federal Reserve system, since the 1930's for the most part. Since we have just come through what is said to have been an even larger financial crisis, this is an appropriate time to re-assess the role of this organization. Congress created it, and Congress can change it. In fact, doesn't Congress have a responsibility to ensure that it's creation serves the People's interests? A proper audit would be a good start on executing that responsibility.

I am very pleased to be able to say that we have made some progress towards our goal, at least in King County. The King County Democrats have passed a resolution in support of a Federal Reserve audit, (read it here) and we think the King County GOP will as well. The larger test comes in June at the State conventions. Stay tuned, stay energized. This is the real deal.