Saturday, December 5, 2009

White Dogs don't Bite?


More than a year after the bankruptcy of Lehman Brothers and almost two years since the near-collapsed Bear Stearns was taken over by JP Morgan Chase, the U.S. Congress is finally proposing new acts to re-regulate the financial market. But it seems once again the politicians are barking up the wrong tree.

Two bills are being contemplated: In the House, Representative Ron Paul is pushing to audit the supposedly independent and apolitical Fed; While Senator Chris Dodd has unveiled his proposed financial overhaul bill that, among other changes, aims to take away the Fed's supervisory role.

While I think the Fed has had some mishaps over the years, it is certainly not the root cause and most certainly should not be the main target of the thrust of major legislative re-regulation that comes two years after the financial crisis erupted. Some of arguments, chief amount them are over-extended period of easy monetary policy and lax oversight on financial institutions, behind the proposed legislations may be valid, but they are at best secondary contributors to the near breakdown of the financial system experienced one year ago. The primary culprits are the too-big-to-fail financial institutions and their predatory behaviours.

How should the reform bills tackle the "vampire squids" (the term was used by Matt Taibbi in his famous Rolling Stone article to describe Goldman Sachs)? The answer can be found in another piece of legislation passed 76 years ago: The Glass-Steagall Act.

The year 1933 was disturbingly similar to 2009. The Great Depression, which culminated into the stock market collapse in 1929 and the collapse of the financial system in 1933 was deemed to have been caused by irresponsible commercial banking institutions that dabbled in inappropriate investment activities (sound familiar?). The Glass-Steagall Act was eventually passed to firewall commercial and investment banking activities.

To look further back into history, there was the Standard Oil episode in which the Rockefeller monopoly and its anti-competitive behaviors were deemed harmful to the economy and the nation. So the Sherman and Clayton Acts (collectively referred to as Antitrust Acts) were enacted at the turn of the 20th Century to specifically to deal with monopolies. If need be, the Acts allow, as in the case of Standard Oil and, later, AT&T, the government to break up the monopolistic entities.

It is therefore disappointing to note that with all the academic and journalistic research that point towards the failure of the system in that it engenders risky behaviors within too-big-to-fail institutions, the best solution as proposed after two years since first domino fell (during which the government allows hundreds of billions to flow into the pockets of executives and stakeholders who were responsible for the meltdown) is the reshuffle and cast an watchful eye over the Fed, whose only crime, at most, was dozing-off guard.

To explain my point with an analogy: After the house was raided by a gang of robbers, rather than to pursue and hunt down the perpetrators or to rectify the security holes in the system (e.g. bring back Glass-Steagall Act which was dismantled in 1999), it was recommended that the guard dogs be changed. The reason?

White dogs don't bite.