Joanne Knight

May 13, 2014

Deregulation Ruined the Economy in 2008, Not High Wages

Our small band of minimum wage activists joined the throng outside of Walmart in Mountain View, California, on Friday May 9 to try to catch the eye or ear of the President. We also wished to show our disapproval of this clear demonstration of the captivity of democracy to corporate forces. Many issues were represented that day: anti-drone, anti- Keystone XL pipeline, OUR Walmart and even anti-Obama. It was vibrant, exciting, and inspiring. A strong sense of solidarity pervaded. But we did not even catch a glimpse of Obama.

I am currently involved in a campaign to increase the minimum wage in Mountain View. The campaign has been opposed by unexamined economic thinking and neoconservative political ideology. Right-wing politicians at all levels seem blinkered in their economic views with a willful ignorance of the full complexity of the economic arguments.



February 15, 2009

Shorting the Regulation

Filed under: economic crisis,Uncategorized — joanneknight @ 12:23 am
Tags: , , , ,

Innovation is the salient energy; Conservatism the pause on the last movement.
Ralph Waldo Emerson The Conservative (1842)

Biblical images of people scrabbling through the dirt for food in Colorado seem to capture the essence of this economic downturn. Lines stretching down the street for charity food parcels certainly remind one of images of soup kitchens during the Great Depression. But unfortunately Western leaders look more like Nero than FDR. The best they can come up with is more interest rate cuts to encourage people to borrow more and spend more; more tax cuts so once again people have more money to spend. It’s time to introduce the ‘R’ word: Regulation on financial markets. If banks cannot decide what is in their own best interest (as was pointed out by the guru of the free market, Alan Greenspan), let alone the broader public interest, it is time for the government to step in and tell them what is.

None of the $US700 billion ($1 trillion) financial rescue package provided to US banks will be used to assist homeowners facing foreclosure or business even though the legislation authorises it. US Treasury Secretary Hank Paulson, who has made about half a billion dollars from the deregulated system, has clashed with Congress, telling them it was designed to stabilise the financial markets, not as a panacea for economic difficulties or to help beleaguered homeowners and automakers.

Deregulation means that we have wildly fluctuating markets operating on rumour and sentiment rather than hard data. Michael Heffernan, senior client adviser at Austock argues that the sharemarket drops have ‘a lot more substance to them that we thought 6 months ago.’ Many commentators claim that the market is suffering from a loss of confidence as if there were no structural reasons like deregulation, speculation and over-leveraging causing instability in the market.

The G-20 Study Group on Global Credit Market Disruption concluded in their report last year that regulatory gaps encouraged the increased use of securitisation and the spread of the ‘originate and distribute’ mortgage model that resulted in insufficient attention being paid to credit quality. Weaknesses in risk management systems and regulatory oversight saw these lending practices continue even as credit quality continued to decline and risk exposures increased. The spread of these losses was caused largely by high levels of leverage in the system, including insufficient capital held against loans. This in turn was partly a product of failings in the regulatory system to apply adequate risk capital to the off-balance sheet entities that securitise loans on behalf of the banks. The complex nature of structured finance products also resulted in some investors having an over-reliance on credit ratings instead of undertaking adequate due diligence. This complexity also meant that exposures to subprime lending were difficult to determine, which contributed to difficulties in assessing risks. Weaknesses in accounting rules meant that off-balance sheet entities did not require clear and transparent disclosure. It seems a significant part of this problem is a lack of regulation.

The main reforms being offered are patently inadequate. The G20 countries advocated greater oversight of ratings agencies and stronger regulation of hedge funds. Consumer protection is to be bolstered and international financial institutions should be reformed. In addition, there should be clearer accounting standards and a review of the way managers are paid.

Many observers believe that Obama will be more open-minded about regulations that strengthen international institutions or that put an end to tax havens. But the incoming president will likely resist ambitious plans for a global financial regulator. ‘Even under a President Obama, the US government would not accept any kind of global supervisory authority for the financial markets,’ said Brad Setser of the Council on Foreign Relations. It seems America remains committed to free trade and deregulated markets.

Proposed changes to financial regulation require brokers to ask their clients whether an order was a covered short sale, and market operators to publicly disclose short-selling data they received from brokers. David Enke, Associate Professor of Finance at the University of Tulsa, argues that by making short data public, others might be tempted to increase their short positions, and so too the selling pressure on the shorted security. In the end, this may do nothing to decrease market manipulation, while still allowing the funds to profit from the falling prices.

According to AEF Rofe, Chairman of the Australian Shareholders’ Association, the new regime fails to address the past failure by the market operator and the regulator to effectively monitor and enforce the disclosure requirements. Advisers at DLA Phillips Fox also seem doubtful about the veracity of these changes. Traders have been selective about disclosure laws for years so asking them to disclose more appears rather pointless. At bottom financial institutions have shown themselves to be exercising reckless judgment when they think there are easy dollars to be made.

It is clear that short selling is a problem and needs to be regulated, but focusing on extreme speculation practices fails to take account of the myriad other causes of the financial meltdown. Companies which collapse due to high leveraging, such as Rubicon, have nothing to do with short selling. Deregulated lending resulting in shoddy lending practices and the inclusion of these bad mortgages as part of investment packages, which was not disclosed, has not even made it onto the agenda. The markets have run away and are now causing the economy to collapse, throwing thousands of people out of work, destroying local businesses, forcing people to seek charity. Markets need to be controlled by governments, not the other way around.

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