Globalization and Deregulation of the Financial Markets: The latest crisis

by

Dr. Ioannis N. Kallianiotis

Economics/Finance Department

The <-xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Arthur J. Kania School of Management

University of Scranton

Scranton, PA  18510-4602

U.S.A.

Tel. (570) 941-7577

Fax (570) 941-4825

E-Mail:  jnk353@scranton.edu

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Woodrow Wilson

President of the United States (1913-1921)

 

 

 

 

 

 

 

 

 

 

 

June 2011

Globalization and Deregulation of the Financial Markets:

The Latest Crisis

 

 

Abstract

 

The purpose of this work is to determine the elements that caused the latest “planned” financial crisis and the prospective problems to the U.S. and consequently to all economies of the world, due to the inhumane globalization. The global uncertainty has increased the price of gold and the U.S. debts and deficits have caused the depreciation of the dollar, which with the help of speculators have heightened the price of oil and created a number of bubbles. The deregulation in the U.S. financial markets and institutions and the easy money policy had increased lending, corruption, speculation, prices in financial and real assets (even in food) and had caused these enormous bubbles, which some people (the world planners=“the wise men”) burst them in 2008 and created the worst financial crisis, following by the first most severe recession (depression) in the 21^st century. This moral and political crisis, in the western free-market economies, led them (especially Euro-zone) into the recent and continued deep recessions, enormous unemployment, annihilation of their wealth, complete distrust for the financial markets and governments; some nations are closed to bankruptcies and have lost their sovereignty, some individuals and families have been destroyed, and a new cold war appeared. Hence, we face, today, an absolutely uncertain future with these interdependent nations that the world leaders accepted without any resistance. This hateful globalization made a domestic financial crisis international.

 

 

I. Introduction

     

The events of the last couple of years and the current ones, which could destroy the international economic system, have proved the magnitude of the problem that globalization[1] has caused to all nations and especially to the U.S. economy, that is the victim and the sacrificer (with all these stranger people, who advise and decide about the future of the world) of the domestic economic welfare for the creation of a “global welfare”. It is very easy to fool some people, but Americans can be fooled all at once by a few manipulators of the truth and the objective in life. The world, currently, has found itself in the midst of the largest global financial crisis since the Great Depression of the 1930s, and this crisis has underlined the importance, that nations must be independent, self-sufficient, and in an autarky situation; following their own business cycle, their own value system, their own socio-economic structure, their own public policies, and being respectful even by their enemies. This is where we must stead today, after all these thousands of years of growth, civilization, knowledge, and above all, the revelation. The rest have no real value, only a market value, which actually is a bubble (a big lie).

Business managers have taken advantage of the phenomenon of globalization by exploiting factors of production, maximizing their compensations, increasing their power over the political leaders and the other authorities, and magnifying the uncertainty around the world. They are stretching the fingers of the “invisible hand” of our free-market system into every country. Socialist countries, atheist communist countries, under-developing ones, all have been persuaded that the market knows best. They embraced the system and joined the game, but we are not sure if they have learnt something from its current deficiencies. Managers by outsourcing their operations reduced their labor and material costs and increase their compensations, earnings, revenue, and shareholders return. The old economic theories and models can not apply to this unreal world, the “new world [dis]order”.  If we do not bring back the social welfare that countries were experienced, before these uncontrolled liberalizations, deregulations, and innovations; of course, with some interdependence, fair competition, and ethical cooperation among nations, even protectionism if it is needed for the citizens’ well-being, this global crisis is nothing compared with the next one.

 

 

II. American Devaluation and the Globalization of the Crisis

 

When the latest crisis began in the U.S. investment banking industry,[2] there was some hope that the continued strong growth in the emerging giants (China, India, and Brazil) might be able to sustain global growth, as the more advanced economies slipped into recession, but the growth in emerging markets depends on their ability to sell to the richer countries. Unfortunately, globalization has made the ups and downs of economic activity (business cycles) very synchronized[3] and at the same time, diversification has become worthless. A country cannot become a net user of all commodities, but a producer and partially user and exporter of the excess production abroad.[4] Some people emphasize that globalization has reduced inflation,[5] but inflation depends on domestic public policies and institutions and not so much on the openness of a country. The only thing that we are sure is that globalization has caused tremendous unemployment and has encouraged illegal migration, which has contributed to the imported unemployment, has reduced wages in the host countries,[6] and has destroy the national identities of the host nations.

    The structure of our free-market economy is very complex and there are participants, who have superior knowledge, information, power, and other advantages above the average person and unfortunately, they abuse their power, acting against the less powerful and against the general public, and against the social interest. The market system is providing to them its structure, all these resources, capital, labor, land, institutions, instruments, and hundred of millions of dollars salary and other benefits (for the CEOs). Businesses and their executives have to give back a “reward to society” for the benefits that they have derived from this free-market.[7] Then, this free-market benefits only businesses and is acting against the social interest; for this reason, it needs to be regulated. The financial markets and institutions are collecting the savings and use them to finance the country’s economy by creating jobs, income (wealth), and improve social welfare. By allocating the savings (domestic and foreign) to businesses and individuals and monitoring the use of these funds, the markets and their institutions play a very important role in the entire free-market system. Parts of the financial sector are unregulated today, due to an irrational deregulation that started in 1980 and continued up to the current crisis, three years ago (2008). Competition has been lost in this market, hostile takeovers are its trend and its pride, and expropriation and foreclosures are its most common functions, lately.    

            The economics of financial deregulations have been studied, but the assumptions of those researchers were unrealistic and heroic. Their results appeared to be wrong and opposite of what they were expected and recommended to the decision makers. Their analysis was a positive one and a “politically correct” one. Regulations and financial markets, and of course, the entire political economy of a country must be analyzed with the traditional normative analysis: What are the “optimal” regulations that will improve social welfare, stability, growth, employment, and democracy in our country- The government, the central bank (Fed) and the other regulatory agencies have to be involved in our financial system because the economy depends on this system. To improve an economy, we need a normative political-economy approach, where every one must be responsible for his role and his obligations towards the society. We did not come here to steal, loot, lie, bribe, pollute, waste, abuse, etc. without using our mind, our conscience, our inherited values and virtues, and without maximizing our objective utility function, which is to maximize our efforts to reach perfection. Then, because we do not know our ultimate objective, someone has to direct us and these are the laws, regulations, codes of ethics, social justice, traditional value system, and other ones imposed by governments (uncorrupted moral and ethical democracies), by educational system (value oriented education), by institutions, and by families.    

A reasonable question is: Why there have been so many deregulatory reforms in banking and financial services during the past 30 years- Kroszner (2000) is using five different approaches (“public interest”, “private interest”, “ideology”, “institutions”, and “leviathan”) to explain regulation and deregulation in financial institutions. Of course, the objective of every science is the improvement of social welfare (well-being) of the citizens (public interest) and nothing else. Then, regulations are necessary in banking and other financial firms to correct any market failures and protect uninformed or uneducated or entrusted consumers from harm. Public interest must be satisfied by regulating the free-market.[8] The private interest is deregulation, increasing their size, strength, and wealth, so they can avoid the coercive power of the government and capturing rents for themselves at the expense of the general public. These institutions become sufficiently powerful, so much as to influence the politicians and the regulatory bureaucracy, which serve at the end primarily, the interest of those subject to regulation. The supposed regulated market actually captures the regulators.[9]  

            The effectiveness of the interest groups depends on their lobbying power. Businesses and producers of goods and services are more powerful and better organized than consumers, so regulations will benefit producers more than consumers.[10] For example, in the long legislative debates over the expansion of bank powers, banks, securities firms, and insurance companies organized powerful lobbying organizations to reduce regulations and they succeeded. Also, politicians are concerned about finding an optimal support coalition to promote their reelection chances, so they take into account the marginal costs and benefits to different groups. This explains why the banking and financial system had particular influence on politicians.  Credit allocation through financial institutions can be an important implicit or explicit tool satisfying government’s industrial policy (redistribution of resources). For this reason, they must be compensated through protective regulation (deregulation). People working for the free-market (Wall Street and Banking) are very smart and it is easy for them to find loop holes bidding the regulations (“brain spread”). Actually, the government has little incentive to enforce rules of sound financial institutions.[11] The codependence of the financial markets on the government and of the politicians on the Wall Street, will continue to allow problems to grow unchecked, as it happened during the latest financial crisis. Then, governments will never avoid bailouts of the corrupted financial sector because of deregulation and their fears that the Main Street will be negatively affected by the financial market absurdity (seeking an unethical balance between lobbyists and voters).

            It has been impossible for the average person to explain the widespread economic deregulation that has taken place during the past three decades and to understand the ideology of these people who act against the social interest. Their ideology might come from some kind of value-neutral political philosophy (liberalism, modernism, “new ageism”, globalism, etc.) and their enemy is the value-oriented government (conservatism, traditionalism, patriotism, spiritualism, etc.). With their ideology, they created an anti-humane legislative, cultural, educational, and social structure of excessive concentration of power in the hands of the financial elite (actually, they are people of the same origin, background, and beliefs) and no one can oppose their cruel establishment.[12] What constitutes ideology and why it acts against the social interest is something that has to do with their wrong philosophy in life; they ignore the ultimate objective of creation and the true aim of human beings.

            Of course, moderation, efficiency, morality, and honesty must be the objective of politicians and bureaucrats, who are public servants. But, unfortunately, they try to increase their size and influence (the leviathan syndrome). The fiscal demands (government expenditures and budget deficits) of the government help financial institutions to develop close and in their favor relationships with politicians who became the supporters of deregulations. Federal Reserve System (main regulator of bank holding companies) and the Treasury (through the Office of the Comptroller of the Currency regulates the national banks) wish to be the main supervisors of financial institutions with expanded powers. Then, there is a conflict between regulators over which one would be the dominant regulator in the future and they decided, instead of giving the power to the government, neither one of them to dominate.         

To understand why there has been so much recent deregulation (regulatory reforms)[13] in financial institutions is difficult, if we would not consider the ultimate objective of the “world planners”.[14] But, it is necessary to identify some of the factors that have contributed to these political-economic innovations[15] and their unanticipated social losses and threat towards their own existence. The deregulations have caused serious economic shocks that altered the efficiency, effectiveness, and the effluence of financial sector on the real one. Technological changes had significant distributional consequences, new products and markets brought new constituencies, competition among institutions increased, and innovations affected the preexisting markets and institutions and caused shifts to risks from financial institutions to governments (to taxpayer individuals). Securitization of mortgages, loans, and consumer credit had become commonplace. Commercial paper and junk bonds provided competitive alternatives to traditional investments. Foreign banks and financial firms entered and were doing business in every country. Banks were starting selling insurance, too. The evolution of asset price bubbles, the trading and pricing of derivatives (redistribution of risk or zero-sum gain instruments),[16] the impact of agency problems on the management of financial firms, the greed, the short-term thinking, the poor judgments of practitioners, and the participants self-interest created a very unstable financial system, which unfortunately, became global and this local crises spread to all over the world.[17]  With all these philosophical, technological, economic, and legal changes, the old financial–real sector equilibrium was disturbed and the results are that the taxpayers have to bail them out. Economists had ignored the negative effects of deregulations and they were emphasizing issues on efficiency. The question is the same all over the world: How to maximize social welfare in a country, without making a single individual worse-off-[18]

            The financial services industry has experienced tremendous demands, greedy supplies, and significant changes over the last thirty years. Thousands of banks have been consolidated, privatized, restructured, newly formed, diversified internationally, introduced new products, but in addition, have been deregulated and extremely risky. Consolidation accelerated, following the 1980s deregulation of restrictions that prohibited bank expansion across geographic markets and into other financial services. The recent destructive deregulation was the Gramm-Leach-Bliley Act (November 15, 1999), which loosens restrictions on commercial banks, investment banks, retail brokerages, and insurance companies; they are all free to enter each other’s lines of business.[19] Have these deregulations improved the risk-return trade-off faced by financial firms- Have they improved the social welfare-

            As a result of bank failures and rapid Mergers and Acquisitions (M&A) activity, the number of banks and banking organizations fell by more than 34% between 1989 (12,728 banks) and 2008 (8,384 banks).[20] Some 279 banks have collapsed since September 25, 2008, when Washington Mutual became the biggest bank failure on record. The recent recession and collapse of the housing bubble have cut bank-industry employment by 188,000 jobs (8.5%), since 2007, according to FDIC data.[21] The share of total nationwide assets held by the eight largest banking organizations nearly doubled over this period. Sophisticated financial technologies and innovations, such as derivatives contracts, off-balance-sheet guarantees, and risk management might have been produced more efficiently by larger institutions. Thus, deregulation of any restrictions on banks increased their sizes. The demarcation between banks and investment banks (Glass-Steagall Act of 1933) had started loosen since 1956 and 1970 with the Bank Holding Company Act and the Bank Holding Company Act Amendments, which allowed BHCs to underwrite certain eligible securities, including general obligation bonds, U.S. government bonds, and real estate bonds, that were exempted from the original Act. In the mid-1980s, the Fed and the Office of the Comptroller of the Currency (OCC) began loosening restrictions on greater bank participation in investment banking and insurance.[22] 

            There are legitimate worries about the manageability of such complex enterprises that we have created the last ten years. The financial regulatory system had worked remarkably well in maintaining financial stability over the past sixty-five years, but in 1980s deregulation started and the system’s stability started to be threatened. Lately, the financial system collapsed and the government had to rescue it. The conservative think tanks criticized such rescues as the socialization of the financial institutions and an unwarranted government intrusion into the free market. Liberal think tanks criticized such rescues as a misuse of taxpayer money to protect rich bankers and financial speculators. At that moment, we had to rescue these institutions because they affect negatively the real sector of the economy, but we have to regulate them so the society can be sure that similar crisis will not happen soon (the traditional view). As the world (its “planners”) abandons humane social policies and embraces globalization, we will see more crises and worse than the current one. Unemployment is worse than inflation or financial market instability. We have to give priority to other indicators and not to the stock market indexes. A distress index,[23] which will measure unemployment, inflation, and debt, would be better for our society because it will measure social wealth. This wealth is the “safety net” of the citizens and has to be protected by regulating the institutions and prevent them to act inefficiently and unfairly for their suppliers of funds. These regulations have to be extended beyond banking and firms, which received rescue funds to the entire financial sector. The financial conglomerates that we created are too big to fail because they create thousands of unemployed people and destroy the confidence for our financial system by generating a financial panic, an economic turmoil, and a deep recession. We have to be careful after this crisis and not to repeat the mistakes of the last thirty years, but to learn the lessons of the current economic contingency.

Furthermore, credit default swaps (CDSs), which allow banks and other lenders to buy insurance against borrowers going bust, have caused serious problems to the borrowing countries and the financial markets. Europeans are asking for more regulations of these speculative instruments and more transparency, especially lately, with the PIIGS in Euro-zone.[24] Also, the EU was considering a ban on speculative derivative trades, including credit-default swaps, which have been blamed for worsening the crisis in Greece.[25] Unfortunately, Greek stocks and government bonds tumbled on mounting concern the nation might struggle to meet its debt commitments as public finances were deteriorating. Greek government bonds fell the most in a year as Fitch Ratings downgraded the nation’s credit.[26] Moody’s Investors Service slashed Greece’s credit rating to junk status on June 14, 2010 in a new blow to the debt-ridden country that is under international scrutiny after narrowly avoiding default in May 2010.[27]

The U.S. Federal Reserve’s “easy money” policies, during the first part of this decade (the Fed cut its target rate for overnight lending between banks to 1 percent in June 2003 from 6.5 percent in December 2000, and left it unchanged for the next year), caused the housing bubble and a tremendous borrowing by businesses and individuals (banks were offering loans without any exception to everyone).[28] Then, between June 2004 and June 2006, it raised the rate in quarter-point moves to 5.25 percent. In 2007, we started talking about the distressed mortgage market and the tremendous losses to financial institutions.[29] But, this must be expected because a medium house in the U.S. is $200,000 (borrowing money), the mortgage rates about 7%, the property taxes ($6,000),[30] insurance, maintenance, and other costs made this poor individual to pay in 30 years 3 times the purchasing price ($600,000) of this home. When he loses his job, due to our market oriented economy, everything is lost for him and his family. It seems that there is no real ownership in any of the two extreme systems (communism and capitalism). The cost of renting a house is much lower than the cost of owning one.[31] European Union tries to impose a similar system to its country-members because they did not have so far property taxes and insurance on their homes.

The subprime[32] crisis in the U.S. national housing market was the worst in 20 years. The foreclosure wave that began in 2006 was sparked by problems with subprime mortgages. Most subprime mortgages are “hybrid” loans, which have a set interest rate for some initial period, say two years. After the initial period, the interest rate adjusts every six months for the rest of the loan’s term. Most commonly, this rate adjustment is tied to the 6-month LIBOR,[33] and the adjustable rate is usually 6% points above the LIBOR. The initial interest rates on subprime adjustable-rate mortgages (ARMs) were always markedly higher than the interest rates offered on prime mortgages.[34]  The higher interest rates after adjustment in 2004 and 2005 were about 3 to 4 percentage points higher than the initial interest rate. The main problem in the subprime mortgage market is many borrowers’ inherent inability to afford the monthly mortgage payment, not the interest rate tied to the loan. Across the U.S., foreclosure rates on both subprime and prime mortgages had risen, and more foreclosures were expected in the near future, due to high uncertainty in the labor market. Lower market prices increased the probability that a borrower will have negative housing equity (HE), meaning that the outstanding mortgage balance (OMB) is higher than the house’s current market value (HCMV).

Homeowners with negative housing equity do not routinely default on their mortgages. Only when adverse life events at the household level take place and affect negatively cash flows (job loss, divorce, unforeseen medical expenses, etc.), typically presage foreclosures. Default probabilities will rise when homeowners are in a position of negative equity because they will have trouble refinancing a mortgage or selling their houses. The homeowner’s interest is to continue serving his monthly mortgage payment, but the business cycle does not allow him to fulfill this obligation. The majority of subprime borrowers had high Loan-to-Value (LTV) ratios, meaning little equity in the house at the time it was purchased; they did not fully document their assets and income, an omission that could mask other risk characteristics; and they had high debt-to-income ratios, meaning that the mortgage was financially burdensome under the best circumstances. Then, a household-level shock could prove to be a tipping point triggering eventual foreclosure.

Also, securitization (the pooling and packaging of loans into securities for sale to investors) had increased the availability and improved the terms of credit, but had increased risk, too. Rather than holding loans on their balance sheets, financial intermediaries were using the proceeds from securitization (asset-backed securities, ABS) to originate new loans. Securitization grew rapidly for most of this decade, with ABS outstanding rising from $3.4 trillion in first quarter 2000 to $8.4 trillion at their peak in mid-2008. When the housing bubble burst, the value of the collateral backing much of the ABS declined sharply, and so did the value of the securities themselves. The Federal Reserve responded by creating the term asst-backed securities loan facility (TALF).[35] Its purpose was to boost securitization by providing loans to people holding certain highly rated ABS. Also, the Fed turned to a new set of policy tools to provide liquidity and direct funding to borrowers and investors in key credit markets. The result was a variety of new facilities: (1) Term Auction Facility (TAF), (2) Term Securities Lending facility (TSLF), (3) Primary Dealer Credit Facility (PDCF), (4) Asset-Baked Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), (5) Commercial Paper Funding Facility (CPFF), and (6) Money Market Investor Funding Facility (MMIFF).

            Further, there are many arguments against the extreme executive compensations during the last years, but at the same time there are a few, who are in defense of these anti-social abuses of the “free-market” (value-free) system.[36] The defenders say that “the U.S. economy has done extremely well, so the executives must get these compensations”. Of course, corporate profits have grown, but their growth is about the rate of growth of the economy. Then, CEOs have not added any exceptional value to the economy. In 1980, the compensation of the average chief executive officer was forty-two times that of the average worker (<-xml:namespace prefix = v ns = "urn:schemas-microsoft-com:vml" /> ); the peak was in 2000 ( ); in 2004 it became ( );[37] and in 2006 ( ).  In 2007, the total revenue of the 500 largest companies in the U.S. was $10,602 billion; their profit was $645 billion, their profit as a percentage of revenue was 6.09%; the compensation of their CEOs was $5.5 billion (maximum executive compensation was $100.3 million), their 2^nd executives received $2.17 billion (maximum $72.5 million), their 3^rd executives received $2.08 billion (maximum $71.4 million), their 4^th executives were compensated with $1.74 billion (maximum $58.4 million), their 5^th executives cost $1.66 billion (maximum $49.1 million). Total pay to top five corporate executives was $13.14 billion, which was 2.04% of the corporate profits.[38]

            The rationale was that these executives had “created wealth” for their shareholders. But, the value that CEOs create ( ) is very small because of their high compensations ( ). Their high risk investments are increasing the risk premium of their institutions and consequently the cost of capital ( ). Then, the wealth to the shareholders is declined and as their net income (earnings after taxes) are falling, they have to raise prices to increase revenue and lay off their workers to reduce labor cost or to misstate their financial statements (inflate the financial results to affect positively their stock prices and to create an incentive to receive higher salaries and bonuses).[39] Since 1940, aggregate corporate profits have, on average, constituted some 6% of our GDP, ranging from lows of about 4% to highs of about 8%, but the CEO compensation went through the roof.[40]

            Actually, who is to blame for the current financial crisis and the peculiar recession that it caused-

1. Countries who consume beyond their production ( ) and generate negative saving.
2. The U.S. households who have spent way beyond their means in recent years; they have to start saving and stop being “consumers”.
3. The banks that took the upside for themselves and left the downside to the taxpayers.
4. The monetary and fiscal authorities who did not intervene in the markets.
5. The regulators who extended homeownership to even those who could not afford it.
6. The theorists who recommend 100% debt.
7. The tax system, which allows the interest on business debt to be tax deductable.
8. The market who tolerate high leverage.
9. The executives who determine their own compensations in hundreds of millions of dollars.
10. The Congress who has been submitted to lobbyists and deregulated the financial markets.
11. The weak and immoral political leadership who cares only for its reelection.
12. The controlled educational system, which has become a value neutral professional schooling.

In March 2010, European politicians and regulators were initiating a continent-wide ban on speculative trading of sovereign credit-default swaps. Making it stick without the Americans could not work. Unfortunately, New York and London dominate swaps trading, and both have resisted greater regulation. Last year, U.S. regulators and Congress rejected a proposed ban on buying credit-default swaps without owning the underlying debt. Adair Turner, chairman of the U.K. Financial Services Authority, said on March 10, 2010 that these so-called naked swaps were not the “key driver” of the Greek debt crisis and it would be wrong to rush to ban them. (sic). The European Union’s top regulatory official, European Commission President Jose Barroso, said on March 9, 2010 that the 27-nation bloc will consider banning “purely speculative naked” credit-default swaps after German Chancellor Angela Merkel and French President Nicolas Sarkozy called for a crackdown on derivatives trading to prevent a rerun of the Greek crisis. [41] European Commission officials are in early stage talks with euro-zone countries about setting up a “European Monetary Fund” to improve economic cooperation in Europe.[42] Also, the U.S. and European governments are moving toward a consensus on taxing large banks to cover the cost of any future bailouts rather than asking taxpayers to foot the bill, as happened in past banking crises.[43]

 

III. Conclusion

 

            Lastly, in a newly released transcript of a Federal Reserve Board meeting in March 2004, former Chairman Alan Greenspan argues against disclosing too much to the public lest the Fed “lose control of a process that only we fully understand.” This statement ranks as a sign of monumental arrogance for the controlled super-power. The context of Greenspan’s remark was a discussion over how much to reveal about the Fed’s thinking on monetary policy in general -not on mortgages in particular. But mortgages were part of the Fed’s monetary deliberations. Democrats and Republicans had been squabbling for weeks over how to ensure that bailouts would not happen in the future. Various bills would attempt to tie the government’s hands. The best way to do that is to discourage leverage. In other words, the federal government should make it expensive for banks to assume too much risk (whether on or off the balance sheet). In a perfect world, markets would perform this function. Theoretically, a bank with too much debt would be punished by sharply higher borrowing costs (or by a cessation of credit altogether). But in the just-ended economic cycle, lenders and investment banks were extended cheap credit as if the supply were limitless. In the 1990s and 2000s, “new-age” financial theorists argued that, thanks to modern risk-management tools, the traditional fear of leverage was outmoded. Even the Securities and Exchange Commission bought into this nonsense. In 2004, it chose to lessen capital requirements on investment banks so long as the assets they owned were “liquid.” The upshot- The “liquidity” of their assets, including mortgage bonds, proved to be ephemeral. Their debts proved permanent and crushing. And post-crash, when the International Monetary Fund looked for indicators that predicted which banks would fail, it found, lo and behold, that the “basic leverage ratio” was the most reliable guide to a bank’s survival. To paraphrase a warning from the drug culture, “debt kills.” Fed Chairman Ben S. Bernanke came into office promising more transparency. The Greenspan tapes confirm that Bernanke was on the right path: Openness is better. Finally, the Senate bill would narrow the Fed’s charter, so that it would regulate only big banks. Bad idea. The Fed is too close to Wall Street as it is. At least, as currently structured, it is exposed to all views. In 2004, the Atlanta Fed tried to warn the Federal Open Market Committee of the dangers in mortgages. Too bad they did not listen.[44] Lately, Dominique Strauss-Kahn, after a sexual scandal, resigned as the 10th leader of the International Monetary Fund, kicking off a contest for his successor as Europeans seek to retain the job amid a lack of unity among emerging-market nations.[45]

            The latest financial crisis had its origin (had been generated by the institutions, mostly, investment banks) in the U.S. housing market. And this anticipated financial crisis together with the high debts and prices of energy and food (due to our lack of production and dependency on imports) brought the economy to a deep recession (severe unemployment) and due to globalization; it was spread to the rest of the world (this is another “advantage” of globalization, a domestic problem of a large economy becomes global). The failure of the unregulated large financial institutions increased the systemic [global systematic (markets)] risk and harmed other financial firms and finally, the real sector of the economy.[46]  Another important type of risk to the financial system has been the “counterparty risk”, which is the danger that a party to a financial contract will fail to live up to its obligations. Counterparty risk exists in large part because of asymmetric information. Individuals and firms know more about their own financial conditions and prospects than do other individuals, firms, and investors (i.e., investment banks that deal in complex financial contracts and the nature of risk they face is not obvious). The solution is only one, regulation and control of every institution and business, from domestic to international, for the benefits of the single, ignored up to now, citizen.

 

 

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