View Full Version : Economists Warn Another Financial Crisis on the Way

03-02-2010, 09:01 PM
Economists Warn Another Financial Crisis on the Way
Nonpartisan Group Led by Nobel Winner Calls for Stronger Financial Reforms
March 2, 2010

Even as many Americans still struggle to recover from the country's worst economic downturn since the Great Depression, another crisis one that will be even worse than the current one - is looming, according to a new report from a group of leading economists, financiers, and former federal regulators.

In the report, the panel, that includes Rob Johnson of the United Nations Commission of Experts on Finance and bailout watchdog Elizabeth Warren, warns that financial regulatory reform measures proposed by the Obama administration and Congress must be beefed up to prevent banks from continuing to engage in high risk investing that precipitated the near collapse of the U.S. economy in 2008.

The report warns that the country is now immersed in a "doomsday cycle" wherein banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management - and when the risks go wrong, the banks receive taxpayer bailouts from the government.

"Risk-taking at banks," the report cautions, "will soon be larger than ever."

Without more stringent reforms, "another crisis - a bigger crisis that weakens both our financial sector and our larger economy - is more than predictable, it is inevitable," Johnson says in the report, commissioned by the nonpartisan Roosevelt Institute.

The institute's chief economist, Nobel Prize-winner Joseph Stiglitz, calls the report "an important point of departure for a debate on where we are on the road to regulatory reform."

The report blasts some of Washington's key players. Johnson writes, "Our government leaders have shown little capacity to fix the flaws in our market system." Two other panelists, Simon Johnson, a professor at MIT, and Peter Boone of the Centre for Economic Performance, voiced similar criticisms.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner "oversaw policy as the bubble was inflating," write Johnson and Boone, and "these same men are now designing our 'rescue.'"

The study says that "In 2008-09, we came remarkably close to another Great Depression. Next time we may not be so 'lucky.' The threat of the doomsday cycle remains strong and growing," they say. "What will happen when the next shock hits? We may be nearing the stage where the answer will be - just as it was in the Great Depression - a calamitous global collapse."

The panelists call for major banks to maintain liquid capital of at least 15 to 25 percent of their assets, the enactment of stiffer consequences for executives of bailout recipients and for government officials to start breaking up firms that grow too big.

In the report, Elizabeth Warren, who was chair of the Congressional Oversight Panel, reiterates her calls for an independent agency to protect consumers from abusive Wall Street practices.

"While manufacturers have developed iPods and flat-screen televisions, the financial industry has perfected the art of offering mortgages, credit cards and check overdrafts laden with hidden terms that obscure price and risk," Warren writes. "Good products are mixed with dangerous products, and consumers are left on their own to try to sort out which is which. The consequences can be disastrous."

Frank Partnoy, a panelist from the University of San Diego, claims that "the balance sheets of most Wall Street banks are fiction." Another panelist, Raj Date of the Cambridge Winter Center for Financial Institutions Policy, argues that government-backed mortgage giants Fannie Mae and Freddie Mac have become "needlessly complex and irretrievably flawed" and should be eliminated. The report also calls for greater competition among credit rating agencies and increased regulation of the derivatives market, including requiring that credit-default swaps be traded on regulated exchanges.

With the Senate Banking Committee, led by Chris Dodd, D-Conn., poised to unveil its financial regulatory reform proposal sometime in the next week, the report calls on Congress to enact reforms strong enough to prevent another meltdown.

"Sen. Dick Durbin once said the banks 'owned' the Senate," says Johnson. "The next few weeks will determine whether or not that statement is true."

03-03-2010, 09:22 PM
Mesa, this is a great article.

I just don't know where to begin there is so much covered here.

So I will just ask you if you want to weigh in on this with any initial thoughts since you posted it.

There are so many areas of debate and discussion that could come from this I don't how to start.

03-03-2010, 09:56 PM
You can only hope that things get better, I sure hope they do. I'm going to graduate from college in a couple of years with a B.A. and I hope I'll be able to get a job then. :lost:

03-03-2010, 11:26 PM
You can only hope that things get better, I sure hope they do. I'm going to graduate from college in a couple of years with a B.A. and I hope I'll be able to get a job then. :lost:

McDonald's is always hiring, so are the car washes. :wink02:

03-04-2010, 12:12 AM
McDonald's is always hiring, so are the car washes.
Haha thanks, I'll keep that in mind. I bet they would love a college graduate. :wink02:

03-04-2010, 05:35 AM
This is a serious problem. Greed, selfishness and corruptness run a muck.

Whether you work in the private sector, for the government or sit on the couch collecting a government paycheck, selfishness and corruptness is everywhere.

What I take from this as a conservative is that the government has HEAVILY regulated industries for years in an attempt to minimize one person taking advantage of another.

Some mortgage loans require 70 pages of paperwork & disclosure that must be read and signed at a "closing". It is impossible for most people to digest and understand all of these disclosures. Some people, unfortunately just start nodding and signing because they get so overwhelmed. In cases like this, it can be argued that it is sometimes having the exact opposite effect as the stated intent.

The government has even gotten directly involved in mortgage lending with fannie mae and freddie mac and look at what a train wreck that has been.

My point is I am all for laws that protect people but is the government, with all of these mountains of regulations and paperwork in place already, not proper regulating these industries and not properly enforcing them?

So my questions are if the government is already heavily regulating these industries and we are still having all of these problems, will all of these new regulations help?

Here's some of my off the cuff thoughts.

1. The government often regulates industries without understanding them.
2. They make laws that they don't enforce.
3. The laws and disclosures are so complicated that nobody understands them and it does as much harm as good.
4. They reward bad behavior with bailouts. When you reinforce a behavior (good or bad) you tend to get more of it.
5. The government not only regulated but inserted themeslves into the mortgage industry with fannie & freddie and it was a disaster.