Only Real Fix Is Regulatory, Analysts Say
WASHINGTON - The blood flowing this week from Wall Street, spilling over into the homes of most citizens and the economies of other countries, raised urgent calls for stricter regulation of major players in the U.S. economy.
Thursday's immediate worry was the health of the two remaining large-scale private investment firms Goldman-Sachs and Morgan Stanley, as well as Seattle-based Washington Mutual. Would they make it through the day?
By mid-day Morgan Stanley was reported to be looking for a buyout by a regional bank, Wachovia.
The middle-of-the-night crisis call that all presidential hopefuls must claim to be ready for are now being directed to the Federal Reserve chairman or Treasury Secretary.
After all-night meetings and phone consultations, the Federal Reserve moved in the wee hours of Thursday to stabilise financial markets here and abroad with infusions of 55 billion dollars in the U.S. and 180 billion dollars to central banks around the world.
Will this, along with the federal takeover of the American Insurance Group and mortgage giants Freddie Mac and Fannie Mae -- be enough to halt the crisis? Pundits are doubtful, tending instead to insist that stricter regulation of financial markets is the vital component needed for a long-term cure.
Major media outlets, including Time, Inc. and the Washington Post, both today blamed lack of regulation for the crisis.
Business writers for Time.com wrote: 'Fear is so pervasive today because for years the financial markets -- and many borrowers -- showed no fear at all. Wall Streeters didn't have to worry about regulation, which was in disrepute,' leading to a 'hothouse of greed' and thus to the troubles we are seeing today, argued Andy Serwer and Allan Sloan.
The Washington Post ran a lengthy article blaming 'official Washington' for failing to oversee the machinations of Fannie Mae and Freddy Mac -- whose imminent failure sparked last weekend's crisis -- resulting in a federal takeover that will cost taxpayers billions of dollars.
The Centre for American Progress, a Washington-based think tank, also placed much of the blame on lack of regulation, charging in a statement today that President's George W. Bush's 'hands-off approach is what has propelled the current crisis.'
'Despite being in charge for seven and a half years, Bush administration regulators neither recognise how the current turmoil could have been avoided with more effective supervision of the financial markets nor understand how the resolution of this crisis begins with individual homeowners,' argues Andrew Jakabovics on the Centre's website.
James K. Galbraith, a professor of business at the University of Texas at Austin, and author of a recent book on free-market economics, argued that: 'Deregulation has been the public faith of the financial sector since [Ronald] Reagan. Under Bush II, waves of predatory finance in housing were aggressively promoted by Alan Greenspan, by McCain's closest economic adviser Phil Gramm, and by so-called regulators who systematically subverted the public interest.'
Deregulation was the theme song of the Ronald Reagan presidency, epitomised by his assertion that 'Government is not the solution. Government is the problem.'
Reagan oversaw the elimination of government controls over a wide range of financial institutions and instruments, consistent with his belief, shared by most Republicans, that financial markets should be unfettered.
More recently -- and very pertinent to the current crisis -- passage of the Financial Services Modernisation Act of 1999, proposed by Republicans Phil Gramm and Jim Leach, did away with financial controls imposed under the New Deal that had barred banks, brokerage firms and insurance companies from mergers and involvement across sectors.
The banking industry and its powerful lobbyists had been pressing Congress to change the law for some time. But Congress' research arm, the Congressional Research Service, advised against overturning the 1933 legislation, known as the Glass-Steagall Act. Nevertheless, Glass Steagall was overturned, and less than 10 years later the consequences are being felt throughout the country.
Most analysts are hesitant to predict the future, except to foresee that the U.S. economy and population will continue to experience financial turbulence and pain for some time to come.
Nomi Prins, with a decade of experience working at Bear Sterns, Lehman Brothers, and Goldman Sachs is now pressing for urgent reform. 'Only a quick bout of sweeping and decisive regulation can fix what's broken,' she said.
She points out that until the complexity of entities created since 1999 means that no one is capable of regulating or overseeing them. The Federal Reserve, for example, is not set up to regulate the insurance business.
'If you buy a new car, you want to look under the hood to make sure it runs,' Prins told IPS. 'The same should be true of decisions made in recent weeks to either bail out or facilitate the merger of failing institutions, but this is not happening, there is no conversation; no strategy.'
Focusing on the trigger of today's crisis, sub-prime mortgages, the Centre for American Progress' Jakabovics argued that the solution lies in developing a programme to help strapped homeowners repay their debt, not standing by and watching them default.
Business analysts Serwer and Sloan warn that: 'Whatever the politicians do, we as a society are going to be poorer than we were,' because credit will be harder to come by, and U.S. citizens will have to learn to live within their means.
'For a year, the Fed and Treasury have been propping up the markets in the hope that this system would recover on its own. It will not, and today's [Lehman] collapse should mark the end of that mindset,' they said.