Economists: Another Financial Crisis on the Way
Nonpartisan Group Led by Nobel Winner Calls for Stronger Financial Reforms
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."