Friday, October 28, 2011

Transparency and Integrity In the Financial System Are Still Lacking

A couple of high-profile insider-trading cases have been in the news lately.  But one mustn't conclude that this means that the system has been cleaned up so that a repeat of the 2008 financial crisis cannot occur.

There have been only modest reforms of the financial system since the crisis of 2008.  The system is still skewed to opacity and a lack of integrity.  Efforts by former Fed Chairman Paul Volcker and others to reform the system have been diluted by the political power of the big banks and major Wall Street firms.  For example, efforts to break up the largest financial enterprises into two areas to reduce systemic risk have failed.  It is imperative that activities that are government-backed are restricted to prudent business activities, while aggressive risk taking is conducted in entities that will be allowed to fail.  Yet, the political clout of the largest financial firms has blocked this reform.  The system remains one where profits are private, but losses are socialized and borne by the nation's citizens.

Furthermore, massive speculative activity in exotic derivative instruments continues to distort commodity and other markets, including the European government bond markets. 

In addition, attempts to bring hedge funds under similar regulatory oversight that other financial firms are under have been weakened to the point of insignificance.  (This is on top of the only 15% tax rate on income of the wealthiest hedge fund managers.)  The Securities and Exchange Commission sought to require hedge funds to disclose their holdings on a timely basis (as mutual funds must do), but intense lobbying by the super rich financiers resulted in a final rule that preserves the existing opacity and requires only general, belated disclosures.

There remain alarming risks to the financial system in an era of stunning income and wealth inequality that I believe will undermine the long-term prospects of this country.

Steve Lehman

No comments:

Post a Comment