Words from the SoapBox

by Marquis Codjia

A few months ago, the crumbling global economy was atop the agenda of many G20 leaders. Social unrest, banking sector meltdown, global growth conundrum, and stock market yo-yos were the main discussion topics among the planetary leadership.

Governments the world over addressed the most imperative issue, the banking pandemonium, with massive cash inflows into a sector that hitherto epitomized capitalism at its best (and worst), with a modus operandi more akin to central intervention in communist economies.

The global tab ranges from 4 to 5 trillion US dollars according to the most optimistic estimates, but the overall costs may run higher in the future.

The financial rescue of the ailing banking sector, in principle, was the right course of action and various experts across the political spectrum saw eye to eye on its criticality, including the staunchest free-market theorizers who routinely treat as leftist energumens out of the antediluvian era those who dare buck conventional wisdom regarding the role of government in social economics.

It was flummoxing, however, to observe how lenient authorities were vis-à-vis banks throughout the bailout process on top of the very favorable terms under which funds were disbursed. Hence, financial institutions that benefited from state largesse were able to quickly use monies received to regain profitability and reimburse their respective governments.

Other parts of the economy didn’t experience so swift a recovery. Unemployment is still high; the mortgage sector is still in a shambles. Banks have been reluctant to lend, creating an underperforming productive sector and a lethargic private consumption. The stock market may be up but, debatably, the “real economy” is still down.

Banks played a crucial role in the current economic malaise but anti-bailout commentators were wrong to vilify them and to affirm that such guilt should have precluded public rescue. Financial intermediaries are an epochal pillar of our post-modern economies and it would have been socio-economically ruinous and politically unpalatable to let them sink.

Admittedly, a majority of banks are today more cash awash and profitable than a year ago albeit some pockets of the industry are still comatose owing to the liquidity hemorrhage that has devastated them since the recession erupted.

Regrettably, nothing has changed. These institutions are resorting again to the erstwhile practices that wrought havoc to the economy in the first place, under the aegis of a regulatory body eerily blind, deaf and tongue-tied.

Banks, evidently, should be encouraged to pursue and make profits as any private concern. But when such a financial quest comes at the expense of an entire system or poses a systemic threat to the productive sector of the economy, the argument in favor of tougher regulation becomes of preeminent import.
Companies need to utilize hedging for exposure control; yet, speculators lately seem to use derivatives to bet against their very benefactors. Although outrageous to vast swaths of the populace, such practices are explicable if one considers that the speculating camp only furthers private interests of elites (their investors) who seldom factor morality into the profitability equation.

Case in point: Greece. The Hellenic government bailed out its banking sector with billions of dollars only to see their country downgraded a few months later because of an perceived default risk.

At this moment, elected officials and central bankers should ponder the following question: did the bailout work? Or, stated differently, did the mammoth cash infusion into banks and the associated supplemental initiatives reach the initial goals?

Seasoned economists and social scientists will grapple amply with issues regarding program effectiveness and efficiency in the future, but prominent experts currently believe the answers to such interrogations are negative. George Mason University economist Peter Boettke posited that bank bailouts have created a “cycle of debt, deficits and government expansion” that in the end “will be economically crippling” to major economies, whereas Barry Ritholtz, famed author of Bailout Nation and CEO of research firm FusionIQ, thinks the rescue programs could have been conducted better.

It can be argued that the initial rescue phase of the bailouts program was effectual in that it helped avert a domestic and global banking hubbub. But, contrary to popular credence, that was the easiest part. The courageous headship of political leaders and regulators cannot be underrated in the process, but it is indisputably far facile for a powerful central bank, like the US Federal Reserve, to make journal entries to the credit of targeted institutions and replenish their corporate coffers via the much celebrated “quantitative easing”.

The Fed, just like other G8 central banks, is in an enviable position because it can create money ‘out of nothing’ by increasing the credit in its own bank account.

Regulation is where actual political bravery need be shown from authorities, and so far the lack of sweeping reforms in the financial sector may obliterate the latter’s plodding recovery.

At present, there are five distinct reasons explicating the mediocre results obtained so far from the bailout scheme.

First, the much needed financial overhaul is taking longer to move up the legislative ladder and reach US President Barack Obama’s desk because not only financial lobbies – such as the über-powerful American Bankers Association – are exerting strong pressure, but the political agenda is also crowded with the healthcare reform and the geostrategic concerns linked to the conflicts in Afghanistan and Iraq.

The fact that Senate Banking chief Chris Dodd, D-Conn., wants to introduce reform in the sector will probably change little in the short-term.

Second, President Obama’s own senior level financial staff is composed of former Wall Street alumni and lobbyists, and many skeptics are incredulous that a clique so tied to financial interests can spearhead true reforms in an industry that was previously munificent to them.

The next two factors are endogenous to the banking industry. One is the past experience of regulation and deregulation cycles that usually make laws dissipate over time, and the other stems from the idiosyncratic ability of financial engineers and investment bankers to design new products and techniques to counter existing laws.

Finally, the regulatory endeavor should be global in scope, and the present lack of geographic cooperation and the practical difficulty to track systemic risk within the industry are currently handicapping further advances.

(Article initially published at http://wp.me/pMqmW-8y)

About the Author:

I’m a finance professional with a solid, varied risk management experience in the financial services arena. I have been involved in capital markets for a few years now, in the course of my work but also as a trader.
I’m an MBA graduate from Rutgers University Graduate School of Business at New Brunswick, New Jersey, and a CPA (Certified Public Accountant).
Read expanded bio at http://marquisc.wordpress.com/about/

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If I Were a Rich Man… by Carl Hampton

Many Americans living in the lower, middle, and even upper middle classes now more than ever before believe that they are striving for wealth that is unreachable. They believe that they will never be truly wealthy, only perhaps maybe with a little more luck they just may be a little better off than they once were, or better yet, better off than the people next door or that guy down the block.

Do the celebrity images put forward by the media exemplify true wealth? If that is the case then maybe most of us will never be truly wealthy.

This struggle with what real wealth should, especially during this recession, bring to light many questions, what is wealth? Is it the size of the house we live in? Is it flashy cars and jewelry? Is it were we take our vacations? Realistically the most important question should be how is wealth defined for the average man-that lower, middle, and upper middle class family that makes up the bulk of the American people?

Many Americans define wealth by the size of the income they earn. How much income per year defines wealthy? Depending on where you are starting form your opinion may change. Is it a “triple digit” income? Perhaps $75,000 means wealthy in your book?

Well, according to Kiplinger Washington Editors if you made at least $35,000 in 2008 you are more prosperous than over half of all of taxpaying Americans. According to the Department of Agriculture, in 2008 nearly 50 million Americans struggled to put food on the table. With these figures along with figures from the US Census, that is roughly one sixth of the entire population of the United States. One sixth of the United States had a hard time feeding themselves and their families.

I find that statistic staggering. Never the less, that puts that $35,000 into some kind of perspective– that is a lot of money. In fact, if you were to be able to make a little less than twice that, $66,000, you would be in the top twenty five percent of all wage earners in the US. That means realistically that you would be more affluent than 75% of the American population.

So, what’s my point? Well, if you are fortunate enough to fall into these categories, why do you not consider yourself of considerable wealth? Why do you not see yourself as having the opportunity to be even more prosperous? Should so many of us define wealth by outward appearance, showy cars, perhaps a boat or private schooling for the kids?

Why not define wealth, in these times of recession, as the ability to be without debt, have food on the table, and perhaps being able to invest some money into a future for your family, whether it be college funds for the kids or a strong stable plan for retirement?

Wealth can also be measured by what you do with your money and how you make it work for you, after all it is easier to save money than it is to make more so why not make it work harder for you?

About the Author

“Your Money Matters” By Carl Hampton Author of “From Credit Despair To Credit Millionaire” http://CarlHampton.com

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