Maurice Ferre for US Senate - Florida Democratic US Senate Candidate

Dr. Paul Volker is correct in his diagnosis of the need for financial regulation. (See his latest article “The Time We Have is Growing Short”, June 24, 2010 release-New York Review of Books, http://www.nybooks.com/articles/archives/2010/jun/24/time-we-have-growing-short/?page=2)
We must control the rampant “gaming”of the financial system with a new Glass-Steagall Act (1934).
Thomas Jefferson said, “A large national bank (in the U.S.) is more of a threat to the Republic than a large standing army.” Jefferson lost both of those battles to Alexander Hamilton and the Federalists.

The Financial sector of the U.S. economy was at 3% of GDP in 1980. In 2010 it is now 6% of GDP. This sector -with its over the top salaries- is as much to be feared as the Military Industrial Complex that President Eisenhower warned us about.
There are five issues America needs to study and reform:

1. Too Big to Fail (TBTF) issues.  We need to define the functions of U.S. banks.  If the (TB) too big limitations does not work (because to compete globally we need big banks), then we need to focus on the fail side (TF); that means regulations are needed. But we cannot go back to the Act of Glass-Steagall Act of 1934. The current Bill that passed the Senate is a good beginning, but lacks teeth. I agree with the Volcker rule.

2. Should we tax bank excess profits and build up a bailout fund? Yes, but will these funds be raided by Congress, as Social Security has been raided?

3. Complexity. Who else understands modern instruments of banking?  Should bankers regulate banks? Who else understands? Who has the expertise? As Secretary of the Treasury, Larry Summers was the principal force at the White House pushing for deregulation with the Gramm-Leach-Bliley Act of 1999. Now, as Director of the National Economic Council, he’s back setting fiscal and economic policy in this White House: the Goldman Sachs continuum. In other words, how do we deal with political capture?

4. Why aren’t the Government Sponsored Institutions (GSI) part of the discussion? Where are Fannie Mae and Freddie Mac?

5. U.S. needs to find a balance between national and international regulations, otherwise there will be bank flight to less regulated centers, hence harming the U.S. economy.

Answers:

- We need to first determine the structure of banks before we determine size. We need to regulate what banks can and cannot do. We need to retain large size banks to remain competitive globally. We cannot regulate risk; segmentation was rejected. Should banks be treated like utilities? Yes.

- We have created a “free agent” (as in sports) society. What will the market bear? We are overbanked; we need to modulate the current incentive system; structural disincentives; competition from other, non banking entities.

- AIG cornered the Credit Default Swaps Market, but the risks were taken over by the U.S. taxpayers; in other words, AIG was relieved of risks, only got the upside, not the downside. This methodology for the U.S. government is not sustainable. We need regulation.

- There is no Chapter 11 for big banks, that’s what’s needed. We need to deal with political statements vs. financial statements.

- Banking problems occurred not in banks but in the affiliate companies to banks; proprietary trading does not happen at banks, thus Holding companies prop up the banks and the entire, now new (12 years), trading apparatus. That needs to change.

- Market for liquidity is now global and can move in nanoseconds, thus, find a way to an acceptable, minimum regulation that works for them. We need practical regulations, with balance.

- Hedge Funds are not good for the banking community, but bring in 25% of banks profits. That’s why banks do not want to return to old ways. Any state regulation or organization regulated must be good for society. In Germany, Chancellor Angela Merkel may lose her political power for doing the right thing. Germans cannot continue to retire at age 53. The U.S. market might not be able to sustain retirement at age 65.

- If Congress is to redesign banking and finance regulations, in the design of the new mechanisms the key questions are: Who are you protecting? Who gets the utility of the transaction? Who gets the risk? In a Credit Default Swap (CDS) world, who will ultimately benefit? Is it possible to design a penalty system for deviation from the original purpose of the transaction? When does it become pure speculation? What happens then? In any new economy, financial regulation and transparency are essential.

- The modern banking problems were the Special Investment Vehicle (SIV), which by being off-balance sheet transactions, lacked transparency, regulation and accountability and lent themselves to casino type speculation, large profits, and elevated compensation packages and eventually large losses. Taxpayers bailed them out and now, after the big banks paid back, they are returning to the SIV’s and market speculation that brought us to the current Great Recession in the first place.

Bank core functions need to be only:
1. Clearing banking systems
2. Granting credit
3. Taking deposits

v We need to return to simplified banking
v Transparency and accountability in all transactions
v Go back to the “middle of the road”, Jeffersonian model, without completely abandoning the Hamiltonian model.