Saturday, May 24, 2008

Regulatory capture: The hands that tighten the banks noose

Everyone can sense that we are at a critical juncture in history. It is not often that the foundations of society are available to be greatly influenced. Generally, that is an acceptance of the status quo with only minor adjustments. In these times only the most vigilant rally to perfect the system, everyone else is resigned and are not inclined get involved. Elections, conflicts and now the economy are on the tongues of even the most passive as devastation engulfs the entire globe. At the apex is a perfect storm of policy, governance, greed and corruption. Politics of fear to feed the greed in a conflict for a commodity and to enrich arms manufacturers. It cannot be overstated that the sheer cohesion of powers combined against humanity is a massive foe. What is the fate of a disparate global public against powerful combined interest of global corruption?

Right now we are facing the expansion of a commodity bubble. To find relief from the problem, you need to first find the source. The damned speculators--people getting rich on the bet oil will go up and constantly driving it up to enrich themselves. Banks and governments say that they are powerless against these gamblers, thriving at the publics expense.
When you scratch beneath the surface you will find that most market speculation is dominated by the banks, industry and government. It actually makes sense, since government and industry would be the vested party's in any market.
Yet they offer us this faceless whipping boy called speculator. Government has blown oil prices on everything from production to storage. It lets the oil giants strong arm smaller governments into selfish deals then profit when the people retaliate by destroying a refinery or pipeline. This exercise in absurdity is the case from the Nigerian delta to Iraq. Then there's Venezuela an Iran, two large oil producers being constantly antagonized with western governments working in collusion with oil giants to guide policy, these countries are living on the cash of their oil while flatlining the u.s. currency. Chavez is winning his battle with Exxon and the attempt to starve Iran into regime change has the American people starving to change with a president who has the lowest approval rating ever. The public had no say in the central bank bailouts but white house resident bush doesn't want the taxpayers to spend billions rewarding speculators. There's that word again so to be clear let's define speculator in this instance(markets) a speculator is an investor who will never take delivery of the commodity. This is to say that brokers on the exchanges who purchase wheat, oil, sugar etc never expect a truck to arrive at their homes to deliver 50 tons corn.
In the mortgage market these securities where bought and sold by people who had no idea where the homes where or who bought them, they only looked to profit from the payments made. Those people have been spared the worst case by taxpayer backed interventions into the markets, though they are the only true speculators(along with the banks and brokerages who packaged and sold it). The so-called speculators that governments are refusing to assist are people who may have purchased a second home hoping to rent it out for extra income. Some chose a home that they considered a bargain and planned to invest in it to sell it at market prices. MOST examples leave you with people involved with the individual sell and purchase of a property. Refusing them the same deal as the ACTUAL speculators and pointing at them having to give up on a property is criminal.
So here we are, time to talk tough. With no serious review the fed has been able to put the taxpayers on the hook for hundreds of billions. The oil giants like the banks laugh off government grandstanding. What government can reign in Citibank, shell and haliburton at the same time? Regulators have a job that is born in conflict, to advance the industry against global competition while guarding the public trust. It's stupid on the face of it, how can you be vigilant in restraining someone that you are obligated to advance? In an ideal world a strong national banking industry would be best for the public. What has happened in practical terms is that banks are protected from the public and are sacrificed for the greater banking "good". Every step of the way, agents for the public discuss changes with the banks to get cooperation and what always comes out of it is a threat from the banking industry. The threat always gets the headline to strike fear into the public. Currently and new regulations would force banks to tighten credit and call loans AND raise fees and... Basically they're going to rob the public and all regulators can do is agree to HOW. Every time the grandstanding fades from the headlines and in the backrooms the deal is the same. Generally they will be able to come together to blame a faceless entity and make firm regulations to block competition with something like wealth based licensing or cash minimums. This protects the public from new entrants who become the problem and further erodes the power of the public.
The laws that come out of these conspiracies against the public all look the same. The wording is some catchall like fraud or licensing that allows regulators grand sweeping power to rid the markets of new competitors. Scammers, spammers and crooks are paraded out to look effective, while the big culprits benefit twice, once from being overlooked and the second by getting rid of competition without spending a dime. When you go to government sites and read what to look for when it comes to fraud, there isn't a bank on earth that could escape the definition but they can escape enforcement. They bury terms in contracts, change conditions among other things and use the law to their advantage. When you signed the documents, the disclosure was there, in legalese, in small print on the 8th page you signed. They send you a letter to inform you of a rate change, now that you are well in debt, the law requires them to give you 30days notice to pay them $20k in cash so that your balance isn't calculated at the new tripled interest rate. If a new competitor employed these tactics every media organization, court and enforcement agency would tar them with fraud without a hint of irony.

Every year it gets harder to bring a case against a major financial institution, while fees and deceptions bring in larger profits. Bankers associations are huge campaign donors and are a strong lobby. Regulators and politicians come out of the industry and people from the industry are chosen to be regulators. Two countries in north America ruled by one brokerage. Goldman Sachs alumni Mark Carney (bank of Canada) and Henry Paulson (treasury sec. USA), they should find cooperation with each other and the industry. What's better is neither is a regulator, they simply set the tone for regulators and act as industry surrogates. Incest between industry and government is nothing new. Top executives are always considered the experts and receive government posts with industry endorsement as an inside man. Very few politicians don't see public service as a stepping stone to lofty positions in industry they expect to peddle their knowledge and relationships to the highest bidder.

What can be done. Yes, media, government, activist, public and academia have all taken turns decrying the woes of the common man against greedy industrial interest. Fortunately I am not a professional belly-acher but a visionary pioneer. While others picketed, petitioned, plead, and published I imposed aid4families. In that spirit, here are a few changes that may help. Pick one: government service or industry but not both. With no incentive of cushy jobs after they leave office some politicians may actually focus on their job. Of course people still have to eat so a set time limit should suffice if a person chooses to leave public service. This is a very specific example, whereas the things that generally make it tempting are stripped away. If you serve on the banking committee then you would be barred for no less than 5 years from holding any board or position with interaction with regulators or government. You could be a branch manager or in accounting or IT at the bank where you can comply with regulations but not influence them. If you come from industry, you may not serve on a body that regulates your primary industry. The spirit of these proposals is the important element, the details can be hammered out. Create a jury duty for important government regulations. A basic trial can be held in court in the evening where the pros and cons are argued. The concerns and finding by the jury would be addressed at a public hearing for approval by the government. Finally, like all things, enforce the laws on the books biased enforcement have caused this carte blanche with the industry and banks act as co-regulators, holding funds, reporting competitors etc. The government wouldn't invite drug dealers to draft drug dealing policy, they simply draft consequences and enforce them. The government has to become more than just the PR department for industry interest groups. The government is not there to force the public to yield to industry greed, the role of government is to make sure that industry works for the public. We need to not just fear STATE RUN INDUSTRY but an INDUSTRY RUN STATE!

These reports about industry are from the imf, sec and media, I know how you like it when they tell you.

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