How to rein in financial delinquents

December 10, 2009|By ALLAN POWELL

The outrage at the unconscionable behavior of the financial elite is appropriate. We now hope that the halls of Congress are vibrating because of the populist fury. Reports of committee hearings are encouraging about the clarity of rebuke they deserve and the will to put checks on their excesses.

At this moment, stories of financial abuse continue to show a lack of shame and little interest for reform. AIG, for example, was saved from collapse by the infusion of $180 billion of taxpayer money. The inspector general recently reported that AIG awarded $1.5 billion in bonuses to its employees, making it clear that oversight of the $700 billion bailout is lacking.

At present, the U.S. Treasury Department owns about 80 percent of AIG. This has earned the system the dubious honor of being "Wall Street Socialism." This is anything but humorous since it shows a betrayal of capitalist theory. According to theory, the capitalist is supposed to be "a rational man" who takes a risk in an economic venture. If successful, a profit is earned. If unsuccessful, the investor takes a loss, or worse, is a complete casualty of the marketplace.


The way this present meltdown is playing out, the elite of our financial system have worked the system to privatize the profit, but socialize the risk on the proposition that they are to big to fail. If society is to be the lifeguard on the beach for the purpose of rescue, surely there should be no objections to rules of conduct for those who endanger their lives and others in uncertain surf. And, as Warren Buffett is supposed to have said, "You don't know who is swimming naked until the tide goes out."

Now that the unthinkable collapse has actually happened, there is the expected hardening of positions about the remediation best suited for relief, recovery and reform. The conservative response still holds fast to its traditional position that we can best bring a return to prosperity by letting free market forces work their way to a predictable correction. Bankers and investors will eventually solve the puzzles of derivatives, hedge funds and subprime mortgages and prosperity will return.

Those who object to this approach point out that the market never was or will be "free." In addition to the uncertainties that bring huge disruptions that preclude a "free" market, there is the ever present urge of businesses themselves to get rid of the free market by forming monopolies, which end any possibility of "free markets."

A recent report of two areas of big business - finance and health care - shows that five big banks control 95 percent of the derivatives' market and, in 30 states, only five health insurance companies control that market. With so much concentration and merger-mania, the "free market" is fiction. The "free market" was done in, not by socialists, but by capitalists.

The second major approach to fixing a failed economy is to restore purchasing power by the massive injection of public funds to lower unemployment and add new regulatory measures to restrain or forbid several innovations in financial risk, which appear to have precipitated this latest financial disaster. We could begin by restoring the Glass-Steagal Act and forcing a separation of the operation of commercial banking from investment banking. In addition, new rules are needed to bring more security to the whole domain of derivatives. A recent report issued by U.S. Sen. Christopher Dodd, chairman of the Senate Banking Committee, has indicated that a sweeping regulatory reform bill is being crafted.

There is a third option to bring some order to the murky world of paper money - treat these financial institutions as public utilities. We do this in areas of public interest such as water, natural gas and railroads so that stability is assured in a much-needed service. This would remove some of the turbulence that is inherent in high-risk securities.

The virtue of creating a public utility system in the area of big finance is that investment is still possible, but the risks are diminished. It is a win-win situation for both investors and society at large. If society is to be the bank of last resort because these financial giants are "too big to let fail," society ought to have more power in the policymaking side of these businesses.

Allan Powell is a professor emeritus of philosophy at Hagerstown Community College

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