The new mantra argues that if we do not do anything we are going to lose the farm and all the animals in it.
How did we get here and what can we do to get out of this mess?
There are multiple roots to the current financial crisis. Capital released after the bubble burst in the technological sector along with increasing liquidity in the financial markets, partly prompted by the emergence of the Chinese sovereign funds, profits from OPEC and the recent creation of a hedge fund by the Chinese government contributed to flood the credit markets with abundant speculative funds the world over.
Alongside came an ideological period, reborn in the roaring nineties, marked by deregulation and market fundamentalism that continues to pervade, amazingly, in some quarter of our legislature even in the face of massive market failures.
The cherry on top of the cake came on the form of new and more complex “investment innovations,” the progeny of poor oversight, that were supposed to broaden the credit markets. The new instruments and the culprits who traded them “hand over fist” rode on the back of an ever-so-loose legal environment and under the light of a compensation system for fund managers that promoted excessive risk-taking behavior.
Too much cash chasing fewer and fewer opportunities, when sound investment became scarce predators rushed after their natural pray; the less informed and protected of our people. Mind you, they are the victims rather than the perpetrators.
What is even more worrisome, the caldron was bubbling hot and all the signals were there for the last two years, but our government did not take any serious action to avert the crisis. At one point Henry Paulson (Secretary of Treasury) called for self-regulation. That did not work.
The proposed “bail out” bill is no solution to the crisis. Its language is too vague to give us any guarantees that as we fork out tons of cash into the financial sector the crisis will vanish and will not show its ugly head again anytime soon.
The bill is fuzzy on its alleged reform on oversight regulation, managers’ compensation reform, foreclosure moratorium policy and, to top it all out, it saddles the shoulders of the next President with the responsibility of implementing new solutions if the current bill does not deliver the promised land.
The second cherry on the banana split, the bill shields the Secretary of Treasury from any legal proceedings against him and is almost silent in terms of proposing action against those who engaged in fraudulent activities.
Too much capital chasing increasingly fewer investment opportunities swinging in a lax regulatory environment with managers who act on perverse incentives and a political machine unwilling to act on time. These are our problems.
The proposed bill is not good because it does not address the root causes of the crisis. What we need is a bill that does and we need to take our time to write it. Acting for the sake of photo ops and alleged expediency may only add more fertilizer to a soil upon which a new crisis will set its roots to be harvested in the near future.
— Luis F. Brunstein
