Like a pet gerbil running endlessly on a circular wheel, Government leaders are putting all of us on the economic treadmill of serial failure. Calls for an immediate investigation into what went wrong and why are going largely unheeded as government leaders claim that a witch hunt is the last thing we need now.
Well, I disagree. We need to hunt down the demons that tanked the economy and exorcise the system of the evil forces that have brought us down. I think that what is needed is a combination of (i) immediate and aggressive enforcement of existing law and regulation and (ii) a bi-partisan investigation of what needs to change so that there isn’t another banking collapse during our lifetime.
By doing nothing the political leaders are setting us up to repeat the mistakes of the last 5 years and guaranty another crisis within a few years. Unfortunately, I have little hope of anything happening before the Presidential election.
Policy makers have set the global economy up for a crash in a few years. They are reinflating the banking sector with massive monetary and fiscal stimuli but not changing the underlying system that was unable to deploy the relatively benign stimulus that was pumped in after 9/11.
The Federal Reserve has dropped the Federal Funds rate to almost the post 9/11 level of 1.00% (currently it is at 1.50%) and dramatically increased money supply. It is also pushing “qualitative” monetary stimuli by using its balance sheet to lend to banks, non-bank corporate borrowers and other central banks. And, the largest Keynesian stimuli package ever is being used to prop up the economy. Ever since the New Deal ended policy makers have avoided fiscal and monetary stimuli on the scale that is being attempted by Paulson and Bernanke. In the process of getting us out of this crisis they are creating the conditions for a massive investment and leverage bubble starting in late 2009 and extending into 2010 and 2011.
However, the fundamental regulatory and oversight system that enabled the 2007 bubble remains essentially unchanged. As examples, there has been no material commitment on the part of the SEC to enforce laws and regulations, the Federal Reserve still doesn’t act as if it is the primary regulator of bank holding companies and, despite widespread and obvious fraud, the Justice Department hasn’t managed to indict a single senior mortgage banker in connection with bad mortgages that caused the sub-prime mortgage mess.
Conventional wisdom states that the Bush Administration is “kicking the can down the road” on regulatory reform and enforcement so that the next President and Treasury Secretary will be forced to deal with the reform and enforcement problem. Unfortunately, we don’t have the luxury of time to wait until the next administration takes office and learns its job. Unless the next President has an urgent timeframe for action, as a practical matter it will be the summer of 2009 before regulatory reform and enforcement will begin. And, by then the banking system will be well on its way to inflating the next bubble.
In less than 3 weeks either McCain or Obama will be President Elect. I think that whichever candidate wins, his first order of business must be to appoint the next Secretary of Treasury and the next Chairman of the SEC (Chris Cox has indicated that he intends to resign in January, 2009). The transition team must begin working with Paulson and his team immediately to get up to speed and begin the process of fixing the underlying issues in our financial and capital markets system.
We must break the boom and bust cycle of the banking sector before it breaks us.
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