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Economy
There’s a reason American workers aren’t paying much attention to the new financial regulations. And no, it isn’t out of “apathy.” Despite making a combined $18 billion in profits last quarter alone, major banks are still doing all that they can avoid new consumer protection legislation – and, we might add, new legislation hasn’t made [...]
Sooo, Congress is bothered by a little corruption? Hah! Also, will there be war with North Korea and/or Iran? (9:30):
Stefan Molyneux runs Freedomain Radio, the largest and most popular philosophy show on the web. His books, podcasts, and videos are available free on the web. Mr. Molyneux accepts donations with the utmost gratitude.
The Dodd-Frank Wall Street Reform and Consumer Protection Act.
“All told, these reforms represent the strongest consumer financial protections in history,” Obama said.
“And these protections will be enforced by a new consumer watchdog with just one job: looking out for people – not big banks, not lenders, not investment houses.”
Skimming the local newspaper stands is generally a downer for me, but this week was particularly depressing. It seems like every day a new article emerges to remind us just how bleak the American economic landscape is.
A study released this month by the Employee Benefit Research Institute appeared in papers across the country, announcing that almost half of American’s aged 36 to 62 will not have enough money set aside for retirement, leaving them working… well, until they die.
The unemployment rate, unsurprisingly, continues to hover above 10%, and on top of that, lending across country remains minimal.
And so, with the recession dragging on into its second year, readers may be surprised to discover that Americans by and large don’t care about the financial reforms recently passed in congress – nearly 45% have no opinion, according to a recent poll released by Rasmussen.
As economist Richard Wolff notes, American workers are looking at the new wave of Democratic party reforms and thinking to themselves, “been there, done that.”
As we’ll see in this two-part story, the new reforms will likely do very little to stop either immediate or long-term failures in our banking and financial systems.
Below is given a brief rundown of the two and a half thousand page bill known as the The Dodd-Frank Wall Street Reform and Consumer Protection Act.
Derivatives trading:
Derivatives are, very simply, financial contracts between two parties based on the price of a certain product. If, for example, a farmer were to sign a contract with a super market, agreeing to sell x amount of apples for y amount of money at a specific date in the future, this agreement would be considered a “derivative.”
Derivatives come in many shapes and sizes however, and can be incredibly complex. Derivatives can be based on shares in a company, currency rates, or the prices of goods.
In other words, possible derivatives contracts are nearly endless, and so are the potential gains and losses associated with them.
The vast majority of derivatives deals are being made by an incredibly small handful of firms. As of 2009, according to the U.S. Department of Treasury, five major banks controlled 97% of the U.S.’s total derivatives markets, valued in trillions of dollars.
But because these large firms are also highly influential in other financial markets, their failures with derivatives can severely impact the rest of the global economy, as we saw in the 2008 financial crisis.
Several specific types of derivatives have recently received wide-spread attention for their role in the financial crisis – particularly Asset-Backed Securities (ABS’) and Collateralized Debt Obligations (CDO’s).
Both ABS’ and CDO’s helped inflate the prices of housing and credit by allowing banks and financial institutions easier ways of funding risky investments.
In order to obtain more money for mortgage loans, for example, banks would stick many mortgages together into a single package and sell them to large financial institutions.
Packaging mortgages into a single portfolio decreased the risk normally associated with buying a single mortgage, because even if one of the mortgages failed, there would still be many more generating an income.
In exchange for buying these portfolios, large financial groups would receive all of the income made from the mortgage payments, and the banks who sold the portfolios would then have new money in which to make more loans to home buyers.
This had two effects. First, it allowed banks to make loans to people it knew could not normally pay them back – these risky loans were made “safe” by lumping them together with other loans.
Secondly, as more homes were sold, it raised the price of houses across the country to absurd heights.
In the new financial regulation, legislators have ordered the creation of derivatives exchanges, or “swap execution facilities,” where derivatives would be traded openly in much the same way stocks are. In this way, derivatives trading would be more transparent for regulators.
But the bill exempts any financial institutions from having to participate in these exchanges if a derivative is used to “hedge” or reduce an investment’s risk. Lenders cannot, however, loan to risky home buyers anymore - at least not without proof of income.
On the next page, we will cover sections of the bill dealing with both “too big to fail” and consumer protections.
This was good for a chuckle:
There is overwhelming agreement among economists that the Second World War was responsible for decisively ending the Great Depression. When asked why the wars in Iraq and Afghanistan are failing to make the same impact today, they often claim that the current conflicts are simply too small to be economically significant.
There is, of course, much irony here. No one argues that World War II, with its genocide, tens of millions of combatant casualties, and wholesale destruction of cities and regions, was good for humanity. But the improved American economy of the late 1940s seems to illustrate the benefits of large-scale government stimulus. This conundrum may be causing some to wonder how we could capture the good without the bad.If one believes that government spending can create economic growth, then the answer should be simple: let’s have a huge pretend war that rivals the Second World War in size. However, this time, let’s not kill anyone.Peter Schiff: Why Not Another World War? | Euro Pacific Capital.
Honestly, I see a lot of promise here. So many Americans see the military mainly as a men’s club and pageant, or as a nifty science and gadget lab. Feminists and gays seem oblivious to the military’s actual purpose and see it chiefly as a testing ground for social equality, while middle-class advocates for the working class consider it a job program for youths pushed out of work by the minimum wage and other economic tinkering. We could have a lot of fun with this if you keep the waste of time, material, and productivity and take out the killing, especially since so many have already mentally subtracted the actual loss of life from the equation.
Schiff, though, is merely kidding:
If all of this seems absurd, that’s because it is. War is a great way to destroy things, but it’s a terrible way to grow an economy.What is often overlooked is that war creates hardship, and not just for those who endure the violence. Yes, US production increased during the Second World War, but very little of that was of use to anyone but soldiers. Consumers can’t use a bomber to take a family vacation.The goal of an economy is to raise living standards. During the War, as productive output was diverted to the front, consumer goods were rationed back home and living standards fell. While it’s easy to see the numerical results of wartime spending, it is much harder to see the civilian cutbacks that enabled it.The truth is that we cannot spend our way out of our current crisis, no matter how great a spectacle we create. Even if we spent on infrastructure rather than war, we would still have no means to fund it, and there would still be no guarantee that the economy would grow as a result.
News and views from around the web posted to the Wonderland Wire:
The Pentagon has confirmed the weapons budget will grow at a rate past inflation for many years to come.
News and views from around the web posted to the Wonderland Wire:
From Jerome Corsi, World Net Daily, June 18, 2010:
“Former Clinton and Obama budget adviser Franklin Raines owns a key carbon-emissions patent he developed as CEO of the government-sponsored mortgage giant Fannie Mae, positioning him and his partners to make millions of dollars if it is used in any carbon-capping scheme implemented by the Obama administration.
Raines [...]
News and views from around the web posted to the Wonderland Wire:
From The Economic Collapse Blog, 16 burning questions about the BP oil spill in the Gulf of Mexico:
#1) Barack Obama has authorized the deployment of more than 17,000 National Guard members along the Gulf coast to be used “as needed” by state governors. So what are all of these National Guard troops [...]
