Would you support "real" financial reform?

[donheff]

(I am willing to put my money where my mouth is) Great, write a check to the US Treasury if that makes you feel better- I believe we are already being taxed for government services for which we are not receiving value commensurate to what we pay.

(comment was tongue-in-cheek) As was my answer...

I suspect your write a check comment was also tongue-in-cheek but it is so common that I have to respond. Many people express a willingness to pay more for the good of the whole. For example, I was adamantly opposed to the Bush tax cuts even though I profited from them. Similarly, I would accept a hit in my portfolio if financial reform would serve my kids and the country as a whole well. The trite answer to write a check is disingenuous. The sacrifice of writing a check would have no impact whereas the policy in question (taxes, financial reform) could be far reaching thus meriting a sacrifice.

 

[ziggy29]

I suspect your write a check comment was also tongue-in-cheek but it is so common that I have to respond. Many people express a willingness to pay more for the good of the whole. For example, I was adamantly opposed to the Bush tax cuts even though I profited from them. Similarly, I would accept a hit in my portfolio if financial reform would serve my kids and the country as a whole well. The trite answer to write a check is disingenuous. The sacrifice of writing a check would have no impact whereas the policy in question (taxes, financial reform) could be far reaching thus meriting a sacrifice.

In other words: The tragedy of the commons.

 

[FinanceDude]

For example, I was adamantly opposed to the Bush tax cuts even though I profited from them.

Don't worry, they will be a distant memory in a year or so........so don't feel bad........

Similarly, I would accept a hit in my portfolio if financial reform would serve my kids and the country as a whole well.

How much of a hit, 50%, 60%?

 

[Gone4Good]

Pre-1933, little financial regulation . . . banking crisis
1933-mid-1970's, heavy financial regulation . . .no banking crises
mid-1970's-present - financial deregulation . . . two banking crises

If you go further back, you'll see that banking crises, and depressions, were pretty common in the 1800's. A financial "panic" happened in the US or Britain every 10 years or so. After the Great Depression, though, it's been relatively calm . . . that is until recently.

 

[FinanceDude]

If you go further back, you'll see that banking crises, and depressions, were pretty common in the 1800's. A financial "panic" happened in the US or Britain every 10 years or so. After the Great Depression, though, it's been relatively calm . . . that is until recently.

You can't compare the 1800's to now...........

 

[Texas Proud]

One of the problems is that people are fogetting what was regulated and a financial institute (bank) and what was not back when...

Investement banks .... NOT
Insurance companies that handle interest rate swaps .... NOT
Car companies .... NOT...
Brokerage firms... NOT

These were the firms that were not regulated as banks... and these are the biggest culprits of the problem... Goldman Sacs, AIG, Merrill, Morgan, GM, Chrysler, etc. etc.

When the worst started to hit, they 'allowed' some of these to become bank holding companies so they could get bailed out...


I was against changing the Glass-Stegal act (sp)... and I worked at a bank. My take was that you could make a great living being a bank and not have the risks that some bankers wanted to take... but were prevented because of it... let's bring it back!!!

 

[Westernskies]

I suspect your write a check comment was also tongue-in-cheek but it is so common that I have to respond. Many people express a willingness to pay more for the good of the whole. For example, I was adamantly opposed to the Bush tax cuts even though I profited from them. Similarly, I would accept a hit in my portfolio if financial reform would serve my kids and the country as a whole well. The trite answer to write a check is disingenuous. The sacrifice of writing a check would have no impact whereas the policy in question (taxes, financial reform) could be far reaching thus meriting a sacrifice.

donheff, I am enjoying this discussion, appreciate your responses. Glad that we can have a spirited discussion with such ideological differences.

My comment about writing the check was not tongue-in-cheek. I am not willing to pay more for yet another government program that isn't going to deliver what I am already paying for. I'm not willing to take a hit in my portfolio for yet another promise of "financial reform" - from a federal government that has a long history of over-promising and under-delivering. I don't support the notion that the answer to whatever problem-of-the-moment that ails us is blindly raising taxes. I'd like to see measurable and sustained accountability in place for the programs we already have, cost-cutting measures to increase efficiency and streamline government, and across- the- board head count reductions to eliminate bloated civil service payrolls first. Would you be opposed to the tax reductions we would enjoy from a more efficient, accountable government? And the premise that just because you are willing to write a check that I should be forced to write one, too is disingenuous- it's easy for you to to pontificate about writing that check; actually doing so is another matter altogether. Why should my portfolio suffer to make you feel better?

 

[FinanceDude]

Why should my portfolio suffer to make you feel better?

 

[Gone4Good]

You can't compare the 1800's to now...........

So what changed?

 

[Keim]

You can't compare the 1800's to now...........

Not if you are comparing policies and laws. But you surely can compare them if you are analyzing basic human behavior. Greed and herd mentality are both very strong players in the finance markets. And I would submit that is what causes these crises, not policies and laws. People see what looks to be a profitable way of doing things, and go after it until the area they are exploiting has ballooned out of proportion. Then the balloon pops.

Greed and herd behaviors are both behavioral constants.

 

[FinanceDude]

So what changed?

For one, we moved from a rural agricultural economy to an industrialized one that has much greater population congregating in large cities.

Farmers used to barter with each other for goods and services, etc. There's probably 100 or more ways we are NOT like the 1800's..........

 

[Gone4Good]

So what changed?

Let me help . . .

The Federal Reserve Act of 1913
The Glass-Steagall Act of 1932
The Banking Act of 1933
The Banking Act of 1935

But lets not forget . . .

Depository Institutions Deregulation and Monetary Control Act of 1980
Depository Institutions Act of 1982 (allowed S&L's to engage in more risky behavior - Ooops)
Glass-Stegall repeal 1999

 

[Gone4Good]

For one, we moved from a rural agricultural economy to an industrialized one that has much greater population congregating in large cities.

Farmers used to barter with each other for goods and services, etc. There's probably 100 or more ways we are NOT like the 1800's..........

And that all has what to do with banking crises?

 

[Keim]

For one, we moved from a rural agricultural economy to an industrialized one that has much greater population congregating in large cities.

Farmers used to barter with each other for goods and services, etc. There's probably 100 or more ways we are NOT like the 1800's..........

There are probably a few million ways we are not like the 1800s. But the constants-the psychology-that motivate human behavior haven't changed at all.

 

[Keim]

Let me help . . .

The Federal Reserve Act of 1913
The Glass-Steagall Act of 1932
The Banking Act of 1933
The Banking Act of 1935

But lets not forget . . .

Depository Institutions Deregulation and Monetary Control Act of 1980
Depository Institutions Act of 1982 (allowed S&L's to engage in more risky behavior - Ooops)
Glass-Stegall repeal 1999

And lets not forget that we moved the dollar off of the gold standard in the 70s.

 

[donheff]

I don't support the notion that the answer to whatever problem-of-the-moment that ails us is blindly raising taxes. I'd like to see measurable and sustained accountability in place for the programs we already have, cost-cutting measures to increase efficiency and streamline government, and across- the- board head count reductions to eliminate bloated civil service payrolls first.

I don't support blindly raising taxes at all.

Would you be opposed to the tax reductions we would enjoy from a more efficient, accountable government?

Absolutely not.

And the premise that just because you are willing to write a check that I should be forced to write one, too is disingenuous- it's easy for you to to pontificate about writing that check; actually doing so is another matter altogether. Why should my portfolio suffer to make you feel better?

Not so fast with the disingenuous here.. I was willing to pay more when Bush gave me a huge bonus. DW and I were in the 1% that made out like bandits. My view was that those tax cuts would unwind the surplus we had finally built up over the past 5 or 6 years and leave my kids holding the bag. What I find stunning is that most of the people who are now so alarmed at the Bush engendered deficits didn't even benefit from the cuts. They just bought the mantra that cuts are good.

As to your portfolio suffering to make me feel good, the question remains - would financial reform (and the ensuing dip due to spooked financiers) be just a feel good effort? A decade of deregulation and lack of oversight contributed to a collapse that has seriously set back a lot of ER plans. My good faith question is should we leave Wall Street unrestrained and hope it doesn't happen again or are there prudent steps we can take to foster a measure of stability.

 

[chinaco]

Some regulatory changes are needed to deal with certain innovations in the markets (CDS) that have cause problems. Plus, there are some entities and types of [-]gambling[/-] investing that should have more oversight.


In some cases, the existing regs would be fine if they were followed/enforced. The basic checks and balances investors rely on are not very reliable.

IMO - Handing out stiff prison sentences and disgorging their compensation/bonuses is the answer.

 

[Leonidas]

Not if you are comparing policies and laws. But you surely can compare them if you are analyzing basic human behavior. Greed and herd mentality are both very strong players in the finance markets. And I would submit that is what causes these crises, not policies and laws. People see what looks to be a profitable way of doing things, and go after it until the area they are exploiting has ballooned out of proportion. Then the balloon pops.

Greed and herd behaviors are both behavioral constants.

I agree. There's a quote (can't remember the author) that illustrates it well: "progress is cumulative in science and engineering, but cyclical in finance."

Read Chancellor's Devil Take the Hindmost, Kindleberger's Manias, Panic and Crashes, Mackay's Extraordinary Popular Delusions and the Madness of Crowds and you can see the similarities in speculative manias that always, always include massive credit expansions followed by the crash - followed by investigations, recriminations and new laws and controls. I can't find my copy of Kindlberger*, but Chancellor goes back to the 1690's in his book and Mackay's book was published in 1852.

Social context changes, technology changes, the "hot thing to have today" changes, but people and their money just keep rolling around in the same pit of mud.

This time it's different? Nope, not even close.

*Googled it: Kindlberger was published in the 1840s and it starts, like Mackay, with the Mississippi Scam in France (1720's).

 

[Keim]

I agree. There's a quote (can't remember the author) that illustrates it well: "progress is cumulative in science and engineering, but cyclical in finance."

Read Chancellor's Devil Take the Hindmost, Kindleberger's Manias, Panic and Crashes, Mackay's Extraordinary Popular Delusions and the Madness of Crowds and you can see the similarities in speculative manias that always, always include massive credit expansions followed by the crash - followed by investigations, recriminations and new laws and controls. I can't find my copy of Kindlberger*, but Chancellor goes back to the 1690's in his book and Mackay's book was published in 1852.

Social context changes, technology changes, the "hot thing to have today" changes, but people and their money just keep rolling around in the same pit of mud.

This times it's different? Nope

*Googled it: Kindlberger was published in the 1840s and it starts, like Mackay, with the Mississippi Scam in France (1720's).

Yep. SSDD. Thats Same Schmidt, Different Day in case ya don't know...

 

[Leonidas]

Yep. SSDD. Thats Same Schmidt, Different Day in case ya don't know...

Funny, I was sitting here paging through Chancellor's book and found something interesting - especially considering that we're talking about politicians bringing about some form of financial reform.

Chanceller says in his introduction: "On numerous occasions we find politicians stimulating speculative manias for their own gain".

I think we should be very careful about hiring foxes to be consultants on hen house security issues.

 

[Westernskies]

I don't support blindly raising taxes at all.
Absolutely not.
Not so fast with the disingenuous here.. I was willing to pay more when Bush gave me a huge bonus. DW and I were in the 1% that made out like bandits. My view was that those tax cuts would unwind the surplus we had finally built up over the past 5 or 6 years and leave my kids holding the bag. What I find stunning is that most of the people who are now so alarmed at the Bush engendered deficits didn't even benefit from the cuts. They just bought the mantra that cuts are good.

As to your portfolio suffering to make me feel good, the question remains - would financial reform (and the ensuing dip due to spooked financiers) be just a feel good effort? A decade of deregulation and lack of oversight contributed to a collapse that has seriously set back a lot of ER plans. My good faith question is should we leave Wall Street unrestrained and hope it doesn't happen again or are there prudent steps we can take to foster a measure of stability.

My good faith answer is that Wall Street does need some oversight- starting with an overhaul of the SEC...but not sure why the knee-jerk reaction is that we have to raise taxes and/or take a hit on our portfolios to provide it... Why would anyone assume that new regulations would automatically cost more to implement and enforce, and negatively impact the market? Maybe if they were fair, simpler to understand, and had a few million less loopholes they would actually cost less, stimulate investment and boost investor confidence- the same goes for our ridiculously convoluted tax codes, for example- with a simple, fair and responsible tax structure (flat tax?) we could send half the IRS home to find wealth-producing jobs in the private sector... a double boost to the economy, with resultant positive impact on our portfolios.

I'm more concerned about the costs of runaway government impacting my portfolio than I am Wall Street "shenanigans" .

So, as a show of good faith, are you willing to send your Bush bonus back? As another 1%'er, I'm keeping mine, by the way. It's already invested on the Street..and up 50% over last year..

 

[ChrisC]

re: the 'invisible hand'







You are correct (or at least I agree with you, maybe we are both wrong ).

Trouble is, the regulators can't smack down the snake-oil salesmen either. Where was the SEC with Bernie Madoff? Why didn't Tim Geitner get audited by the IRS? and on and on....

The snake oil salesmen (and women) can move 1000x faster than those hundreds of people in Congress. The (largest part of) answer is transparency and education.

Why did so many people on this forum express shock at all those who were taken by Madoff? Simple, we are educated enough in basic financial matters to know the warning signs, we would look for more transparency, etc.

Don't get me wrong, I think that some forms of regulation are a good thing and I welcome them. But I really want to see them focus on education and transparency. I just love that old quote - "You can't cheat an honest man." Nah, it's not 100% true, but there is a lot of truth to it.

-ERD50

Yeah, but "no regulation" means the snake-oil salesman sells all the time with impunity and causes havoc and harm. With effective regulation, we cure most of the bad ills. No amount of regulation will perfectly regulate all of the tidal waves of snake-oil ingenuity. But the inability to attain perfect regulation should not be the enemy of good, sensible regulation. Despite Madoff and Ponzi, the investing public is better off with the SEC than not having an SEC. Of course, this should not displace basic norms of caveat emptor that each individual should instill in himself.

When you start citing extreme, and rare cases of regulatory failure like Madoff, it should not mean you throw out the SEC regulatory apparatus that failed to police Madoff because of defective SEC staff judgments; on the other hand, the absence of regulatory oversight, monitoring and enforcement in some very key financial areas does suggest we need to do something and not let the invisible hand guide us.

 

[Gone4Good]

When you start citing extreme, and rare cases of regulatory failure like Madoff, it should not mean you throw out the SEC regulatory apparatus that failed to police Madoff because of defective SEC staff judgments; on the other hand, the absence of regulatory oversight, monitoring and enforcement in some very key financial areas does suggest we need to do something and not let the invisible hand guide us.

Madoff aside, the SEC is a prime example of good government at work. Our entire financial system is based on trust. Without trust, we'd all have our money, or more likely our gold, sealed behind locked doors. We'd only invest with people who we personally know and trust. But because we have financial policemen on the beat we feel comfortable enough with the honesty of our financial system that most of us never actually even see our money. Our trust is so great that we routinely invest with complete strangers - people we've never met, and likely never will. It's a remarkable accomplishment. It wasn't always that way.

In so many ways we've become so accustomed to things working right that we take for granted all of the things that government does that make our lives better, and yes, our economy stronger. Instead we elevate the occasional failures (Madoff) to such large proportions they overshadow all of the good that is done every single day. It isn't a reasoned or well thought out position that says all government and all regulation is bad. But we do seem to hear that view expressed more frequently, and more strongly, these days.

 

[Westernskies]

Madoff aside, the SEC is a prime example of good government at work. Our entire financial system is based on trust. Without trust, we'd all have our money, or more likely our gold, sealed behind locked doors. We'd only invest with people who we personally know and trust. But because we have financial policemen on the beat we feel comfortable enough with the honesty of our financial system that most of us never actually even see our money. Our trust is so great that we routinely invest our money with complete strangers - people we've never met, and likely never will. It wasn't always that way.

In so many ways we've become so accustomed to things working right that we take for granted all of the things that government does that make our lives better, and yes, our economy stronger. It isn't a reasoned or well thought out position that says all government and all regulation is bad. But we do seem to hear that view expressed more frequently, and more strongly, these days.

I love my government. I just wish it was smaller. And more efficient. And more transparent. And I trusted it more.

 

[Leonidas]

Too many of these guys get caught after their play has run out on its own - when there are no new suckers to be brought in and the house of cards starts to fall down. If the housing market tanking had not lead to the credit markets and the stock market, Bernie Madoff would still be out there doing his thing.

Marokopolous (sp?) took five whole minutes to figure out that Madoff was running a Ponzi scheme. He gave it to the SEC 3-4 times over a decade, laying it out for them in detail the last time (he did everything but type up the indictment for them) and still they missed him completely. And while Bernie did his best to maintain a low profile, when the SEC finally did investigate they completely ignored concrete evidence that he was lying his ass off. They never bothered to verify how he cleared trades, who was on the other end of any of his trades, swallowed whole a bunch of BS about options that he claimed he was trading, and then ignored evidence that when he allegedly made some of those he trades he did not even have a position in the market. No, instead they gave at least one of the investigating attorneys the highest performance evaluation because of her ability to "understand and analyze the complex issues of the Madoff investigation."

Why didn't the SEC at least comment, if not enforce the requirement for additional reserves, when AIG, FNMA and FHLMC ignored reality, changed their accounting practices, etc. when all of those mortgages and loans started turning bad?

But if you really want to find why you shouldn't feel all warm and fuzzy about the SEC walking the beat on the street, just look at their record on the uptick rule and naked shorts.