Financial Meltdown Five Years After

James Hall
Activist Post

So appropriate that the architect of banking deregulation, Larry Summers pleads that he is not the right person to head up the Federal Reserve. No S$%#. Well, the Fed is certainly the hot seat under normal circumstances. What will it be like when the next crisis directly puts into play the reserve currency status of the dollar? Do not worry, anniversaries are supposed to look at the brighter side. Never mind, our benevolent government is hard at work presenting the public with the kind of assurance that would make anyone start singing happy birthday.

Your government money provides charts for inspection. However, what did all that TARP money do to correct the panic? According to Anthony Reyes writing in Treasury Notes comes to a laughable conclusion in The Financial Crisis Five Years Later: Response, Reform, and Progress In Charts.

But putting out the fires of the crisis was not enough. To address the underlying causes of the crisis, we had to modernize our regulatory framework and put powerful consumer financial protections in place. That is why President Obama took up the mantle of financial reform by championing and enacting the Dodd-Frank Wall Street Reform and Consumer Protection Act?. Americans now have a dedicated consumer financial protection watchdog, financial markets are more transparent, and the government has more tools to monitor risk, and resolve firms whose failure could threaten the entire financial system. 

As we approach the five-year anniversary of the height of the crisis, the financial system is safer, stronger, and more resilient than it was beforehand. We are still living with the broader economic consequences, and we still have more work to do to repair the damage. But without the government’s forceful response, that damage would have been far worse and the ultimate cost to repair the damage would have been far higher.

Sound so reassuring. However, Dodd-Frank ignored serious derivative overhaul. Forget about mere regulation of financial markets, what about the federal government taking on even more fiscal responsibility of last resort. Too big to fail is an empty phrase, when the full faith and credit of the Treasury is placed into question. Just whom do you trust?

Hester Peirce, a scholar at the Mercatus Institute, told TheDCNF how Dodd-Frank’s placement of all financial derivatives into government-managed clearing houses could lead to poor investment decisions and possibly unbalance the financial markets. 

Because derivatives are such a complicated and long-term investment, Peirce argues that investors should always pay close attention to who they’re dealing with. What Dodd-Frank does is say, ‘Don’t worry about [your counterparty], because you’re going to be in this relationship now with a clearing house for a year, and the clearing house is safe, so don’t worry about it,’ she said. 

‘What we’ve done then is we’ve removed a whole layer of market scrutiny on counterparties,’ Peirce concluded.

Ah, the “so called” success of the Sugar Daddy rescue effort is that the final counter-party is the U.S. government, financed by the private Federal Reserve. Over at the Fiscal Times in an article, The 5 Best and 5 Worst Regulations in Dodd-Frank, provides the operative summary.

‘The worst thing about Dodd-Frank is the misguided effort to remove risk from the system,’ said Dan Crowley, a partner at K&L Gates and head of the capital markets reform group. ‘Risk is essential to the capital formation process. Empowering the government to reduce risk in the system will inevitably increase compliance costs and decrease investor returns.’

Oh, that nasty risk, raising its head again. After the toll in human suffering from the loss in capital value and income return, it is a rare person who can say that their wealth factor has recovered to pre-2008 conditions. So too, the government has taken a tremendous hit. The New York Times presents in their Business Day, Adding Up the Government’s Total Bailout Tab, a two year old list of additional guarantees that are part of the price of the Wall Street bailout.

Beyond the $700 billion bailout known as TARP, which has been used to prop up banks and car companies, the government has created an array of other programs to provide support to the struggling financial system. Through April 30, the government has made commitments of about $12.2 trillion and spent $2.5 trillion — but also has collected more than $10 billion in dividends and fees. Here is an overview, organized by the role the government has assumed in each case.

Read the entire breakdown. Wonder what Mr. Reyes over at Treasury would say to this cost to the taxpayer? Does it not seem that the math just does not add up? The next summary from the same Treasury Notes has Mr. Reyes stating.

The federal government’s crisis response was designed to stop the panic and stabilize the financial system with a series of measures, including government guarantees, emergency financial programs, and capital investments. It succeeded in doing so. 

Estimates of the potential losses at the time exceeded $1 trillion dollars. By mid-2013, with most of the emergency programs wound down and most of the funds disbursed under the Troubled Asset Relief Program (TARP) recovered, we can more realistically measure the potential losses and gains on the overall effort.

Well, just ask anyone with a positive net worth before 2008 and inquire if they still consider themselves part of the middle class. The overview of the last five-year monetary architectural plan of providing costless money to the banksters, while starving the average worker and depleting individual investment coffers, is frightening. It is a hard sell for the Treasury. Putting a smiley face on a report, when the actual results are killing Main Street, is preposterous. Thanks Larry Summers, for designing the free rein, wheeler-dealer derivative house of cards that only partially broke in phrase one.

Just wonder what kind of improved government charts we might expect when the next government debt guaranteed bubble bursts wide open. Save the cost to the Treasury, your credit is zero.

Original article archived here

James Hall is a reformed, former political operative. This pundit’s formal instruction in History, Philosophy and Political Science served as training for activism, on the staff of several politicians and in many campaigns. A believer in authentic Public Service, independent business interests were pursued in the private sector. Speculation in markets, and international business investments, allowed for extensive travel and a world view for commerce. Hall is the publisher of BREAKING ALL THE RULES. Contact batr@batr.org