Fed report on SVB collapse faults bank's managers -- and central bank regulators

[snot]

12. I've got a lot of thoughts about bank regulation,

for anyone interested:

As Elizabeth Warren, Nouriel Roubini and others have pointed out, for over 50 years following the enactment of Glass-Steagall and other reforms following the crash that brought on the Great Depression of the 1930’s, our economy boomed while avoiding busts. Beginning with President Reagan’s deregulation of S&L’s followed by President Clinton's repeal of Glass-Steagall and refusal to regulate credit derivatives, those very effective protections have been dismantled. Some were partially restored after the 2008 crash, only to be weakened again.

At present, the very structures of our financial system have been modified to the point that the worst kinds of speculation and cannibalistic capitalism are incentivized, while genuinely productive enterprises are starved or even targeted for LBO’s that hollow out products and jobs and ultimately destroy the company.

There are now extant several times more credit derivatives – which geometrically multiply the loss from any depreciation in related assets – than there were in 2008. We are teetering on the brink of the biggest financial disaster in human history. (And we can’t money-print our way out of this and other expenses without inflating the dollar into oblivion, together with "the full faith and credit" standing of the US, which would likely impact any replacement CBDC.)

American citizens see what is going on. Some may not understand the details, but we all understand that the game is rigged; we all see that no matter what happens to the banks or corporations, the people who run them walk out vastly wealthier; and we all see how many of our elected representatives are in Wall Street pockets.

I personally have saved for my retirement since I was 16 years old, lost a huge chunk of my life savings in the 2008 crash, got out of the stock market because it had so clearly become a casino in which only the house wins, and so never made back what I lost; and now, rampant inflation is devouring what’s left.

What we’re up against is not just “vulture capitalism” – the extraction of sustenance from enterprises that are already dead – it’s “cannibal capitalism” – preying on and hollowing out living, robust economic enterprises. Or as (Sir Thomas) Gresham’s Law puts it from another angle “Bad money drives out the good."

Measures I believe we should push for as soon as possible include:

In the case of any failed or bailed-out financial institution, claw back ALL senior executive compensation paid by or on behalf of that institution or any of its affiliates or agents for the previous three years.

Repeal the “bail-in” law(s) that make innocent depositors liable for bank losses before bond and stockholders in the bank. Depositors have the LEAST ability to assess the financial status and risks of the banks they select and the least control over what the bank does; it’s both unfair and creates the wrong incentives to subject gandma’s deposits to risks greater than those borne by the bank bond and stockholders.

Restore Glass-Steagall for real (not pretend, as Dodd-Frank did), together with all other financial regulations enacted in the wake of the Great Depression, to their status ca. 1970.

Outlaw all investment in credit derivatives except those necessary in order to hedge an “insurable” business interest (e.g., such as those necessary for an airline to hedge against fuel price increases). (Otherwise, you’re basically allowing people to buy insurance on properties they don’t own – which not only multiplies the losses if any one property “burns down,” but actually creates an incentive for arson!)

Stop bailing out Wall St. banks and other companies; instead, liquidate them and let their including their stock and bond holders eat any losses. If there are concerns about losses to pension funds and other innocent parties, bail those out directly rather than bailing out the failed bank or credit derivative issuer (such as AIG in the 2008 crash).

Investigate and prosecute Wall St. crimes. It is completely unacceptable that Goldman-Sachs got away with betting against the same securities it was selling to pension funds. If that’s not a strict liability crime, it should be.

Restore the regulations subjecting brokers to fiduciary obligations toward their customers.

Prohibit senior management of failed banks from working in other banks – forever.

Outlaw "naked shorts."

Outlaw any CBDC issued by the U.S., the Fed, or any agent or delegee of either. This is a big topic in itself, which I can’t take the time to go into here; but we know that a CBDC would fatally disempower us, and we don’t need or want it.

I realize that one possible objection to the foregoing is that the U.S. may lose financial business if it attempts reforms while other countries continue under rules that are more lax. But in nearly all cases, the banks in those other countries are in even worse shape and the citizens in those countries just as outraged as we are at the bail-outs and the hollowing-out of their real economies. I’m confident that if the situation were properly explained, nearly everyone in the world, other than the bankers and their cronies, would be thrilled to see meaningful regulation of banks and financial markets restored. And this is not a partisan issue: I have yet to meet a Republican (other than those actually employed or funded by Wall St.) who isn’t outraged that there haven’t been more prosecutions of Wall St. executives.