Break up the banks!

Finally someone with real power in the current financial world has stated the obvious: The world’s big banks need to be broken up into utilities that do what you and I think of as banking and speculative trading companies that take risky bets on the markets with their own money.

The speaker of such truths: Mervyn King, Governor of the Bank of England.

Proposed market reforms, including rules that would require banks to raise more capital, don’t address the basic danger posed by banks that are too big to fail, King said in a speech on October 20 in Edinburgh.

Requiring banks to keep more capital wouldn’t create a big enough margin of safety as long as big banks were free to engage in unlimited risk taking with the expectation that tax payers would pick up the tab for any losses large enough to endanger the financial system.

Congress writes strong new regulations for banks–and then exempts everybody but my grandma

Maybe it’s a seasonal thing.

We carve pumpkins at Halloween.

We carve turkeys at Thanksgiving.

So why shouldn’t Congress carve out its own legislation in mid-October.

You may not be familiar with the term “carve out.” I wasn’t until this round of action in the U.S. Congress.

A carve out is when you write really strong regulations–regulations that voters think will do the job that needs to be done–and then gut them in a way that you hope nobody will notice by making sure that they apply to almost nobody.

Lobbyists, I’d note, love carve outs.

The House Financial Services Committee delivered a big carve out to the banking industry on October 15.

Poor things: It looks like the banks are going to be forced to eat a truck load of government debt.

It’s a neat (partial) solution.

Governments around the developed world have been issuing billions–make that trillions–in new debt in order to pay for the bail out of the global financial system.

The worry, of course, is that at some point the world would see a buyers’ strike and the United States and the United Kingdom, two of the biggest issuers of new debt and two of the most fiscally challenged of developed economies, would be stuck with the need to raise money in a market that didn’t want any more of their paper.

Well, you can worry a little bit less. It’s the world’s banks to the rescue. So what if they’re riding to the rescue only because financial regulators are holding a gun to their heads?

Capitalism could still get a stem to stern overhaul. To keep score in the Revolution track something economists call “externalities.”

“A crisis is a terrible thing to waste,” said Stanford economist Paul Romer way back in 2007 near the start of the recent (or should that be “current”?) global fiscal and economic crisis.

You certainly understand why if you take a look at U.S. economic history. Most of the time the structure of our economy seems ruled by inertia. It takes a crisis to change anything significant. It took the repeated financial crises of the late nineteenth century to produce the Federal Reserve, antitrust rules, and the Income Tax. The Great Depression to produce Social Security, the Securities & Exchange Commission, and the National Labor Relation, and more. (Hey, it was a BIG crisis.)

And what do we have to show for the crisis that has bankrupted the next generation?

Bubkis is the common conclusion. A tweak of CEO compensation here. A little cosmetic gussying up of bank balance sheets. Maybe, just maybe, some feeble protection against rapacious credit card lenders. Oh, and health care reform that is either “The path to socialism” or “Gee, I wish it went further” depending on your politics.

But compared to the bar set by the Great Depression, the Great Recession seems to have produced remarkably little change.

Well, I say it ain’t so. We’re engaged, final score isn’t in yet folks, in the most far-reaching effort to change the way that capitalism works since Bismarck invented the old age pension.

Regulatory reform won’t fix the financial system; it’s time to think about starting over again from scratch

All the plans that I’ve seen to ”reform” the financial markets flounder on one problem: They all assume that if you give regulators more power, they will regulate.

 The record says that’s simply not true. And if it’s not, giving the Federal Reserve, the Securities & Exchange Commission, and other regulators more power will do absolutely nothing to lessen the chances of a repeat of the financial crisis that almost took down the world economy.

Consider the slapdown administered by federal judge Jed Rakoff to the Securities & Exchange Commission (SEC) on August 10.

The SEC had proposed settling its case against Bank of America (BAC) with the bank paying $33 million. Bank of America wouldn’t, of course, admit that it had done anything wrong in the case.

The case was yet more fallout from Bank of America’s purchase of Merrill Lynch at the end of 2008. In November 2008, Bank of America sent out a proxy statement to investors saying that bonuses would not be paid to senior Merrill Lynch executives without the consent of Bank of America. In fact, however, Bank of America had already agreed to payouts to Merrill Lynch executives of $5.8 billion in bonuses as part of the original merger agreement.

In other words, the proxy was completely misleading. Someone lied to investors.

What riled Judge Rakoff was that the SEC was letting Bank of America get off without naming that someone.