Batten down the Hatches

Most economists are saying what most Americans have been saying for some time. This doesn’t feeling like a recovering economy. But is it just another calm before yet another storm? I earlier reported on a new thesis called “The Doomsday Cycle” and the attention that it had been receiving in academic circles. The idea is that the Fed and other central banks have just been increasingly feeding private sector debt to grow bubble economies and that despite several downturns that have been not so severe (the dot com or tech bubble) and severe (the housing or sub prime bubble), we continue offering easy credit that’s not supporting real growth in the world economy. There is now a report coming from some of my favorite Cassandras that suggests we’ve yet to work out on the problems of the last few years and it’s likely to get worse. This would include Nobel prize winning economist Joseph Stiglitz, Public Watchdog of Bailout Funds Elizabeth Warren, and Rob Johnson of the United Nations Commission of Experts on Finance. The report argues that a down turn is coming that will be much worse than the recent one. The central cause of these continuing blow outs are those banks that continually speculate rather than lend to businesses that actually produce and do something which are being continually enabled by Federal governments everywhere.

The report warns that the country is now immersed in a “doomsday cycle” wherein banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management – and when the risks go wrong, the banks receive taxpayer bailouts from the government.

“Risk-taking at banks,” the report cautions, “will soon be larger than ever.”

Again, financial innovations are at the center of the maelstrom.

“While manufacturers have developed iPods and flat-screen televisions, the financial industry has perfected the art of offering mortgages, credit cards and check overdrafts laden with hidden terms that obscure price and risk,” Warren writes. “Good products are mixed with dangerous products, and consumers are left on their own to try to sort out which is which. The consequences can be disastrous.”

Frank Partnoy, a panelist from the University of San Diego, claims that “the balance sheets of most Wall Street banks are fiction.” Another panelist, Raj Date of the Cambridge Winter Center for Financial Institutions Policy, argues that government-backed mortgage giants Fannie Mae and Freddie Mac have become “needlessly complex and irretrievably flawed” and should be eliminated. The report also calls for greater competition among credit rating agencies and increased regulation of the derivatives market, including requiring that credit-default swaps be traded on regulated exchanges.

At the same time, we’re seeing the reform bill that was intended to stop a repeat of the 2008 global financial crisis being watered down to the point of uselessness by congress and the FIRE lobby. You can watch at Bloomberg which is livestreaming the conference here at the Roosevelt Institute. It’s called Make Markets Better. I know it’s finance and economics, but you’re better off knowing, believe me.