Saturday, July 30, 2011

Gambling with financial stability not limited to regulators

Between the US and European governments it is harder to tell which likes to gamble with financial stability more.

In the US, the Administration is talking about armageddon if the debt ceiling is not increased.  Not surprisingly, consumer and investor confidence is plummeting.

At the same time, just like it did for healthcare and financial reform legislation, rather than demonstrate any leadership by publicly defining exactly what it wants from Congress to address the problem, the Administration is leaving it up to the Democrats and Republicans in Congress to draft a bill acceptable to both parties.

Hello.  The public does not give credit for "passing" legislation.  The public gives credit for passing legislation that  does something positive for the US.

Take the financial reform legislation (also known as the Dodd-Frank Act).  The D and F actually stand for the grades that the public is assigning to this legislation.

Why are the grades so low?  It is obvious to the public that the legislation puts dramatically more responsibility into the hands of the regulators to prevent a future financial crisis.  The very same regulators that the public knows who had more than enough authority to prevent the last crisis and failed to do so.  Talk about gambling with financial stability.

It is equally obvious to the public that the legislation does not address the causes of the crisis.  Let us take for example the credit rating services.  The Dodd-Frank Act was suppose to reduce the financial system's reliance on the credit rating services.  The fact that the Administration is concerned over the potential for a downgrade and the impact this downgrade will have on the global economy is a sure sign that the Act did not achieve this goal.  Talk about gambling with financial stability.

Meanwhile, the governments in the Eurozone are hardly free of the gambling with financial stability addiction.  They keep trotting out the same solution to the bank solvency problem and its related sovereign debt crisis:  bailouts.

Unfortunately, the Eurozone governments just implemented the most recent bailout immediately after the regulators stress tested the banks and concluded that most banks were adequately capitalized and could absorb losses.  By implementing a bailout so soon after the regulators announcement, it calls into question the competency of the regulators.  Talk about gambling with financial stability.

On top of that, the latest bailout did not actually fix the Greek sovereign debt problem as it does not substantially reduce the amount of debt Greece owes.  This sets up the need for yet another bailout.  Talk about gambling with financial stability.

Despite all evidence to the contrary, your humble blogger continues to believe in Winston Churchill's observation that the US and, by extension, Europe always finds the right solution after trying everything else first.

If so, we must be rapidly approaching adoption of the FDR Framework.  As regular readers know, it is this framework that is the basis for financial stability and the restoration of investor and consumer confidence.

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