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Banks star in the 'Great Escape'

When President Obama informed the White House press corps yesterday that he would shortly sign into law a package of measures that would ensure that the financial collapse of 2008 could not happen again, he was promising something he could not possibly deliver.

Congress has created a compromise bill that is so cumbersome that many critics see it as unworkable; it has nothing to say on “leverage” or borrowing to fund speculation; plans to break up big banks are on the back burner; and the United States has no international agreement on its approach.

In the meantime, the conditions that gave rise to the global financial crash of 2008 remain very much in place, with warnings that a new bubble is ready to burst. The system remains weighed down by debt at every level – financial, state and household.

Congress has created more than 2,300 pages of new regulations, which will be supplemented by more than 250 rule-making interpretations. Words and no teeth, according to investment adviser Terry Savage, who says:

Yet when it came to the basics, like requiring brokers to act as ‘fiduciaries’ – putting their client's interests ahead of their own and fully disclosing any conflicts – this simple act was consigned to a ‘study group”. And when it came to prohibiting the banks' risky activities … the law will take as long as 10 years to fully go into effect.

Even the Financial Times views the new legislation as relatively harmless. Senior writer John Authers, whose new book is a gripping tale called The fearful rise of markets, writes:

After the financial crisis, it was beyond argument that existing regulations had failed, and would need to be rethought. Only a few months ago, it looked as though the Great Re-regulation might turn into a Great Revenge, as politicians planned to squeeze the banks. Now, for the banks it begins to look like a Great Escape.

First Goldman Sachs was fined just $550 million for betting against itself with no admission of guilt. This is just three days’ revenue for the investment bank and reflects the power of Goldman Sachs, whose former employees include the treasury secretary Timothy Geithner.

Authers, whose book warns that the rise in markets in the last year has no connection with reality, admits that the bill Obama is about to sign does not tackle the “central issue of leverage”, through which banks and others borrowed to multiply many times over the effect of their investments – and their eventual losses.

His concern at the political failure is barely disguised:

Having toyed with going too far, politicians and regulators have not gone far enough in the needed re-regulation. That is worrying for the long-term health of the financial system, but good for shareholders in financial stocks.

Meanwhile, at a global level the story is more or less the same. The Bank for International Settlements (BIS) is drafting new rules about the levels of capital that banks should have. But all the indications are that attempts to raise thresholds to curb excessive and speculative lending will be omitted when the BIS publishes its proposals later this year.

The moral of the story is this: politicians can huff and puff all they want and play to the public gallery over the banks. But when it comes to the crunch, the capitalist state is under the thumb of financial markets that have a compelling logic, life and power of their own as Greece, Ireland and Spain have already found out. Despite bailing out the banks, he who pays the piper does not, in this case, call the tune.

Paul Feldman
Communications editor
21 July2010

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