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Thursday, September 24, 2009

Marshall Auerback and no holds barred for the FCIC

It is our opinion that the financial crisis will have rebounded on us by the time the Financial Crisis Inquiry Commission issues its report. But it is a step forward. Marshall Auerback is resoundingly right in his call for no limits on the investigation.

Financial Crisis Inquiry Commission must examine core financial practices and ideas
from New Deal 2.0
by Marshall Auerback
September 17, 2009

FCIC Chairman Phil Angelides got it right in his remarks at the Commission’s first public meeting:

“We have been called upon to conduct a full and fair investigation in the best interests of the nation –pursuing the truth, uncovering the facts, and providing an unbiased, historical accounting of what brought our financial system and our economy to its knees. This is what the American people deserve and this is what we are obliged to do. In this critical instance, if we do not learn from history, we are unlikely to fully recover from it.”

Ultimately, if Chairman Angelides and the rest of the FCIC are to succeed in their mission, they must start from first principles and explain that the financial system is a means, not an end. It is not justified by its own existence. Banks are not common property, whose growth and profitability are per se matters of national honor or pride. They are public/private partnerships, established for the public purpose of providing loans based on credit analysis. It is therefore particularly important to put a stop to the anti-social, perverse and, in many cases, fraudulent practices of the major financial players which brought on the credit crisis.

If the FCIC (aka “Pecora Commission 2.0?) is to have any long-lasting relevance, it must establish the larger purposes that economic policy in general, and financial policy in particular, should address. A difficulty of regulatory reform lies in the underlying desire, sometimes unstated, to return to the previous status quo ante, without asking whether that system actually met society’s needs or was coincident with broader public purpose. The challenge of the Commission is to align the financial sector’s interests with the broader purposes of public policy via a sensible new regulatory framework.

This principle has been conspicuously lacking in Obama’s “reforms” thus far. Extraordinarily, the moves by governments to provide deficit-stimulus and taxpayer support to their ailing economies have been hitherto hijacked by the financial sector to fill their own coffers. At the same time, their “spokepersons” (media, economists etc) are mounting an increasingly strident attack on the deficits themselves, pleading for a return to fiscal orthodoxy, whist decrying the “draconian” financial reforms designed to reign in the banks so that their objectives begin to align more broadly with public purpose.

These attacks have started to resonate politically. The casino is back in business, trading and speculating on the financial markets are on their way to reach pre-crisis levels. Reform is losing momentum. Banks are again posting profits and managers are again receiving large bonuses, the bankers themselves oblivious to the fact that these bonuses constitute a huge taxpayer subsidy and extremely regressive and anti-social wealth transfer. Meanwhile, the productive economy remains mired in severe recession, yet the financial markets have yet again managed to close the shutters to the real world. Such are the makings of populist revolts.

If governments start cutting back, as the received financial wisdom now dictates, the banks alone will have pocketed billions in public welfare, whilst the rest of us will be left with a huge residual of unemployment and poverty at the other end of the socio-economic scale. Equally significantly, we will be no further along toward understanding the problems that created the crisis in the first place.

So what is needed by the FCIC is a major examination of the practices and ideas that created the underpinnings for this crisis. We need a no-holds barred commission, one that ruthlessly investigates all financial institutions, even those that are not under the jurisdiction of the federal government. We need a profound restructuring of our financial system, so that it doesn’t unduly foster reckless bubbles (where transitory gains in employment and income are wiped out in the subsequent crash), but is redirected to growth along lines that meet a range of important physical and social objectives. Banking can play a role in the transformation and reform of our economy, but only if the regulation to which they should be subject is directed toward public purpose, not private enrichment. It is, as Chairman Angelides suggests, a daunting and complex task, but at it’s core a simple one: “To rebuild and sustain a system of capital that helps us create enterprises of value, that puts Americans to work so they can support their families and fulfill their dreams, and that provides the foundation for a new era of broadly shared prosperity.” Good luck to him and the other members of the Commission!

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