Sunday, June 21, 2009

What Frank Rich Does Not Consider

The esteemed columnist Frank Rich of NYT is on tear and is grilling Obama Financial Reform plans on coals in his latest op-ed column. But our esteemed columnist is excluding certain things and hence his criticism is misplaced. Here are those reasons:

1. First the simple reason why Obama Administration let goes free the rating agencies: it is for you and me taxpayers. My hypothesis here is if Obama Administration goes after rating agencies, very easily these rating agencies will take revenge on Uncle Sam by dramatically reducing the Triple A rating and that will result in higher borrowing costs for Fed. Yes, I understand that it is ‘corruption of highest’ order. But you see you have to understand why our beloved President loses his sleep in the night – no, it is not Hilliary’s 3 AM call (though those are coming now with rejuvenated Axis); but it is the indebtedness of America. Our President has made the moral choice that it is easier, for the sake of Tax Payers, to perpetuate this corruption and let rating agencies remain leash free than adopt the harder route of adopting serious ‘deficit reduction’ program so as then Uncle Sam control the bad behavior of these agencies.

2. When it comes to Consumer Protection Agency, however, the politics aligns with President’s votes. Hence, the solid stance and aggressiveness by the President in that regard. Chances are high that President Obama will create such an agency with a reasonable teeth and effectiveness.

3. With banks, Rich sounds lot like Simon Johnson and Dr. Doom – that big banks are inherently bad; those need to be broken and simply never allowed to become ‘too big to fail’. The question is really not about the big banks, it is about the failure to manage and supervise them well. If every big bank in USA is to be broken, then why not Wal-Mart? One would say then, but failure of Wal-Mart will not need bailout from Fed. Is that true? Look at GM. Any big company failure will force USA Government to intervene, especially in the fragile times of recession. So how can you separate banks? To the extent, ‘counter cyclical’ Capital requirements go; those elements are there in the proposed reforms.

4. It is also proposed that Fed would take on risk created by big non-bank financial organizations. People wonder that is dilution of the original Fed mandate of ‘price stability’ and then later added goal of employment. That is true. But we cannot forget that Fed has been always the lender of the last resort. Any time a strategic risk situation is created due to a rogue non-bank financial company, how will it be resolved? Almost always by pouring additional cash. Who else can fulfill that need than the lender of the last resort? What good is achieved if someone else makes that call but it is the Fed Balance Sheet which will carries the herculean burden? Hence it does not make sense to have someone else to carry out these duties. Besides, are we going to have one more czar with another of Senate confirmation parade to triangulate and crowd the space of top financial regulators? Does not sound encouraging. It seems that resting these new duties with Fed is a choice of lesser evil among all those that are there.

5. Next restoration of ‘Glass-Steagall’ – are we to believe that in today’s complex world we can go to the simplicity of defining banking by instruments and end users? Dangers are there across the spectrum and those need to be regulated. Having separate units performing different banking needs will not in the end reduce total risk? Then again what good will come out by artificially regulating banks? True solution to the current Great Recession sound lot like solutions applicable in Great Depression; but causes are of different flavors pointing to recent regulatory agency failures.

6. Now it is true that Soros demands banning certain ‘default credit swaps’ (because betting is on failure / bankruptcy of certain companies) and there is merit in that. So Rich’s criticism is valid here and Obama Administration has needlessly y missed an opportunity to propose stricter regulations to control such swaps.

So it seems proposed financial regulations are not as bad as what Frank Rich will like us to believe. He has not considered many aspects and seems like avoidably critical.

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