Time For A New Teddy Roosevelt As Well As A New FDR

Right Democrat has this, by Joe Costello, from the New Way Forward blog:

We’ve all heard of derivatives, but no one knows what exactly they are. However, it is more important to understand the impact they had on the financial system, and that is relatively easier to discern. One important thing derivatives and other financial innovations allow is for Wall Street and the banks to get around well established practices, rules and regulations on carrying reserves. In a money system such as ours, based on fractional-reserve banking (also see Greider’s “Secrets of the Temple” for nice explanation), this is extremely important. Simply, it just allows greater and greater leverage, or to most of us, that simply means more debt. It’s not so important when things are going up, but its life and death when things are going down. One of the nuts in Ms Tett’s piece:

The implications were huge. Banks had typically been forced to hold $800m reserves for every $10bn of corporate loans on their books. Now that sum could fall to just $160m….(they) had pulled off a dance around the international banking rules.

Basically, we the taxpayers are now supplying all the reserves on losses the banks failed to put aside, though they’ve stolen, and I mean that literally, all the profits.

We haven’t even come close to starting a discussion on reforming the banking system and until we do there will not be much of an economic recovery. There’s way too much dreck around and under any healthy rules of finance much of the American banking system is insolvent, and will remain so until action is taken. Outside of generating profits for Wall Street, and they generated a lot of profits, the financial innovations of the last three decades are of little value. Talk about touching them, Wall Street will squeal like the stuck pigs they are, yet we need a much deeper conversation, for example, maybe the banks shouldn’t be large money creators for society.

Anyway, we’re a long way from any conversation, to start it, the American people will first have to win back their political system from Wall Street. What say you?

Read Gillian Tett’s piece in the Financial Times.