By: Marquis Codjia
A few months ago, the crumbling global economy was atop the
agenda of many G20 leaders. Social unrest, banking sector
meltdown, global growth conundrum, and stock market yo-yos were
the main discussion topics among the planetary leadership.
Governments the world over addressed the most imperative issue,
the banking pandemonium, with massive cash inflows into a sector
that hitherto epitomized capitalism at its best (and worst),
with a modus operandi more akin to central intervention in
The global tab ranges from 4 to 5 trillion US dollars according
to the most optimistic estimates, but the overall costs may run
higher in the future.
The financial rescue of the ailing banking sector, in principle,
was the right course of action and various experts across the
political spectrum saw eye to eye on its criticality, including
the staunchest free-market theorizers who routinely treat as
leftist energumens out of the antediluvian era those who dare
buck conventional wisdom regarding the role of government in
It was flummoxing, however, to observe how lenient authorities
were vis-à-vis banks throughout the bailout process on top of
the very favorable terms under which funds were disbursed.
Hence, financial institutions that benefited from state largesse
were able to quickly use monies received to regain profitability
and reimburse their respective governments.
Other parts of the economy didn't experience so swift a
recovery. Unemployment is still high; the mortgage sector is
still in a shambles. Banks have been reluctant to lend, creating
an underperforming productive sector and a lethargic private
consumption. The stock market may be up but, debatably, the
"real economy" is still down.
Banks played a crucial role in the current economic malaise but
anti-bailout commentators were wrong to vilify them and to
affirm that such guilt should have precluded public rescue.
Financial intermediaries are an epochal pillar of our
post-modern economies and it would have been socio-economically
ruinous and politically unpalatable to let them sink.
Admittedly, a majority of banks are today more cash awash and
profitable than a year ago albeit some pockets of the industry
are still comatose owing to the liquidity hemorrhage that has
devastated them since the recession erupted.
Regrettably, nothing has changed. These institutions are
resorting again to the erstwhile practices that wrought havoc to
the economy in the first place, under the aegis of a regulatory
body eerily blind, deaf and tongue-tied.
Banks, evidently, should be encouraged to pursue and make
profits as any private concern. But when such a financial quest
comes at the expense of an entire system or poses a systemic
threat to the productive sector of the economy, the argument in
favor of tougher regulation becomes of preeminent import.
Companies need to utilize hedging for exposure control; yet,
speculators lately seem to use derivatives to bet against their
very benefactors. Although outrageous to vast swaths of the
populace, such practices are explicable if one considers that
the speculating camp only furthers private interests of elites
(their investors) who seldom factor morality into the
Case in point: Greece. The Hellenic government bailed out its
banking sector with billions of dollars only to see their
country downgraded a few months later because of an perceived
At this moment, elected officials and central bankers should
ponder the following question: did the bailout work? Or, stated
differently, did the mammoth cash infusion into banks and the
associated supplemental initiatives reach the initial goals?
Seasoned economists and social scientists will grapple amply
with issues regarding program effectiveness and efficiency in
the future, but prominent experts currently believe the answers
to such interrogations are negative. George Mason University
economist Peter Boettke posited that bank bailouts have created
a "cycle of debt, deficits and government expansion" that in the
end "will be economically crippling" to major economies, whereas
Barry Ritholtz, famed author of Bailout Nation and CEO of
research firm FusionIQ, thinks the rescue programs could have
been conducted better.
It can be argued that the initial rescue phase of the bailouts
program was effectual in that it helped avert a domestic and
global banking hubbub. But, contrary to popular credence, that
was the easiest part. The courageous headship of political
leaders and regulators cannot be underrated in the process, but
it is indisputably far facile for a powerful central bank, like
the US Federal Reserve, to make journal entries to the credit of
targeted institutions and replenish their corporate coffers via
the much celebrated "quantitative easing".
The Fed, just like other G8 central banks, is in an enviable
position because it can create money 'out of nothing' by
increasing the credit in its own bank account.
Regulation is where actual political bravery need be shown from
authorities, and so far the lack of sweeping reforms in the
financial sector may obliterate the latter's plodding recovery.
At present, there are five distinct reasons explicating the
mediocre results obtained so far from the bailout scheme.
First, the much needed financial overhaul is taking longer to
move up the legislative ladder and reach US President Barack
Obama's desk because not only financial lobbies - such as the
über-powerful American Bankers Association - are exerting strong
pressure, but the political agenda is also crowded with the
healthcare reform and the geostrategic concerns linked to the
conflicts in Afghanistan and Iraq.
The fact that Senate Banking chief Chris Dodd, D-Conn., wants to
introduce reform in the sector will probably change little in
the short-term. Second, President Obama's own senior level
financial staff is composed of former Wall Street alumni and
lobbyists, and many skeptics are incredulous that a clique so
tied to financial interests can spearhead true reforms in an
industry that was previously munificent to them.
The next two factors are endogenous to the banking industry. One
is the past experience of regulation and deregulation cycles
that usually make laws dissipate over time, and the other stems
from the idiosyncratic ability of financial engineers and
investment bankers to design new products and techniques to
counter existing laws.
Finally, the regulatory endeavor should be global in scope, and
the present lack of geographic cooperation and the practical
difficulty to track systemic risk within the industry are
currently handicapping further advances.
(Article initially published at http://wp.me/pMqmW-8y)
About the author:
I'm a finance professional with a solid, varied risk management
experience in the financial services arena. I have been involved
in capital markets for a few years now, in the course of my work
but also as a trader. I'm an MBA graduate from Rutgers
University Graduate School of Business at New Brunswick, New
Jersey, and a CPA (Certified Public Accountant). Read expanded
bio at http://marquisc.wordpress.com/about/