Republicans HATE regulating banks. After the economy suffered an implosion which the banking industry was responsible for … it is as if the Republican party has willful ignorance and amnesia regarding how the American economy nearly did a rerun circa 1929 Great Depression style. Changes were needed to put the banking sector back on track. But when it came to passing legislation to fix the problem … this is how so called “conservatives” voted:
Think about that. That’s EXTREME. We had a huge meltdown and not only are Republicans wanting to eliminate banking regulations passed by President Obama … at least their nominee (but presumably the party if given the chance) would get rid of regulations tsigned by the former party standard bearer … President Bush. The Dodd-Frank Act is far from perfect but it is having a debilitating effect on the banking sector’s ability to risk commercial deposits on risky bets akin to Las Vegas gambling.
We won’t fix this problem until banks start to make more money from lending to small business owners than to invest in highly risky derivatives bets. When banks start to view betting on derivatives and other exotic financial instruments as less attractive than giving a $300,000 loan to someone looking to open up a restaurant … the economy will recover and quickly.
But separate from all of this – the long term solution is for every state to create its own state owned bank like the Bank of North Dakota; 17 states are looking into it currently and if you don’t know about the Bank of North Dakota – you need to read about that HERE.
The Economist writes HERE:
The full effects of these changes are yet to be felt, but some consequences are already clear (see article). Nomura, a Japanese bank that pounced on the European and Asian arms of Lehman Brothers, is licking its wounds and retreating from its ambitions to build a global investment-banking powerhouse. Deutsche Bank, long reliant on its investment bank to boost profits, now hopes for utility-like returns on equity of just 12% compared with the 20% it used to earn.
The retreat also has a human cost. The financial industry in London, the world’s most international banking hub, will probably have shed 100,000 jobs by the end of this year from its peak of 354,000 in 2007. In New York the industry employs 20,000 fewer people than it did before the crisis, and it is likely to lose 2,600 more jobs this year. Pay is also falling fast—down by about 30% since 2007—and it comes with new strings.
The Huffington Post points us to a study from the IMF that says an increase in bank regulations is going to have a negligible negative impact on the economy HERE:
The International Monetary Fund earlier this week released a report, entitled “Estimating the Costs of Financial Regulation,” which estimated that new international rules requiring banks to hold more capital and be better prepared for financial shocks would result in a jump in U.S. borrowing costs — by an entire 0.28 percentage points. In Europe, the effect would be even lower: an increase of 0.17 percentage points. And in Japan, the effect would be 0.08 percentage points of added borrowing costs.
Compare and contrast this with the recent estimate by the nonprofit group Better Markets, that the financial crisis has cost the U.S. economy alone at least $12.8 trillion. Another report two years ago by the Pew Economic Policy Group estimated direct costs of the crisis at about $12 trillion and 5.5 million lost jobs. In light of such costs, an extra 0.28 percentage points on your next mortgage or car loan doesn’t seem like such a high price to pay.
The IMF report can be found HERE; an excerpt:
Reforming the regulation of financial institutions and markets is critically important and should provide large benefits to society. The recent financial crisis underlined the huge economic costs produced by recessions associated with severe financial crises. However, adding safety margins in the financial system comes at a price. Most notably, the substantially stronger capital and liquidity requirements created under the new Basel III accord have economic costs during the good years, analogous to insurance payments.
Large banks will likely be relative losers as a result of derivatives reforms. Customized derivatives, which have been a product with high profit margins, will be replaced to a large extent by standardized derivatives, which will tend to have lower profit margins as a result of the greater competition and transparency. Offsetting this, bank capital requirements will go down as trades shift to exchanges and clearing houses, although the benefits will be partially reduced since the customized derivatives that remain will carry considerably higher capital requirements.
You can find a cheat sheet regarding the Dodd-Frank Act HERE.
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