By MATTHEW JAFFE
March 2, 2010
Even as many Americans still struggle to
recover from the
country's worst economic downturn since the Great Depression, another
crisis – one that will be even worse than the current one – is looming,
according to a new report from a group of leading economists, financiers, and
former federal regulators.
In the report, the panel, that includes
Rob Johnson of the United Nations Commission of Experts on Finance and bailout
watchdog Elizabeth
Warren, warns that financial regulatory reform measures proposed by the
Obama administration and Congress must be beefed up to prevent banks from
continuing to engage in high risk investing that precipitated the near collapse
of the U.S. economy in 2008.
The report warns that the country is now
immersed in a "doomsday cycle" wherein banks use borrowed money to
take massive risks in an attempt to pay big dividends to shareholders and big
bonuses to management – and when the risks go wrong, the banks receive taxpayer
bailouts from the government.
"Risk-taking at banks," the
report cautions, "will soon be larger than ever."
Related
Wall
Street: Obama to Cut Size, Power of Banks
Govt.
Bailout Called Failure on Many Counts
Obama Spells out
Rebates for Energy Efficiency
Without more stringent reforms,
"another crisis – a bigger crisis that weakens both our financial sector
and our larger economy – is more than predictable, it is inevitable,"
Johnson says in the report, commissioned by the nonpartisan Roosevelt
Institute.
The institute's chief economist, Nobel
Prize-winner Joseph Stiglitz, calls the report "an important point of
departure for a debate on where we are on the road to regulatory reform."
The report blasts some of Washington's
key players. Johnson writes, "Our government leaders have shown little
capacity to fix the flaws in our market system." Two other panelists,
Simon Johnson, a professor at MIT, and Peter Boone of the Centre for Economic
Performance, voiced similar criticisms.
Federal
Reserve Chairman Ben Bernanke and Treasury Secretary
Tim Geithner "oversaw policy as the bubble was inflating," write
Johnson and Boone, and "these same men are now designing our
'rescue.'"
The study says that "In 2008-09, we
came remarkably close to another Great Depression. Next time we may not be so
'lucky.' The threat of the doomsday cycle remains strong and growing,"
they say. "What will happen when the next shock hits? We may be nearing
the stage where the answer will be – just as it was in the Great Depression – a
calamitous global collapse."
The panelists call for major banks to
maintain liquid capital of at least 15 to 25 percent of their assets, the
enactment of stiffer consequences for executives of bailout recipients and for
government officials to start breaking up firms that grow too big.
In the report, Elizabeth Warren, who was
chair of the Congressional Oversight Panel, reiterates her calls for an
independent agency to protect consumers from abusive Wall Street practices.
Related
Bunning
Will Deal on Jobless Pay Extension
EXCLUSIVE:
GOP: Obama Mortgage Plan 'Failed'
702
Banks in Trouble, Says Government
"While manufacturers have developed
iPods and flat-screen televisions, the financial industry has perfected the art
of offering mortgages, credit cards and check overdrafts laden with hidden
terms that obscure price and risk," Warren writes. "Good products are
mixed with dangerous products, and consumers are left on their own to try to
sort out which is which. The consequences can be disastrous."
Frank Partnoy, a panelist from the
University of San Diego, claims that "the balance sheets of most Wall
Street banks are fiction." Another panelist, Raj Date of the Cambridge
Winter Center for Financial Institutions Policy, argues that government-backed
mortgage giants Fannie Mae and Freddie Mac have become "needlessly complex
and irretrievably flawed" and should be eliminated. The report also calls
for greater competition among credit rating agencies and increased regulation
of the derivatives market, including requiring that credit-default swaps be
traded on regulated exchanges.
With the Senate Banking Committee, led by
Chris Dodd, D-Conn., poised to unveil its financial regulatory reform proposal
sometime in the next week, the report calls on Congress to enact reforms strong
enough to prevent another meltdown.
"Sen. Dick Durbin once said the
banks 'owned' the Senate," says Johnson. "The next few weeks will
determine whether or not that statement is true."