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Sept 30, 2011
THE NEXT FINANCIAL TSUNAMI
Arshad M. Khan
The U.K. Independent Commission on Banking (ICB) led by Sir John Vickers, former
Chief Economist of the Bank of England, issued its report earlier this month. The ICB
was tasked a year ago to propose structural and non-structural reforms in the
aftermath of the 2008 banking crisis. Its principal recommendation is the separation
of retail and investment banking.
In the U.S., the Glass-Steagall Act guaranteed the protection ICB now proposes for
the U.K. But it was dismantled during the Clinton administration with Treasury
Secretary Robert Rubin and his deputy Larry Summers claiming it was outdated
because the sophisticated modern market would ensure policing of the financial
institutions. It is ironic that the ICB's findings would subject British banks to a standard
we already had, but lost to the greed of bankers through their control of the political
It was the big banks' hunger for money-making mortgage instruments that fueled the
mortgage loan boom, which in turn precipitated the housing bust. In the old days,
when local mortgage lenders held on to the mortgages, they had a strong incentive to
vet the borrowers carefully -- not so when they became a conduit for the paper to big
Wall Street banks.
Despite this disaster, the drumbeat for dismantling regulation continues. The
Dodd-Frank Act which was supposed to reinstate controls left the mechanics to
agencies. So now the lobbyists get two bites at the apple: first, at the legislative
level, and then at the agencies. Pitiful, remarkable and a testament to the bankers'
clout that three years after the advent of the crisis, no satisfactory controls exist.
Now comes the European tsunami. While the principal bankers of the high-risk
European sovereign debt are French and German, the U.S. financial industry might
well be involved as insurers. The overall magnitude of the problem is even larger
than the mortgage lending crisis. In each case the creditor banks have run to
governments and central banks to help, and when the crunch comes, will do so again.
In Europe, too, the likely answer will be to monetize the debt -- the governments will
help, the central bankers will create the money. In effect, the general public will end
up paying through inflation, a lowered standard of living, or both.
As long as governance is firmly in the grip of powerful special interests, the situation is
unlikely to change. We will continue to be brainwashed to believe that certain sacred
cows can never be touched or some unimaginable disaster will befall us. They will
remain "too big to fail," and we, too small for anything more than lip service.
The U.S. economy is shot. The bankers are still not lending; they are using their
profits to shore up balance sheets loaded with bad mortgage paper. The future holds
a similar prospect for European banks. And everyone is running to the Chinese for