Financial Crisis

Contrary to what the doomsayers have been saying, Greece's debt crisis may turn out to be one of the best things to happen to the European Union.

While the situation has been messy, it also has signaled a badly needed wake-up call to Europe about a flaw at the heart of its monetary union. That in turn has resulted in a move toward reforms that have the potential to lead to sensible financial regulation and transparency, as well as to strengthen Europe's union. These reforms include:

The recent battle over healthcare reform in the United States, in which the Obama administration was barely able to pass weak reform, is just further proof of how far the US has fallen behind Europe. Yet all the media has been able to obsess over for the last couple of months is – the Greek debt crisis!

In following the tic toc daily developments of the financial reform debate, Brain Beutler makes that following observation over at Talking Points Memo:

Anti-Wall Street sentiment is so strong and Republicans have such a weak hand that Democrats in the Senate are suddenly finding themselves strengthening the financial reform bill with new amendments and beating back GOP attempts to weaken it.

He details the Sanders amendment which would open up the Federal Reserve to greater scrutiny. The Fed has been one of the least transparent institutions and calls for greater oversight have never gotten much traction. Until now. A vote is scheduled for Monday on this amendment and I think it will generate some weekend talk show discussion. It will be interesting to see what the party breakdown is here. Will it cut across party lines, break down the usual partisan divide, or become more of a landslide vote?

For me, one of the most consequential votes was taken yesterday where the Shelby alternative to the consumer financial protection bureau was voted down by a unified Democratic caucus and joined in by Republican Seantors Grassley and Snowe. The Shelby approach proposed a weaker oversight body and was seen as a step backward by most consumer advocates. This was a very telling vote, which indicated for me that the final vote on the whole package is headed for home. It may take a few more swerves along the way, and certainly continues to bear close watching, but there is momentum to get something done which avoid the President's veto pen.  

Until last week, I'd never heard of "IBGYBG." But during the Senate Permanent Subcommittee on Investigations' eye-opening hearings into ratings agency malfeasance, former Moody's senior credit officer Richard Michalek introduced me to it while testifying about the perverse incentives that dominated the industry. On the investment bank side, he said, bankers were looking to score the one-time fee from whatever securitization deal they were asking the agency to rate, and move on to the next deal.

Opponents of comprehensive immigration reform argue that legalization rewards bad behavior. They contend that illegal immigration is a crime that merits punishment and expulsion, not amnesty. The logic is that if we respond with tough enforcement, illegal immigrants will finally get that they aren't welcome here and go back to their home countries. This kind of reasoning is what's behind laws like the one recently passed in Arizona, which requires law enforcement personnel to determine whenever possible the immigration status of suspected illegal immigrants.

Originally posted at Huffington Post

In Washington these days, not much is assured. Senate Republicans have ended their filibuster of financial reform, but this just allows debate on the bill to go to the Senate floor. There remains plenty of opportunity for opponents to make more mischief. Still, all signs point to a deal.

The conventional political theory behind getting a financial reform bill through Congress runs something like this. Backed by the Administration, Democrats have proposed changing the rules governing the financial sector which are opposed by the big banks and their allies but their influence is being offset given their contributing role in the Great Recession. Republicans in Congress, who have not wanted to see the President succeed in anything, are reticent about blocking legislation that can be billed as taking on Wall Street, especially as a fall election looms where they are anticipating significant gains. That’s a recipe for finding common ground on the political playing field.

But what’s in the bill? After all, the details surely must matter and will determine whether it is a deal worth taking. {I previously outlined five benchmarks for President Obama to consider before he signs on the dotted line}. What we do know is that the current regulatory regime did not include sufficient safeguards to prevent a near total collapse of the national economy nor protect households from being pushed into products they did not need nor understand. Risks of financial instability were exacerbated rather than contained. Priority number one for reform should not focus on finding a political compromise but making sure we don’t repeat the economic experience of the last few years. That is hardly a partisan position. And if we look closer at some of the major provisions of the bill under consideration, they also potentially create common ground on the policy landscape and point toward getting a bill done now that is not just politically wise, but moves the ball down the policy playing field as well.

We know that the combination of the popping of the housing bubble and the Great Recession has produced a wave of foreclosures, defaults, and left many homeowners underwater owing more on their homes than they are worth.

Monica Potts of the America Prospect shines some light on a pretty revealing study that examined foreclosure rates among lower-income borrowers.

China’s trade surplus declined in the first quarter, and during March the country ran a deficit of $7.2 billion, its first monthly trade deficit since 2004. Contrary to some analyses, this is not proof that the economy has made significant progress toward rebalancing or a reason for the United States to back away from pushing China on yuan appreciation.

The deregulation of the American financial industry that began in the 1970s is now widely viewed as a disaster. Even Bill Clinton has admitted that the supporters of deregulation in his administration, like Robert Rubin and Larry Summers, gave him bad advice.

A year and a half after an economic earthquake shook the world, the so-called experts are still trying to figure out what happened and how to move forward. In the shadows of that confusion, new economic models are beginning to find traction.