The Next Financial Crisis

http://www.marketwatch.com/story/the-next-worse-financial-crisis-2011-07-06

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"We can't win the future with a government of the past." (President Obama - State of the Union - 1/25/11)

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It's hard to keep track of what's been going on with correcting the faults in government regulation that allowed the worldwide financial crisis to occur but Bret Arends has a perspective that is hard to disagree with: the last financial crisis isn't over, but we might as well start getting ready for the next one.

Here are his 10 reasons why:

1. We're learning the wrong lessons from the last one.
Did Barney Frank, the Community Reinvestment Act, Fannie Mae and Freddy Mac, Bill Clinton and liberals in general cause what happened? If so, how do we explain Spain? Were they over there too?
2. No one has been punished.
Executives like Dick Fuld at Lehman Brothers and Angelo Mozilo at Countrywide cashed out hundreds of millions of dollars before things crashed: "Predatory lenders and crooked mortgage lenders walked away with millions in ill-gotten gains."
3. The incentives remain crooked.
Thanks to restricted stock, options, the bonus game, securitization, fee structures, insider stock sales, "too big to fail" and limited liability, "they (the top financial executives) are paid to behave recklessly."
4. The referees are corrupt.
Here we quote again: "The players (Wall Street) get to bribe the refs ... The banks and other industries lavish huge amounts of money on Congress ...They do it thru campaign contributions ...They do it thru $500,000 speaker fees ... And they do it by spending a fortune on lobbyists ... The finance industry spent $474 million on lobbying last year alone ..."
5. Stocks are skyrocketing again.
So, what's the problem? Business must be working, right? Well there's that little issue of capital spending domestically (here in the U.S.) and unemployment. Companies can only spend so much on inventory before consumer demand needs to take over.
6. The derivatives time bomb is bigger than ever - and ticking away.
And, we quote again: "Just before Lehman collapsed ... Wall Street firms were carrying risky financial derivatives on their books with a value of $183 trillion. That was 13 times the size of the U.S. economy ... That number has now INCREASED to $248 trillion!"
7. The ancient regime is still in the saddle.
I guess the qualification to save the economy and/or fix the "problem" is that you were a "Wall Streeter" or a participating economist/regulator because many of those people are (or were) still in place.
8. Ben Bernanke doesn't understand his job.
Here, I disagree. Bernanke's PhD was on the Great Depression and he's done everything possible with monetary policy to spend into a lackluster economy (avoiding the potential for "deflation" which was a real possibility). My theory is that the spending on the rest of the economy (which Bernanke doesn't control) was not enough. I'm talking about infrastructure spending, etc. I find myself in good company on that thought with Krugman and Buffet.
9. We're levering up like crazy.
U.S. corporations are in far more debt than most people realize. Again we quote: "U.S. non-financial corporations ... are in debt to the tune of $7.3 billion. That's a record level and up 24% in the past five years." All that's true but those same corporations are at an all time high in cash flow because this is, once again, a "JOBLESS RECOVERY." So, productivity has gone up dramatically because 7 million people have yet to be hired back - they have either been replaced by some of Larry Ellison's Oracle computer programs or the work has gone overseas. So, here Arends is wrong: more debt doesn't mean more leverage if there's cash to back it up.
10. The real economy remains in the tank.
About this, Arends and I agree. The leading indicator (often referred to by economists as a "lagging indicator") is JOBS. Where are we with that? The sure fire indicator of how bad things are is a "Presidential Commission." This one is led by Jeff Immelt, GE's CEO. I hope what they come up with helps.

So much for the ten reasons we are doomed to repeat 2008. To quote Arends again: "You know what George Santayana said about people who forget the past. But we're even dumber than that. We are doomed to repeat the past not because we have forgotten it but because we never learned the lessons to begin with."

So, we have Dodd-Frank and the rules that are being refined to support it. But, what was that "derivatives" number again? And, Elizabeth Warren, whose idea it was to create a consumer advocacy commission (which she is currently staffing even though there has been no formal appointment of her as Chairperson) is being "attacked" by politicians and lobbyists as the wrong person to run such an agency - I have no idea why, unless it has something to do with wanting to do the right thing by the consumer. Are there people who would be threatened by her? Must be. She's a Harvard law professor who is an expert at bankruptcy. She makes sense. Are we threatened by that?

Hopefully, we will avert the next financial crisis. I'd prefer to see life as a half full glass.