Why U.S. debt problem is so hard to solve

A speech by Neal S. Wolin, deputy secretary of the Treasury, shows why it will be so difficult, if not impossible to solve the debt problem. The massive federal debt is not helping the U.S. economy, and so our attempt to escape from recession may be over.

Regulation of the financial sector is a key element of the health of the economy and this was the topic of Mr. Wolin’s talk. The Wall Street Journal published the speech without comment (comments are elsewhere on WSJ blogs, etc.). I’m going to intersperse my own comments with the speech, edited to remove rhetorical flourishes.

Begin:

We’ve made progress, but we cannot forget why we enacted this legislation. In the fall of 2008, we witnessed a huge financial panic. The crisis was brought about by fundamental failures in our financial system.

In the years leading up to the crisis, firms took on risks they did not fully understand and used legislative loopholes to operate some businesses without oversight, transparency, or restraint. Profits and compensation were tied to short-term gains without proper consideration of long-term consequences.

Americans took on more debt than they could afford, and many firms encouraged them to do just that. [Firms? They were financial firms – banks, etc.]

In Washington, regulators did not make full use of the authority they had to protect consumers and limit excessive risk. [Did not make full use…? Regulators who complained about the over-leveraging were ignored or ridiculed.]

Policymakers were too slow to fix a broken system. [Lobbyists for the financial sector outshouted the regulators trying to rein them in.]

The crisis erased trillions of dollars of wealth, put Americans out of work across the country, and shook the foundations of our entire economy. [Debt is not wealth. Most of the “loss” is the drop in bubblicious home prices – mortgaged to the hilt and beyond.]

The system we had favored short-term gains for individual firms over the stability and growth of the economy as a whole; was weak and susceptible to crisis; and left taxpayers to save it. [Taxpayers did NOT have to save it. In fact, many members of the non-DC public begged Congress and the Administration to let the weak firms fail. This was a teachable moment – financial managers needed to learn the real meaning of moral hazard. See video above.]

The Dodd-Frank Act creates a comprehensive and robust regulatory framework. The statute creates a structure for the government to monitor and respond to systemic risk. It makes clear that no firm will be considered “too big to fail.” It requires regulators to impose heightened prudential standards on large, interconnected financial firms. It provides for the comprehensive regulation of the derivatives markets for the first time. The statute establishes a single agency dedicated to protecting consumers.
[More bureaucracy. More paperwork. More regulation, in spite of the fact that past regulation didn’t work. More expenses as the regulated have to pay for regulators. Only punishment by the market will work. NO MORE TOO BIG TO FAIL!! ]

Yet today, some on Wall Street, K Street, and Capitol Hill seek to slow down, roll back, or even repeal these crucial reforms. Others complain about the pace of reform; lack of coordination by regulators;that transparency in the derivatives markets will harm liquidity; that the new consumer agency will stifle consumer choice and innovation, that it will interfere with existing regulators, or that it’s not accountable to anyone.

And some even say we can’t afford to pay for reform. [No! Not that! Actually, these are legitimate complaints, even though the complainers probably wouldn’t like IFO’s solution which is: so fail already!]

I want to address these criticisms one by one. [IFO doesn’t. We think you get the picture. We – the American public – are being eaten alive by these greedy people: financial sector, lobbyists, Administration, Congress. Bring on the Tea Party!]

After addressing the complaints, he goes on to say: But those who are charged with implementing reform have not forgotten why we needed reform. We needed reform because ultimately, a fragile system benefits no one. [The American market economy is the strongest, most resilient, richest economic system ever to arise from the ashes of mercantilism.]

That prosperity requires a new system – a balanced system. A system that is stronger and more robust, but one that also promotes innovation, fosters growth, and creates jobs. A system that channels capital effectively to businesses and to consumers. [This Dodd-Frank system does none of these things.]

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About InvestingforOne

I've been investing in various assets by myself using a discount broker for many years. Over that time, I've developed some theories that others might find useful. Plus, there is more to investing than money. Time, talent, work, friends, family all go into developing a good and satisfactory strategy.
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