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A quick read on financial deregulation

Trump’s reversal of Wall Street regulations risks another Lehman Brothers but ‘on a larger scale’
The good news is the CHOICE Act is dead on arrival in the Senate. That said, it is appalling that the House passed this to begin with. Millions of Americans lost their homes and retirement funds from the financial crisis. As a Southern California resident, I saw the catastrophe unfold right before my eyes as homes that once sold in the $800k range were now on the market for $350-$400k. I have often argued some blame needs to be put on the consumer for borrowing a sum of money that they could not pay back (or if they could, the mortgage was based on a Utopian society whereby the household’s income remains the same or increases at a ate greater than inflation), but the banks approving these loans were reckless and irresponsible. As an aside, please note the crisis was a liquidity event, not from too many mortgages. It is hard for me to understand the logic behind deregulating these banks after giving them a bailout. It can easily be argued that the banks will be more responsible as they learned what not to do from the first financial crisis. But I am not that naive. Anyone remotely familiar with Wall Street (I worked at a couple firms) knows the bonus structure incentivizes risk taking and the internal compliance regulations in place are merely to avoid getting fined. If you take regulations away, the internal regulations will disappear in the name of “I’m paying your salary, so let me do what I need to do.” The second reason, as this article mentions, is that banks have been bailed out once. It is common knowledge that the too big to fail banks are indeed too big to fail. Therefore, the downside risk is minimal because if a risky mistake is taken, they know they will not be allowed to fail. Lastly, as Fed Chairwoman Yellen states every time she testifies in front of Congress, there is no evidence that bank regulations are hindering banks. Bank profits are at record levels and their balance sheet riskiness is at low levels.

Categories: Uncategorized

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