The Dow has just rallied to within striking distance of 11,000 (a level it crashed through a year ago and only momentarily surmounted in April of this year). Corporations are posting record increases in profits (after plummeting for the past 2 years) and the rate of unemployment appears arrested. A slew of new rules and regulatory platforms have been executed promising to protect the greater public against loose and unchecked profiteering at the expense of economic integrity. Though it may be a nervous smile, at least there has been reason to do so. But, is the crisis over? And, what exactly is the crisis?

If this week’s jobless report of an addition of 95,000 claimants is any indication, then I would say that the crisis is hardly past us (despite the DOW surmounting 11,000). Although, one can’t pin the blame for this crisis on the banking & financial domain entirely, it did lead the way to the precipice and ignite the conflagration. The crisis, so to speak, is really in two respects: at one level it deals with really just the recession. It’s synonymous with unemployment and the general gloom in the economy and its perception will lift once the elusive robust economic activity resumes. The other respect is of a broader and deeper nature. There is a crises of repetition. There is an unshakeable frustration that these scandals keep repeating and keep getting bigger. A plethora of reactionary-legislation has been written now and in the past, yet it has never been able to prevent the next disaster. Remember the Junk Bond scandal, the Asian Crises, Savings & Loans, the Internet Bubble, the Enron & WorldComm bankruptcies, the Sarbanes-Oxley Act and countless other legislation. If history is any indicator, the current Banking Reform Act is another piece of after-the-fact fixes that yield little and the industry will work some way around the laws. In fact, the increased cost of regulation will likely prompt a wave of mergers and acquisitions that will create bigger banks and financial companies with bigger problems (along with too big to fail). The University of Massachusetts’ PERI Institute has made the following statement after researching the current financial reform…

“While there are positive moves there are some serious omissions as well. First, there is little to no discussion on the reform of off-balance-sheet activities… Indeed, given the importance of the shadow banking system in terms of credit intermediation, fostering procyclicality of the system, and given the high degree of concentration in the market, it is likely that the shadow system will be the fault line for any future bank run. In this event, what will be the appropriate response? Will money market funds be allowed to break the buck? Will the Fed and Treas-ury once again be called to backstop the system, and at what terms? At the moment, reform legislation is avoiding the question entirely, or leaving it implicitly up to the discretion of the FSOC or other bodies with little or no examination of the pros and cons of alternative arrangements.”

In conclusion, the paper says, “The Senate Bill is a step forward in financial reform. It is nevertheless seriously lacking in several areas”. This should not come as a surprise. The crux of the matter is that we are dealing with symptoms of a greater problem while the problem remains unaddressed. We keep promulgating new laws while not resurrecting principles. This should be fundamental and pivotal to every American citizen. I believe one gaping hole is that there is not a robust citizens platform to influence financial reform. And there remains too deep a complexity/comprehension gap between the layman and the expert with respect to how the a system that is meant to serve the layman works. Here’s a couple of principles that should be core to reform:

> The Fed should not be owned by banks. It should remain independent of the government but should have a wide governing body including academics and what we can term as ‘ordinary’ citizens.

> Resurrect the Glass-Steagall Act which separates the Banking, Investments, and Insurance industries thereby avoiding over-complications and retaining a competitive landscape.

> Activities like off-balance sheet accounting should not be permitted at all.

These, among many more. So, the crises, so to speak, remains – past the recession.

Author Bio: Amer Chaudri is a 16 year veteran of the banking and finance industry where he has worked in diverse roles and management positions including back-end planning, front-end sales and financial management. He is the author of “Diatribe: A Scathing Journey Into the Heart of the Corporate Financial Culture”. He wrote the book in 2010 on recent history in the financial and banking worlds leading up to the contemporary economic and financial crises. You can purchase a copy of the book at http://Amazon.com by following this link: http://www.amazon.com/Diatribe-scathing-Financial-corporate-digressions/dp/1608444740/ref=sr_1_1?ie=UTF8&s=books&qid=1289738769&sr=1-1

Category: World Affairs
Keywords: current banking reform,financial reform,financial crises,current financial reform,banking reform