ENGLISH FOR SENATE POSITION PAPER ON:

Financial Sector Reforms

The deregulation of the financial, insurance, and securities markets that was implemented in the late 1990s by the abolition of the Glass-Steagall Act and other Depression-era safeguards has removed Federal oversight of this sector and has resulted in many subsequent abuses of the fiduciary trust essential for public confidence.  The most notorious example of this failure is the Enron bankruptcy, which resulted in losses of Billions of dollars for its investors, employees, and the public from its collapse.  The financial manipulations and deceptive accounting practices now being uncovered in the Federal National Mortgage Corporation scandal also show the depth of the corrupt culture of deliberate mismangement and disdain for the public trust, even by Federally chartered institutions.  The collapse of Allfirst Bank in Maryland and Pennsylvania almost a decade ago was caused by unsupervised trading in derivatives and other securities and resulted in losses of $700 million, much of which cost was was passed on to the public which ultimately pays the bill for FDIC insurance covered bank failures.

The Federal Reserve System also is not immune from well-earned criticism:  the Chairman's famous warning about "Irrational Exeuberance" speculation in the stock market almost a decade ago was not followed up by the Federal Reserve's using its authority to choke off stock market speculation by raising the margin rate (minimum downpayment percentage on stock purchases) from 50% to 90%.   It also gave the Congress the green light five years ago to pass the tax cuts for the wealthy that were implemented and now have been extended by the Bush Administration despite the incredible budget deficits that have resulted.  Most recently, it has warned it member banks to be more cautious about their exposure (lending) to hedge funds, which are private investment clubs not subject to Securities and Exchange Commission regulation, reporting, and oversight.  Notably, it did not also call for a freeze on more lending or for reporting the scope and amount of such loans to hedge funds by its member banks.   The consequences of these Federal Reserve Bank's  failures are now plain for all to see:  the ensuing stock market bubble and collapse eight years ago which cost 401K retirement plans to lose a fourth or more of their value, the resulting flight of savings combined with irresponsible mortgage lending into the housing market which has resulted in the national real estate bubble that is now rapidly deflating, the near doubling of the national debt in the past five years, and the ongoing flight from the dollar by foreign investors which is now accelerating and resulting in uncontrollable inflation that now is producing dangerous volatility in the securities markets.

In the short term, not much can be done to rectify the present unstable and dangerous national financial situation as long as the Republicans control Congress and the White House.  The Federal Reserve has lost control over the money supply and is now being forced to raise interest rates to stem the foreigners stampede from dollars.  If it also tries to flood the market with more dollars (i.e., "printing money") to bring down domestic interest rates, it will only precipatate more flight from the dollar.  Because the Federal Reserve's governors are ideologically (i.e., Ayn Randist) adverse to "Credit-Allocation" and thus will not rein in the flow of specualtive bank lending, they cannot choke off the ongoing speculation in the securities markets, no matter what bad things happen to the domestic economy as the result of ever-increasing debt servicing costs on consumers and small businesses.  The fate of our national finances is now in the hands of foreigners, not the Federal Reserve, who alone now have the power to decide the fate of the dollar and our economy.

Only if the Democrats attain veto-proof majorities in both houses of Congress after the November 2006 elections will there be any hope for change.  The Republicans are in collective self-denial about the adverse impact of their ruinous monetary and fiscal policies.  The recent passage of $80 Billion in added tax cuts for the wealthy at the expense of cutting $40 Billion in programs for the poor still increases the overall deficit by $40 Billion.  The fiscal fiction that these cuts help to stimulate the economy and job growth might be true for China, where the new partially American-owned (only 49%, the Chinese get the rest free) factories are being constructed, but not for the United States. The Republicans also fail to realize that more American jobs sent abroad also results in fewer income taxes collected from American workers.  They are destroying the domestic tax base with these unfair trade and taxation policies. No wonder the Vice-President said that "deficits don't matter"!.  Too bad the foreigners now dumping their dollars don't believe him!  (Also, please read the Budget, Deficit, and Taxation Issue paper).


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