In a prior posting, I offered a plan to end the Real Estate Crisis in our country. You might want to re-read it at this time. If you think what I suggested was “crazy,” wait until you read what follows. In this posting, I offer some ideas to end what I refer to as the Wall Street Crisis. It really is a much larger financial crisis, encompassing the banking and insurance industries as well. (In a future posting, I will address how we can resolve the nation’s annual budgetary crisis and start to reduce the national debt.)
Solving these three problems (the Real Estate Crisis, the Wall Street Crisis and the Budgetary Crisis) will enable the American economy to recover from the recession in which it now finds itself. These problems all, in some way, relate to each other, and each amounts to one leg of a three legged stool. Without viable resolution of all three of them, there can be no recovery. You already have read my ideas for solving the Real Estate Crisis. Here is what I propose we do with Wall Street.
By Wall Street, I refer to the mechanism by which stocks, bonds and commodities are traded on various exchanges. These markets put ownership of corporations in the hands of millions of individuals, pension funds, mutual funds, businesses, etc., who trade in their shares. These parties also participate in lending money to corporations and governments by trading in bonds and finally, they enable producers of commodities to know what their future output will be worth via commodity trading. The laws of supply and demand put prices on all of these activities, and of course, both buyers and sellers try to trade at a price most favorable to them. That’s what markets are all about, and in some way, what happens in the markets affects us all.
Unfortunately, It has grown into something far more complicated than the basic functions I have outlined. It was so complicated two years ago that worthless mortgages were packaged by Wall Street firms as something which could be traded in an environment where neither the buyer nor the seller nor the packager really understood what they were handling. Those few individuals who did understand what was going on profited greatly and everyone else is continuing to suffer. Their greed came close to destroying our nation’s economy. It is not coincidental that the thief of the century, Bernie Madoff, was neither a bank robber, a jewel thief nor a safecracker but came out of the Wall Street environment, where the real thieves are. Wall Street was so involved in satisfying its own greed that all but a few … to whom no one listened … took no notice of what Madoff was pulling off. Similarly, whistle blowers who sensed what was going on with the mortgage-based derivatives were also ignored.
The blurring of the line between Wall Street and the Banks confused this even more, and the blame for the disaster must be shared by bankers as well as traders. A problem with resolving the Crisis on Wall Street is that by the time that we realize we have a problem on our hands, it is already too late to do anything about it. That’s why the following guidelines seem overly simplistic and severely radical. When things get too complicated, people do not understand what is going on and may allow trickery to continue and that is bad. That’s why Wall Street must “keep it simple” from now on. Because Wall Street and the banking industry have knowingly betrayed the American people, their operations must be ripped apart and reconstructed along these guidelines. It is in the national interest that they operate without a hint of impropriety. Let’s start with the banks.
1. Commercial banks should not be permitted to get involved in investments on Wall Street or anywhere else. The Glass-Steagall act should be reinstated, restoring the wall between banking and investing. The activities of commercial banks should be limited to taking in money in connection with checking accounts, CDs and savings accounts. They should lend this money out for mortgages, consumer debt (credit cards), automobile and similar loans and finally, loans to the business community. That is it. End of story. That is all commercial banks should do. They can give away toasters to those that open new accounts if they want to.
2. Investment banking or that aspect of banking where vast sums of money are amassed for business and government purposes from worldwide sources, including funds raised for mergers and acquisitions, should be separate and apart from commercial banking. It should be permitted, however, to work in liaison with underwriters of new issues of bonds and preferred stock which are often vehicles used in order to raise these amounts of money. Investment banks themselves, however, should not trade stocks and bonds.
3. The stock market’s various exchanges enable individuals, businesses, pension plans and mutual funds to buy and sell shares of stock and also to buy and sell bonds (pieces of loans).
a. To distinguish these trades from what goes on in a typical Las Vegas casino, nothing that is purchased on any exchange would be permitted to be sold for at least thirty days. This is to distinguish between “trading” and “gambling” or pure speculation. If anyone is interested in doubling their money in a short time and getting out quickly before the price drops, they should be rolling dice at a craps table and not speculating with the life blood of our economy. Too much is at stake. Someone “winning” a lot of money quickly means the economy has “lost” a lot of money quickly, with no economic benefit occuring.
b. No trading in “options” based on what a buyer or seller anticipates the future price of an equity will be would be permitted either. (Commodity trading, which is involved in future values, would be an exception to this, however, the 30 day restriction on selling a “position” would still apply.)
c. Going “short” (borrowing a stock from a broker, selling it, and then repurchasing it at a lower price to repay the broker, thereby making a profit … or suffering a loss if the price isn’t lower) will no longer be permitted.
d. No “derivatives” nor fancy packaging more complicated than a mutual fund simply consisting of stocks, bonds and/or commodities would be permitted.
e. Trading on “credit” or “margin” will not be permitted. If one does not have the funds to make a purchase, they should not be in the market. In order to make any purchase, the funds must be there first.
f. Mutual funds will follow these same rules in their trading of stocks, bonds and commodities.
g. A shareholder’s financial success should come from the success of the corporation they own in the form of shared profits (dividends) until they choose to sell their shares, hopefully at a profit. Making money “in the stock market” in any other way than via dividends or “selling for more than you paid” is at the expense of the economy since it only involves a non-productive manipulation of money.
Which leads us to businesses which are exclusively in the “money” business and whose owners are usually among the super-rich: Such businesses include entities such as hedge funds (to be distinguished from mutual funds which exist to enable small investors to diversify their holdings), venture capital firms and private capital firms. These businesses may sometimes behave like investment banks, but investment banks are primarily involved in raising money for clients who are in "real" businesses. The entities of which I speak, however, exist only to make money for their owners. Their value to the economy is nebulous. The only thing they deal in is money. The line between them is vague and many of things they do to make money would not be possible if the guidelines suggested in this article existed. At a very minimum, there should be very strict regulation of these entities, whose activities have not been closely watched until recently. Criminal prosecution of individuals involved in such entities has been in the headlines lately, and there will be more to come. (This is not to say that businesses in some other “line” than the “money” business should be restricted from buying stock. There are good reasons for this including the purchasing their own stock to protect against a takeover, or purchasing the stock of a competitor for that same purpose or purchasing the stock of a customer or a supplier. These are legitimate reasons so long as the business deals in a real product or service, and not just be in the “money” business.)
4. Regulation of Banks and the Stock Exchanges should be extremely rigorous. Dishonesty in this area, because of the effect it can have on the entire economy, should be dealt with severely by the courts. When the Naval facility at Guantanamo Bay is no longer needed for holding terrorists, it should be changed over to a facility for those convicted of crimes on Wall Street or in banking. They deserve a warm climate to prepare them for the place where they will ultimately go. Eventually, Mr. Madoff should be transferred there.
5. Historically, regulation of insurance companies (which insure our homes, our lives, our cars, our boats, our businesses and many business contingencies) has been left to the states. The Federal Government should become involved, however, with the regulation of the kinds of coverages insurance companies underwrite. Because the scoundrels at one company insured the artificial value of the practically worthless mortgage derivatives mentioned earlier, an act which almost brought down our economy, regulatory steps should be taken to assure that this kind of thing does not occur again.
6. Executive compensation in financial firms, banks and insurance companies should be regulated by a fixed formula such as providing a CEO with a salary no greater than 50 times the average salary of all of the firm’s employees. Bonuses above 10% of other compensation will not be permitted. Employees who sell financial products may of course receive reasonable commissions.
7. The Federal Reserve Bank, our central bank, oversees monetary policy. The interest rate it dictates in providing funds to banks to carry out their business can control inflation. They also control our supply of currency. The relationship between the Fed and commercial banks, investment banks and the markets should not be a cozy one since what the Fed does should be for the welfare of the nation and not for that of these institutions.
Without the financial world of stocks, bonds, commodities, banks and insurance companies, our economy would cease to operate. It is indispensible. But sadly, many Americans have lost confidence in these institutions, believing that their motivation often crosses the line between making a legitimate profit and greed. What they do must be in the national interest. That’s why the radical guidelines I propose are necessary to restore confidence in the financial sector, which at present is considered by many Americans to be acting in its own interest and not in the interest of the public it is supposed to serve.
Having now offered suggestions to deal with the Real Estate Crisis and the Wall Street Crisis, I am ready to tackle the final aspect of our economy’s three legged stool, our budgetary crisis and the national debt. Watch for it. I encourage readers of this blog to compare what I am proposing with what the alleged experts are saying, if anything. Your comments are welcome.
Jack Lippman
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