Saturday, November 03, 2007

Basel II: Maybe Not Too Little, But Surely Too Late?

What's this, you ask? And why Basel?

I'm referring to yesterday's adoption by the Federal Reserve Board of what banking circles commonly call "Basel II," heavy banking legislation that's coming down the pike. Unfortunately, although it may not be too little, it's certainly too late. An earlier implementation of these rules could have saved the global economy trillions of dollars and a lot of grief.

Swiss Alps
[Thanks to myself for this great photo of the Swiss alps.]

What grief, you ask? Allow me to explain.

I'm referring to some grief you may never hear about, but which is turning some banking CEOs into nutty-putty. I'm talking about a disguised but huge banking industry "glitch" camouflaging itself behind a housing bust and hiding under some pretty good economic statistics.

Think of this "little malaise" as that undefinable feeling of unease that inspired consumers to lower their confidence rate this month, but that most of us can't quite seem to put our finger on.

Many people have heard of the real estate woes in the US and elsewhere. The housing boom/bust has already touched some of our friends, if not ourselves. Mortgages are becoming fewer and farther between, our home values are plummeting in many parts of the country, and refinancing the adjustable rate mortgage that you thought you could pay off before too late is becoming impossible for a small but significant number of us homeowners.

Behind all this is some hefty banking drama of which only some people have heard, and which is just plain scary. In short, the banking industry has been involved in some very unwise speculative activity. And I'm not talking about those fly-by-night banks; I'm referring to the world's biggest banking institutions, like Citicorp, Bank of America, Bear Stearns, Merrill Lynch, JP Morgan Chase, Deutsche Bank, UBS of Switzerland, and other well-known companies.

An explanation of exactly what these big players have been doing would take many thousands of words. For those who are curious about the gory details, I've written about parts of the games they play here, here, here, here, and here.

Suffice it to say that they have been having a free-for-all feeding frenzy off some credit issued by our friends at the Federal Reserve and at other central banks, and have lost sight of reality due to the blindingly drugged exhilaration of their gambling successes--at least up until June of 2007. (You've heard about those million-dollar Wall Street bonuses, right? Well, the good news is that these could be history, at least for a while.)

You may have read recently about a few bad profit numbers from a number of banking institutions. What looks like a bad hair day is really a frenzy of activity on the part of the financial elite, to save their own skins and to save the entire global banking system.

Oh, you hadn't heard? No doubt true, because our savvy federal money managers have managed to keep a lid on most of the details. (See this post and this post for a few of the ones that got published.)

For those of you who think that your good government watchdogs will be all over any hanky-panky that any dastards might want to perpetrate, let me inform you that your infamous bulldogs have been chewing on this bone since 1999, well before the latest round of unwise speculative activity began. The central bankers obviously knew something was needed in this regard; but unfortunately, the subject has occupied them for the ensuing eight years with nothing concrete to show for it up to now, as far as the public is concerned.

But with the finalization of Basel II, they're finally getting there. Why has it taken them this long? Well, Virginia, that's the nature of government committees. It just does. Meantime, eight years after they began mumbling to each other about the dangers of this evolving speculative situation--a catastrophe that they clearly saw coming and, I conjecture, that they themselves created--the crap has now hit the fan and we're all going to pay for it sooner or later, probably in the form of increased inflation, heavier government, stagnating wages, and reduced government-paid retirement benefits.

And when I think that a liberated marketplace could have eliminated all of this toil and trouble, and for free at that. That means no government bureaucracies, no Swiss holidays, no speculation with our money, no housing boom/bust; just normalcy.

To make a long story short, (1) if governments were smaller, banks would be smaller, and credit would be limited by the system. (We'll discuss that some day.) (2) Any bank that took on the kind of risk those like mortgage lender Countrywide have taken on to date, would already have failed. (In fact, were it not for our government, Countrywide would already be history. See this post for the details of how Countrywide has been bailed out with our money.) Even one such failure would discourage any other banks from trying unwise maneuvers. Heck--in fact, even the fear of failure would probably have avoided any one bank's failure in the first place.


Today, however, the biggest banks in history and the largest mortgage companies in the world have no fear. Why? Because governments have decided they will "lower the Fed rates," lend taxpayer collateral, and perform other banking system interventions to save such big banks from failure, no matter what stupid shenanigans the financiers pull. This is lending your and my money to gamblers so that they don't lose their shirts. Meanwhile, it's you and I who will end up standing around with our pants down.

Do we really want to save gamblers from their own folly? Do we really want banks so big the government doesn't dare let them fail? Do we really want to pay sightseeing pundits to go to Switzerland to write banking policy eight years too late? Do we really need mortgages we can't afford? Do you really need the price of a home to explode (along with your property taxes in most places), only to see it come crashing back down on you a few years later?

Please ponder this, especially next time you have the urge to vote for big-daddy government. It is this very government that got us all into this pickle in the first place.

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