Simon Johnson describes how support for financial reforms is rising despite banks fighting tooth and nail to restrict changes to the current status quo.
In the early and mid-2000s, US officials allowed large financial institutions to take on big risks – being persuaded that the people running those firms knew what they were doing. In particular, important parts of our financial system became highly leveraged, in the sense that they took out debts that were very large relative to their shareholder equity. At that time, on average, the world’s largest banks had equity worth only around two percent of their total balance sheets. As asset values went up, so did bonuses – financial executives are typically paid based on their “return on equity,” unadjusted for risk. When house prices turned down and related losses mounted, these small amounts of shareholder equity – the core of what is known as capital in the banking world – were quickly wiped out for the most highly leveraged firms.
The logical next step would have been a set of reforms to prevent big financial firms from ever becoming so highly leveraged again…..Not surprisingly, the big banks and their allies fought back against any reasonable reforms that would limit their leverage and their ability to take big risks. The Dodd-Frank reforms passed by Congress in summer 2010 were, as a result, disappointing.
Increasing bank capital requirements and limiting the types of activities that FDIC-insured banks can engage in are in everyone’s best interest. Even in the long-term interest of banks. But unfortunately bankers are focused on their short-term bonuses and not the long-term stability of the financial system.
Read more at Financial Reform Rising | Perspectives | BillMoyers.com.