Rewriting the Rules of the Economy -- Fixing the Financial Sector

Rewriting the Rules of the Economy -- Fixing the Financial Sector


Nobel Prize winning economist Joseph Stiglitz’ report for the Roosevelt Institute entitled “Rewriting the Rules of the American Economy” notes the recurrent financial crises that plague our economic health and recommends ending “too big to fail”, regulating the shadow banking industry and off shore banking, transparency in all financial markets, reducing credit and debit card fees, stricter penalties for financial malfeasance, and reforming the rules of the Federal Reserve.

As we all now know, Wall Street financial manipulations destroyed vast portions of the American economy, nearly resulted in a global depression and caused many individuals to lose their jobs and homes in the financial melt-down of 2008 and its aftermath. Treasury Secretaries Paulson and Geithner, Federal Reserve Chair Bernanke and President Obama deserve enormous credit for avoiding a second global Great Depression and for restoration of American jobs, incomes, home prices and stock market values. You would have lost your job, all your money in the banks, in stocks, in your private retirement account and your home. The Dodd-Frank legislation has put a stop to the worst abuses, but not only no one went to jail for their manipulations and deceit in packaging shoddy home loans, but significant portions of Congress and one of the major party’s presidential candidates seek to undo Dodd-Frank.

“Too big to fail” refers to financial institutions that if they failed would once again imperil the US and the global economy. Stiglitz recommends a surcharge on these banks so that the costs of future failures are not underwritten by the American taxpayer, but rather by these banks and other institutions whose failures would put the entire economy at risk. This is akin to the FDIC insurance that undergirds small depositors in commercial banks.

The shadow banks are institutions like AIG, GMAC, GE Capital and others that function like banks but without the regulatory protections and oversight of banks. There are also offshore banks in places like the Cayman Islands, Jersey and Guernsey where the wealthy and the criminals hide their assets from taxation and escape US banking regulations. Offshore banks hold an estimated 31% of the net profits of US multi-national corporations. Stiglitz recommends that the banking activities of the shadow banks be regulated as if they were banking institutions; he recommends barring the ability of American businesses and individuals to use the offshore banks to hide their assets and incomes from discovery, appropriate regulation and US taxation.

Transparency refers to your ability to know the fees and other costs assessed by those who manage your funds and investments. Stiglitz recommends that hedge funds, equity managers and other asset managers who do not now disclose their fees be required to do so that investors can decide where their investments get the best returns to the asset owners. He also recommends fiduciary duties for all those who recommend and manage your investment and retirement portfolios whether investment advisors or broker/dealers.

Credit card and debit card fees may range from 1% to 3% while the costs of the transactions are less than a fraction of one percent. These costs are passed through to the purchasers. Stiglitz recommends regulatory action to reduce these fees closer to their actual costs.

Penalties for financial transgressions are now more typically deferred prosecution agreements (DPA’s) under which the defendant often does not admit wrong-doing but agrees to change its practice, implement reforms and not repeat its offence.  DPA’s have been increasing exponentially while criminal prosecutions have fallen. Stiglitz recommends harsher treatment of individuals and financial institutions as a deterrent to repeat and serial offenders.

Stiglitz recommends reforming the governance of the Federal Reserve: transparency, conflicts of interest rules, disclosures and recusals and restrictions on revolving doors between the Federal Reserve and the financial industry it regulates.


Prepared by: Lucien Wulsin

Dated: August 9, 2016










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