Published on Alternet (http://www.alternet.org)
Home > 6 Ways to Reform Our Corrupt Financial System
________________________________________
6 Ways to Reform Our Corrupt Financial System
By Joseph Stiglitz [1] / W. W. Norton & Company [2]
March 24, 2016
The following is an excerpt from the new book Rewriting the Rules of the
American Economy [3] by Joseph E. Stiglitz (W. W. Norton & Company, Inc.,
2016):
The growth of the top 1 percent was enabled by specific policy decisions. It
occurred when we removed safeguards that protected consumers and taxpayers
from excesses in the financial industry and failed to update other
common-sense regulations. It occurred when corporations cast aside their own
long-term interests in favor of short-term stock gains for shareholders and
distortionary CEO pay packages. It occurred when we restructured the tax
code in ways that led to more leverage and higher executive pay, as opposed
to more investment in productive assets. Addressing these issues doesn't
just address inequality; doing so will also build a solid foundation for the
economy of the 21st century.
We must curb the current system's risks to the overall economy and curtail
practices that directly cost consumers. Here is an agenda that ends "too big
to fail," reduces the risks in "shadow banking," increases financial market
transparency, makes a more efficient payments mechanism by limiting credit
and debit card fees and enhancing competition, enforces rules with stricter
penalties, and reforms Federal Reserve governance.
End "Too Big to Fail"
We have yet to undertake the reforms needed to end too big to fail and thus
reduce the potential for failure of large financial institutions to damage
the broader economy. Banks that are backed by the government and are so big
that their failure will cause the entire economy to contract don't need to
internalize the costs of their failures and can reap huge benefits from
risky bets. They have a perverse incentive to take on excess risk, knowing
that should a problem arise they will be bailed out, with losses being borne
by others. This, of course, is exactly what occurred in the 2008 financial
crisis, the impacts of which still reverberate throughout the economy.
Despite recent experience and the Dodd-Frank reform, banks are still not
only too big to fail, but also too big to manage-evidenced by repeated
failures like the "London Whale." And even when they are not too big to
fail, they can be too interconnected, too interlinked to fail: with
excessive linkages (e.g., those associated with CDs and derivatives), the
failure of one institution can lead to a cascade of other failures-stoppable
only with a government bailout. That is why interlinkages need to be
transparent and regulated.
The Financial Stability Oversight Council should assess large, systemically
risky financial firms with an additional capital surcharge above what
regulators currently assess under the Basel Accords in order to make failure
less likely and more manageable. Moreover, being too big to fail (or too
interconnected to fail) gives banks an advantage: they don't have to account
for the costs their failure poses to the system as a whole, and get a
subsidy as a result. The surcharge corrects for a market distortion that
otherwise would favor such banks, even if they are not more efficient than
smaller ones.
A surcharge would force banks to internalize the true cost of their risks
and improve economic efficiency, while insulating taxpayers from the costs
of failed institutions. And, to avoid the unproductive debate over how to
exactly quantify "systemically important financial institutions," the
requirements should be graduated rather than set to a specific level.
Further, if firms are incapable of producing "living wills" that the Federal
Reserve and the Federal Deposit Insurance Corporation believe show how they
can unwind in bankruptcy without causing massive costs to the rest of the
economy, then these institutions need to be broken up along business lines
and by size so that potential failures can be better managed. In addition,
living wills and their analyses should be made public. The wills have to be
designed to work not just in normal times but also in the abnormal times
associated with a financial crisis. Some doubt whether meaningful living
wills can in fact be constructed, given the kind of turmoil that can arise
in the midst of a crisis. If this is the case, then the only recourse is to
begin the process of breaking up the too big to fail institutions in the
same way we once broke up Standard Oil and AT&T.
Regulate the Shadow Banking Sector and End Offshore Banking
Among the too-big-to-fail financial institutions are shadow banks, which are
nonbank financial institutions that engage in lending by trading bonds and
securities, often by bundling them through a process called securitization.
They include money market funds, insurance companies like AIG, and even
automakers. Even though these nonbank financial institutions were integral
to the causes of the financial crisis, with many of them having to be bailed
out, post-crisis reform hasn't done enough to address the enormous risks
inherent in the sector's opaque activities and non-arms-length lending.
The shadow banking sector continues to grow while remaining insufficiently
regulated. In fact, much of the activity in the shadow banking system is
motivated not by its greater efficiency but simply to circumvent regulations
designed to ensure the stability and efficiency of the financial system. We
must not only address the regulatory defects that have allowed this sector
to grow too fast. The crisis revealed that our regulatory structure was not
up to the task; it hadn't adapted to the new ways that credit was provided
within the shadow banking system. But by general consensus, in the aftermath
of the crisis, the shadow banking system continues to be inadequately
regulated. It is a matter of choice that we have failed.
For instance, regulation should improve transparency in the entities
considered shadow banks. As just one example of how to increase
transparency, the Securities and Exchange Commission should reevaluate and
expand on its recent ruling on money market mutual funds, whose
vulnerabilities in the 2008 financial crisis sparked a panic. The ruling
required that all money market mutual funds be valued on a floating basis
reflecting the value of their underlying assets, rather than a fixed price
of $1 per share. A good expansion would be to apply the floating values rule
to all money funds. This rule would help shore up money market risk, and in
particular, reduce the likelihood of panics.
We also need to clarify the government's role as a lender to these nonbank
financial institutions. The current ambiguity increases overall risk. During
the 2008 financial crisis, the Federal Reserve radically expanded its
ability to function as a lender of last resort and provided liquidity
services to the shadow-banking sector, thus expanding the too-big-to-fail
subsidy to an even broader set of institutions. Emergency lending is crucial
in a crisis, and is one of the powers the federal government has to help
mitigate the risk of a financial panic. But without clear rules, guidelines,
and limits, these powers can become subject to serious abuse. As a result,
Congress, under the Dodd-Frank Act, requires the Federal Reserve to only
establish an "emergency lending program or facility [that] is for the
purpose of providing liquidity to the financial system, and not to aid a
failing financial company" in a crisis. The Fed was required to establish
clear procedures to meet that goal but has dragged its feet, writing a weak
rule that insufficiently clarifies its role. The Federal Reserve must write
clear rules outlining the government's role in back-stopping the shadow
banks. It must ensure the regulatory framework is sufficiently strong that
such back-stopping is truly a rare event and it must impose charges on the
shadow banking system for the costs imposed on society and the risk of
potential bailout costs. Congress should take action if the Federal Reserve
makes no progress in writing these rules.
Most importantly, there needs to be a re-examination of the extent to which
shadow banks and offshore financial centers are used to end-run the
regulations designed to ensure a safe and sound financial system. It is hard
to understand what true economic advantages-other than regulatory
circumvention-Cayman Islands or other offshore banking centers have over
those located onshore. The U.S. has the requisite financial
expertise-indeed, much of the management of the offshore accounts is
actually done in the U.S.
Bring Transparency to All Financial Markets
Opaque activities in finance are not limited to credit intermediation. The
uncompetitive and often undisclosed fees associated with asset management,
particularly those from alternative management vehicles like private equity
funds and hedge funds, are a driving source of financial sector growth,
profits in that sector, and the income share of the top 1 percent.
Furthermore, most investors in IRAs and other financial products don't
understand the rules under which they operate-that the managers of such
funds are not even held to a fiduciary standard and can be conflicted. Of
course, any excess fee is simply a transfer of wealth from regular investors
in these pension funds or savings vehicles to those in the financial sector.
Already, thanks to a provision of Dodd-Frank that requires private equity to
register with the SEC, significant amounts of fraud or substandard behavior
have been disclosed. As the director of the SEC's Office of Compliance
Inspections and Examinations put it after investigating a sample of 150
newly registered private equity advisers: "we have identified what we
believe are violations of law or material weaknesses in controls over 50
percent of the time." Congress should expand the SEC's mission, and require
private equity and hedge funds to disclose holdings, returns, and fee
structures. The SEC should provide additional regulatory scrutiny and
investor advice on these deals. This will formalize their regulation, making
it similar to mutual fund regulations; the competition that will follow from
this price transparency will help reduce financial rents.
Reduce Credit and Debit Card Fees
High consumer fees on credit and debit card transactions are one clear
symptom of abuse of market power in the financial sector. Modern technology
should enable the transfer of money from an individual's bank account to
that of the merchant from whom he or she is making a purchase to cost but a
fraction of cent. Instead, the fees credit and debit card companies charge
merchants-often 1-3 percent or more of the cost of the transaction-do not
reflect the cost of services provided but rather a monopoly rent on the
country's networked payments infrastructure. Ironically, financial
institutions often lobby against taxes that increase transaction costs at
far lower rates by arguing that the added fee will hurt business.
The Durbin amendment to the Dodd-Frank bill was supposed to bring down the
excessive fees that the debit card companies impose on merchants (and which
are passed along to consumers in the form of higher prices). Increased
prices from monopoly power, as we noted, are just as important in lowering
standards of living for ordinary Americans as decreased nominal wages. But
Dodd-Frank delegated responsibility for the implementation of the regulation
to the Federal Reserve, which has not sufficiently reduced the fees.
Further, the Durbin amendment was limited to debit cards, leaving the even
more important credit card market open to unrestrained monopoly power.
Recent court decisions hold open the promise that the market will be more
competitive in the future, but we should not rely on this. We need to make
sure that the market acts competitively, and that the financial sector does
not exploit its market power over the payments mechanism.
Enforce rules with Stricter Penalties
The enforcement of the rules is just as important as the rules themselves.
And in the past decade there's been a shift away from strict criminal
enforcement of financial regulation. Fewer, if any, cases go to court.
Instead the SEC and the Justice Department settle with favorable conditions,
such as deferred prosecution agreements. Under these agreements, the parties
regularly don't admit to any wrongdoing, or even pay penalties commensurate
to their benefits. No individual is held directly accountable. The fines
that are paid come from shareholders and are tax deductible; the
perpetrators of the offenses aren't necessarily punished or made to give
back the compensation they received as a reward for the extra profits
generated by their illegal activities. Enforcement has swung toward these
favorable deals instead of serious consequences and convictions for
wrongdoing.
The firms promise not to engage in the proscribed activity (which they have
not admitted doing), but then they are repeatedly hauled up for engaging in
similar activities. It is clear that the kind of enforcement we have is not
acting as a sufficient deterrent.
The SEC and other regulatory agencies should instead focus on more strict
enforcement, and Congress should hold the agencies accountable if no
progress is made. No company should be able to enter into a deal like a
deferred prosecution agreement if it is already operating under such an
agreement. These agreements should face stricter judicial review and
scrutiny. And compensation schemes should be designed so that perpetrators
face significant consequences-for instance, a clawback of bonuses and a
reduction in retirement benefits.
Reform Federal Reserve Governance
The mindset of who enforces these rules also matters. Many of the
regulations in the financial sector are enforced by the Federal Reserve. And
the leadership at the Federal Reserve is too often influenced by the largest
financial interests rather than by small lenders and borrows. Reforms to the
governance structure of the Fed should focus on reducing the conflicts of
interest that seem so apparent and reforming the process by which officials
are chosen.
Concern about the Fed's behavior has focused mostly on its conduct of
monetary policy and the management of the 2008 bailout.
On the right, many argue for a rules-based system-monetarism, under the
influence of Milton Friedman, called for the money supply to increase at a
fixed rate. But the evolving structure of the economy largely discredited
such theories and their ability to ensure the macro-stability of the
economy. On the left, there was a concern that the Federal Reserve reflected
more the interests of financial markets, with their focus on inflation, than
the economy as a whole, or workers in particular, who were more concerned
with unemployment. Even officials who did not come from Wall Street appeared
to be "cognitively captured." These issues received heightened attention in
the aftermath of the 2008 crisis, when the Federal Reserve appeared
unwilling to disclose many details of what it, together with the Treasury,
had done. Among the beneficiaries of the largesse were the institutions
whose executives had served on the committees selecting the head of the New
York Fed. And numerous reports raised questions about the appropriateness of
Fed actions, many of which reflected de facto subsidies, of enormous
proportions, to certain institutions. The Fed is a public institution; it
has been given public responsibilities in the macro-management of the
economy, the conduct of bailouts, and the regulation of the financial system
and the governance of the Fed should reflect this.
A 2011 study by the Government Accountability Office found significant scope
for improvement in management of conflict of interest within the Fed system.
Employees and members of all the regional boards of the Fed should be
required to disclose all potential conflicts of interest (defining that very
broadly); individuals with any significant conflict of interest should be
precluded from employment or membership in the board of any regional Fed;
members should be required to recuse themselves from decision making in
cases with any possible conflict of interest; and members should be held to
a revolving-door agreement that prevents working for the financial industry
for some time after their term of service. On top of this, the boards and
officers of regional Federal Reserve banks should be chosen in transparent
and accountable elections.
***
Our economy is a large and complex system and, in order to solve the
problems with that system, we must aim to fix the economy as a whole. The
financial crisis of 2008 and the Great Recession that followed exposed the
inadequacy of the old economic models; the new research and thinking that
has emerged as a result suggests that equality and economic performance are
in fact complementary rather than opposing forces. No more false choices:
changing course won't be easy in the current environment, but we can choose
to fix the rules structuring our system. By doing so, we can restore the
balance between government, business, and labor to create an economy that
works for everyone. Building on the innovative legacy of the New Deal, we
must tame the growth of wealth among the top 1 percent and establish rules
and institutions that ensure security and opportunity for the middle class.
Joseph Stiglitz, a Nobel laureate, is a professor of economics at Columbia
University.
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Published on Alternet (http://www.alternet.org)
Home > 6 Ways to Reform Our Corrupt Financial System
6 Ways to Reform Our Corrupt Financial System
By Joseph Stiglitz [1] / W. W. Norton & Company [2]
March 24, 2016
The following is an excerpt from the new book Rewriting the Rules of the
American Economy [3] by Joseph E. Stiglitz (W. W. Norton & Company, Inc.,
2016):
The growth of the top 1 percent was enabled by specific policy decisions. It
occurred when we removed safeguards that protected consumers and taxpayers
from excesses in the financial industry and failed to update other
common-sense regulations. It occurred when corporations cast aside their own
long-term interests in favor of short-term stock gains for shareholders and
distortionary CEO pay packages. It occurred when we restructured the tax
code in ways that led to more leverage and higher executive pay, as opposed
to more investment in productive assets. Addressing these issues doesn't
just address inequality; doing so will also build a solid foundation for the
economy of the 21st century.
We must curb the current system's risks to the overall economy and curtail
practices that directly cost consumers. Here is an agenda that ends "too big
to fail," reduces the risks in "shadow banking," increases financial market
transparency, makes a more efficient payments mechanism by limiting credit
and debit card fees and enhancing competition, enforces rules with stricter
penalties, and reforms Federal Reserve governance.
End "Too Big to Fail"
We have yet to undertake the reforms needed to end too big to fail and thus
reduce the potential for failure of large financial institutions to damage
the broader economy. Banks that are backed by the government and are so big
that their failure will cause the entire economy to contract don't need to
internalize the costs of their failures and can reap huge benefits from
risky bets. They have a perverse incentive to take on excess risk, knowing
that should a problem arise they will be bailed out, with losses being borne
by others. This, of course, is exactly what occurred in the 2008 financial
crisis, the impacts of which still reverberate throughout the economy.
Despite recent experience and the Dodd-Frank reform, banks are still not
only too big to fail, but also too big to manage-evidenced by repeated
failures like the "London Whale." And even when they are not too big to
fail, they can be too interconnected, too interlinked to fail: with
excessive linkages (e.g., those associated with CDs and derivatives), the
failure of one institution can lead to a cascade of other failures-stoppable
only with a government bailout. That is why interlinkages need to be
transparent and regulated.
The Financial Stability Oversight Council should assess large, systemically
risky financial firms with an additional capital surcharge above what
regulators currently assess under the Basel Accords in order to make failure
less likely and more manageable. Moreover, being too big to fail (or too
interconnected to fail) gives banks an advantage: they don't have to account
for the costs their failure poses to the system as a whole, and get a
subsidy as a result. The surcharge corrects for a market distortion that
otherwise would favor such banks, even if they are not more efficient than
smaller ones.
A surcharge would force banks to internalize the true cost of their risks
and improve economic efficiency, while insulating taxpayers from the costs
of failed institutions. And, to avoid the unproductive debate over how to
exactly quantify "systemically important financial institutions," the
requirements should be graduated rather than set to a specific level.
Further, if firms are incapable of producing "living wills" that the Federal
Reserve and the Federal Deposit Insurance Corporation believe show how they
can unwind in bankruptcy without causing massive costs to the rest of the
economy, then these institutions need to be broken up along business lines
and by size so that potential failures can be better managed. In addition,
living wills and their analyses should be made public. The wills have to be
designed to work not just in normal times but also in the abnormal times
associated with a financial crisis. Some doubt whether meaningful living
wills can in fact be constructed, given the kind of turmoil that can arise
in the midst of a crisis. If this is the case, then the only recourse is to
begin the process of breaking up the too big to fail institutions in the
same way we once broke up Standard Oil and AT&T.
Regulate the Shadow Banking Sector and End Offshore Banking
Among the too-big-to-fail financial institutions are shadow banks, which are
nonbank financial institutions that engage in lending by trading bonds and
securities, often by bundling them through a process called securitization.
They include money market funds, insurance companies like AIG, and even
automakers. Even though these nonbank financial institutions were integral
to the causes of the financial crisis, with many of them having to be bailed
out, post-crisis reform hasn't done enough to address the enormous risks
inherent in the sector's opaque activities and non-arms-length lending.
The shadow banking sector continues to grow while remaining insufficiently
regulated. In fact, much of the activity in the shadow banking system is
motivated not by its greater efficiency but simply to circumvent regulations
designed to ensure the stability and efficiency of the financial system. We
must not only address the regulatory defects that have allowed this sector
to grow too fast. The crisis revealed that our regulatory structure was not
up to the task; it hadn't adapted to the new ways that credit was provided
within the shadow banking system. But by general consensus, in the aftermath
of the crisis, the shadow banking system continues to be inadequately
regulated. It is a matter of choice that we have failed.
For instance, regulation should improve transparency in the entities
considered shadow banks. As just one example of how to increase
transparency, the Securities and Exchange Commission should reevaluate and
expand on its recent ruling on money market mutual funds, whose
vulnerabilities in the 2008 financial crisis sparked a panic. The ruling
required that all money market mutual funds be valued on a floating basis
reflecting the value of their underlying assets, rather than a fixed price
of $1 per share. A good expansion would be to apply the floating values rule
to all money funds. This rule would help shore up money market risk, and in
particular, reduce the likelihood of panics.
We also need to clarify the government's role as a lender to these nonbank
financial institutions. The current ambiguity increases overall risk. During
the 2008 financial crisis, the Federal Reserve radically expanded its
ability to function as a lender of last resort and provided liquidity
services to the shadow-banking sector, thus expanding the too-big-to-fail
subsidy to an even broader set of institutions. Emergency lending is crucial
in a crisis, and is one of the powers the federal government has to help
mitigate the risk of a financial panic. But without clear rules, guidelines,
and limits, these powers can become subject to serious abuse. As a result,
Congress, under the Dodd-Frank Act, requires the Federal Reserve to only
establish an "emergency lending program or facility [that] is for the
purpose of providing liquidity to the financial system, and not to aid a
failing financial company" in a crisis. The Fed was required to establish
clear procedures to meet that goal but has dragged its feet, writing a weak
rule that insufficiently clarifies its role. The Federal Reserve must write
clear rules outlining the government's role in back-stopping the shadow
banks. It must ensure the regulatory framework is sufficiently strong that
such back-stopping is truly a rare event and it must impose charges on the
shadow banking system for the costs imposed on society and the risk of
potential bailout costs. Congress should take action if the Federal Reserve
makes no progress in writing these rules.
Most importantly, there needs to be a re-examination of the extent to which
shadow banks and offshore financial centers are used to end-run the
regulations designed to ensure a safe and sound financial system. It is hard
to understand what true economic advantages-other than regulatory
circumvention-Cayman Islands or other offshore banking centers have over
those located onshore. The U.S. has the requisite financial
expertise-indeed, much of the management of the offshore accounts is
actually done in the U.S.
Bring Transparency to All Financial Markets
Opaque activities in finance are not limited to credit intermediation. The
uncompetitive and often undisclosed fees associated with asset management,
particularly those from alternative management vehicles like private equity
funds and hedge funds, are a driving source of financial sector growth,
profits in that sector, and the income share of the top 1 percent.
Furthermore, most investors in IRAs and other financial products don't
understand the rules under which they operate-that the managers of such
funds are not even held to a fiduciary standard and can be conflicted. Of
course, any excess fee is simply a transfer of wealth from regular investors
in these pension funds or savings vehicles to those in the financial sector.
Already, thanks to a provision of Dodd-Frank that requires private equity to
register with the SEC, significant amounts of fraud or substandard behavior
have been disclosed. As the director of the SEC's Office of Compliance
Inspections and Examinations put it after investigating a sample of 150
newly registered private equity advisers: "we have identified what we
believe are violations of law or material weaknesses in controls over 50
percent of the time." Congress should expand the SEC's mission, and require
private equity and hedge funds to disclose holdings, returns, and fee
structures. The SEC should provide additional regulatory scrutiny and
investor advice on these deals. This will formalize their regulation, making
it similar to mutual fund regulations; the competition that will follow from
this price transparency will help reduce financial rents.
Reduce Credit and Debit Card Fees
High consumer fees on credit and debit card transactions are one clear
symptom of abuse of market power in the financial sector. Modern technology
should enable the transfer of money from an individual's bank account to
that of the merchant from whom he or she is making a purchase to cost but a
fraction of cent. Instead, the fees credit and debit card companies charge
merchants-often 1-3 percent or more of the cost of the transaction-do not
reflect the cost of services provided but rather a monopoly rent on the
country's networked payments infrastructure. Ironically, financial
institutions often lobby against taxes that increase transaction costs at
far lower rates by arguing that the added fee will hurt business.
The Durbin amendment to the Dodd-Frank bill was supposed to bring down the
excessive fees that the debit card companies impose on merchants (and which
are passed along to consumers in the form of higher prices). Increased
prices from monopoly power, as we noted, are just as important in lowering
standards of living for ordinary Americans as decreased nominal wages. But
Dodd-Frank delegated responsibility for the implementation of the regulation
to the Federal Reserve, which has not sufficiently reduced the fees.
Further, the Durbin amendment was limited to debit cards, leaving the even
more important credit card market open to unrestrained monopoly power.
Recent court decisions hold open the promise that the market will be more
competitive in the future, but we should not rely on this. We need to make
sure that the market acts competitively, and that the financial sector does
not exploit its market power over the payments mechanism.
Enforce rules with Stricter Penalties
The enforcement of the rules is just as important as the rules themselves.
And in the past decade there's been a shift away from strict criminal
enforcement of financial regulation. Fewer, if any, cases go to court.
Instead the SEC and the Justice Department settle with favorable conditions,
such as deferred prosecution agreements. Under these agreements, the parties
regularly don't admit to any wrongdoing, or even pay penalties commensurate
to their benefits. No individual is held directly accountable. The fines
that are paid come from shareholders and are tax deductible; the
perpetrators of the offenses aren't necessarily punished or made to give
back the compensation they received as a reward for the extra profits
generated by their illegal activities. Enforcement has swung toward these
favorable deals instead of serious consequences and convictions for
wrongdoing.
The firms promise not to engage in the proscribed activity (which they have
not admitted doing), but then they are repeatedly hauled up for engaging in
similar activities. It is clear that the kind of enforcement we have is not
acting as a sufficient deterrent.
The SEC and other regulatory agencies should instead focus on more strict
enforcement, and Congress should hold the agencies accountable if no
progress is made. No company should be able to enter into a deal like a
deferred prosecution agreement if it is already operating under such an
agreement. These agreements should face stricter judicial review and
scrutiny. And compensation schemes should be designed so that perpetrators
face significant consequences-for instance, a clawback of bonuses and a
reduction in retirement benefits.
Reform Federal Reserve Governance
The mindset of who enforces these rules also matters. Many of the
regulations in the financial sector are enforced by the Federal Reserve. And
the leadership at the Federal Reserve is too often influenced by the largest
financial interests rather than by small lenders and borrows. Reforms to the
governance structure of the Fed should focus on reducing the conflicts of
interest that seem so apparent and reforming the process by which officials
are chosen.
Concern about the Fed's behavior has focused mostly on its conduct of
monetary policy and the management of the 2008 bailout.
On the right, many argue for a rules-based system-monetarism, under the
influence of Milton Friedman, called for the money supply to increase at a
fixed rate. But the evolving structure of the economy largely discredited
such theories and their ability to ensure the macro-stability of the
economy. On the left, there was a concern that the Federal Reserve reflected
more the interests of financial markets, with their focus on inflation, than
the economy as a whole, or workers in particular, who were more concerned
with unemployment. Even officials who did not come from Wall Street appeared
to be "cognitively captured." These issues received heightened attention in
the aftermath of the 2008 crisis, when the Federal Reserve appeared
unwilling to disclose many details of what it, together with the Treasury,
had done. Among the beneficiaries of the largesse were the institutions
whose executives had served on the committees selecting the head of the New
York Fed. And numerous reports raised questions about the appropriateness of
Fed actions, many of which reflected de facto subsidies, of enormous
proportions, to certain institutions. The Fed is a public institution; it
has been given public responsibilities in the macro-management of the
economy, the conduct of bailouts, and the regulation of the financial system
and the governance of the Fed should reflect this.
A 2011 study by the Government Accountability Office found significant scope
for improvement in management of conflict of interest within the Fed system.
Employees and members of all the regional boards of the Fed should be
required to disclose all potential conflicts of interest (defining that very
broadly); individuals with any significant conflict of interest should be
precluded from employment or membership in the board of any regional Fed;
members should be required to recuse themselves from decision making in
cases with any possible conflict of interest; and members should be held to
a revolving-door agreement that prevents working for the financial industry
for some time after their term of service. On top of this, the boards and
officers of regional Federal Reserve banks should be chosen in transparent
and accountable elections.
***
Our economy is a large and complex system and, in order to solve the
problems with that system, we must aim to fix the economy as a whole. The
financial crisis of 2008 and the Great Recession that followed exposed the
inadequacy of the old economic models; the new research and thinking that
has emerged as a result suggests that equality and economic performance are
in fact complementary rather than opposing forces. No more false choices:
changing course won't be easy in the current environment, but we can choose
to fix the rules structuring our system. By doing so, we can restore the
balance between government, business, and labor to create an economy that
works for everyone. Building on the innovative legacy of the New Deal, we
must tame the growth of wealth among the top 1 percent and establish rules
and institutions that ensure security and opportunity for the middle class.
Joseph Stiglitz, a Nobel laureate, is a professor of economics at Columbia
University.
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Error! Hyperlink reference not valid.[5]
Source URL:
http://www.alternet.org/books/6-ways-reform-our-corrupt-financial-system ;
Links:
[1] http://www.alternet.org/authors/joseph-stiglitz
[2] http://www.wwnorton.com/
[3]
http://www.amazon.com/Rewriting-Rules-American-Economy-Prosperity/dp/0393254
054/?tag=alternorg08-20
[4] mailto:corrections@xxxxxxxxxxxx?Subject=Typo on 6 Ways to Reform Our
Corrupt Financial System
[5] http://www.alternet.org/
[6] http://www.alternet.org/%2Bnew_src%2B
