3 Signs of Continuing Financial Rot in the US

The new financial reform legislation is set to be signed into law, but it mainly offers politicians with an opportunity to show they’ve done something… regardless of whether or not it will help avoid the next financial crisis. Among many others, here are three top signs that rot — the kind this reform has no way of improving — persists in the US financial system.

From The Washington Post:

1. The global glut of savings. “…we’ve gotten out of the crisis without fixing it. China is still roaring forward, accelerating exports and pouring money into the U.S. economy. And we’re happily taking it. With our economy weak and our deficits high, we need it. So after falling to 3 percent after the crisis, our current account deficit is back to 4 percent and rising.”

2. The indebted American. “The fact that money is available to borrow doesn’t explain why Americans borrowed so much of it. Household debt (mortgages, credit card balances, etc.) as a percentage of GDP soared from a bit less than 60 percent in the early 1990s to a bit less than 100 percent in 2006.”

3. The “It’s so little money!” problem. “Simon Johnson, an economist at MIT, recalls a conversation he had with a hedge fund manager. ‘The guy said to me, “Simon, it’s so little money! You can sway senators for $10 million?”‘ Johnson laughs ruefully. ‘These guys don’t even think in millions. They think in billions.’ This financial crisis will stick in our minds for a while, but not forever. When it fades, the finance guys will begin nudging. They’ll hold fundraisers for politicians, make friends, explain how the regulations they’re under are onerous and unfair. And slowly, surely, those regulations will come undone.”

The new legislation consolidates power with the same regulators that failed to prevent previous problems, with megabanks that are already too big to fail, and with, disappointingly, the Federal Reserve. Hopefully, the new consumer protection agency won’t be rounding up “protection money.” You can read more details, and two more potential launch pads for the next financial crisis, in The Washington Post’s coverage of five places to look for the next financial crisis.


Rocky Vega,
The Daily Reckoning

The Daily Reckoning