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Dean Baker: A Financial Sector Small Enough to Drown in a Bathtub

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marmar Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Dec-08-08 08:10 PM
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Dean Baker: A Financial Sector Small Enough to Drown in a Bathtub
Edited on Mon Dec-08-08 08:10 PM by marmar
from TPM Cafe:

A Financial Sector Small Enough to Drown in a Bathtub
By Dean Baker - December 8, 2008, 4:38AM

As the tale of greed and stupidity that gave us the housing bubble and subsequent crash continues to unfold, it is becoming increasingly clear that the problem was not simply that the regulators were out to lunch. Some regulators saw the problems and wanted to take steps to rein in abuses but were prevented from doing so by the political power of the financial industry.

The best example of politics thwarting effective regulation was when Alan Greenspan, Robert Rubin, and Larry Summers prevented Brooksley Born, the head of the Commodity Futures Trading Commission, from regulating credit default swaps in 1998. However, there are many other instances coming to light in which political interference obstructed efforts to stem questionable practices by the financial industry.

We must come to grips with the power of the financial industry in any effort at regulatory reform. The issue is not just producing the right set of regulations to prevent the sort of abusive practices, over-leverage, and excessive risk-taking that fed the growth of the housing bubble. It is also necessary to ensure that regulators have the power to restrain industry abuses.

In order for the regulators to get the upper hand, it will be necessary to shrink the financial sector to a size where it can be effectively controlled. The sector had experienced explosive growth over the last three decades. At its peak in 2004, it accounted for almost 30 percent of all corporate profits.

This figure by itself should have raised alarm bells. Finance is an intermediate good. We need the sector to be able to borrow money to buy a home or start a business, but it is not an end in itself. While spending more on health and housing may make us better off, spending more on finance is evidence of an inefficient financial system. An efficient financial system is a small financial system. .......(more)

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