How Out-of-Control Credit Markets Threaten Liberty, Democracy and Economic Security

Think back to the Great Depression. What we lost then and now and what we need to regain is trust. To be frank, I don't know how we can win that trust in our system back. But, when it comes to credit markets, I know where we can start.

First, we need to make sure there are no more bailouts. While the bailouts have prevented a Great Depression for now, they have engendered a deep sense of cynicism and resentment which has negatively impacted credit and growth. Second, we need to know that our largest financial institutions are well-capitalized enough to withstand large economic shocks. Without this knowledge, no one can separate liquidity from solvency — exactly the problems banks had during the Great Depression. Third, we need to enforce regulations through sound regulatory oversight and civil or criminal penalties. Self-regulation is a pipedream promoted by corporatists. And we see that time and again where regulations are not enforced, financial institutions turn to excess that leads to panic and crisis.

Doing these three things will not magically turn our economy around and get credit flowing again. But these steps are essential to restoring trust in our financial institutions and government. Restoring that trust is the first and most important step in getting our credit markets to work the way they are supposed to — in a way that enhances and insures our individual liberty, rather than the false privileges of corrupt financial institutions.

Read it at Naked Capitalism
How Out-of-Control Credit Markets Threaten Liberty, Democracy and Economic Security
By Ed Harrison

In trying to understand our modern monetary system and the problems at the heart of the current crisis, the most important aspect is credit. Although I currently believe demand for credit is a greater issue, problems within financial institutions remain serious. Harrison’s third point, which seems to contrast an earlier view about the need for more regulation, is worth highlighting. In the US there are already thousands of regulations for financial institutions. The trouble is that many are simply not enforced or hold penalties so small as to make breaking the rule still worthwhile. Greater transparency and enforcement are clearly needed in light of the recent PFG bankruptcy, LIBOR scandal and countless other known and unknown transgressions.