After the 2008 banks bailout, we were promised that financial reform was going to prevent future bailouts.
Never again.
But as we approach the fourth anniversary of the financial collapse, we’re learning just how hollow those promises were.
The most recent example stems from reports that regulators have secretly designated derivatives clearinghouses too big to fail in a financial emergency.
That means that in a crisis, such clearinghouses, in which risky credit default swaps are traded, would be bailed out at taxpayer expense through secret access to cheap money at the Federal Reserve’s credit window.
That’s where the big banks and the rest of corporate America lined after the 2008 to borrow trillions at low interest – with no strings attached.
The Fed didn’t require the banks to share that low interest with consumers or homeowners. The Fed didn’t require that banks make some attempt to fix the foreclosure mess. The Fed didn’t require corporations hire the unemployed or lower outrageous CEO pay.
The Fed just shoveled out the cheap loans.
Now the Fed is planning to extend that generosity, as a matter of policy, to derivative clearinghouses – which puts taxpayers directly on the hook for Wall Street’s risky gambles, like the ones that recently cost J.P. Morgan Chase $2 billion.
While those trades didn’t threaten to sink the economy, it was the unraveling of those kinds of complex gambles that tanked the economy in 2008.
Nobody knows for sure how large the derivatives market is, but the estimates are truly mind-boggling. One derivatives expert estimates that there were $1.2 quadrillion in derivatives last year – 20 times the size of the world’s economy.
While requiring these derivatives to be traded on clearinghouses is supposed to increase transparency, that assumes regulators are aggressive, diligent and understand the trades.
But signaling that these derivatives should be eligible for a bailout is nothing short of insane, at least from the taxpayers’ perspective. From the bankers’ perspective, it’s a pretty good deal, and a reassuring indication that nothing much has changed since the financial crisis: the regulators are still deep in the bankers’ pocket.
Meanwhile, the real reforms that might have a shot at actually fixing the problems and protecting our economy from the big bankers’ addiction to risk get little or no consideration in what passes for political debate.
The best step we could take is to re-impose the Depression-era Glass-Steagall Act, which creates walls between safe, vanilla, and consumer banking (which have traditionally been federally guaranteed, and riskier investment banking and derivatives trading But the bankers oppose Glass-Steagall, and for the present, they remain in control of both political parties and the regulators’ financial policies.