|
  Ray Brescia: What Would Lincoln Do?: Financial Regulation in Times of Crisis
Reported by Huffington Post on Wednesday, 18 November 2009 (on November 18, 2009)
|
As the Obama Administration and Congress try to sustain momentum to grapple with financial reform, perhaps the thorniest issue they face in this arena is how to deal with banks that are Too Big to Fail. Secretary Geithner\'s recent testimony before Congress introduced the idea of granting the Federal Reserve and FDIC new powers to wind down these hulking institutions should they pose dangerous risks to the financial system again. Of course, the FDIC\'s general powers stem from New Deal reform efforts, and many have looked to FDR-era measures as a template for financial reform today. But a further look back, one that reviewed Lincoln\'s efforts to reform the financial system of his day, could shed light on what tactics might prove effective to respond to the need for systemic financial reform now.
It is certainly in vogue to ask \"What Would Lincoln Do?\" in this the 200th Anniversary of Lincoln\'s birth: what would Honest Abe say about performance enhancing drugs in sports; what would Lincoln do about particle acceleration; how would Lincoln deal with the bozo in the cubicle next to yours; was he a PC or Mac? Putting such fanciful inquiries aside, given the many parallels between the crisis the U.S. economy faced at the outbreak of the Civil War and the present financial crisis, Lincoln\'s tactics for dealing with reform of the financial industry of his day may help guide regulatory reform efforts today.
The present crisis was brought about by many factors, not the least of which were a speculative bubble in real estate, easy credit and financial product \"innovations\" that helped to pump up that bubble, and a de-regulatory philosophy that cleared space for risky behavior to thrive beyond government oversight.
Many of these features were also present in the financial system at the outbreak of the Civil War. The 19th Century was punctuated by a series of financial crises, often labeled panics. The one of the greatest relevance to Lincoln\'s presidency was the Panic of 1857, which had many features which resemble, eerily, the financial crisis the nation faces today. In the 1850s, new technology (at the time, railroads), inflated a speculative bubble in real estate. Properties in and around planned train lines were sold with a dizzying speed, and changed hands multiple times as speculators propped up property values to unsustainable heights. Staggering losses followed the bursting of that speculative bubble.
On Wall Street, financial innovation led to overleveraged investing. And, yes, this is the 1850s, not the early part of this decade. Back then banks used \"call loans\" to lend money to stock market speculators. The loans were backed by the very securities in which the speculators were trading. This type of financial innovation made capital available for further investing, which helped to prop up stock values. When those stocks crashed, the loans went bad because the collateral that backed them was worthless.
A third common feature of the two crises was federal de-regulation in the banking industry. The fall of the Second Bank of the United States during the Presidency of Andrew Jackson precipitated a nearly three decade long period in which the Federal government abdicated any role in the nation\'s financial system. A suspicion of federal oversight of banking predominated among presidents and congressmen alike, making national financial regulation prior to the Civil War impossible. This suspicion was so deep that there was no national currency at the time; in fact, there were roughly 10,000 different types of bank notes in circulation, and counterfeiters were busy generating thousands of fake notes as well.
Now, the Civil War was an obvious difference between then and now. But that crisis, which presented a desperate need for the federal government to raise funds to support the Union war effort, created an atmosphere in which broad-ranging, national financial policy could be advanced. Rather than come reluctantly to the conclusion that a national financial system was needed, Lincoln had been an advocate of both a national currency and a national bank well before the war. The wartime financial crisis thus created an atmosphere in which broader financial reform was possible, and Lincoln, not one to let a good crisis go to waste, pressed his advantage.
Lincoln\'s legislative efforts in this area had two prominent features: they were incrementalist and used the federal power to tax certain bank practices to drive them out of existence. The critical changes Lincoln sought - the creation of a federal banking system and the adoption of a national currency that would replace the use of state bank issued bank notes - were first introduced in 1861 and 1862. But these goals could not be accomplished in one stroke. Instead, over the course of the next four years, four different laws were rolled out to bring about the two key changes Lincoln sought. Through the Legal Tender Act of 1862, the National Currency Act of 1863, the National Bank Act of 1864 and budget legislation of 1865, a national currency and a national bank system were put in place, a system that remains in many respects largely intact today.
It was the final legislation of 1865 that sealed the deal, however, and revealed Lincoln\'s use of taxing powers to further financial reform. Through this legislation, the use of state bank notes in commercial transactions was taxed, making such practices prohibitively expensive and driving consumers and businesses towards the use of the national currency in all of their financial dealings.
In the end, Lincoln and his supporters in Congress brought about a radical transformation of the American banking system, but they did not accomplish it through one piece of sweeping legislation. Instead, they chose incremental steps. One cannot discount the fact that the need for these changes was made more apparent by the need to fund the ongoing war effort, and if the war was brief, as many thought it would be, it is no doubt possible that few of the more systemic changes would have come to pass. Nevertheless, the approach was both incremental, and one steeped in realpolitik; it recognized that certain changes were possible at particular times. And only through the success of each step of the agenda (like the popularity of the legal tender greenbacks generated in 1862 and then the national currency) could subsequent steps be introduced.
How might Lincoln\'s approach to his financial crisis provide insights to the Obama Administration facing its own? Lincoln\'s playbook would counsel incrementalism, and the use of taxes to drive out disfavored practices. Incrementalism would be helpful in instituting the types of large-scale changes - like the regulation of derivatives, the overhaul of mortgage regulations and the creation of a new Consumer Product Safety Commission - that are necessary but may not be possible to achieve in a single piece of legislation or one legislative push. Ironically, the greatest threat to financial reform today is the success of the radical intervention in the financial sector in the fall of 2008 through the spring of this year. If that is the case, small, incremental steps might be all that are possible at this stage.
Second, the power to tax could be used to rein in Too Big to Fail institutions. Taking a page from Lincoln, these institutions could be taxed to create an insurance fund should such institutions go bust. Instead, the Obama Administration has proposed a mechanism for assessing a fee against large institutions when one fails. Instead of these assessments after the fact, an ongoing tax, from the outset, would serve two functions. First, it would increase the cost of operating such institutions. If the corporate form is still profitable under the tax, such institutions can choose to operate as such. Second, a TBTF tax would create a reserve fund for when those institutions do, in fact, fail. No doubt, should an institution fail, big banks and their legion of lobbyists would fight the planned assessment, likely arguing that any assessment would threaten their own health moving forward, requiring greater federal intervention. A tax that started now would build a reserve fund slowly, while also discouraging the very practice of utilizing the large bank form by making it more costly at the outset.
The process of regulatory reform will likely take many years, if true reform is possible at all. Lincoln\'s efforts to bring about a radical transformation of the American financial system were born in the crucible of war, yet the need for such reform was there before the hostilities began. Let us hope that we won\'t need to stare into a financial abyss again, as we did last year, before lasting and wide-ranging reform is instituted this time around.
Links: Full news story
|
|
| |
| | Recent related news |
| |
guardian.co.uk
9 hours ago - UK | When Faisel Rahman saw a microfinance scheme - lending tiny amounts to millions of (poor) people... |
Huffington Post
1 day ago - Business | Starting a bank sounds like an impossible Gilded Age enterprise more befitting of a Rockefeller than... |
Huffington Post
2 days ago - Business | As the states\' credit crisis deepens, four states have initiated bills for state-owned banks, and... |
Huffington Post
2 days ago - Politics | For a fleeting moment I thought Congress was going to do something really wise: Get out of the... |
Huffington Post
2 days ago - Politics | At a time when our political and financial landscapes are littered with villains and those unwilling... |
| |
guardian.co.uk
3 days ago - Business | Spending cuts are not the way out of the financial crisis – taxing financiers' transactions is a... |
Huffington Post
3 days ago - World | As if looting Main Street of its savings, pensions, and that precious thing called trust weren\'t... |
The New Republic
4 days ago - US | Today's New York Times lays out Mitch McConnell's overarching strategy:
{{
Before the health... |
Huffington Post
5 days ago - Business | Henry M. Paulson, former CEO of Goldman Sachs and Treasury Secretary during the recent collapse of... |
Huffington Post
5 days ago - Politics | There is a financial markets reform that would avert the next financial meltdown, support free-market... |
| |
|
|
|
| |
Facebook
E-mail
Twitter
Mixx
StumbleUpon
FriendFeed
Tweet the News!
Select Region >
Top News RSS Feed | News for my Website | Archive | Advertise | Help | Enquiries | Bookmark this site | 
U.S. version
