Wouldn’t it be nice to have your own set of rules when you’re playing a game? You could do what you want when you want to do it. A main advantage of that strategy is that you can win at the game no matter what. And if you change the rules, there can be no consequences for breaking them. When I think of that kind of attitude, I think of a spoiled child or a hero in a movie—not the financial world.
In a movie, rules and laws are often broken to save the day, and at the end of the movie, everyone sees eye-to-eye with the hero. They completely understand the reasons why the hero had to break the rules and laws. In the “real world,” rules and laws apply even if the hero “saves the day.” If a hero breaks laws while saving someone there would be consequences. In extreme cases, there have been times when the hero follows the rules and laws and are “good Samaritans,” but they still get punished.
Just like the spoiled child or movie hero, the financial world appears to be making up their own set of rules, and sometimes laws. However, the financial world won’t be able to avoid all the pitfalls along the way like the movie hero. There will be real consequences if something goes wrong or doesn’t work out.
To avoid negative consequences, the financial world is modifying and making up their own set of rules and laws. In fact, this has occurred recently, and it is happening around the world. I think the old saying goes, “if it can happen once it can happen one thousand times.” Changing a rule or regulation once opens the door to the potential to have it happen more frequently.
According to an article on cnbc.com titled “Asian Stocks Slip but Japan Up as Banks Rally,” “Mizuho Financial led the gainers, soaring over 20 percent at one point, after a Nikkei report quoted traders saying that global banking regulators have agreed to effectively delay the enforcement of new capital adequacy rules for large banks.”
It seems like if the rules don’t work out, or the rules end up not fitting what the financial industry needs, they are quickly modified or rescinded. This makes a very unlevel playing field as it is difficult for people to try and guess what might be changed next. Governments probably argue that it is for the good of the people. I think consistency is better.
Since it seems that any government for any reason can change the rules of the game, I’m going to write a letter to my bank to petition for my mortgage to be waived: “Dear Bank, I was thinking that my mortgage shouldn’t be a mortgage. I think it should be more like document with some suggestions for terms of payment. I’m not sure if my mortgage fits my overall lifestyle right now. And since it seems like you can change your rules, I would like to change mine. Thanks for your time, and I’ll look for the waiver in the mail.” If the idea of writing to my bank sounds absurd, then why doesn’t a government changing rules and laws sound any less absurd?
Besides blatantly rescinding the rules as the Japanese government did in the above example, there are examples of the government going about things in a quiet manner. An article titled “US Forgoes Billions in Tax on Citi” found on cnbc.com stated, “The U.S. government ‘quietly’ agreed not to collect billions of dollars in potential taxes from Citigroup as part of its deal to allow the bank to repay its taxpayer bailout, The Washington Post reported. The Internal Revenue Service issued a notice on Friday that extends the benefit to Citi and other companies in which the government owns a stake, the Post reported.”
I’m sure that there are details to completely explain why Citigroup is able to take advantage of this perk. But, I’m also sure that there are an equal number of reasons why Citigroup should pay the taxes. Wouldn’t it be nice to pick and choose which taxes you would like to pay given a set of circumstances?
Can you imagine? I bought a lot of retail products and I went out to dinner, so today I’m choosing not to pay sales tax. Well, let’s see on Tuesday, I usually fill up my car with gasoline, so that will be the day that I’ll choose exemption from the state gasoline tax. Hmmm…I think I’m on to something that is completely ridiculous and won’t ever work because I would be breaking the law. If I can’t choose, neither should a “too big to fail” company like Citigroup.
An article in the New York Times, on November 19, 2009 titled, “Audit Faults New York Fed in A.I.G. Bailout” said, “There have been suggestions that the Fed chose to negotiate weakly, Mr. Barofsky said, to give a ‘backdoor bailout’ to A.I.G.’s banks. He said Mr. Geithner and the Fed’s lawyers had denied this, but added that ‘irrespective of their stated intent,’ there was no doubt about the result: ‘Tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.’”
This sounds like an Enron episode gone mad. When Enron was at its height, it was creating “shell” companies to funnel the losses of bad trades and acquisitions. How is this different? One main difference is that the money that was funneled to AIG’s counterparties was US taxpayers’ funds. The bottom line is that Enron ended badly and this won’t end up any better.
Another way to look at this is a “game” of musical chairs. It is like if you pay me, then I can afford to pay you. But net-net, that doesn’t get me anywhere. It is an endless loop that can’t fix the problem because what comes around goes back around. Try taking out a zero percent interest credit card to pay off another credit card. It initially works because I can free up money that I would have been paying interest on. However, eventually, the same problem will kick in when the interest starts on the new card, and I’ll have to find another card or pay up. It seems like every day we are getting closer and closer to the “pay up” time.
On November 28, 2009, Reuters.com posted, “Federal Reserve Chairman Ben Bernanke said on Friday congressional proposals to audit the Fed and strip it of regulatory powers as part of post-crisis reforms could damage prospects for economic and financial health in the future. ‘These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States,’ Bernanke wrote in a column posted on the Washington Post's website.”
This must be a nice feature as part of being Federal Reserve Chair—do whatever he wants to do, no questions asked. This relates nicely to the spoiled child analogy at the beginning of the article. If the spoiled child can get whatever he wants when he wants it, there will be no limits on what he will eventually ask for. In addition, the spoiled child will keep stretching the limits.
At some point, the spoiled child will push the limits too far. This might be the case with the Federal Reserve. The last time I checked the Fed was more or less part of the government. The basic question then is: Can’t the US taxpayers ask question and learn how the Federal Reserve operates and see what it is doing? According to Bernanke, the answer is “no.”
I think questioning and facilitating discussion is good because no one person has all the right answers. To make informed decisions that will affect an entire country, it takes input from several people to make quality decisions. Eventually somebody will want an audit to take place, and since Bernanke is in effect dealing with taxpayer’s money, an audit will be voted on. It will be interesting to see the results of that public hearing.
When rules and laws change to meet a situation, it is difficult to grasp what is going on. I’m all for rules and laws to be updated and changed when done so appropriately and in accordance to protocol. If things continue down the path of uncertainty, it will make it even more difficult to reach stabilization because the laws and rules that are supposed to offer the most stability are slipping and sliding in every direction.
