These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:
Washington in the Obama era seems bent on imposing “solutions” that not only fail to solve Americans’ problems, but make us poorer in the bargain.
In a direct attack on Wall Street, the president and his ally, Sen. Blanche Lincoln (D., Ark.), are bent on imposing the “Volcker rule,” which would prohibit banks from making speculative investments with their own funds, and on requiring banks to divest their derivatives trading desks, or at least put them in a separate subsidiary owned by a parent holding company. Five major banks–Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley–do 90% of U.S. derivatives trading.
This may ultimately make banking less stable, while forcing a good deal of securities trading out of New York to offshore locations.
The recent credit crisis was caused by: 1) banks (small and large) writing shoddy mortgages, and 2) inadequately backed derivatives, called swaps, that insured the mortgage-backed securities that financed those loans.
Money was lent to homeowners who simply did not have the ability to repay their debts–and instead relied on a continuous cycle of refinancing, borrowing more and more as housing prices rose. Continue reading…