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April 06, 2010

10 out of 10 Economists Agree: We Were Wrong

After about a year of wrangling, we’re now into the final stretch of financial regulatory reform!  Sen. Dodd of the Finance Committee, Rep. Frank of the Financial Services Committee, and the White House have all said that a financial reform bill will likely be on the President’s desk by Memorial day.

As Global Trade Watch has extensively documented, the United States, in cooperation with other countries, must overhaul the WTO’s radically deregulatory financial services provisions if it wishes to enact meaningful financial regulatory reform.  Regulations specifying a maximum size of financial firms and prohibiting certain risky types of financial trading could be vulnerable to challenge under the WTO’s dispute settlement mechanisms.

Members of Congress must push back hard against those who are trying to remove the teeth from the reform proposals.  Wishful thinking about the capacity of financial services corporations to properly mange huge risks does not negate the fact that a tough regulatory framework is necessary.  This fact is illustrated quite clearly in the results of a 2004 survey of 84 finance professors conducted by the International Swaps and Derivatives Association. This survey would be a barrel of laughs if the consequences of these attitudes weren’t so disastrous.

Some of the highlights:

  • 100 percent of respondents agreed with the statement that “Derivatives help companies manage financial risk more effectively.”
  • 99 percent of respondents agreed that “The impact of derivatives on the global financial system is beneficial.”
  • 81 percent of respondents agreed that “The risks of using derivatives have been overstated.”

It’s disheartening that these “experts” could not fathom the role that derivatives would play in the 2008 financial meltdown.  In their extended comments, many of them claimed that derivatives helped promote financial stability:

“[Derivatives] allow the transfer of risk from parties that don't want to bear risk to parties that can. For example, credit derivatives make the banking system safer.”

- James Angel, Associate Professor of Finance, Georgetown University: McDonough

“Derivatives with high counterparty credits allow intermediaries and dealers to hedge their positions much more effectively, at a much lower cost and in a speedier fashion. This greatly reduces the insolvency/liquidity risk of intermediaries and dealers thereby adding stability to the global financial system.”

- Mo Chaudhury, Faculty Lecturer in Finance, McGill University

“By allowing for a more efficient management of risk derivatives have resulted in a more efficient allocation of capital. An efficient allocation of our resources, including capital, allows for more rapid global economic growth. It is through economic growth that each generation has the ability to live better than past generations. Thus, an expanded efficient use of derivatives is an important component for future economic growth.”

- Michael Brandl, Lecturer, University of Texas at Austin: McCombs

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Comments

Don Juan of Austria


Never has one group of experts been more wrong than economists for the last 20 years.

They have absolutely no grounding in true economic history, for example showing the effectiveness of tariffs and quotas for most of U.S. history, or the effectiveness of the New Deal financial regulations.

At some point, though, people simply have to stop listening to them. If I see a clown on a street corner making a bunch of outlandish and wrong statements, I laugh at him rather than asking him what he thinks about economic policy.

However, since the economic collapse a couple years ago, the same economists still dispense the same advice (free trade, no regulations, etc.), and are still listened to by policymakers. It's mind-boggling. And the very few heterodox economists and organizations (like Public Citizen) that have identified the problems going back years continue to be ignored.

Ray Tapajna

The Tea Party may be brewing the wrong tea if they leave out the main cause behind our economic crisis - free trade and globalization. I have not seen signs with the words NAFTA, CAFTA, GATT, WTO on them.

It is obvious that our economy based on making money on money instead of making things has burned out. The value of workers has been deflated and this value is a real asset and acts as a real money standard.

The Tea Party also does not include the payroll tax as a bad tax. About 70 percent of all workers pay more in payroll taxes than they pay in income taxes. And payroll tax revenues have been spent the same way as income tax revenues have been spent. President Clinton even admitted he used Social Security funds to support his Balkan wars. The payroll tax is a flat tax on the working poor.

I also do not see many references about the unemployment rate being a facade especially when only about 38 percent of all workers qualify for unemployment insurance. This means about 62 percent of all workers are missing in action from any kind of real reporting.

It is also obvious that workers have no voice in the process of free trade and globalization. Millions have lost their jobs due to free trade during the most massive dislocation of jobs in U.S.history.

See http://www.ethicsbox.com/tea-parties-brewing-wrong-tea
or http://tapsearch.com/realworldnews

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