While the government is focusing on getting the economy back on track, using large infusions of cash and other gimmicks, something more subtle has created the disaster and, unless it is tackled, the end result will be more of the same. In the last decades the periodic overhauling of the U.S economy based on ideological inclinations of the party in power planted the seeds for today’s crisis. These overhauls (overregulation, not enough regulations) have had the effects of producing a new category of ingenious entrepreneurs (corporate raiders and currency manipulators that simply re-invented capitalism. Gone were the days when investments in public-listed companies funded research and development and helped create the jobs that sustained the economy. Presently, investors can make hefty profits from their investments in a company in a matter of hours while not a single job is created. It naturally encourages speculation and causes a company’s true value to be artificially overvalued.
Moreover, when Lehman Brothers, the U.S’ fourth-largest investment banks folded on September 15th, its obligations to creditors totaled 613 billion of dollars, of which 138 billions was owed to Citibank, the nation’s biggest bank. Incredibly, Lehman Brothers’ liabilities were slightly lower than Turkey’s GDP and bigger than Belgium’s, respectively the world’s 17th and 18th economies. Bear in mind that a Gross Domestic Product is the total amount of goods and services produced by a country in a given year. Given the mammoth size of the U.S gross domestic product, 14 trillions of dollars in 2008, it is not unusual for a large U.S-based investment bank to be holding assets worth more a trillion of dollars. How Lehman Brothers managed to rack up 613 billion of dollars in debts merits to be put in perspectives.
Investment banks buy and sell on behalf of their clients, which include wealthy individuals, institutional investors, mutual funds, and state-funded pensions. Additionally, they help governments and public-listed companies raise money by selling bonds and securities on the capital market. Because it is hard to reconcile Lehman Brothers’ astronomical debt with its institutional purpose, this pertinent question needs to be answered. Did the Securities and Exchange Commission (S.E.C) surrender its supervisory role to these pillars of modern capitalism?
Though many have accused the regulators of falling asleep at the wheel, it is however preposterous to think that the S.E.C could effectively police the market when quarterly reports, which make or break companies, give egotistical C.E.Os a strong incentive to be deceitful. The challenge is simply too great for the regulatory agency’s seasoned and meticulous auditors. The Bernie Madoff fiasco is a prime example of the S.E.C inability to effectively supervise the market. It was reported that Madoff’s investment firm never actually made a single transaction and, yet, no one was able to uncover the fraud. In the age of overlapping business interests could the S.E.C successfully audit a conglomerate like American Insurance General (A.I.G) between the mandatory quarterly reports? Because A.I.G tentacles reach more than a hundred companies, the task would likely drain the manpower resources of the S.E.C, thus allowing others to get away with the unorthodox practices that cause the market to lose 40% of its value since September of last year.
These are dire times that require drastic actions as far-reaching as FDR’s New Deal. A new approach is needed to guarantee the flow of capitalization to companies, which is essential to job growth, as this crisis takes the sail out free market theories revolving around the notion that the market can self-correct any abnormalities. Hence the need to eliminate the short-term investments holding companies captives of manipulations by unscrupulous speculators. Being the most powerful country in the world and possessing the largest economy, the U.S, despite its woes, can still lead the reorganization of the global financial system by doing away with quarterly reports and institutionalizing semester reports. While this radical approach may sound anathema to free market purists and financial speculators, it would however restore integrity into the system, encourage investments that create jobs and give the S.E.C enough time to ferret out unorthodox practices.
The 700 billions of dollars taxpayers-funded intervention may be called bailout, stimulus or rescue package, it is nonetheless a form of nationalization that would eventually destroy the entrepreneurship spirit that took this country to unprecedented heights. Bailing out companies would not make dissatisfied customers amenable to products they do not want. More ominously, since the Treasury Department rather than an autonomous Authority would be in charge of the financial purse, the government-engineered rescue of troubled banks and other companies may be too intrusive. It is a stark departure from the principles that guided this country from its inception to the present and may end up doing more harm than good.
For 233 years the U.S political system was hailed as the best ever devised by men, because no other came close to matching its stability. This financial crisis however exposes its shortcomings because many branches of the U.S government (Congress and the White House) acted as contributors. As president Obama said in his inaugural address: “Americans have a duty to themselves and the world”, which means that the U.S, being the center, cannot afford to fail or the rest of the world would suffer terrible consequences. Therefore, how the new administration confronts the crisis would determine whether the U.S remains the world’s leading nation or becoming a second rate power.