Here We Go Again

A Sequel to Financial Folly: Wall Street's Continued Risky Ventures

The only thing worse than driving over a cliff is to drive over it again. Unless we take corrective action, this is precisely what will happen within our financial system.

The 2008 financial crisis was not just a result of financial misadventure but also of profound corruption. Wall Street's entanglement with Mortgage Backed Securities (MBS) and similar complex financial instruments was at the heart of this debacle. These MBS, which were nothing more than bundles of home loans repackaged as attractive investments, were aggressively marketed by a network of financial experts whose integrity was compromised. As the housing market began to crumble, the inherent risks and volatility of these securities became painfully evident. This led to a domino effect across financial markets, culminating in the downfall of key financial institutions. The crisis was so devastating that its ripples were felt not just on Wall Street, but across the global economy, underscoring the catastrophic impact of corruption in the upper echelons of finance.

Faced with potential economic disaster in the fallout, the U.S. government stepped in to bail out numerous banks and financial institutions, injecting trillions of dollars into the economy to avert a complete meltdown. This move, while stabilizing the financial system, was not without its controversies. One of the most glaring was the lack of significant legal or financial repercussions for the individuals and institutions whose corrupt actions had contributed to the crisis. In a twist that many viewed as adding insult to injury, several key figures involved in these corrupt ventures later assumed influential roles within the very industry they had endangered, overseeing the banking sector and its regulations. The bandits were not punished, freeing them to continue their bad behavior.

Today, as the shadows of the 2008 financial crisis linger, Wall Street finds itself at another crossroads, one that echoes past corruption. Despite the lessons that should have been learned, major banks are once again pushing the boundaries, this time in the derivatives market. Wall Street on Parade recently published an article that sheds light on a concerning trend: financial giants are resisting regulatory efforts aimed at ensuring greater stability in the financial system. A key point of contention is the requirement for banks to hold more capital as a buffer against potential losses. Wall Street argues that such requirements restrict their ability to invest, specifically in the derivatives market. This pushback is alarming, considering the risky nature of derivatives trading and its potential consequences. It would appear that the same bandits are at it again; the only lesson they learned the last time around is that the government has their back.

Some brief background regarding derivatives: Derivatives are complex financial instruments whose value is derived from the performance of other assets, like stocks, bonds, commodities, or market indexes. They are often used for hedging risk or speculative trading. While derivatives can provide significant gains, their complexity and reliance on shaky predictions make them highly susceptible to market fluctuations. This volatility is compounded by the use of leverage, where small initial investments can lead to large exposures. The derivatives market, vast in size and scope, is therefore a hotbed for potential financial turbulence.

The situation today is reminiscent of the past, where high-risk financial practices were pursued at the significant risk of economic stability. Wall Street's current resistance to holding more capital as a safeguard reveals a worrying inclination to prioritize short-term gains over long-term security, potentially setting the stage for another financial debacle.

No doubt, the government will cover for Wall Street’s foolishness once again. The intricate dance between Wall Street and Washington is a tale of influence, power, and financial might, where the ordinary citizen is merely a pawn that is willingly cast off the chess board of life in pursuit of ultimate greed. This Wall Street - Washington relationship is particularly evident in the pressure exerted by financial institutions on bank regulators and members of Congress. A case in point is Congressman Jason Smith, chair of the Ways and Means Committee, whose campaign financing paints a telling picture. According to a report from OpenSecrets.org, Smith has currently received over $270,000 in contributions from the Securities and Investment industry for his upcoming 2024 campaign, making this industry his top contributor. Such figures raise critical questions about the impartiality of political decision-making in financial regulation.

This situation is not unique to Smith but is indicative of a broader trend where campaign financing significantly influences legislative and regulatory actions. The financial industry, with its deep pockets, appears to be investing strategically in political campaigns. In doing so, they aren't just supporting candidates; they are purchasing influence. This influence is crucial when it comes to legislation and regulatory decisions affecting Wall Street's operations, particularly concerning high-risk investments like derivatives.

The concern is that members of Congress, swayed by these financial contributions, may push for leniency in regulations, allowing Wall Street to continue engaging in risky financial practices. The narrative of another government bailout looms large in this context. The implicit understanding that the government will step in to cover losses emboldens these firms to persist in their high-stakes financial gambles. It's reminiscent of Charles Givens' notion of “Wealth without risk,” but at a colossal scale and with public funds at risk.

The most disconcerting part of this dynamic is the direct impact on ordinary Americans. Much of our pension and retirement funds are tied up in these financial markets. Thus, when Wall Street engages in risky derivatives trading, it's not just their capital on the line – it’s the financial future of millions. This situation effectively holds the country’s financial security hostage. If Wall Street falters, it's not just the big banks that suffer; it's the retirement plans and savings of ordinary citizens. In this high-stakes game, it seems that Wall Street has managed to secure a safety net for itself, underwritten by the government and, by extension, the taxpayer.

If you're like me, the realization of the scale at which Wall Street operates will not just make you sit up in your chair but quite possibly fall out of it in disbelief. Picture this: according to a Wall Street on Parade newsletter, the towering titans of Wall Street hold an astonishing $157.3 trillion in derivatives, a figure that eclipses the entire world's GDP last year by a staggering $56.7 trillion. This isn't merely a national concern; it's a colossal risk hanging over the global economy. Imagine the scenario where even a fraction of these derivatives goes south and is not covered by capital on-hand. The resulting domino effect could obliterate that $157.3 trillion, sending shockwaves that would make the 2008 crisis look like a mere dress rehearsal.

The magnitude of this potential economic calamity is starting to sink in, and the reaction is a mix of fear and pragmatism. Some people, in their justified uneasiness, are increasingly turning to gold as a safe haven. It's as if the lyrics from the Police echo the current sentiment: “When the world is running down, you make the best of what's still around.” In today's tumultuous financial landscape, gold appears to be the best of what’s still around for many. Its enduring value in times of economic uncertainty offers a glimmer of stability amidst a sea of volatile and complex financial instruments.

But this shift to gold is more than a trend; it's a stark indicator of the dwindling trust in our financial systems and institutions. It reflects a growing awareness among the public of the precarious nature of the financial maneuvers on Wall Street. The question remains: How long can we continue on this high-wire act without a safety net? The answer, unfortunately, might be found in the not-too-distant echoes of the past, unless significant regulatory and structural changes are made to ensure financial stability and restore public confidence.

In light of the precarious situation we find ourselves in, it becomes a civic duty for each of us to take a stand. The Wall Street mega banks, bolstered by their armies of lobbyists, are poised to weaken the proposed capital rules that serve as a safeguard against their high-risk financial practices. We cannot stand idly by and watch this unfold. It's time for action.

I urge everyone reading this article to make their voice heard. Reach out to your U.S. Congressmen and Congresswomen today. You can do this by contacting the U.S. Capitol switchboard at (202) 224-3121. This is your direct line to the decision-makers who have the power to influence the course of our financial future. When you speak to your Congressperson (or more likely, their staff), express your concerns clearly and firmly. Tell them to uphold and enforce stronger capital rules for the so-called “casino banks” of Wall Street. It's essential that our banking regulators maintain stringent regulations to curb the risky behaviors that could lead us into another financial disaster.

This is more than just a call to action; it's a plea for vigilance and responsibility towards the financial stability of our nation and the world. We've witnessed the consequences of lax regulations and unchecked financial gambits. It's time to learn from our past and work towards a future where economic stability is not a gamble, but a guarantee. Let your voice be heard, and let's strive for a financial system that prioritizes the well-being of all, not just the few.

In short, let’s not drive that car over the cliff again.