I am quite aware the theater is on fire, but everyone seems to be running towards a locked exit. I will keep screaming and pointing towards the open door to the left, but for now let me show you the locks on the door.
I hear a lot of cheerleading right now for this economic bill, one that will supposedly end this crisis, or at least extend it for a few years. It will do neither and tucked inside are some of the most horrific ideas ever put to paper by a politician. This is not a good bill; this is an armed robber’s note.
I will begin with two aspects, which while buried, are still widely available to the viewing public. When someone puts forth such an overwhelming colorfast of stupidity, it should see never see the light of day. This such absurdity was voted on in no less that very Halls of Congress.
So to begin, I will make a second hand observation based on verification of one of my fears. I do hope Forbes is a name still somewhat trusted in the financial world:
Bailing Out The Oil Market
William Pentland, 09.23.08, 11:35 AM ET
While everyone knows the U.S. government is looking to bail Wall Street banks, few people realize that it's also bailing out speculative oil and commodities traders in the process, fueling a sharp rise in energy prices.
Lehman Brothers (nyse: LEH - news - people ) and AIG (nyse: AIG - news - people ) held enormous trading positions in commodities markets. If those positions had been liquidated suddenly, the price of everything from wheat to oil would have collapsed. The Commodity Futures Trading Commission, the main regulator of U.S. commodity markets, allowed Wall Street's investment banks and trading companies to take control of massive positions in commodities markets called swaps held by Lehman Brothers and AIG.
"If speculators were forced to liquidate their positions, oil would easily be $65 to $75 per barrel by the time the liquidation was complete," said Michael Masters, the founder of Atlanta-based hedge fund Masters Capital Management. Tuesday, oil was trading at $108.74 in midday trading in New York.
In 2006, the U.S. Senate's Subcommittee for Permanent Investigations had already reported "there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices." The trouble is that so much of the trading happens in so-called "dark markets," unregulated over-the-counter electronic exchanges where trading companies buy and sell energy derivatives, that this role is hard to document.
"The market dynamics induced more and more financial players to move into commodities markets," said Fadel Gheit, a senior oil analyst at Oppenheimer & Co. "It was a perfect storm. The Federal Reserve was cutting interest rates and people were running away from the dollar as it lost value. Hedge funds, pension funds and mutual funds started pumping money into commodities because they were the safest place and the safest of them all was crude oil. There were too many dollars chasing too few physical assets. That's the bottom line."
Now no one should act shocked that oil is inflated when we have oilmen sitting as President and Vice-President. How this is covered in the bailout is that investment banks got heavily involved in speculation. Now that the sheer amount of dollars in the system drove the price up, the actual value of the commodities is well below the speculation price.
What this bill purposes to do is cover the banks in this value gap, between fantasyland and reality. This will keep oil prices artificially high, much to the delight of President Bush’s base. His real base. Now if we were to let the market work itself out, these long positions would have to be liquidated and the prices for oil and wheat would drop back down to real intrinsic value.
The losses incurred by these banks would remove a lot of the money currently driving the demand and driving the price of the commodity to unrealistic trading values. So in a nutshell, the banks made a very bad investment and now they want us to pay for it. And not only that, they want us to pay with our own money to keep oil prices artificially high.
We also need to address the dark markets. How is there an unregulated energy market when Enron was just a few years ago? Who was asleep at the wheel on this? And not only the energy market, but there is an exchange where the SEC has no oversight? How did this come to be, and why hasn’t this been addressed?
This was an economic bill, was it not? Is it to much to ask while Congress is artificially inflating the value of oil that they at least close a rogue market that led to oil being artificially high? Just simple SEC oversight is all I am asking. This still is a country of rule of law, no matter what the last eight years say.
I will keep screaming about above until I get some kind of answer. Then I will be screaming louder about this. I have not seen any coverage of what is below, and I fault the media and the both parties for such language to find its way into a bill. It is reckless, dangerous and calls into question Congress’s very sanity.
Yes, I read the bill. And here is what I found most shocking:
Follow along, so you know I am not making this up:
So here is the bill. Kindly download and turn to page 83. The following passage:
13 SEC. 128. ACCELERATION OF EFFECTIVE DATE.
14 Section 203 of the Financial Services Regulatory Re-
15 lief Act of 2006 (12 U.S.C. 461 note) is amended by strik-
16 ing ‘‘October 1, 2011’’ and inserting ‘‘October 1, 2008’’.
This made me almost cry for my country. Looks pretty innocuous, just sitting there, looking all legal. Sitting pretty if you will. No one will ever see it, buried so deep.
Well, I did.
So what is Title 12 of the Financial Services Regulatory Relief Act of 2006, proudly passed by the Republican-lead Congress? You remember that gang, don’t you? Surely they would have our best interests at heart.
What’s in Sec. 203?
SEC. 203. EFFECTIVE DATE.
The amendments made by this title shall take effect October 1, 2011.
Oh well, that’s fine. But what’s in the amendment?
SEC. 202. INCREASED FLEXIBILITY FOR THE FEDERAL RESERVE BOARD TO ESTABLISH RESERVE REQUIREMENTS.
Section 19(b)(2)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(2)(A)) is amended--
(1) in clause (i), by striking `the ratio of 3 per centum' and inserting `a ratio of not greater than 3 percent (and which may be zero)'; and
(2) in clause (ii), by striking `and not less than 8 per centum,' and inserting `(and which may be zero),'.
Wow, looks like somebody is taking a ratio to zero. I wonder what that ratio is? I bet you in the back already know.
Let’s go to 12 U.S.C. 461, and see exactly what is is we are adjusting.
Let’s see here, Section 2, Subnote A of 12 U.S.C. 461. How is that for obscure! Let’s see what we got here.
(A) Each depository institution shall maintain reserves against its transaction accounts as the Board may prescribe by regulation solely for the purpose of implementing monetary policy—
(i) in the ratio of 3 per centum for that portion of its total transaction accounts of $25,000,000 or less, subject to subparagraph (C); and
(ii) in the ratio of 12 per centum, or in such other ratio as the Board may prescribe not greater than 14 per centum and not less than 8 per centum, for that portion of its total transaction accounts in excess of $25,000,000, subject to subparagraph (C).
You dirty apes.
You mean to tell me that each depository institution can maintain zero reserves against its transaction accounts?
You put it right there in writing! Sure you buried it across three bills, but you are now allowing for the possibility that banks can hold zero reserves!
This is how the bank code would have read had the bill passed today:
Each depository institution shall maintain reserves against its transaction accounts as the Board may prescribe by regulation solely for the purpose of implementing monetary policy—
(i) in a ratio of not greater than 3 percent (and which may be zero) for that portion of its total transaction accounts of $25,000,000 or less, subject to subparagraph (C); and
(ii) in the ratio of 12 per centum, or in such other ratio as the Board may prescribe not greater than 14 per centum and which may be zero, for that portion of its total transaction accounts in excess of $25,000,000, subject to subparagraph (C).
So you plan on restoring confidence in the banks by allowing the banks not to have any reserves to match people’s checking and savings accounts? What, was the FDIC just going to cover that all? Wait, don’t answer that, I already know the answer.
But remember the effective date! The original Relief Act of 2006 called for a date of October 1, 2011 to allow banks zero reserves, if the Federal Reserve Board thought it fit. This bill would have moved that up to tomorrow!
Tomorrow people! Do you hear me! Tomorrow we could have all woken up to the possibility of zero holdings in our banks and it being legally allowed!
And you dare cheerlead for this bill?
These two items, among other things, must be stricken from this bill. It is an affront to any decent citizen in this country and should be hung as a mark of shame on any fellow citizen who voted for it today.
Zero reserves and artificially high energy prices, brilliant. Just brilliant.
And yes, I do have a plan b. But for now, I must plead with you not to run to the lock door, the fire is fierce, the theater is ablaze, but this bill is just kindling.
Don't go pouring gasoline on yourself.
Sorry I did not update this earlier, but I was busy reading and processing the debate it caused. I would highly suggest reading Pinkbunny's companion diary to this one, FYI: Zero Bank Reserves What Does It Mean. The comments are also highly recommended.
After reviewing the counter-arguments of what I have presented above, I believe I can offer a solution to this rather poorly written portion of the economic bill presented yesterday:
SEC. 203. EFFECTIVE DATE.
The amendments made by this title shall take effect February 1, 2009 with a sunset date set to June 1, 2009, unless otherwise updated by another act of Congress.
Now, from what I have gathered from reading some insightful critics is that banks need a little wiggle room in the liquidity of the market in its current state. While this is a solvency issue at its core, the current crisis is a self-fulfilling prophecy of write-downs. Unless we can break the cycle of write-downs, the whole point of this exercise is futile and the problem of solvency never properly addressed.
I have chosen the date of February 1, 2009 based on the fact that next President will be inaugurated on January 20, 2009. That ten day span should be more than enough time to get all the principles needed for this plan to work to be properly vetted and confirmed by Congress.
I have zero faith in the people currently in charge of the economy, and even less in the Executive Branch as a whole in aspect to the general welfare of the citizens of this country. It is in our best interest to wait until President Obama, and trust me, it will be President Obama, has his people in place to tackle this economic crisis.
The key here is the sunset clause. At the root of any solvent bank is the faith that deposits are secure. While creative accounting might be needed to end the cycle created by even more creative accounting, it should not be left open ended with no closure date. We can offering the banking system a window to move capital around to stop the write-down cycle, then we must close it.
- Lost in the shuffle of allowing zero bank reserves, was the fact that "dark markets" exist without SEC oversight. This must be address in the next bill. How this exists now is beyond reproach, and these rogue markets must be brought into the fold of rule of law.
- I never stated that the FDIC was going to be defunded. The point I was trying to make is that deposits in the bank help counter the full load expected of the FDIC should an institution fail. There is no way the FDIC, as it is currently funded, could over night pay out all the deposits currently in all banks in this nation. And if banks were at zero percent holding ratios, there would be nothing to help support the pay out by the FDIC because the very institutions they are bailing out have no money in the coffers. That was the point I was trying to relay.
- I also am not hitting the panic button, I am calling for cooler, and more rational, heads to prevail. I long sensed this nation was being railroaded into a very bad bill. I am all for economic assistance to help stop this crisis, but I am not for a bill that would only do more damage.
- There are alternatives. There are better ways of tackling this problem than just throwing money at it. This is not a time to pack up the bags, grab the shotgun and head to the hills. This is actually a chance to right the many, many wrongs of the last 30 years.
- This bill should not be viewed as the end of the world, or America. It should be viewed as a golden opportunity to get the fundamentals of our economy sound and squared. Rarely does such a mandate come from the citizens, who rarely take interests in such matters, and rarely do we have a Democratically-controlled Congress.
Where other people see gloom and doom, I see an end to the tunnel and light. We must not allow Congress to order more tunnel. Now is the time to craft a bill that secures our economic fortunes and restores faith in said system by looking out for the general welfare of the public.
If the Democrats, and even moderate Republicans, can come together and forge such a bill, a new dawn will rise in this country, instead of the nightfall all the doom and gloomers are panicking over.
So in closing, thank you for all the input, the greatest success of this diary is that it started a dialogue that should have started weeks ago. Thank you for the recommends, I find them rather flattering. And thank you to those like pinkbunny, whose voices are needed to bring all aspects of the issue to the table.
Now let's work together to make sure the bill passed works in the best interests of the nation as a whole, and not against.
And let's also make sure to check the fine print as well.