WHAT WENT WRONG WITH THE ECONOMY AND HOW TO FIX IT PART ONE.
RICHARD M. SCAIFE |
JOHN ENSIGN |
MARK SANFORD |
TOM COBURN |
GARY BAUER | DAN BURTON | | JOHN BARRASSO | DICK ARMEY | LAMAR ALEXANDER | MAX BAUCUS | GARY BAUER | THE BIRTHERS
ROY BLUNT | JOHN BOEHNER | KIT BOND | JIM BUNNING | RICHARD BURR | KEN CALVERT | ERIC CANTOR | SAXBY CHAMBLISS | TOM COBURN
BOB CORKER CHUCK GRASSLEY | SEN. CORNYN | ANN COULTER | JIM INHOFE | JIM DEMINT | BILL NELSON | PAT ROBERTSON | ADOLPH COORS
JAMES DOBSON | LATE JERRY FALWELL SEN. CRAPO | TOM DELAY | RICHARD DEVOS | DICK CHENEY | DOUG LAMBORN | THE FAR RIGHT PURPOSE
GIULIANI | GLENN BECK LINDSEY GRAHAM | JUDD GREGG | JEFF GANNON | REPUBLICAN HALL OF SHAME | SEAN HANNITY | HEALTHCARE REFORM
LARRY PRATT | WALLY HERGER | MIKE HUCKABEE JOHNNY ISAKSON | JEB BUSH | MIKE JOHANNS | JOHN MCCAIN | MITCH MCCONNEL
DICK MORRIS | NEWT GINGRICH | BILL O'REILLY | RUSH LIMBAUGH SARAH PALIN | SEN. RISCH | PAUL ROBERTSON | SEN. ROBERTS
GEORGE ROCHE | MITT ROMNEY | RONALD REAGAN | KARL ROVE | SEN. SESSIONS | RICHARD SHELBY | TOM TANCREDO | TRENT FRANKS
REPUBLICANS WHO VOTED FOR RAPE | LT. GOV. ANDRE BAUER | CHRISTIAN HIJACK | FOX NEWS MICHELLE MALKIN | MARK PRYOR
MIKE MCINTYRE | JOE PITTS | HEATH SHULER | BART STUPAK | CHRISTIAN RECONSTRUCTIONISTS | ZACK WAMP | FRANK WOLF
CHIP PICKERING | TEA BAGGERS | JOHN ASHCROFT | LOUIS SHELDON | WYLY BROTHERS | GEORGE W. BUSH UNOFFICIAL PAGE | THE FAMILY
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Here's a summary of what went wrong and the proposals which would try to fix it:
1. Problem: Nobody was looking out for the little guy. At least five federal regulators had some responsibility for protecting consumers from fraud and predatory lending involving credit cards, payday loans, mortgages and other credit products. Yet this responsibility was the primary focus of none.
Fix: The Federal Reserve, Federal Trade Commission and other regulators would be stripped of certain powers which would be given to a newly created Consumer Financial Protection Agency. It would be independent and would have the power to make and enforce consumer-protection rules. States could pass rules even tougher than those of the new agency.
2. Problem: No regulator was looking at the entire financial system. Individual regulators saw parts of the problem, but nobody saw how together they posed a systemic threat.
Fix: The Federal Reserve would be charged with guarding against threats to the broad financial system. It would have until Oct. 1 to propose what new powers or changes in law it would need to do this.
3. Problem: There are insufficient regulatory tools. When investment bank Lehman Brothers went bust last September, regulators lacked the authority to seize it as they would a commercial bank. Its demise triggered a near-collapse of the global financial order.
Fix: Regulators would be allowed to take over and dissolve a large, globally interconnected financial institution if it posed a threat to the financial system.
4. Problem: There were many voices, but no consensus. Although at least seven federal regulators tried to halt the global financial slide, they spoke with different voices.
Fix: A Financial Services Oversight Council would be created a panel of regulators led by the Treasury Department to identify risks to the financial system and advise the Federal Reserve.
4. Problem: There were Outsized risks. Because no one was looking at the whole picture, regulators were unaware of how much risk had accumulated in the financial system.
Fix: The Treasury Department will lead an effort to create new capital requirements for all financial institutions, not just banks, and must issue a report with proposed changes by Dec. 31. The Treasury is expected to require financial firms to save money in good times to have adequate reserves in bad times.
5. Problem: Shopping for the least regulation. Regulation of financial institutions was spread among several agencies whose enforcement can best be described as spotty. The most egregious example was insurer American International Group, which branched into financial products through a thrift that the Office of Thrift Supervision insufficiently regulated.
Fix: The Office of Thrift Supervision would disappear under Obama's plan, which would roll several federal regulators into a new National Bank Supervisor. It would govern all federally chartered lenders, whether they're banks or savings and loans.
6. Problem: Spreading risk without responsibility. The financial crisis began in mortgage finance, where mortgage brokers with no federal regulation originated loans that were underwritten mostly by investment banks that weren't regulated for their financial soundness. The banks bundled the loans into pools a process called securitization and the securities were sold to investors.
Fix: Loan bundlers now would have to retain portions of what they sold to ensure that they too had "skin in the game."
7. Problem: There was a free rein for credit-rating agencies. Investors snapped up bundles of loans thinking that they were safe because rating agencies said they were. The rating agencies had a conflict of interest, however, because investment banks often hired them to package the loans.
Fix: The Securities and Exchange Commission would get new powers to supervise rating agencies and demand tougher reporting requirements.
8. Problem: Investment banks have ran amok. The SEC regulated investment banks only through the lens of investor protection. These banks Bear Stearns, Lehman Brothers and others often borrowed $30 to invest alongside every $1 of their own.
Fix: The end of SEC oversight of large global investment banks; the Federal Reserve would regulate them instead.
9. Problem: Hedge funds and other private pools of capital lacked transparency. These are investment funds for the very wealthy, trust funds, endowments and pension funds. They and private equity funds take huge risks in financial markets, but they aren't regulated. The absence of any public information about their finances amplified concerns as the global financial system tanked.
Fix: They would have to register and report to the SEC, which would determine whether their investments were so vast that their failure could pose a threat to the financial system.
10. Problem: Money market funds were thought to be safe. These low-risk, low-return instruments earn interest for ordinary investors and were thought to be virtually risk free, until investors pulled so much money out of one last fall that its investment income fell below operating expenses. That added to the global financial panic.
Fix: President's Working Group on Financial Markets would recommend changes to eliminate the risk of runs on these funds.
11. Problem: Complex financial instruments exploded in popularity before they imploded. Over the past decade, these complex new products galloped beyond the reach of regulators. This was especially true of credit-default swaps, private bets between parties on the performances of loans or other forms of credit. This swaps market, which includes bets on the future prices of oil contracts, is valued in the trillions of dollars.
Fix: Credit-default swaps and other "derivatives" would be subject to comprehensive regulation and would be required to be traded on a regulated exchange, along with new reporting requirements and far greater transparency.
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