[by Guy Gerhard]
Guy Gerhard, progressive activist from Council Bluffs,
conducted an in-depth interview for Blog for Iowa with Mike Denklau,
candidate for U.S. Representative for Iowa’s 5th District. This is the second of three parts. Click here to read Part 1
BFIA: You were talking about regulation as far as the health insurance companies. How do you see regulation affecting what’s going on in the economy, as far as these investment banks are concerned?
Denklau: I can tell you I actually have first-hand experience working with the regulators in this area. When I was at Lehman Brothers, we were working with the financial regulators in DC to try to change policy and address issues in the market that we thought could pose a threat to individual investors like ourselves. It became very apparent rather quickly, that the regulators that we had in place over the last few years, and still have in place now, were terribly under-resourced. And they didn’t necessarily have the right resources – they had many great lawyers, for instance, but they don’t necessarily have the financial talent to keep up with the innovation that’s taking place on Wall Street.
Of course, part of that is the pay structure…obviously, there’s limits to how much we can pay our government employees, but it’s something that needs to change so that they have the resources and the know-how and the right people. But, of course, we need to be thinking broader than that. We need to be thinking, how do we address things like this too-big-to-fail issue which still exists, and is clearly a major threat going into the future.
We need to start thinking, okay, we get a council of regulators together so that everyone is talking, figuring out what the major systemic risks are out in the market, make sure we’re identifying and addressing those, being proactive towards those risks instead of just trying to clean them up. And then creating a new authority, or an authority within the Fed for instance, to be able to wind down these institutions when they’re so big, if they do get into trouble―something like the FDIC does with a community bank.
There have been over a hundred bank failures across the country of commercial banks. It’s troubling, but the individual customers, you and I, aren’t bothered by that at all, you know. We go in on Monday and it’s a different name but all our accounts are there and everything works. We need to get a system like that in place for these massive financial institutions and not just the banks, but all of these big financial institutions that threaten the system.
We saw this with Bear Stearns and Lehman Brothers. They were not banks, but they had the potential to threaten the entire system. So we do need to address that.
Then of course, there’s the discussion over the consumer side right now. Having an agency that is thinking about consumer products is probably an idea that we should consider seriously. It’s getting the right mix of regulation because more isn’t necessarily better, but obviously we can do a better job.
BFIA: I believe it was the Glass-Steagall Act, back in the 1930s, that did a couple of different things. It established the FDIC and it also established regulations of the banking industry. Then, in 1999, Gramm-Leach-Bliley came along and basically gutted all the regulations. Do we need to go back to what Glass-Steagall was originally intended to do?
Denklau: Glass-Steagall separated the investment banks and the commercial banks. So you wouldn’t have a Citibank, for instance, doing investment banking services and providing home loans and things like that. I don’t think we need to go back to that system but again, we need to be sure that we’re prepared for the system that we have now, which means we need to be able to address this too-big-to- fail issue.
The reason I don’t necessarily think that we want to go back to that old system is, these banks do have clients that are global, that need a wide array of products, and having a full-service financial institution is very helpful for the clients, our businesses, and therefore, the economy.
It’s also a global competition issue. If our banks aren’t allowed to do this but foreign banks are, we’re going to be at a severe disadvantage to London and Frankfurt and Tokyo and Hong Kong―all the other major financial centers around the world, which again, will hurt our productiveness, our competitive advantage in the world. I don’t think we need a return to that, but we do need to be prepared to handle the additional risks that these institutions will have. I think it’s critical that we have that council of regulators and that we give the Fed the authority to “wind down” these too-big-to-fail institutions if they get into problems.
BFIA: One of the things that Thom Hartmann has talked about on his radio program he calls the Corporate Death Penalty. Since the Supreme Court has ruled that corporations have the same rights as people, shouldn’t they have a natural life span? Shouldn’t they be allowed to die after a certain period of years, instead of going on and on for generations, getting bigger and bigger, and thus creating companies that are too big to fail?
Denklau: I don’t think you necessarily want to put limits on how long our companies can exist because there are some great companies that still do fantastic things that have been around for well over a century. But, I think you do strike a good point in that the market should be allowed to discipline and do its job, which is [that] when a company gets itself into trouble it should be allowed to die. Therefore, if we were able to have the Fed step in take over these massive financial institutions when they are failing – they essentially have died, in the sense that the debt-holders and the shareholders are losing their investment in that company. The company is gone. But, at the same time, we’re protecting the broader system: the clients. We can sell off those assets and continue the system intact. Just the way it does with the FDIC
BFIA: One of the things that I have noticed, and I’m sure most Iowans have noticed recently is, about three weeks ago, gasoline prices spiked twenty per cent. There was no apparent reason for that. Daily Finance reported on October 21 that demand for gasoline was falling and the Associated Press reported, just a week later, that crude and gasoline inventories were up. But then, the San Francisco Chronicle reported that investment banks were speculating again, which is the exact same thing that was going on before, that created the bubble that burst, sending the economy downhill. How do we stop these banks from continuing to do this?
Denklau: Obviously, some of the run-up, I think, is hope for the future. The economy is starting to turn around. We’re starting to see some good signs, although employment is lagging a bit.
But, there are issues. There are investors that literally have tankers full of oil sitting off the coast waiting for a better price. It’s a cost/benefit analysis between how much does it cost for you to store it in a tanker off the coast versus selling it in the market. Of course, there will be speculators and there have always been speculators. But, I think for us to have a well-functioning economy, to allow companies such as airlines, to be able to protect themselves against rising prices in fuel, we need to have active financial markets and securities products so they can do that.
So, you will have some people that will use futures contracts to gamble, so to speak, or speculate. But, at the same time, there are very legitimate business purposes as well that we need to consider. It is a difficult balancing act. At the end of the day, you’ll generally see that oil prices and demand are driven by the economy. If these speculators are wrong, in that they believe the economy is going to start roaring again, they’ll be disciplined themselves by the market.
BFIA: Let’s shift gears a little bit. Foreclosures are still rising. I was driving through a neighborhood the other day, and I counted eight different houses all boarded up due to foreclosures. The banks were supposed to be rewriting these adjustable rate mortgages. They were supposed to be doing things to help homeowners and we don’t see it happening. What is the answer to that? How do we get them to do what they were supposed to be doing in the first place?
Denklau: Obviously, there’s an issue with the bankruptcy laws, and people being able to work through these things is something we really need to consider. Unfortunately, the way foreclosures work, everyone loses. The banks lose because it’s difficult for them to sell. They’re taking a house that probably had a significant loss to what the loan is. Then, obviously, the homeowner is at a serious loss because they’ve lost their equity in the house and their place to live, and it’s very disruptive to their lives…
BFIA: Plus, it brings down property values for the rest of the neighborhood.
Denklau: Absolutely. I think it’s much better to keep people in their homes whenever possible. I totally agree that we should be doing more to help people with that. The issue of how much credit is available right now is a problem. I think we’re all frustrated with that because we saw that all of the money that the government was putting into the financial system to try and stimulate that credit just hasn’t been coming out.
I think we’re in that painful period where we have to realize that we’re over-leveraged, we’ve borrowed too much over the past few years. Now it’s time to take a step back and start saving. Banks need to take a bit less risk which means they’re going to be doing fewer loans in some cases because not as many people will qualify. It’s going to be painful while there is some tightening and a return to sound banking practices….
Thankfully, Congress is also trying to help with tax credits. They have extended the First Time Home Buyer [credit]. They have also come out with a tax credit for people who are upgrading a home. Hopefully, that will help stimulate the market and sales once again.
Check back next Thursday
for Part III
Guy E. Gerhard is a life-long liberal who
has been involved in many progressive causes and campaigns including
civil rights, voting rights, reproductive rights and a woman’s right to
choose, nuclear disarmament (he was arrested with 200 of his closest
friends at the Nevada Nuclear Test Site in Mercury back in the ’80s),
workers’ rights and union organization and civil rights for gays,
lesbians and same-sex couples. He currently is focused on getting Steve
King, the embarrassment of Iowa, out of office. He occasionally blogs
under the pen-name Iowa Guy at swiowaguy.blogspot.com and can
be contacted through Facebook. He lives in Council Bluffs with his
spouse of 16-plus years, two cats and three rather unpleasant little