AlterNet: As Wall Street Collapses, Will Washington Get a Clue?

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As Wall Street Collapses, Will Washington Get a Clue?

By Nomi Prins, AlterNet. Posted September 17, 2008.

The speculative nature of the financial industry is a threat to national economic security. It requires a serious exit strategy.



As the Dow hemorrhages, Wall Street firms are betting on which one will bite the dust next, and Federal Reserve Chairman Ben Bernanke probably wishes he could leave as the next administration sets up shop, no one is proposing the long-term solution to the banking crisis: regulating the industry.

The Fed was right to turn Lehman Brothers away from its window during those final moments of doom on Sunday night. As such, the resulting $613 billion Chapter 11 filing, the largest bankruptcy in U.S. history (WorldCom dropped to second with a mere $104 billion in assets) was secured.

It was wrong to back the $30 billion bailout of Bear Stearns in March, which facilitated JPM Chase's acquisition of Bear. It should not be the Fed's responsibility, or the government's, to back investment bank speculation. Instead, regulators should have been more vigilant as speculation outpaced available capital, and transparent quantification of risk went out the window.

However, it should be the government's job to stabilize the financial system; the question is how. Unfortunately, neither the Federal Reserve, nor the government, nor the presidential candidates have the slightest clue. Neither a blame game nor desperate piecemeal fixes will work. This is not about Republican or Democratic policies, but systemic bipartisan deregulation. Only a quick bout of sweeping and decisive regulation can fix what's broken.

In 1932, three years after the 1929 stock market crash, the banking system last stood at a brink of implosion. Franklin Delano Roosevelt zoomed past Herbert Hoover into the White House. The country was struggling through a Great Depression unleashed by the forces of unregulated economic greed. FDR stood up to the unrestrained power of Wall Street and contained it. The resultant New Deal included a stoplight at the heavy intersection of financial capital and unregulated greed, called the Glass-Steagall Act of 1933. ......(more)

The complete piece is at: http://www.alternet.org/workplace/98914/as_wall_street_collapses%2C_will_washington_get_a_clue/