where academia meets practice in business education

Are you clinging to the hope that the 2008/09 crash of the global economy was the last one that we’ll experience in our lifetimes? Do you believe that our political leaders learned much from the events that almost destroyed the world’s financial system?

If you remain optimistic about our economic future, you might wish to ponder legislation that was approved by the United States Congress last week. Legislators easily passed a bipartisan federal budget that funded the operating activities of the United States and avoided any possibility of another imminent government shutdown.

That sounds very promising, doesn’t it? After all, any bipartisan activity in Washington can be a cause for celebration. And any budget process that avoids a federal government shutdown can represent a step in the right direction.

But before you permit yourself to feel optimistic about the future, you might wish to read the “fine print” of the budget bill. If you do, you’ll notice that an important component of regulatory oversight, one that was instituted by the Dodd Frank Act just a short time ago to prevent a future government bail-out of the “too big to fail” banks, is being dismantled.

Lobbyists from the global bank Citigroup reportedly helped write the provision that repeals restrictions on the riskiest investment activities of federally insured banks. On a go-forward basis, the new law “will allow banks covered by the Federal Deposit Insurance Corporation to directly engage in derivatives trading.”

In other words, as a result of this law, the world’s largest American banks will again be empowered to trade in the very derivatives that Warren Buffet once called “financial weapons of mass destruction.” And the institutions that engage in these trades will retain the benefit of insurance coverage by the taxpayer supported FDIC.

Will this new law encourage riskier behavior by America’s banking giants? And will it again create the very conditions that might lead to the next global economic collapse? The sudden roll-back of the derivative regulations that were first passed only four years ago makes it difficult to be optimistic about the future stability of the global financial system.

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