Investment banks cannot self-regulate. Their business model is founded on endless want and greed–add more leverage is the tried and true recipe for their eye-popping bonuses. They cannot help themselves. Careful, clear and enforced regulation in this area is the only way to hold the integrity of the global financial system together. But we already knew this. This was the reason that the government enacted Glass Steagall to separate investment banks from banking in the clean up after the great financial crash and depression in the early 30’s. This recent Economist article captures precisely where we are at today: Banks are safe, say banks.
Bank leaders are telling politicians all over the world, that we cannot admit that there are too many debts now to be repaid. They say if we admit the truth the financial system will implode. But the system is already broken. The bad choices that led us here have been made over the past 20 years; the truth is already out of the bag. It is time for the adults in the room to stop pretending and start fixing the system.
A key part of the process will be to hold hearings cross-examining all the top bankers, their cronies and accomplices. We must get all the hideous details out in the open in a sustained and comprehensive fashion. Only then will the politicians and regulators be embarrassed into doing the right thing at last. The failure to understand and accomplish this routing out process has been the greatest failure of Obama and his government. Not only did he not do the right thing here, he actually continued to perpetrate the damage by promoting some of the key culprits into his inner circle and rewarding them handsomely ever since. I believe that history will judge him very harshly for this failure.
For those who think it is hopeless and that the truth will never be acknowledged, I think the history of the Pecora Commission and its bank hearings in the 1930’s is key to review. For more see this excellent article by Joe Nocera in the NYT: The Banking Miracle.