The 2010 election season is under way and, as usual, the fate of the federal Social Security system is part of the political debate. College of Arts and Sciences economics Professor Laurence Kotlikoff, author of “Jimmy Stewart is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking,” says as the Social Security program marks its 75th anniversary, it’s time to rebuild it into “Personal Security System” retaining the 1930s-vintage system’s best features, scrapping the rest, and covering its costs. Continuing Social Security without change, he writes in a Bloomberg commentary, amounts to “fiscal child abuse.”
“Our nation is in terribly hot water. Business as usual is no answer. The only way to move ahead is to radically reform our retirement, tax, health-care and financial institutions to achieve much more for a lot less. The Personal Security System is a major step in that direction. It meets all the legitimate goals of Social Security without the system’s waste and penchant for robbing the young.”
Contact Laurence Kotlikoff, 617-353-4002, firstname.lastname@example.org
As the Senate is poised this week to vote on the House-passed compromise bill reforming the financial regulatory system, Law Professor Tamar Frankel, an authority on securities law and author of “Trust and Honesty: America’s Business Culture at a Crossroad,” speculates about the future of derivatives trading once the reform act is enacted. More important than regulating the trading of derivatives, the instruments that helped bring down the financial system in 2008, Frankel feels that citizens should turn away from the “medicine men” (and women) who created the risky bets.
“Unless the geniuses who created the enormously risky ‘risk reducers’ and those who sold them take part of what they sell, and never again bet against what they have created and sold, we will continue to have the enlightened age of a sophisticated financial system — unemployment, enormous national debt, and the death of the middle class that used to be America’s backbone.”
Contact Tamar Frankely, 617-353-3773, email@example.com
The Group of 20 industrialized nations wrapped up their meeting in Toronto promising to have their government deficits by 2013 and “stabilize” debt loads by 2016, signaling to domestic political audiences and international markets that they’re serious about reducing stimulus spending. But economics Professor Laurence Kotlikoff, author of “Jimmy Stewart is Dead” about the future of the banking industry, says the G-20 missed the mark by not focusing on the critical future problems of paying pensions and health care benefits.
“Had the G-20 agreed to do long-term fiscal gap accounting and to develop policies that eliminated those fiscal gaps, it would have done something real. What’s it’s really done is agreed to delay making the critical policy changes needed to avoid insolvency.”
Contact Laurence Kotlikoff, 617-353-4002, firstname.lastname@example.org
The Congressionally sponsored bipartisan Financial Crisis Inquiry Commission now has cast its eyes on the credit-rating agencies and the impact they may have had on the Great Crash of 2008. Law Professor Elizabeth Nowicki, a veteran attorney from both Wall Street and the Securities and Exchange Commission, says the agencies are both hopelessly plagued by conflicts and in a position to undermine the very stability of the capital markets.
Nowicki: “Today’s hearings, then, will serve only as a political tool to emphasize the need for a dramatic response to the financial crisis.”
Meantime, School of Management master lecturer Mark Williams, a former Federal Reserve Bank examiner and author of “Uncontrolled Risk” about the fall of Lehman Brothers, says that while the rating agencies weren’t the main cause of the credit crisis, but they left the gate open and let the market and its participants behave in a more destructive manner.
Williams: “Meaningful financial reform will require that rating firms devise compensation plans that reward for high rating standards and provide penalties for intentional ratings manipulation.”
Treasury Secretary Timothy Geithner is visiting with his European counterparts to say that the U.S. and Europe broadly agree on the need to reform the financial system but that global cooperation is needed. Law Professor Cornelius Hurley, director of the Morin Center for Banking and Financial Law and a former counsel to the Federal Reserve Board of Governors, says Geithner should be doing less lecturing and more listening in Europe in that the U.S. right now has only a “deeply flawed” legislative proposal to show as its response to the financial crisis.
“The better posture for the U.S. to strike on the international stage would be a willingness to cooperate with ongoing reform initiatives by the G-20, the Financial Stability Board, and others.”
Contact Cornelius Hurley, 617-353-5427, email@example.com
Because no one followed suit, Germany’s unlateral ban on “naked” short selling of European government bonds – speculative bets that prices will fall on borrowed assets which then can be sold back to the lender with the speculator pocketing the difference –rocked global markets. Mark Williams, who teaches finance at the BU School of Management and is author of “Uncontrolled Risk” about the lessons to be learned from the fall of Lehman Brothers, says this shows that systemic risk remains high in our global financial market.
“Short sellers are a symptom not the cause of our fragile financial system. The action that will be most effective is coordinated efforts by G-20 powers to enact a global financial reform. Efforts being made in the U.S. will not solve the systemic risk that Greece has reminded us still exists.”
Contact Mark Williams, 617-358-2789, firstname.lastname@example.org
Acknowledging the political risk of appearing to stall a popular cause, Senate Republicans voted to delay the start of floor debate on the financial regulatory reform bill — at least without some concessions first. Experts from three BU schools — Law Professor Cornelius Hurley, Mark Williams, who teaches finance at the School of Management, and political science Professor Graham Wilson – each sees the reform fight from a different perspective.
Hurley: “By using the balance sheet of the U.S. Treasury and the Fed, the ‘too big to fail’ banks have captured the derivatives market. Separating these banks from their risky derivatives activities will protect the U.S. taxpayer from further abuse.”
Williams: “Without meaningful financial reform, another Lehman-type disaster is only a matter of time. Given what is at risk, it is time for our politicians to realize that they are in the risk-management business and need to act.”
Wilson: “Politically this is all about appearances – who is seen as dragging their feet, representing Wall Street not Main Street or alternatively, not listening to other people’s ideas.”
With efforts to regulate the trading of derivatives stalling in the Senate Banking Committee, members of the Senate Agriculture Comittee are taking a stab at it, hoping to add it to an 0verall financial reform bill the banking panel is crafting. Law Professor Elizabeth Nowicki, both a former SEC attorney and Wall Street lawyer, says unregulated derivatives trading crashed the economy and regulating them is the only way back.
“If Obama truly wants to fix the economy, he needs to make derivatives his priority. Derivatives are truly the Tonya Harding of the economy.”
Contact Elizabeth Nowicki, 617-353-2807, email@example.com
The Obama administration announced a new strategy to fight home foreclosure, including requiring lenders to cut or eliminate monthly mortgage payments for many jobless homeowners. School of Management Finance & Economics Department chair Professor Jack Aber says some borrowers may unfairly benefit at the expense of others, but breaking the impass still makes sense.
“Purging these underwater loans out of the financial system will reduce uncertainty and ultimately strengthen the financial condition of lending institutions.”
Contact Jack Aber, 617-353-4404, firstname.lastname@example.org