Deficits, Dollar, Dubiously Free Trade, Federal Reserve, Game Theory, Individual v. Collective, Live and Learn, Treasury, Trust

Open Letter on Financial Reform

By Jim Boswell, author of Crush Depth Alert

A few days ago a friend of mine asked me what I would say in an open letter to a group of Independents if they asked me what I thought of the financial reform bill that is currently being considered in Washington. The following is my open letter response to those Independents:

Dear Friend,

Financial reform is needed very badly, but the financial reform bill that is being considered in Washington at the moment is not good. The current financial reform bill as proposed will not fix the financial systems of this country. Never, ever. To fix the financial systems of this country much more drastic changes need to be made than those that are being proposed.

Recently, I had an article published in Business Insider that explains how the Federal Reserve, Fannie Mae, and Freddie Mac mismanaged long-term interest rates for a period that goes all the way back to the early 1980s.

What the Federal Reserve did and what they allowed Fannie Mae and Freddie Mac to do over the past thirty years went against financial theory. What the Fed allowed was a setting of mortgage rates much, much higher than they should have been back in the early 1980s, which then led to a period where the people of the United States were able to live off newly created debt year after year as a result of the sanctioned refinancing, refinancing, and more refinancing of our American homes.

All the time that this was happening, Fannie Mae and Freddie Mac grew “fat” off of our debt. The more debt that Fannie and Freddie could create, the more money Fannie and Freddie made. Don’t fool yourself. Fannie Mae and Freddie Mac were Government Sponsored Enterprises (GSEs) and not true business enterprises. And as such, with the protective shield of the government implied behind them, the executives of those agencies managed to pay themselves grandly while building up the long-term debt of our country. In truth, Fannie Mae and Freddie Mac did not answer to the people of the United States; they answered to their stockholders. And it was solely because of that fact that we are living through the greatest recession since the Great Depression.

Yet, guess what? There is not a single thing in the current financial reform bill dealing with the issue of Fannie Mae, Freddie Mac, or even the Fed (at least in the proper way).

Now it is time to get blunt. The current Federal Reserve Chairman should resign his post, and so should the current Secretary of the Treasury. And along with that as a given, the Democrats and/or the Republicans need to replace both Chris Dodd and Barney Frank from their central positions as it relates to governmental finance. In fact, all the financial leadership positions in Congress need to be reconsidered.

Over the last thirty years the United States financial system failed the people of the United States of America and the world.

Historically speaking, if there is one thing we should never forget: it is that freedom, innovation, and business is what made the United States of America strong, and it will be freedom, innovation, and business in the United States that will continue to make the United States strong in the future.

Related to that philosophy, I was recently asked by another friend to comment on the recent G20 meetings. Now I would like to share with you my own “independent” reading of the world’s (G20) situation. Here is how I responded to my friend:

“Everyone at the G20 seems to want to get their debt spending down. I think that is a noble objective. I even think that our own Fed guys (Bernanke) and Treasury (Geithner) are working towards that same solution themselves. The trouble is: there is no reason for delay. The solution to the problem is already known. It is the establishment of a fixed, steady 4.0% long-term interest rate for the United States. If you did that, all the other currencies of the world would be able to set their debt currencies against that. And do you know what? A 4.0% long-term fixed rate in the United States is just about as low as you can go and still leave room to avoid both “inflationary” or “deflationary” spikes.

I’m beginning to think we have the wrong people going to the G20 meetings. Over time, and especially through this most recent crisis, I have come to realize how business represents the strength of the United States of America. The stronger our businesses are the stronger our country is. I have also come to understand that it’s in our form of freedom-loving government in the United States of America that business best prospers, which then led me to believe that businesses in the United States of America will always have an advantage over businesses coming from other governmental forms.

However, through my analysis, I have also come to realize that part of business as I define business (both in a macro and micro scale) is tied to finance (or economics) in some form or another. And having looked at it in that manner, I have also come to the conclusion that finance (economics) is in place to serve (rather than direct) business and thus the general welfare of the people.

Now considering contemporary times, based upon what the Fed did and allowed Fannie/Freddie to do, all I can say is this–finance did a very, very poor job of helping business and the people of the United States and the world these last thirty years. In fact, finance, by itself, nearly toppled all of the world’s economies and businesses in 2008, and I think we all know what that might have meant.

Change needs to take place! But the current financial reform bill does not change a thing. And for that reason, I believe the current Fed chairman and the current Secretary of the Treasury need to resign their positions. I also believe that both the Republican and Democratic parties need to quickly find new replacements for the likes of Barney Frank and Christopher Dodd.

The United States of America needs a “new world (globalnomic)” economist at the Fed. The United States of America needs a “new world (globalnomic)” economist at the Treasury. Our global community is advancing quickly, and it is important that the “greatest society of all the world’s great societies” grows at least as fast as those who count on us to lead.

Putting that in practical terms–the longer it takes us to make the necessary changes at the top so we can implement “real financial reform”, the longer all of those newly unemployed people we have in the United States are going to stay unemployed. And the longer it is going to take the world to work itself out of our current economic crisis.”

Note from SwiftEconomics.com founder, Ryan Swift:

If any of Jim’s proposals resonate with you, please contact me. Let’s work together to address the problems in our economic system. It is on us to create a sustainable and vibrant US economy. The powers at be have let us down. Based on their “solutions” to health care, mortgage debt/housing, public debt, and the financial system, I wouldn’t expect that to change.

Jim Boswell has an M.B.A. degree from The Wharton School (University of Pennsylvania), an M.P.A. from School of Public and Environmental Affairs (Indiana University), and a B.A. degree from Hanover College. His recently published book, Crush Depth Alert, Fourth Lloyd Productions, explains in detail with supporting exhibits, graphs, and tables the factors that led up to the recent financial crisis while offering solutions on how to move forward. This is a follow-up to an earlier BusinessInsider.com article (June 24, 2010) by Boswell called “How 25 Years of Mismanagement at Fannie and Freddie Caused The Financial Crisis”.

You can purchase Crush Depth Alert here.

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