Posted on Sun, Nov. 08, 2009

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Prevent another financial debacle

The usual indicators of economic well-being remain on a roller coaster. Any hopes raised by the third quarter’s 3.5æpercent growth dipped with Friday’s news of the

10.2æpercent unemployment rate in October — the nation’s 22nd-straight month of job losses and the first time the rate has reached double digits since 1983.

Obama administration officials had to flinch at the number, having forecast early this year that the jobless rate would peak at 8æpercent before decreasing this fall.

But Obama bashers are foolish to believe that things would be better if Congress and the Bush and Obama administrations had done nothing to rescue the financial system and the economy. For all their problems, the bailouts and stimulus packages may have staved off not just a U.S. depression but a global one.

In the coming weeks, all eyes will be on consumers and their willingness to spend their way through the holidays.

At least the slowness of the recovery offers some time for reflection and action aimed at keeping this debacle from happening again.

As Sheila Bair, the chairwoman of the Federal Deposit Insurance Corp. and an Independence native, said last week in a Kansas State University lecture excerpted on the next page, meaningful reforms are needed to give the nation “a resilient, transparent and better-regulated financial system — one that combines stronger and more effective regulation with market discipline.”

Getting from here to there will be even harder than it sounds, as lawmakers need to increase oversight and regulation without going too far and stifling innovation and overly restricting credit. Congress at least appears on the right track in seeking ways to ensure that investment banks share more risk and costs going forward, and in trying to keep them from having undue influence over investment-rating agencies.

A five-month McClatchy Newspapers investigation, revealed in a series of stories published in The Eagle, illustrated how cynical, corrupt and perhaps criminal the players in the financial system can be when it comes to serving their own interests above all others.

For example, according to McClatchy, investment bank Goldman Sachs promoted billions of dollars worth of subprime mortgage-backed securities in 2006 and 2007 as it secretly bet that those products were doomed. After having hedged against a housing downturn and shifted much of its risk onto pension funds, insurance companies, unions and other investors, Goldman Sachs then received enough in direct and indirect federal bailout funds via its many friends in Washington, D.C., to return to profitability quickly.

McClatchy also reported that Moody’s Investors Service compromised the integrity of its investment ratings by favoring analysts willing to promote risky products and by punishing those who warned of trouble.

A company ought to see the harm in peddling financial products while wagering that the value of those products will plummet. And investment analysts must not let potential profits weaken their scrutiny or cloud their judgment.

In case financial firms can’t or won’t avoid such appalling practices in the future, the nation needs a responsible regulatory system to step in on behalf of the economy, taxpayers and common sense.

— For the editorial board, Rhonda Holman

— For the editorial board, Rhonda Holman

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