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An assessment of the Financial Regulatory Reform that is emerging in House and Senate Bills. Yes reforms will be passed but will they prevent another crisis and are they tackling the root causes of the financial crisis. The assessment here is that they fail on both accounts. According to Christopher Whalen of the Institutional Risk Analyst it tackles the symptoms more than it responds to the causes of the crisis. He sees the response in the areas of derivatives trading, credit ratings agencies, consumer proteciton agency, as inadequate to meet a future crisis.

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Nouriel Roubini on what the Fed needs to do in the closing months of 2009 and in 2010, especially for the exit strategy on the massive monetary easing of 2009, supervising banks and financial institutions and requiring adequate capital at banks to cover crisis needs. See the actions by the FSA in Britian to require larger capital cushions for banks.

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Systemic risks from "too big to fail" and the pushback on capital reserve requirements that leave banks with lower reserves. Ewing describes the role of the president of the Swiss Central Bank, Mr Hildebrand, in setting rules for higher capital reserves for Swiss banks than that of other countries and the pushback from the banks resisting the new regulations. "He will never find another job in Switzerland," a Swiss newspaper Der Sonntag quoted one banker saying this about Mr. Hildebrand. Losses at Swiss bank UBS during the financial crisis and the $2 billion loss at a UBS trading desk in 2011 have created a new awareness of systemic risk at banks. During the financial crisis banks used an optimistic estimate of "risk weighted assets" which led to insufficient capital reserves in a crisis even as the banks were shown to be well capitalized. A sense that banks in Europe and the U.S. will continue to have insufficient capital reserves at 3-4% of assets under new rules and with the longer phase in times for the new Basel III regulations of reserves at 7% of assets to after 2016....

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Under the Volcker Rule setup during the global financial crisis of 2008-2009, banks total investments in private equity, hedge funds and similar higher risk funds cannot exceed 3% of high quality capital. During the financial crisis investment banks were highly leveraged leading to the collapse of Bear Stearns and Lehman Brothers, and the precarious financial condition of other banks. Goldman has pared down about 60% of such investments. Remaining are $4.8 billion in private equity investments, $1.2 billion in real estate, and about $1.1 billion in both credit and hedge funds. Regulators have given the bank till July 2017 to comply. As banks recovered from the impact of the crisis, the tearing of the social fabric that happened with high unemployment in some groups especially older white men, has remained six years after the crisis- as evident in the U.S. election campaigns this year. As a result the mood has shifted for tighter regulation and both party platforms, Republican and Democratic, now call for reinstatement of the Glass Steagall Act, which separated commercial banking from investment banking as part of the lessons learned from the Great Depression. Volcker, was chairman of the U.S. Federal Reserve during the Carter administration, known for taking a tough line against inflation. He was the principal driver of the move to restrict banks from risky activity, and faced considerable opposition from banks during the 2009-2013 period when the rule was being formulated.  ...

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The Basel 3 Rules and the extra capital cushions required by 2019, will double the amount of core equity a big bank holds as a proportion of assets. This is happening earlier because markets are making banks increase their capital cushions. But more needs to be done to make "too big to fail" banks in the U.S. and Europe safer, says the Economist in a May 2011 special report on international banking. An independent commission in Britain has suggested an additional equity buffer of 3%. The Economist says the Basel committee should consider similiar rules for the largest banks. Another proposal is being considered by Swiss regulators who want to see their banks holding the equivalent of 9% of their risk weighted assets in convertible capital. This kind of buffer is considered essential to prevent the kind of sudden collapse of the global financial system that was seen in late 2008.

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In a conversation before an audience at the IMF on May 6, 2015, U.S. Federal Reserve chairwoman, Janet Yellen, says about stock market valuations in early 2015- "I would highlight that equity market valuations at this point are generally quite high. Not so high when you compare returns on equity to returns on safe assets like bonds, which are also very low, but there are potential dangers there." She was responding to a question from IMF Managing Director Christine Lagarde on whether the Fed's low rate policies were creating a bubble in financial markets. S&P 500 company earnings for the 1st quarter- with 417 companies having reported results- show earnings growth of 0.2%, according to FactSet. The Dow Jones Average is up 0.1%, and the S&P 500 up 1%, for the year. Yellen said about financial stability- "Risks to financial stability are moderated, not elevated at this point. There was a great deal we missed before the crisis, I believe we are better prepared." The preparation includes the stress tests and higher capital requirements being set by the Fed to ensure banks can cope with losses, and the living wills arrangement for too-big-to-fail companies. Yellen conveyed her own sense of the proper role of the financial sector and the role of the Federal Reserve in promoting that role for social, economic and technological progress, in a clear and insightful manner- " A well-functioning financial sector promotes job creation, innovation and inclusive economic growth. But when the incentives facing financial firms are distorted, these firms may act in ways that can harm society. Appropriate regulation, coupled with vigilant supervision, is essential to address these issues."...

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Of 21 reader comments to this piece on banker pay, all except for 4-5, were very critical of the bankers behaviour, including many of their colleagues in the financial industry who commented. The lack of any response from the FSA on the grounds that its not the FSA's job, or from the Treasury, is disconcerting. Treasury is said to have not said a word, when RBS hired a head trader for a rumored 7 million pounds. All this coming on the heels of the RBS and Lloyds debacle, makes the Labor government open to attack from the Conservatives under Osborne and Cameron. and from Mervyn King of the Bank of England. They have expressed strong disapproval of the busines as usual attitude of bankers.

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Paul Peterson, a professor who heads the Program on Education Policy at Harvard, says that public school education has not done as well as private or charter school education. In two areas character or values, and school discipline, public schools lag far behind private schools or charter schools. Private schools score 59% and 46% in these two areas, public schools lag far behind at 21% and 17%, in the 2016 Education Next Survey, says Peterson. He says by appointing Betsy DeVos as Education Secretary, the Trump administration sees the need to think how public schools can benefit from improvement in these areas.

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The large response triggered on the internet by Anne-Marie Slaughter's article in the July/August 2012 issue of the Atlantic on women and work, how it is difficult for women to work and raise children without making changes in today's American society so that a healthy balance can be achieved.

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Mervyn King, Governor of the Bank of England, wants to see stricter requirements than Basel III on capital reserves for U.K. banks. The Bank of England has expressed its strong disapproval of UK banks lobbying activities in Brussels to push for a dilution in Basel III standards. The British government and the Bank of England want to have the flexibility to set their own stricter standards and not to be bound by a relaxed standard set by the EU. The risk to British taxpayers is a principal concern. In the U.S. Fed governor Daniel Tarullo is pushing for capital reserve requirements stricter than Basel III's 7% requirement- calling for a requirement of 10-14%.

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Five rules the editors of the WSJ say should be followed when working on cleaning up the banking system. A clear no, as Krugman and other experts point out is for the government to make the rather imprudent move to take on all the debts of the banks as in Ireland. A second rule is not to underestimate the size of the problem and delay action till the problem gets much worse, when its harder to deal with. ECB president, Mario Draghi, pointed out the problem at Spain's handling of Bankia bank as a clear example, telling the European parliament recently: "There is a first assessment, then a second, a third, a fourth. This is the worst possible wayof doing things. Everyone ends up doing the right thing, but at the highest cost." A third rule is to set clear rules about banks, who gets rescued and who gets closed and why- so that its not left upto the discretion of officials. On this rule Spain's outgoing Zapatero administration gets good marks from WSJ for settting clear rules to the cajas svings banks. A fourth rule applicable to Europe is to first setup the expertise and conditions for a European banking regulator before setting up a banking union and direct injection of funds by the EFSF into banks of individual countries. A fifth rule is to avoid creating even larger mega banks by consolidating failing banks with large banks, and continuing the government's implicit guarantee of the bank because it is "too big to fail" and creates systemic risk- this is the situation after action by the U.S. Federal Reserve, regulators and the U.S. Treasury....

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Janet Yellen, Fed chairwoman, says the financial system is safer now after the financial regulation, stress testing, living wills and other changes that the Federal Reserve has implemented. She says there is no need for a reduction in these key regulatory rules. One of the changes is that banks now use a safer mix of financing- equity financing has doubled for capital, and wholesale borrowing is cut in half, since the 2008 financial crisis that took the U.S. and with it the global financial system to the brink of disaster. The appointment of Randall Quarles to the Fed by the Trump administration was intended to  reduce regulation, and this is Yellen's response to such proposed ideas. 

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Nelson Schwartz of the NYT looks at the town of Neenah, Wisconsin, a year after the election in Wisconsin, Michigan, Pennsylvania with 80,000 votes swinging the other way from blue to red handing the election to Mr. Trump. The pressures are still there with cheaper imports, paper mills about to close, and workers still struggling to keep the same lifestyle as their parents. Even with low unemployment of about 3% in Wisconsin, with the slow increase in wages and corporate pressures for profits, trade wars, the sense is that the problems of the American middle class are still just as deep.

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The FDIC with help from the Treasury would bail out the creditors and the counter parties in the event a large financial institution fails. And then the FDIC would collect the money from some 120 banks. This is the idea behind a Geithner- Rep. Frank proposal. But critics point are skeptical whether the FDIC can collect the money from banks, which would be too weak themselves in a financial crisis. One critic said it allows the government to spend another $1 trillion to bailout banks, and then perhaps in one year or a hundred years collect that money back.

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Browning points out the record Dow Jones Industrial Average (DJIA) average was not in 2007 but in 2000 when adjusted for inflation- on Jan 14, 2000. Since 1994 consumer prices measured by the Bureau of Labor Statistics have risen by 55%. Using 1994 dollars the March 5, 2013 closing DJIA average is at 9256, the 2007 high at 10194, and the record on Jan 14, 2000 at 10424, according to calculations made by Bespoke Investment Group. In inflation adjusted terms these calculations show the Dow barely making any progress in relation to the 2000 figure. When dividends and taxes are included, Browning says the inflation adjusted Dow is still not back up to the 2000 level. For retirees and sensible investors the real value of this money has to be taken account. Yale University professor, who founded the CAPE cyclically adjusted P/E, confirms what Browning says in an article in the WSJ March 10, 2013. There Shiller says that the inflation adjusted S&P 500 index has not made it to the 2000 level, so that investors have not made up for money lost in inflation in 13 years....

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Krugman says earlier profits at Citigroup and BofA were a figment of the accountants imagination. Both announced losses for the third quarter. He says the moment for radical action for banks has passed but now its all upto luck that even as the banks are not lending job growth can be supported. Beyond that there is he says a desperate need for financial reforms.

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This Wall Street Journal editorial comes out in favor of higher capital reserve requirements similiar to that suggested by Federal Reserve Board governor Daniel Tarullo. The Journal says that if regulators are serious in the U.S. about controlling systemic risk, then the 14% rule or a 15% rule for assets held in reserve by banks should be adopted. Daniel Tarullo had suggested a 14% capital reserve requirement. These requirements would be phased in gradually over several years. Basel III requirements require only a 7% requirement and is phased in over many years. Capital standards are likely to be gamed. For this reason the requirement for only Tier 1 capital to be eligible is essential. What about the Basel III standards and the European banks? Would this put them in a better position to earn higher returns. This should be a problem left for European taxpayers to tackle says the Journal. As long as U.S. taxpayers are supporting U.S. banks with an implicit subsidy to take on larger amounts of risk -because they will be saved in a crisis with taxpayer dollars- the Journal says it makes sense to require 10-14% in capital reserves. It cites the Japanese banks which were highly overleveraged with lower capital reserves compared to American banks, and fared poorly. The Dodd-Frank bill imposes a complicated set of regulatory requirements with regulators required to write new sets of rules. The editorial concludes that it is far better to tackle the problems in the banking system with a sufficiently high requirement for capital reserves to manage risks than to have the detailed rule making on every subject that Dodd-Frank suggests....

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Jack Hough points to other important factors that affect the Dow Jones Industrial Averages and the S&P 500 Index. The quality of earnings, the relationship between wages and corporate earnings, and macroeconomic factors, all affect the level of the indexes. The historical average of wages relative to earnings would leave shares at 24 times earnings says Hough. This would mean a further decline of 40%. As U.S. companies earn more of these profits overseas compared to the past, they could sustain a higher level of earnings relative to wages says Hough, but this may not be the level at which they are today. In Hough's view the earnings numbers are made to look better than they actually are, which should be taken into account. He does not mention macroeconomic factors which add to the volatility, and policy decisions which create higher levels of uncertainty affecting decisions on consumption and investment in the economy.