Home >> History, Ideology & Science >> Globalization

     Email   Print 

The Great Recession: Plus ca change ...

Sam Vaknin, Ph.D. - 1/26/2010

Two years later, many of the problems and imbalances that gave rise to the Great Recession are still with us and, owing to the might of special interest groups and Wall Street, are unlikely to be effectively tackled. This - coupled with the rampant mismanagement of public finances - virtually guarantee a second leg of this financial crisis in 2010.

Here is a partial list:

Synthetic collateralized debt obligations (structures of credit default swaps that yield streams of income identical to payments from pools of profile-specific mortgages) have not been banned or limited to the value of the underlying loans. Thus, leveraged, non-productive "wealth" is still being conjured out of thin air;

Naked short-selling and naked credit default swaps (writing or buying credit default swaps on securities not owned by the seller or buyer) are still allowed;

Brokerage firms and investment banks are still permitted to bet against securities held in their clients' portfolios (often placed there by the very same "financial experts" and "investment advisors");

Profits in the financial system are still siphoned off into huge bonus pools rather than augment balance sheets, capital ratios, and repay the bailout money forked out by taxpayers;

Bank deposits insured by the FDIC are still intermingled with and used in derivatives trading and investments in risky assets, such as equities and corporate bonds;

Accounting rules still allow the booking of profits on hedged investments, regardless of counterparty risk (frequently the result of wrong-way risk: when the insurer is as likely to be as damaged by the insurance event as the investor) and systemic or liquidity hazards (market failures);

Compensation in the financial sector is still divorced from long-term performance. This creates moral hazard and agent-principal conflicts.