The Threat of Socialism

While the precise measures for regulation are still being debated, one of the foremost considerations in the United States appears to be the participation of banks in the interests of hedge funds and private equity consortiums. Clearly outside the traditional activity of a bank, these devices offer commercial banks the opportunity to generate revenue and hedge exposure in a manner not available elsewhere. Particularly when competition within the market is stiff, maximization of returns to shareholders is of paramount concern, and any diligent commercial lender will seek to diversify with such a strategy.

If these activities cause a contraction in the mortgage market, or if they restrict liquidity by jeopardizing the integrity of the financial system, and precipitate further distressed property, they will surely be outlawed, for this is precisely the mischief to be cured as revealed by the events of 2008. America reveres the prospect of homeownership that is supported by transparent and efficient financial systems.
More plainly, the right to form a corporate association will also continue to be given respect in the US, along with the accountability of a bank to shareholders. It is merely the involvement in exotic financial products such as credit default swaps, undocumented securitization of mortgages, and other off balance sheet transactions that is sought to be averted.

Of ancillary interest is an attack on the motivation for the appropriation of such high risk activities. It has been widely suggested that this stems from an over developed notion of incentive based remuneration for upper management an executives. Particularly after the scandalous conduct of Bernard Madoff, issues such as these will be given full airing as a matter of policy.
As recently as 2009, the banks that were fortunate enough to avail themselves of the bailout packages offered by the US Federal Government chose to repay the government in a timely fashion and avoid the contingency of enduring State ownership. Having discharged all their obligations to the American tax payer, the now financially recovered institutions resumed the exorbitant bonuses and remuneration of pre-2008, in the face of an enduring recessionary climate and in the face of hundreds of thousands of homeowner’s desperately staving off unemployment and foreclosure by means such as the commercial short sale.
Some would say that this facet of the regulatory issue is ill placed and one more conducive to corporate law. That the premise of vetoing a shareholder’s right to approve executive remuneration is incongruent with capitalism will be a poignant issue for the legislature to consider. With the efforts of the Cold War but a memory in the mind of a generation of US citizens, it makes little sense to retrace the progress made by the western economical model, in favor of one tainted with socialism.

To many who oppose universal health care in the United States, the imposition of limits on the remuneration of corporate executives will be easy to vote down. At very least, Republicans in Congress will find it difficult to justify. The consummate Democrat, President Obama has voiced an intention to make headway in this direction, and Barney Frank, Chairman of the US House Financial Services Committee, has recently entered into discussion with leaders within the European Union.

Posted by Arnold Balthazaar on Jun 16 2010. Filed under Economic Updates, Financial Institutions, Government. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry