Of Regulation, Risk, Deficits And Austerity.

Democratic Perspective is fortunate to have an outstanding economist in our ranks.  Chuck Williamson is a member of Verde Valley Independent Democrats and the brother of co-host, Stephen Williamson.  He spent his career in the banking industry, much of it as Chief Investment Officer for First Interstate Bank of Oklahoma. He was responsible for $12 billion of investments in a seven-state region both in trust activities and the bank’s own portfolio, which was primarily mortgage-backed securities; the kind that got us all in trouble recently.

But Chuck said, “I was already retired by then, but I will admit to campaigning and lobbying for the repeal of Glass-Steagall for almost my whole career. Of course, at the time, most of these derivatives that caused the problems didn’t even exist so no one thought to regulate them.”

“When we got Glass-Steagall repealed,” he continued, “it meant bank holding companies could buy brokerage firms and vice versa, and so there was a huge consolidation in the business. The whole financial service industry ended up in the form of bank holding companies regulated by the Federal Reserve. The banks themselves were still regulated in a different way through the Comptroller of Currency.”

“It’s not easy for a bank to get into trouble,” said Chuck. “They do sometimes, but most of the problems that occurred in this crisis were at the holding company level which is regulated by the Federal Reserve. Alan Greenspan really didn’t believe in regulations,” he said.

“I was on the side of arguing that case but, of course, in reality it’s nonsense,” Chuck stated. “Recently, one of the largest banks in the country fired the person, who was my counterpart when I was working, who managed the treasury activity of that bank because they took a $2 billion loss.”

“They misunderstood the risk they were taking or, I think there is an easier explanation if it becomes public, she was a profit center,” he said. “It wasn’t about managing risk.  We all had stock options and things that gave us incentives that lasted over years, but the reality is if you didn’t make budget for a couple years in a row, it didn’t matter if you had options because you weren’t working there anymore.”

Of course, bank losses are nothing new. Chuck explained that the Williamson family experienced two previous crashes. Their great-grandfather’s bank went bust in 1893 along with four thousand other banks. “The reason wasn’t that they made bad loans,” said Chuck. “They had panics where people wanted to withdraw their money. No bank can survive that. They make loans; they make investments; they don’t have it.”

In 1909, there was another run on the bank where the Williamson’s grandfather worked. According to Chuck, “The manager… before the bank opened saw a line forming. He took all the empty money bags from the vault and went around to the hardware stores and bought up every washer in Oklahoma City, filled the money bags with washers and had guards arrive with a wagon to unload it. The crowds dispersed and his bank was one of the few that survived the run.”

The story shows how emotionally driven the economy can be. This is true today in the Euro Zone with the Spanish banks. “It’s a run. It’s the same thing,” said Chuck. “People have lost confidence in the banks.”

When reminded that Ron Paul blames the Federal Reserve for the crisis in 2008, Chuck replied, “Without the Fed, we would have seen credit disappear. The banks would have collapsed. There would be no loans. We would be liquidating all the banks. FDIC would have covered small depositors, but that doesn’t help big corporations…without the Fed, this crisis would have been a depression.”

“In Europe, they have a European Central Bank, but each country has its own bank and they don’t have a common strategy. So it’s a very flawed structure that they ended up creating. What’s happened recently, Andrea Merkel in Germany has opposed a lot of the bailouts and limited their size and so on and is following an austerity program. But it hasn’t worked.”

“It’s sort of like the Ryan Budget,” he continued. “If you really cut all the things in the Ryan Budget, we will slip immediately into another recession and if we don’t do anything about the cliff we created; this artificial, nonsensical thing about the tax increases and spending cuts that will go on at year end; if we don’t do anything about it we will absolutely be in a recession next year.”

Could Romney’s business experience make a difference? “He has 17 years of experience with investments at Bain Capital. I have 30 years. Does that make me more qualified?” Chuck asked. “The answer is business experience is almost irrelevant. It’s really getting things done in Washington that matters.”

As for austerity, Chuck said, “People who fully believe that markets have all the answers should realize that we don’t have to deal with deficits now,” he said. “We have the lowest interest rates in my lifetime. The markets are saying, ‘You don’t have a deficit problem today.’”

“What you need is a government that you can understand and predict,” he said.

Finally, he offered his views on healthcare. “I have to say as an economist, one thing I do believe in is supply and demand. And so if you look at the price and supply of medical services, what I would do to control the cost is to increase the supply? Let’s say double the number of positions in medical schools and nursing schools and let the government give scholarships if they’re willing to work in underserved areas for 10 years and so on. If you increase the supply of the medical business, you’ll reduce the costs.”

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