Peter Singer: Mega-banks and the next financial crisis

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http://online.wsj.com/article/SB10001424052748703899704576204594093772576.html?m od=WSJ_Opinion_LEADTop

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He specifically targets the Fed's "unprecedented" policy of sustaining near-zero interest rates and its exercise in money-printing, "Quantitative Easing 2," that has it buying medium- and longer-term securities from the Treasury. "In effect they're treating confidence in fiat money—in paper money—as inexhaustible, that it's a tool that's able to be used not just in the throes of crisis," but also as "a virtually complete substitute for sound fiscal, regulatory and taxing policy."


Fed officials, he adds, "really seem to think that inflation is something they can deal with very easily and very quickly. I don't believe they're right." He notes that, in the late 1970s, inflation was only in the high single digits yet curing it required interest rates of 20% and a collapse of the bond market.

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Mr. Singer further warns that investors shouldn't misinterpret apparently bullish signals from a rising market. "Of course printing money is going to support asset prices," but "it's very dangerous" and is not a substitute for trade, tax and regulatory reforms that make America an attractive place for job creation.

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"Dodd-Frank has made the system more brittle and has shaped the next crisis in a very negative way," he warns. "The opacity of financial institution financial statements has not been addressed or changed at all. . . . We have a very large analytical research effort here and we have not found anybody that can parse" the sensitivity of big banks to changes in interest rates, asset prices and the like. "You can't do it."


Even after the crisis, credit ratings "obviously provide no real clue," he says. "Rumor and feeling is all you have. You don't know the financial condition of [Citigroup], JPMorgan, Bank of America, any of them." Mr. Singer believes the big banks still carry too much leverage, and he doesn't trust regulators to monitor them effectively.


The largest financial institutions, he says, are "a random collection of survivors. Almost none of the survivors exist because of their perspicacity, risk controls and sound management—even the ones that are vaunted along those lines. . . . How and why do they exist? Mostly an accident, meaning who got bailed out first and who was saved next and how did peoplle feel and what did people say the weekend Merrill was under pressure [in September 2008]."