Charles Munger is Warren Buffett’s closest sidekick and a billionaire owner of Berkshire Hathaway stock.  He is a brilliant investor in his own right, and Munger talks on investment are as sought after within the professional investment community as are Buffett’s.

Today on CNBC Maria Bartoromo asked Munger what he thought of derivatives.  She was talking about the type of derivatives that played a leading role in transforming the real estate slump into a global earthshaker.  And most recently got Goldman Sachs charged with fraud by the Securities Exchange Commission (SEC).

Munger was to the point.  “I’d get rid of them.”  He isn’t talking about the traditional methods of hedging risk exposure that preceeded the “innovation” of these toxic derivatives.  Munger isn’t against legitimate hedging of real assets.  He just is against the modern, steroidal, derivatives that were sold as hedging instruments and then totally exploded in a totally illiquid market. 

So count Munger, a Republican and among those who should know, as one experienced professional who realizes that these derivatives, as President Clinton also observed when asked about them, “have no underlying purpose.”

Except to skim off billions in commissions and spread profits by Investment Banks.

Get rid of them.  And if that can’t be accomplished, make them all boilerplate and traded on public exchanges where the traders cannot make outsized profits.  If we do that then IBs will have to return to doing what they’re supposed to do: Raise funds for productive investment opportunities.

There are some US Senators who understand what’s really needed to put our economic ship on a more stable course.

Following is a proposed regulation from four Senators, all Democrats.  The proposed legislation is called SAFE Banking Act of 2010.

April 21, 2010

WASHINGTON D.C. – U.S. Senators Ted Kaufman (D-DE) and Sherrod Brown (D-OH), with Robert P. Casey (D-PA), and Sheldon Whitehouse (D-RI) today announced new legislation that would place reasonable caps on the size of our nation’s behemoth financial institutions. Their bill, The SAFE Banking Act of 2010, would also ensure that banks have the resources to cover their losses. The senators explained why Wall Street reform is needed to hold Wall Street accountable, prevent future bailouts, and protect American homes, jobs, pensions, and businesses.
“We can either limit the size and leverage of  ’too big to fail’ financial institutions now, or we will suffer the economic consequences of their potential failure later. Breaking apart too-big-to-fail banks is the necessary first step in preventing another cycle of boom-bust-and-bailout.  This debate is a test of whether the power of that idea can spread and gain support,” said Kaufman.

“Though it is clearly the safest way to avoid another financial crisis, this idea must overcome tremendous resistance from Wall Street banks and their politically powerful campaigns against structural financial reform,” Kaufman continued. “Moreover, the idea must overcome the inertia and caution in a Congress drawn to easier ideas that may work. But how much should we gamble that they will work? Limiting size and leverage are redundant fail-safe provisions to prevent a dangerous outcome. Senator Brown and I are proposing a complementary idea, not a substitute.”

 
“If we’re going to prevent big banks from putting our entire economy at risk, we need to place sensible size limits on our nation’s behemoth banks. We need to ensure that if banks gamble, they have the resources to cover their losses,” Brown said.

“The SAFE Banking Act prevents megabanks from controlling too much of our nation’s wealth – no one investment bank or financial institution should be able to risk more than three percent of our nation’s gross domestic product and they should have enough money to back up their liabilities,” Brown continued. “This bill would not only prevent bailouts and protect against economic collapse, it will help boost lending to small businesses. We know that the dominance of a few megabanks has virtually frozen lending to small businesses, which account for 64 percent of new jobs.  Having more banks will create competition and increase small business lending so that our economy can grow and unemployed Americans can find jobs.”
 

The nation’s financial system has become dominated by institutions that are not only “too big to fail,” but also, as FDIC Chairman Bill Isaac describes, “too big to manage, and too big to regulate.”  The six largest U.S. banks now have total assets estimated to be in excess of 63 percent of our GDP.  The gigantic size of megabanks, and the perception in the marketplace that they are indeed too big for the government ever to permit them to fail, gives these megabanks a competitive advantage over smaller financial institutions. The lack of competition in the banking industry leads to ever-higher levels of risk in the system.”
 
The financial sector has received nearly $4.6 trillion in taxpayer support since the Wall Street meltdown in 2007-08. That figure represents at least four times what has been spent in the wars in Iraq and Afghanistan since 2001.
 
The SAFE Banking Act of 2010 would limit the size of megabanks by:

• Imposing a strict 10 percent cap on any bank-holding-company’s share of the United States’ total insured deposits;
• Reducing the maximum amount of non-deposit liabilities at financial institutions (to two percent of United States GDP for banks, and three percent of GDP for non-bank institutions);
• Setting into law a six-percent leverage limit for bank holding companies and selected nonbank financial institutions.

The SAFE Banking Act would also help boost lending to small businesses. The dominance of a few megabanks has helped to contribute to a virtual freeze of lending to small businesses, which create approximately 64 percent of new jobs. Over the last year, banks have been decreasing their consumer and small business lending, including Small Business Administration (SBA) loans. The three biggest banks reduced their 7(a)-SBA lending by 86 percent from 2008 to 2009), while increasing their investments in securities by almost 23 percent. Having more banks will create competition and increase small business lending so that our economy can grow.
 
Components of the SAFE Banking Act – particularly size caps – are supported by an ideologically-diverse group of economists. The idea of size caps is supported by Thomas Hoenig, President of the Kansas City Fed; Paul Volcker, former Chairman of the Federal Reserve; Mervyn King, Governor of the Bank of England; Richard Fisher, president of the Dallas Fed; Robert Reich, Secretary of Labor under former President Clinton; and commentator Arnold Kling of the National Review.
 
Brown and Kaufman held a news conference call today with The Main Street Alliance, a consortium of small businesses committed to Wall Street Reform. The Main Street Alliance released a letter <http://brown.senate.gov/imo/media/doc/MSA%20Letter.pdf>  signed by 117 small business owners from 23 states calling on Congress to enact comprehensive financial reform that contains 3 pillars: enacting an independent consumer financial protection agency, ending “too big to fail” banking , and ending proprietary trading.  The letter argues that without these three things, small businesses will continue to be at the mercy of risky Wall Street speculation that destroyed our economy, cost 8 million people their jobs, and forced untold numbers of small businesses into bankruptcy.  
David Borris of the Main Street Alliance said, “We have built our business on a 25 year old foundation of honesty, transparency, and a deep commitment to serving our local community.  Wall Street has broken our trust, and if we don’t take this opportunity to reign in the abusive and reckless practices we will only be sowing the seeds of another crisis.  We, America’s small businesses, who suffer the brunt of these crises, deserve more of our elected representatives.  Stand with us and pass comprehensive financial reform, including an independent consumer financial protection agency.”

When it comes to financial regulatory reform, Senator Ted Kaufman is a breath of fresh air and common sense.   Kaufman replaced Sen. Joe Biden when Biden became Vice President upon the election of President Obama.   He received his undergraduate degree in mechanical engineering at Duke University, and an MBA from Wharton School of the University of Pennsylvania.

The following is the complete text of a speech on regulatory reform Kaufman made on the Senate floor.

U.S. SENATOR TED KAUFMAN
April 19, 2010

Mr. President, as we continue to learn more facts from various investigations into the 2008 financial meltdown, a certain picture is becoming increasingly clear.  Like a jigsaw puzzle slowly taking shape, we can begin to see the outlines of many of the causes of the crisis — and the solutions that they demand.  
 
In my view, it is a picture of Wall Street banks and institutions that have grown too large and complex and that suffer from irreconcilable conflicts between the services they provide for their customers and the transactions they engage in for themselves. It is also a picture of management that either knew about the lack of financial controls and outright fraud at the very core of these institutions — or was grossly incompetent because it did not.  And the picture includes regulators who failed miserably as well, due to malfeasance or incompetence or some combination of the two.
 
Until Congress breaks these gigantic institutions into manageably sized banks and draws hard, clear lines for regulators to ensure that effective controls remain in place, we will have done neither that which is necessary to restore the rule of law on Wall Street nor that which will ensure that another financial crisis does not soon happen again.
 
What have we learned in just the past five weeks?  On March 15th, I came to the Senate floor to discuss the Bankruptcy Examiner’s report on Lehman Brothers and said — as many of us have suspected all along — that there was fraud at the heart of the financial crisis.  The examiner’s report exposed the use of so-called Repo 105 transactions and what appears to have been outright fraud by Lehman, its management and its accounting firm, who all conspired to hide $50 billion in liabilities at quarter’s end to “window dress” its balance sheet and mislead investors.  And this practice does not appear to be unique to Lehman Brothers.
 
I went further and noted that questions were being raised in Europe about whether Goldman Sachs had an improper conflict of interest when it underwrote billions of Euros in bonds for Greece.  The questions being raised include whether some of these bond-offering documents disclosed the true nature of these swaps to investors, and, if not, whether the failure to do so was material.
 
Last week, we learned about more alleged fraud at the heart of the financial crisis.  On Friday, the Securities and Exchange Commission filed charges against Goldman Sachs and one of its traders for alleged fraud in the structuring and marketing of collateralized debt obligations tied to subprime mortgages.  Goldman allegedly defrauded investors by failing to disclose conflicts of interests in the design and structure of these collateralized debt obligations.  The SEC says this alleged fraud cost investors more than $1 billion.  While I will not prejudge the merits of the case, the SEC’s complaint alleges that Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and that the hedge fund had taken a short position against the CDO.  
 
Robert Khuzami, Director of the SEC Division of Enforcement, said “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”  Kenneth Lench, Chief of he SEC’s Strucured and New Products Unit, added “The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress.”  Goldman Sachs has denied any wrongdoing and has said it will defend the transaction.
 
This particular case involving Goldman Sachs was almost certainly not unique.  Instead, it was emblematic of problems that occurred throughout the securitization market.  Late last month, Bob Ivry and Jody Shenn of Bloomberg news wrote about the conflicts of interests present in the management of CDOs, a topic also discussed at length in Michael Lewis’ book The Big Short.  The SEC should pursue other instances of conflicts of interest in the CDO market that led to a failure to disclose material information.  
 
Mr. President, last year Senators Leahy, Grassley and I, along with many others in the Congress, worked to pass the bipartisan Fraud Enforcement and Recovery Act, so that our law enforcement officials would have additional resources to target and uncover any financial fraud that was a cause of the financial crisis.  However long it takes, whatever resources the SEC needs, Congress should continue to back the SEC and the Justice Department in their efforts to uncover and prosecute wrongdoing.  
 
I applaud SEC Chairman Mary Schapiro and especially Rob Khuzami and the team he has reshaped in the Enforcement Division. They deserve our steadfast support as the leadership of the SEC continues its historic mission of revitalizing that institution and making it clear to all on Wall Street that there’s a new cop on the beat.
 
Also last week, our colleague, Chairman Carl Levin, Ranking Member Coburn and the staff on the Permanent Subcommittee on Investigations began a series of hearings on the causes of the financial crisis.  It is a testament to the professionalism and dedication of Chairman Levin that he has brought the Subcommittee’s resources to bear in such an effective and thorough manner.  I also want to commend Ranking Member Tom Coburn for his dedication and effort as a partner in this effort.  Chairman Levin and the Subcommittee staff deserve credit and our deep appreciation for the work that they have put into this series of hearings on Wall Street and the financial crisis.  Since November 2008, Subcommittee investigators have gathered millions of pages of documents, conducted over 100 interviews and depositions, and consulted with dozens of experts.  It is truly a mammoth undertaking and the fruits of their labor were evident in last week’s two hearings on Washington Mutual Bank. I look forward to the Subcommittee’s remaining two hearings on this subject, including this Friday’s hearing on the role of the credit ratings agencies.  I urge my colleagues to watch.
 
The Levin hearings deserve comparison to the legendary Pecora investigations of the 1930s, which were held by the Senate Committee on Banking and Currency to investigate the causes of the Wall Street Crash of 1929.  The name refers to the fourth and final chief counsel for the investigation, Ferdinand Pecora, an assistant district attorney for New York County. As chief counsel, Pecora personally examined many high-profile witnesses, who included some of the nation’s most influential bankers and stockbrokers.  The investigation uncovered a wide range of abusive practices on the part of banks and bank affiliates.  These included a variety of conflicts of interest, such as the underwriting of unsound securities in order to pay off bad bank loans as well as “pool operations” to support the price of bank stocks.  
 
The Pecora hearings galvanized broad public support for new banking and securities laws.  As a result of the Pecora investigations’s findings, the Congress passed the Glass-Steagall Banking Act of 1933, to separate commercial and investment banking; the Securities Act of 1933, to set penalties for filing false information about stock offerings; and the Securities Exchange Act of 1934, which formed the SEC, to regulate the stock exchanges. Thanks to the legacy of the Pecora hearings and subsequent legislation, the American financial system rested on a sound regulatory foundation for roughly half a century. That is, until we began the folly of dismantling it.
 
The Levin hearings have shined a much-needed spotlight on the role of potential outright fraud by financial actors as well as the incompetence and complicity of bank regulators in the financial crisis.  There is no better example of the danger that fraud and lax regulation poses to our financial system than the collapse of Washington Mutual, known as WaMu.  
 
Far too often, the failure of institutions like Washington Mutual is blamed on high-risk business strategies. While such strategies are clearly part of the problem, they should not be used to mask other causes, such as fraud and malfeasance, which played a significant role in the collapse of WaMu. Evidence developed by the subcommittee demonstrates that WaMu officials tolerated, if not outright encouraged, fraud as a byproduct of promoting a dramatic expansion of loan volume.
 
The most blatant example of WaMu’s culture of fraud was its widespread use of “stated income” loans – a practice of lending qualified borrowers loans without any independent verification of their income.  Approximately 90 percent of WaMu’s home equity loans, 73 percent of its Option ARMs, and 50 percent of its subprime loans were “stated income” loans.  As Treasury Department Inspector General Eric Thorson said last week, WaMu’s predominant mix of stated income loans created a “target rich environment” for fraud.
 
Because WaMu made these stated income loans with the intent to resell them into the secondary market, it was less concerned whether borrowers would be able to repay them.  WaMu created a compensation system that rewarded employees with higher commissions for selling the riskiest loans.  In 2005, WaMu adopted what it called its “High Risk Lending Strategy” because those loans were so profitable.  In order to implement this strategy, it coached its sales branch to embrace “the power of yes.”  The message was clear.  As one industry analyst said, “if you were alive, they would give you a loan . . . if you were dead, they would still give you a loan.”  
 
That this culture led to fraud on a massive scale should have surprised no one.  An internal review of one Southern California loan office revealed that 83% of loans contained instances of confirmed fraud.  In another office, 58% of loans were confirmed to be fraudulent.  And what did WaMu management do when it became clear that fraud rates were rising as housing prices began to fall?  Rather than curb its reckless business practices, it decided to try to sell a higher proportion of these risky, fraud-tainted mortgages into the secondary market, thereby locking in a profit for itself even as it spread further contagion into the capital markets.
 
In order for WaMu and institutions like it to sell these low-quality loans to the secondary market, they needed a AAA rating from the credit rating agencies.  So what did these institutions do?  They gamed the system and manipulated the agencies by engaging in a practice called “barbelling.”  Apparently, the credit ratings agencies did not examine individual FICO scores when rating mortgage-backed securities, and instead relied on average FICO scores.  As revealed at the hearing by a WaMu risk officer, and detailed in Michael Lewis’ The Big Short, lenders could create the requisite average score by pairing loans whose borrowers had relatively high scores with borrowers whose scores were far below levels that would normally warrant a loan.  So if the raters wanted an average FICO score of 615, a lender could pair scores of 680 with scores of 550, even though borrowers with scores of 550 were almost certain to default.  This “barbell” effect satisfied the rating agencies, even though half the loans had little chance of success.  At the hearing, WaMu CEO Kerry Killinger effectively admitted to barbelling, while saying “I don’t have the barbell numbers in front of me.”
 
To make matters worse, WaMu secured high FICO scores by seeking out borrowers with short credit histories.  Such borrowers often have high FICO scores even though they have not demonstrated the ability to take on and pay off large debts over time.  These borrowers were called “thin files” borrowers.  According to a report in The New York Times, WaMu encouraged “thin file” loans, even circulating a flier to sales agents that said, “a thin file is a good file.” The Big Short even discusses “a Mexican strawberry picker with an income of $14,000 and no English” that was ostensibly given a $724,000 mortgage on the basis of his “thin file.”  
 
Plainly, the Office of Thrift Supervision failed miserably in its responsibility to regulate WaMu, and to protect the public from the consequences of WaMu’s excessive and unwarranted risk taking, including the toleration of widespread fraud.  Although WaMu comprised fully 25% of OTS’ regulatory portfolio, OTS adopted a laissez-faire regulatory towards WaMu.    Although line bank examiners identified the high prevalence of fraud and weak internal controls at WaMu, OTS did virtually nothing to address the situation.  In fact, OTS advocated for WaMu among other regulators and even actively thwarted an FDIC investigation into WaMu during 2007 and 2008.  The complete abdication of regulatory responsibility by OTS may find sad explanation in the fact that OTS was dependent upon WaMu’s user fees for 12-15% of its budget.
 
The regulatory failures of OTS were not unique. The overall regulatory environment at the time was extremely deferential to the market, based on the widespread but faulty assumption that markets can and will effectively self-regulate.  At last Friday’s hearing, the testimony of the Inspector General of the Department of the Treasury was particularly noteworthy.  He said that banking regulators “hesitate to take any action, whether it’s because they get too close after so many years or they’re just hesitant or maybe the amount of fees enters into it . . . I don’t know. But whatever it is, this is not unique to WaMu and it is not unique to OTS.”  Let me repeat, it was the conclusion of our Treasury Department’s inspector general that the failure of regulators to harness the lawless nature of conflicted institutions was not unique to Washington Mutual or to the Office of Thrift Supervision.
 
Mr. President, I have said before and I will say it again:  it is time that we return the rule of law to Wall Street, where it has been seriously eroded by the deregulatory mindset that captured our regulatory agencies over the past 30 years.  We became enamored of the view that self-regulation was adequate, that “enlightened” self-interest would motivate counterparties to undertake stronger and better forms of due diligence than any regulator could perform, and that market fundamentalism would lead to the best outcomes for the most people.  Transparency and vigorous oversight by outside accountants were supposed to keep our financial system credible and sound. The allure of deregulation led us instead to the biggest financial crisis since 1929, and to former Federal Reserve Chairman Alan Greenspan’s frank admission that he was “deeply dismayed” that the premise of enlightened self-interest had failed.  And now we’re learning, not surprisingly, that fraud and lawlessness were key ingredients in the collapse as well.
 
As we turn to financial regulatory reform, we must remember that effective regulation requires not only motivated and competent regulators but also clear lines drawn by Congress. Based on what we have learned, what must we do?
 
First, we must undo the damage done by decades of deregulation.  That damage includes financial institutions that are too big to manage and too big to regulate (as former FDIC Chairman Bill Isaac has called them), a “wild west” attitude on Wall Street in which conflicts of interest are rampant and lead to fraudulent behavior, and colossal failures by accountants and lawyers who misunderstand or disregard their role as gatekeepers. The rule of law depends in part on having manageably sized institutions, participants interested in following the law, and gatekeepers motivated by more than a paycheck from their clients.
 
That’s why I believe we must separate commercial banking from investment banking activities, restoring a modern version of the Glass Steagall Act to end the conflicts of interest at the heart of the financial speculation undertaken by megabanks that are “too big to fail.”  We further should limit the size of bank and non-bank institutions, something Senator Sherrod Brown and I will propose in legislation we plan to introduce this Wednesday. Otherwise we will continue to hear these mega-banks claim they are merely “market-makers,” and no one who deals with them should trust whether the very creator of a financial product they sell is secretly betting against its success.
 
Second, we must help regulators and other gatekeepers not only by demanding transparency but also by providing clear, enforceable rules of the road wherever possible.  One clear lesson of the Goldman allegations is that we need greater transparency and disclosure of counterparty positions in over-the-counter derivatives.  We should mandate that derivatives are traded on an exchange or at least centrally cleared.  The rare exemption should carry with it a reporting requirement so that all counterparties understand the positions being taken by other clients of the dealer firm.
 
Clearly, we need to fix a broken securitization market.  No market, regardless of how sophisticated its participants, can function without proper transparency and disclosure.  While I am pleased that the current reform bill would direct the SEC to issue rules requiring greater disclosure regarding the underlying loans in an asset-backed security, I believe that we must go further still. Requirements for disclosure should not merely begin and end at issuance.  Instead, disclosures should be automated, standardized and updated on a timely basis, providing investors with relevant information on the performance of the loans, their compliance with relevant laws (fraudulent origination, for example, is generally uncovered after the fact), and their replacement by new collateral.  This information would empower investors and countervail the malfeasance of issuers looking to “adversely select” dodgy collateral that they are also shorting on the side.  Moreover, such real-time monitoring by investors would also have beneficial effects further up the securitization supply chain.   If originators know that they can’t get away with selling fraudulent or poorly underwritten loans, they will also be forced to improve their standards.

While not a silver bullet, I am also generally supportive of requirements that those who originate and securitize loans retain risk by keeping some percentage on their balance sheets.  WaMu, for example, developed, in Senator Levin’s words, a “conveyor belt” that originated, packaged and dumped toxic mortgage products downstream to unsuspecting investors.  Their lack of “skin in the game” allowed them to make a mockery of the “originate to distribute” model.  And while Bear Stearns, Lehman Brothers and other firms faltered due to their excessive retention of risk, this basic requirement will better align the interests of originators and securitizers with those of investors.
  
Moreover, a clear lesson of the Levin hearings is that Congress must ban the widespread issuance of stated income loans.  I understand Senator Levin is developing further reform proposals based on his conclusions from the hearings.
 
Third, we must concentrate law enforcement and regulatory resources on restoring the rule of law to Wall Street.  We must treat financial crimes with the same gravity as other crimes because the price of inaction and a failure to deter future misconduct is enormous.  That’s why I’m pleased the SEC is turning the page on its recent history and sending a message throughout Wall Street:  fraud will not pay.
 
Mr. President, last week’s revelations about Washington Mutual and Goldman Sachs reinforce what I’ve been saying for some time.  Deregulation was based on the view that rational actors would operate in their own self-interest within a framework of law.  But even with the most rigorous regulators, it is impossible to trace the financial self-interest of convoluted financial conglomerates, much less constrict their behavior before it runs afoul of the law.  WaMu made loans they knew could not be paid back. Goldman Sachs allegedly permitted clients to take secret positions against the very financial products that it had created.  
 
The picture being revealed by the jigsaw puzzle of multiple investigations is now emerging clearly in my eyes. These financial institutions are too big and conflicted to manage, too big and conflicted to regulate, and too big to fail.  Even Alan Greenspan has said about our current predicament:  “If they’re too big to fail, they’re too big.”
 
Our country took a giant step backwards during the last financial crisis, upending the dream of home ownership for millions of Americans, and throwing millions of people out of work as well. The credibility of our markets, one of the pillars of our economic success, was badly damaged. It must be restored. There must be structural and substantive change to Wall Street, where bankers must resume their central role of efficiently allocating capital, not taking bets in opaque markets that no one can understand.  
 
The solution is clear.  We must split up our largest financial institutions into more manageable entities; we must separate their component parts so they are no longer inherently conflicted and so they can be properly regulated. Only then, if necessary, can they be allowed to fail without sending our entire economy to the precipice of disaster.”

Award winning journalist, Steven Pearlstein of the Washington Post, puts the tag on how banks and others are working overtime to gain exemptions from regulatory reform.  Before he went to the Post, Pearlstein began his career at Foster’s Daily Democrat, the daily newspaper in Dover, NH where Beezer got his first job as a journalist. 

“Here’s a simple explanation for the financial crisis: Too much cheap credit was extended to households, businesses and even sovereign governments that couldn’t afford to carry that debt or pay it back. The obvious implication is that, going forward, credit and other financial risks should be made more expensive and harder to get.

Now, however, as we close in on the endgame for financial regulatory reform legislation, special interests are crawling out of the political woodwork demanding loopholes and exemptions. And if you strip away their end-of-the-world-as-we-know-it rhetoric, their basic complaint is that the reform bill would make credit and other financial risks more expensive and harder to get — in other words, the bill is doing exactly what it is supposed to.

Let’s start with the auto dealers, who are running all over the Capitol this week claiming that the cost of an auto loan will increase if they are subjected to supervision by a new agency charged with preventing fraudulent and abusive consumer lending. Judging from their rhetoric about the nightmare they will face with all that costly and time-consuming paperwork, you’d have no idea these were mostly multimillion-dollar retail giants with multiple franchises in multiple cities. Nor would you know that they act as the front end of a giant auto-loan conveyor belt that stretches back to Wall Street’s “shadow” banking system. Nor would it be clear that dealers often earn as big a profit financing a car as they do selling it, and that as the point-of-sale lender, they are not above engaging in high-pressure tactics to get customers to sign loan documents before they leave the showroom and before they have a chance to shop around with other lenders.

The dealers’ argument, of course, is a carbon copy of that used years ago by mortgage brokers and lenders who successfully fought attempts to make them abide by the same rules as regulated banks. And over time, those cagey brokers and lenders used their regulatory immunity to earn huge profits and gain a greater share of the mortgage market by offering unsuitable loans to unsuitable borrowers before selling those loans off to Wall Street. An underwriting race to the bottom ensued that eventually led banks to start up or purchase separate mortgage subsidiaries so that they could operate in the unregulated environment. We all know how well that turned out.

If there is one lesson that ought to have been learned from the recent crisis — as well as the savings-and-loan debacle of the late 1980s — it is that everyone who engages in the same business should be regulated in the same way by the same entity, irrespective of the charter they hold. If car dealers want to be in the lending business, they should be regulated like every other lender for the simple reason that their customers deserve the same protections as other borrowers.

Small banks are making many of the same arguments as the auto dealers as they seek to insulate themselves from virtually every provision of the financial reform bill. The community bankers are under the wrong impression that the aim of regulatory reform is somehow to punish those who caused the crisis or to ensure that the same crisis doesn’t happen again. In fact, the purpose is to anticipate and prevent the next crisis, which is just as likely to be caused by hundreds of community banks simultaneously engaging in the same risky behavior (remember the savings-and-loan crisis) as it is from the mistakes of a few large Wall Street banks.

If the community bankers have their way, however, they’ll not only be allowed to keep their present regulator but continue to be able to find another if the present one gets too tough. Their capital requirements and deposit insurance premiums would not reflect the recent rise in failures and losses. They could continue to delay writing off the losses from all those crappy loans they made to local developers, many of whom just happen to be directors. Their shareholders would be denied any say in the pay of top executives or even any additional information about that pay. And they would be exempted from new rules requiring them to keep some of the risk from the loans they sell off to Wall Street. They’re also backing a provision to prevent big banks from getting any bigger and taking their customers. Other than that, though, the community bankers are gung-ho for reform.

Any listing of special pleaders would be incomplete if I didn’t mention those struggling Main Street companies that use derivative contracts to hedge some of the currency, or interest rate, or commodity risks of their basic businesses — you know, companies such as Exxon, Southwest Airlines and Caterpillar. Although the reform bill requires that most derivatives be traded on open, regulated exchanges that require buyers to post collateral, the “end user community” wants an exemption from all that. On the face of it, that seems rather curious — open-regulated exchanges normally lower the prices of the things traded on them by reducing the spread between what is bid and what is asked. But it turns out that because most of these end users have triple-A credit ratings, Wall Street’s swap dealers waive any requirement that they post collateral, which not only results in lower costs for the end users but also higher margins for the dealers than if the contracts were traded on an open exchange.

The losers in this arrangement, of course, are you and me. Without the collateral to back up these contracts, the entire financial system is denied the extra cushion that comes in rather handy in preventing financial crises. Think of American International Group, another AAA-rated company that used its giant balance sheet to secretly load up on derivatives, or Enron, the blue-ribbon energy company where the futures and derivatives trading desk became the tail that wound up strangling the dog.

If the price of regulatory reform is that it raises the cost of derivatives trading for end users, it is only because the cost of derivatives trading was too low and never reflected the true cost of the systemic risks and taxpayer bailouts needed to deal with them. Rather than bellyaching about modest increases in costs, these well-heeled end users ought to be thanking us for decades of implicit subsidy of their hedging activity and graciously offering to start paying their fair share.”

Beezer has long maintained that, within sensible boundaries, taxes are not the most important driver of strong economies.  Progressive tax tables are just, if not more, positively correlated to strong job and income growth in the US as are periods where there are broad based tax cuts.

Where the correlation breaks down is regarding deficits.  Broad based tax cuts strongly correlate to larger deficits, whereas progressive tax rates don’t. 

The point is that if we’re searching for the causes of strong job and income growth we’re wasting our time arguing over tax rates.  We’re asking the wrong question, so we don’t get the right answer.

The recent dustup over Greece in the European Union, where Greece is running a debt of 115% of its Gross Domestic Product (GDP) and can’t make the bond payments so it needs a bailout, made Beezer look at some relevant statistics.

One is the percent of GDP the government (federal, state and local) gets in revenue.  The other is the percent of government spending as a percent of GDP.

Greece has a low percent of government revenue to its GDP, 37%.  By contrast Germany’s is 44.3%.  So Germans are taxed more than Greeks.  Yet Germany has the stronger economy.  Obviously higher taxes didn’t hurt German economic strength.  On the other hand, Greece’s lower taxes didn’t build a better economy.  The low rate, however, has increased Greece’s deficit and thus it’s debt levels.

Germany’s debt is running at 73.2%  of GDP.

Now consider the US.  Our tax revenues run about 28.3% of GDP and, during the current recession, our government expenditures are 45% of GDP.  Normally this spending would run about 35%, at least during the past decade.  Hence the much larger deficits right now.

Greece is currently spending about 50% of its GDP and Germany about 47.6%.  In both cases, as in the US, expenditures increased dramatically due to the ongoing recession.  

So running a low total tax revenue didn’t much help the US economy anymore than it helped the economy of Greece.  And now that both Europe and the US are in recession, the low tax rates in the US and Greece just caused larger budget deficits.

Lesson.  If you’re a government and you want to pay your bills tax enough to do so.  And if you want a strong economy, keep tax rates progressive and look for the real drivers of strong job and income growth.  If you just want to run larger deficits, don’t tax.

In 1900 diabetes was rare.  A doctor could spend an entire career and not come across diabetes.

A century later in the US there are 24 million people with diabetes and another 56 million or so who are pre-diabetic.  Americans spend an estimated $116 billion annually treating diabetes.   Although it’s not currently believed that diabetes is infectious, the startling rise in the number of people with it has risen to the levels normally associated with pandemics.   Houston, we have a problem.

There are two basic types of diabetes.  Type 1, called juvenile diabetes, commonly shows up in young people and happens suddenly.  One day you seem to be fine, the next day you’re thirsty and peeing all the time and you go to the doctor and find out you have Type 1 diabetes.  And you have it for life.

Type 1 is labeled as an auto-immune disease.  Your body suddenly decides pancreas cells that manufacture insulin are bad and attacks them.  Human beings can’t survive without insulin.  Diet and insulin regimes are used to control the problem, but to date there’s no real “cure.”

Type 2 usually appears later in life, is associated strongly with being overweight but unlike Type 1, Type 2, if identified early, can be slowed or even reversed by lifestyle and diet changes.

While there are important distinctions between Type 1 and Type 2, there are themes common to both.

Take the environment.  Not just the flora and fauna around us, but our personal environments.

Compare the lifestyle we lived for the hundred thousand years, or so, before we started farming. For most of our existence, we’ve been hunter gatherers.  Back then we exercised regularly, what with having to run around to hunt and gather.  That means we were outside more than we are today.  It means babies were fed their mother’s milk.  And it means we ate food unpolluted by man made artificial fertilizers, pesticides, anti-biotics and growth hormones.  

So let’s visit this list of differences and see if they might be, as the police are fond of saying, “persons of interest” in a crime.

Take the exercise and outdoor exposure we got as hunter gatherers and compare it with our existence today.  Many of us spend the vast majority of our day indoors under artificial light.  Low Vitamin D levels are strongly associated with diabetes.  Exposure to natural sunlight is what creates Vitamin D in humans. Someone who lives in Maine is more likely to have diabetes than someone living in Florida.  Globally, diabetes is found at much higher levels in northern, temperate climes compared to those found in equatorial regions.

People who regularly exercise burn off more calories and tend to have more muscle than those who don’t.   Type 2 diabetes is strongly associated with being overweight and physical inactivity.  Measure your waist size at your belly button level.  If it is equal to half or more of your height (in other words you’ve got a “pooch”) your chances of developing Type 2 increases dramatically.

Consider our diets today versus the diet we had when we spent time outdoors hunting and gathering.  Back then there were no processed foods and very little sugar and salt added.  No Dunkin Donuts or Cheetos or processed foods of any kind back then.  Processed foods invariably are packed with sugar and sugar creates huge spikes in insulin levels.  They are also packed with fats, many of these fats long identified as being unhealthy.  What they don’t have is fiber and fiber is known to be necessary for good health.

Back then there were no man made fertilizers in the food we ate.  No man made growth hormones.  No man made pesticides to ingest.  For more than a hundred thousand years of our evolution as humans, we didn’t eat any of these things.  And genetically, we’re still the same humans today as we were then.

So who do we take a good hard look at, other than ourselves, for consuming all this stuff our bodies never had to deal with until very, very recently?  Who are the enablers?  The “people of interest?”

That would be government, by its policies, and the food industry.  Our government, as just one example, spends anywhere from $4-$7 billion per year subsidizing corn.  As a result of that we have corn coming out the whazoo.  Problem is, corn is starchy and high in sugar.  There are many, many other vegetables far more healthy for us than corn.

But corn it is, our government has decided.  With the subsidy it’s cheap and in America as elsewhere price is everything.  So our cattle are fed corn instead of what cattle are supposed to eat, which is grass.  That makes them fat and unhealthy.  But cheap.  So we Americans consume cheap beef that’s unhealthy for us because corn is cheap because the government has decided it should be thus.  And it’s not just the fat.  We end up feeding the cattle growth hormones so we can slaughter them earlier.  And we end up pumping them full of anti-biotics because we force them to eat corn, which makes them sick.   And we have slaughterhouse factories where these poor beasts live, literally, shoulder to shoulder hock deep in their own excrement until the day they are marched to their slaughter.

If you want some more about corn (including the massive use of high fructose corn syrup in just about everything you can find on your supermarket shelves) and how its subsidy has warped our farm system and our food supply, you can type in “corn subsidies” in the web search box to your right.

Interestingly, young people who grow larger, faster, are statistically more likely to develop Type 1 disease.  One can only wonder if there’s a connection to all the hormones we now eat (chicken also get hormones because, just like cattle, we can fatten them up quicker that way) and rapid growth among some young adults.  They are getting a good dose of growth hormones because of what they eat. 

Another concern is that our environments, paradoxically, may be too clean.  This, some think, may cause our immune systems to weaken.  Also, mother’s milk contains plenty of immune enhancing ingredients.  So breast feed your kids and when they’re old enough, make sure they get a lot of outdoor exercise and nibble a few mud pies.  And while you’re breast feeding them, lay off the packaged foods and industrial ag produced meats.  If you must eat meat, buy pasture fed beef, free range chicken and wild caught fish.  What the mother eats gets pumped into the baby, whether it’s still attached to the umbilical cord or the mother’s teat to feed.

Oh, and while we’re on the subject of cows, let’s consider dairy.  Don’t do dairy.  It’s thought that infant baby formula using milk tinkers with the child’s developing immune system.  And a number of nutritional experts recommend everyone reduce their dairy intake.   If you want to see previous posts about the problem with cows and dairy, just type ”dairy” in the search box.

If you want a quick article listing the five suspects in creating our diabetes pandemic, you can go here.  If you want a book length discussion of the diabetic pandemic, read Dan Hurley’s “Diabetes Rising: How A Rare Disease Became A Modern Pandemic, And What To Do About It.”

And if you want to start eating healthier, both for yourself and for your children, know beforehand it’s going to be tough to do in America.  Almost everything on your local supermarket shelf is supercharged with high fructose corn syrup and fat and contains pesticide residues both inside and out.  And all the meats are laced with fat, growth hormones, and anti-biotics.

Fast food eating is definitely out.  You might as well take up smoking and heavy drinking instead. 

If you have a health food supermarket nearby, such as Whole Foods or Trader Joes, you’re halfway home.  But you still need to more carefully plan your meals, and for most of us who’ve grown up the past 40 years or so, that’s a lifestyle change all by itself.

And get some outdoor excercise, particularly if you live in a northern clime where clouds are more common than sun.

The good news is that if you even do half of this, your chances of developing Type 2 are lessened dramatically.  And if you’re pre-diabetic, you can actually reverse the development.

Finally, contact your Congressperson and tell them to end the corn subsidy.  Subsidize healthy foods instead.