Roiling the Financial System

By Steve McCann

Last night the Senate passed a new regulatory reform bill, it now must reconciled with the House version. Among the provisions is one that forces large U.S. banks to spin off or close swap desks and bans the banks from proprietary trading. This is now contributing to the worldwide market turmoil.

This is another step in the disorderly regulatory crackdown on banks and financial institutions in the United States and Europe.

Earlier Germany unilaterally banned naked short selling. The Euro remains under intense pressure as the debt problems in many European countries continue unresolved. In Greece public protests over wage cuts continued unabated. A disappointing jobs report in the U.S. revived fears that any economic recovery in the United States could prove short lived.

Market makers in European bonds said the market was no longer functioning for the weaker economies of Portugal, Spain and Greece. There is now a growing fear that banks could renege on their loan obligations due to the rise in risk and currency declines. US banks alone have $60 billion in exposure to troubled European countries.

Dan Tarullo, a Federal Reserve governor, told Congress that this crisis could cause US banks "to pull back on their lending, as they did during the period of severe financial market dysfunction that followed the bankruptcy of Lehman Brothers".

In the past 24 hours most Asian markets slumped to their lowest level in nearly nine months. The market indices in Europe also closed at their eight month lows. The Dow Jones average is down more than 1,000 points since its high just a short time ago.

And what does our President and Congress do: play the race card regarding illegal immigration, pass legislation guaranteed to exacerbate the situation, continue to spend as if there were no crisis and go out in public to declare the worst is over and things are on the right track.

In short no one in government, either in the United States and Europe, has the slightest idea what they are doing or what they should do except to bash the banks and capitalism for their policies that got everyone into this situation starting many years ago. The worst is yet to come.