Saturday, November 26, 2011

By Richard Lee, The Stamford Advocate, Conn.

Nov. 26–Efforts taken by the U.S. government to blunt the financial crisis that knocked the economy to its knees in 2008 are setting the stage for another crash, according to a Darien resident who recently added “author” to his experience as an investment banker and risk manager.

James Rickards, who wrote “Currency Wars: The Making of the Next Global Crisis,” (Portfolio, $26.95) contends that despite federal legislation, U.S. banks continue to grow, using similar strategies that played a role in the nosedive.

He details in his book how a dollar in disarray can lead to an international financial war using currencies and capital markets.

Rickards describes his role in organizing a 2009 war game, with about 60 military officials, intelligence experts and academicians, to determine the impact of financial actions by foreign powers on U.S. security.

Globalization and the interconnection of financial institutions contributed to the morass, said Rickards, who advises the U.S. Department of Defense, the U.S. intelligence community and hedge funds.

“The answer is: break up the big banks. That way none of them is too big to fail. One could fail, but it wouldn’t bring down the whole system,” said Rickards, a critic of the 1999 Gramm-Leach-Bliley Act, which eliminated restrictions prohibiting affiliations between commercial and investment banks, as set forth by the 1933 Glass-Steagall Act.

He also criticized the Commodity Futures Modernization Act of 2000, which deregulated the trading of over-the-counter derivatives, a contributor to the crisis.

“In 2008, you heard about too big to fail, but now the five biggest banks are even bigger,” said Rickards, criticizing Treasury Secretary Timothy Geithner, former president of the New York Federal Reserve Bank, for his policies. “I think he is the biggest problem. He’s too close to the banks to hold their feet to the fire.”

Rickards is pessimistic about seeing new policies to prevent another crash. “I’d like to see a strong dollar policy that we had under (former President) Reagan and (Paul) Volcker,” he said, referring to Volcker’s time as chairman of the Federal Reserve.

Rickards is on the right track, according to Ed Deak, economics professor at Fairfield University, but he said Basel III, the international agreement made in 2010 requiring banks to increase their capital and improve their ability to contend with financial crashes, is a good step.

“It will be more expensive for them to be as free-wheeling as they were before. They have to put more skin in the game,” Deak said.


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