Hillarysworld

The financial crises might be more easily understood if all the economic jargon were in plain English. For a start, here’s a translation of key points from Paul Volcker’s Sunday  New York Times opinion piece about financial system reform and his testimony Tuesday before the Senate banking committee.

With gentlemanly understatement, Volcker notes that, while the government has been a whirling dervish in providing bailouts, “some central structural issues have not been addressed.”

What he means is that we haven’t addressed the central problem of financial regulation: what to do about institutions that are “too big to fail.” Until we solve this, the pattern of serial financial crises followed by massive taxpayer bailouts is sure to continue.

Volcker is saying that we’ve been spending a lot of money — trillions of taxpayer dollars — but we haven’t changed a thing. So when the machine that is our financial system starts up again, it will crash and burn, just like it did a few years ago.

This is what Volcker means by:

“A large concern is the residue of moral hazard from the extensive and successful efforts of central banks and governments to rescue large failing and potentially failing financial institutions. The long-established ‘safety net’ undergirding the stability of commercial banks — deposit insurance and lender of last resort facilities — has been both reinforced and extended in a series of ad hoc decisions to support investment banks, mortgage providers and the world’s largest insurance company. In the process, managements, creditors and, to some extent, stockholders of these nonbanks have been protected.”

Translation: We’ve bailed out hundreds of financial institutions (including all the big ones except Lehman Bros.) by throwing billions of taxpayer dollars at them. The regulatory system that is supposed to guarantee only insured bank depositors, and free-market discipline for other bank creditors and all nonbank creditors, has been thrown out with a “series of ad hoc decisions” (this last is pretty clear) by the government.

Volcker calls these decisions “extensive and successful.” Translation: The government threw money at the problem until all the big banks’ creditors were fully repaid. The government’s efforts were “successful” from the perspective of those creditors. But he doesn’t explain how the rest of us benefited from the largest bailout in human history.

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