Will Wall Street ever be fixed?

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When it comes to the financial industry, there is a major fallacy that exists: that Wall Street deals only with elite, rich people who deserve to lose their money, and that Mom and Pop are not directly affected by the antics and conflicted practices in the industry.

This couldn’t be farther from the truth. Even when Wall Street CEOs are hauled in front of Congress—as Lloyd Blankfein was amid the SEC fraud charges against Goldman Sachs, and as Jamie Dimon was after JPMorgan Chase lost $6 billion on bad trades—they try to make this argument. “We are all big boys.” “We are all sophisticated institutional investors who know exactly what we are doing.”

But stop and think about this for a second. Whose money is being played with anyway?

Look at just the recent scandals: Who gets affected when a county in Alabama trades a structured derivative with JPMorgan that goes sour, and brings the county closer to bankruptcy? Who gets impacted when a government such as Greece or Italy trades derivatives with Goldman Sachs or JPMorgan to cover up its debt and kick its problems down the road? Who ultimately loses when Morgan Stanley misprices the Facebook IPO and mutual funds lose billions of dollars of retirement and 401(k) savings?

Mom and Pop, that’s who.

Whose lives are affected when a sovereign entity such as Libya loses a billion dollars of its own people’s money betting on derivatives? Who loses when Barclays and other major banks rig the London Interbank Offered Rate (LIBOR), the interest rate that underpins trillions of dollars in student loans and mortgages? Whose savings evaporate when JPMorgan brokers sell underperforming mutual funds to their clients to generate more fees?

The list goes on and on and on. All this ultimately affects the citizens, teachers, pensioners, and retirees whose destinies are tied to these organizations that are managing their money. Mom and Pop are more affected by the bad behavior on Wall Street than anyone else—it is their money on the line. But how does Wall Street make so much money, anyway? Surely there are times when they must lose? Don’t count on it. Think about this:

There are certain quarters when a Wall Street bank makes money every single day of that quarter. Yes: ninety days in a row. One hundred percent of the time, it generates a profit. How is this even possible?

Two words: asymmetric information. The playing field is not even. The bank can see what every client in the marketplace is doing and therefore knows more than everyone else. If the casino could always see your cards, and sometimes even decided what cards to give you, would you expect it ever to lose?

Here’s how it happens: Because Wall Street is facilitating business for the smartest hedge funds, mutual funds, pension funds, sovereign wealth funds, and corporations in the world, it knows who is on every side of a trade. It can effectively see everyone’s cards. Therefore, it can bet smarter with its own money.

Worse, if Wall Street can persuade you to trade a custom-made structured derivative that serves the firm’s needs, it is as if your cards have been predetermined. Certainly not much scope for the casino to lose in this scenario.

Now consider where the gambling takes place. In a real casino, it is on a casino floor with cameras all over the place. Even if you don’t like Las Vegas gambling, it is regulated. On Wall Street, the gambling can be moved to a darkened room where nothing is recorded, observed, or tracked. With opaque over-the-counter derivatives, there are no cameras. In this darkened, smoke-filled room, there is maximum temptation to try to exploit clients and conflicts of interest. And this temptation and lack of transparency are what led to the global financial crisis in 2008.

Finally, think about the dealer. Your salesperson or trader might seem objective—like a friendly casino dealer who jokes around and is on your side—but there are times when he or she might be trying to steer you toward the thing that makes the casino the most money. If you were playing blackjack and you had 19, would you ever expect the dealer to tell you to hit? Sometimes, on Wall Street, they urge you to take another card.

Ironically, real casinos may actually be better regulated than Wall Street banks. The SEC and the U.S. Commodity Futures Trading Commission (CFTC) were not able to stop what led up to the crisis, and are still struggling to put appropriate measures in place to limit the conflicts I’ve described. With all these advantages, how can Wall Street ever lose? Even real casinos don’t make money every single day of the quarter.

As proof of this information advantage: Why do Goldman Sachs and JPMorgan Chase mutual funds —housed in their respective asset-management divisions on the other side of the Chinese wall—underperform their peers, as measured by Morningstar? Why do some hotshot traders from banks such as Goldman Sachs, Morgan Stanley, and JPMorgan go out on their own, start their own hedge funds, and flounder? Because they no longer have the advantage of being able to see everyone’s cards. No more asymmetric information, no more batting a thousand, when you are out on your own without unfair advantage.

The reforms Wall Street is pushing back the hardest against are in the areas it knows are the most profitable: opaque derivatives and proprietary trading. But these also happen to be the areas that are most dangerous to the stability of the financial system. The Wall Street lobby has already spent more than $300 million trying to kill measures to regulate derivatives (so that they are brought into the light of day and become transparent on exchanges), and to eliminate proprietary trading so banks can no longer bet against their customers using their information advantage as prescribed by the Volcker Rule. Wall Street hates transparency and will fight as hard as possible to prevent it from coming.

I am a hardcore capitalist. I am all for people getting filthy rich and for businesses making as much money as possible. It is the fuel that keeps our economy growing and wealth should be an aspiration to motivate entrepreneurs everywhere. But I want it to be done fairly. I just don’t believe that capitalism is embedded with some kind of assumption that ethical boundaries should be pushed as far as possible, and that deceiving your customers is necessary to generate maximum returns.

I believe in a business model that is long-term-oriented, where there is an intrinsic fiduciary responsibility to do right by your clients so they will keep coming back to you. Not only is it the right thing to do, but it is also better for business. You will make just as much money—but you will make it more slowly and steadily and transparently. This should be good for shareholders, too, who like a predictable revenue stream and a steadier book of business. Today’s take-the-money-and-run model is just not responsible, or sustainable.

How can it be that years after the crisis nothing has been done to fix any of this? Don’t we live in the greatest democracy in the world? People should be outraged that there is no political will to fix a problem that hurts everyone, enriches a super minority that has learned to rig the game, and could threaten the world with another calamity in a few years’ time.

People know that there is something deeply wrong with the system, but very few can put their finger on what the problem is. After the crash in 1929, the U.S. Senate conducted the Pecora Hearings, to investigate the causes of the crash. This inquiry led to real reforms that held banks accountable and eliminated the abusive practices that had caused the stock market crash. This was followed by decades of calm in the financial system.

If I ever achieve anything in my financial activism, I hope it will be to empower some people with enough understanding to call their congressman, congresswoman, or senator and ask this question: Why don’t you have the guts to do the same thing?

Share your thoughts…

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Entrepreneurship: The Way To the Future?

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A decade ago, nearly all of the smartest business school graduates flocked to Wall Street traditional corporate jobs in finance and management.

Today, I see a growing number of newly minted Ivy League graduates decide to start their own businesses or go to work for Silicon Valley startups.

In one study of over 30,000 Wharton graduates, conducted by the University of Pennsylvania, researchers found that more than 7% of 2013 grads started their own companies right away — five times as many as in 2007.

They also discovered that, since 1990, nearly a quarter of Wharton grads have been entrepreneurs at some point, even if it wasn’t straight out of school.

I believe America today needs more entrepreneurs than ever. One of the great trends we’ve been witnessing over the past decade, and in particular the past 5 years, has been what you might call the “democratization” of entrepreneurship”. It’s a powerful trend and one that I think will have a huge impact not just on the US economy and workforce, but perhaps even more intensely on other areas of the world – particularly developing economies.

I predict that this growth is likely to continue and most probably accelerate for several reasons.

  1. The high number of students seeking entrepreneurial opportunities stems, in part, from the feeling of control that owning and running your own company provides. Even though they’re working at least as hard as the bankers, they have control over their own destiny. In fact, entrepreneurs tend to be happier than workers in any other profession. Also In places like Silicon Valley, breaking into the scene is all about who you know, making these networks invaluable assets.
  2. Earning an MBA creates an instant backup plan in case the business fails. Knowing they can always count on a graduate degree from a top school to land a more traditional job allows MBA holders to take more risks. They’re able to turn an entrepreneurial failure into something that won’t hurt their resumes, as opposed to other botches, such as bad performance reviews.
  3. For the older set who cut their teeth on Wall Street, Silicon Valley or a path to entrepreneurship may offer the promise of a healthier lifestyle. Being a Wall Streeter myself, I know for a fact that the Wall Street vets who switch careers are usually making “a lifestyle choice.”
  4. Given Wall Street is today under a lot of regulatory scrutiny and pressures that are outside of any individual day-to-day control, going to a high-profile technology company or taking the entrepreneurial path can be more liberating and freeing. It is the ultimate place where you can be creative instead of reactionary in addition to the innovation, creative freedom, and meaningful work that is not available anywhere else.
  5. Most importantly, entrepreneurs don’t care about pedigree. It is a fact that entrepreneurial communities are networks, not hierarchies. Openness, the free flow of information, the lack of community gatekeepers and entrepreneurs as leaders are hallmarks of these networks. As a result, the fundamental tenants that underpin these networks there is a decreased emphasis on pedigree, background and connections. While this hasn’t completely taken hold in all countries, in many places entrepreneurs are rightly judged by the strength of their ideas, the value they bring to the community and the success of their past efforts and not on their family name or where they attended school. This has opened the door for many entrepreneurs who 10 or 20 years ago would have found themselves cut off from the opportunities they have today.

Fundamentally, I believe the world does and will further benefit from the democratization of entrepreneurship as more people look to themselves as the engine to grow beyond their circumstances. And this phrase works in reverse as well – entrepreneurship promotes democratization. Entrepreneurs value the stable systems that democracy tends to bring, they see themselves and not government as the answer to their societies challenges, they provide jobs and economic stability that promote stable society and they work in networks that by their nature are fundamentally more democratic than hierarchical regimes.

I don’t have a crystal ball and I don’t know exactly what the next 20 or 50 years will bring. But I do believe that the global trend towards “entrepreneurship” will continue and that the world will be much better for it.

Share your thoughts…

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Financial Policy Best Practice Framework

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On March 18th 2014 the US Federal Reserve Chair Janet Yellen stated the need for “reasonable confidence” in order to effectuate a more conservative monetary policy focusing on interest rate raise. Chair Yellen has indicated four macroeconomic factors that need to be further monitored.

  • The labor market with further unemployment rate decline;
  • A continued rise in currently slumped wages;
  • Core inflation stabilization (independent of energy ‘push’);
  • A higher “market-based” expected inflation rate.

The Fed’s decision to hold off on short term rate hikes comes one week after its macroprudential bank stress tests. Notable amongst the results was the “conditional approval” of Bank of America’s capital plan, with complete rejection of Deutsche Bank and Santander’s capital plans. It is clear that under Yellen the Federal Reserve is attempting to uphold the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. From a general standpoint, it is also quite glaring that the Federal Reserve as a central bank is fast adopting more of an eco-political role as a quasi-indirect financial system regulator through financial system monitoring. As has been mentioned before, monetary policy is the fastest mechanism to quell financial system defects, as fiscal policy results tend to lag.

Since the 2008 financial crisis, many economists have called for a more active regulatory role from central banks other than pure monetary rate fixes and being a lender of last resort. In January 2013 Fed Governor Powell met with members of the Financial Services Forum Policy Roundtable to the need for further engagement with appropriate bank regulators with regards to Dodd-Frank and specific cooperation among federal banking agencies. Here we see the Federal Reserve’s role expand into embracing full regulatory responsibilities and acknowledging the need to be more cognizant of fiscal agency activities. Since it is fast becoming the trend of the US Federal Reserve and of central banks in general to take up more than pecuniary monetary policy functions, it is the responsibility of the Financial Policy Council to suggest optimal regulatory best practices.

After careful examination, we found great quantitative insight in regards to the prevention, control and monitoring of financial crises by central banks through the International Monetary Fund’s Policies for Macrofinancial Stability: How to Deal with Credit Booms. (Giovanni Dell’Ariccia, Deniz Igan, et al. 2012). As the title suggests, credit booms are cited as the main, very complex cause of large scale financial crises which mere shifts in short term interest rates cannot fully solve. It is important to note that credit booms are intrinsically not detrimental to the financial system and to the macro economy at large, once properly and timely monitored. The tail risk associated with credit booms can bring strong growth or absolute demise to the financial sector depending on how it is mitigated during the boom, and controlled for the expected credit trough cycle. While there is increased regulation of the overall banking sector within the US, there is a renewed tendency towards credit increase within the non-banking business sectors, which in turn spur the banking sector to increase product (mortgage) marketing to remain competitive. This is a structural aspect of the financial system which encourages credit booms, and credit crises within the US.

Credit Boom Identification

  • The IMF defines credit boom as any period during which the annual growth rate of the credit-to-GDP ratio exceeds 10 percent. A boom ends as soon as the growth of the credit-to-GDP ratio turns negative; thus, the credit-to-GDP measure for any sovereign is crucial to monitor by the Federal Reserve, even in the resetting of an indirectly related short term market shocks.
  • Dell’Ariccia and his IMF colleagues applied the definition of a credit boom and ensuing variance stress tests to a sample of 170 countries with data starting as far back as the 1960s and extending to 2010, with the identification of 175 credit booms therein.
  • One of the most telling results of sample testing showed that no matter the country classification or geographical sphere, one in three booms was followed by a banking crisis within three years of the boom. As well, the IMF results showed that the geographical regions that experienced credit booms had even greater credit delinquency during and well after the crises.
  • Three out of five booms were followed by subpar growth in spite of further macro economic stimulus packages for at least six years following the credit contractions, or outright credit busts. The referenced term for this phenomenon is a “creditless recovery.” One very strong contributing factor to this type of recovery is a failure of both monetary and fiscal policy to focus on credit aggregates, and instead silo industries and sectors according to individual need (e.g. Real Estate).
  • An even more concerning find by the IMF study showed that credit booms generally start at the tail end or after buoyant economic growth. Many decision makers in the lower federal or parliament house tend to believe a credit boom is an absolute sign of economic growth. This is not necessarily so. In many cases, a credit boom occurs to make up for declining economic growth, depending on the sovereign’s liquidity position.

Monetary Policy Control

In particular, credit booms seem to occur more often in countries with expansionary macroeconomic policies, and low quality of banking supervision. This model usually fits a developing country or emerging market paradigm. Thus, it is noteworthy that the major financial crises of 2008 stemmed from the US banking and financial systems, and even more so from a primarily credit risk perspective. It is as if the central banking system completely dismissed signs of macroeconomic overheating. Should monetary policy then remain conservative with high cost of borrowing, low asset price valuations to stifle credit growth? The answer goes both ways. Most times central banks focus on short term rate adjustments to adjust money supply, all the while paying attention to market risk. This was the case of the US Federal Reserve prior to the financial crisis of 2008. We have already pled the case for allowing a credit boom to occur, with control. A credit boom naturally has credit risk to adjust for; therefore it is necessary for central banks to change monetary policy in response to aggregate asset price. We note here that aggregate asset price valuation control is necessary over a focus on individual bank institutions to effectively mitigate credit risk factors.

A serious problem faced by central banking decision makers is tightening monetary control during the first sighting of a credit boom, as purely political decision makers may confuse a credit boom with absolute economic growth. Monetary policy measures to control a credit boom can spur a higher short term unemployment rate, which leads to fiscal issues. Well meaning monetary policy control can also exacerbate macroeconomic pressures: increases in rate borrowing costs can lead to an outflow of funds to foreign lenders, even more creative variable interest only lending options, and a further increase in the banking sector’s debt service.

Almost all sovereigns immediately turn to monetary policy unsupported by immediate regulatory policy to ‘fix’ the repercussions of a credit decline, credit bust, and ensuing financial crisis, since monetary policy does have the ability to create corrective action without an extensive time lag. The IMF study states that stand-alone monetary policy can help slow down a credit boom during economic overheating, or simply put, when the economic crisis hits. However stand-alone monetary policy is still reactive without the support of immediate macro prudential regulatory policy, with a policy framework considering aggregate changes.

Fiscal Policy

Fiscal policy has the least immediate positive effect on immediately controlling credit booms. Fiscal policy counts in the long term outcome of controlling the likelihood of credit booms through resetting tax provisions that affect borrowing. The IMF study cites that fiscal consolidation independent of a credit boom can bolster the financial sector in case of a credit crisis. However, the time lag and political implications associated with fiscal policy are inhibiting factors to a proactive control at the early stages of a credit boom. This brings to question the overall effectiveness of governmental fiscal policy in an ever changing and increasingly sophisticated global financial arena. Empirical support from the IMF study suggests that fiscal tightening is not associated with a reduced incidence of credit booms that lead to financial crises in the short to medium term. If so, it may be quite precarious to place increased financial system decision making in governmental folds.

Dell’Ariccia and his IMF colleagues propose countercyclical taxes on debt to offset the credit cycles, and so add tightening balance during a credit boom. In this regard, there will be further fiscal consolidation, or “buffers” that may act in the same manner as a regulatory capital requirement. A salient point made in favor of this measure is that the taxation would apply to the very active nonbank financial institutions as well. The issues cited with such fiscal policy modifications have to do with an easy circumvention of tax policy through various “tax planning” mechanisms especially employed by the nonbank sectors. Indeed, the IMF regression results actually depict that during a period of high economic growth, increasing tax revenues are simultaneously correlated with an increase in credit lending by both bank and nonbank entities. Further taxation may then truly be counterproductive to financial system tightening.

Regulatory Policy

Macro prudential policy consists of capital and liquidity requirements, and regulatory stress testing of the banking sector throughout the economic cycle. Capital and liquidity requirements act as countercyclical buffers to control the cost of bank capital; loan-loss provisions especially demand capital increases to account for an economic trough. When put into practice in a consistent manner, regulatory policies provide adequate information to decision makers on the credit health of the banking sector. To date, most of these policies have been fully monitored and implemented in hindsight as it pertains to curtailing and preventing a credit boom. Regulatory policy as a stand-alone has not been fully effective with curtailing the start and duration of an overheating credit boom.

Aggregate measures of macro prudential policy include the following:

  • Differential treatment of deposit accounts;
  • Reserve requirements;
  • Liquidity requirements;
  • Interest rate controls;
  • Credit controls;
  • Open foreign exchange.

The IMF team found through empirical analysis that these measures are truly helpful in predicting a negative outcome of a current credit boom, rather than being able to actually prevent credit overheating in the financial system. The IMF also found that the global banking sector has been able to circumvent credit controls such as asset concentration by utilizing foreign partner or parent banks, and/or by creating foreign banking and nonbanking spinoffs. Empirical analysis also suggests that the Loan to Value (LTV) ratio monitoring is particularly prudent in restricting negative credit overheating, especially when faced with real estate credit crises.

Conclusion

The IMF study suggests and we agree that financial policy is justifiable in preventing, curbing and monitoring credit overheating in the global economy. We also see that stand-alone policies are not fully effective in mitigating negative credit and tail risks with the boom. Overall, a credit boom occurring during an economic boom can have positive returns once aggregate risk is effectively managed. Since the 2008 financial crisis we see the US Federal Reserve take a more active role in setting financial system policy monitoring, which in effect may be necessary given the highest stand-alone weakness of fiscal policy. Suggestions are as follows:

  • When credit booms coincide with a general economic boom, monetary policy can be the initial (not sole) tool to manage and slow down economic overheating.
  • During the early stages of a credit boom, macro prudential and other regulatory policies should be effectuated in line with monetary policy to ensure capital buffers to mitigate a credit crisis.
  • The IMF has stressed that the governing body to enforce macro prudential polices must have a thoroughly structured task force to supervise and detect when capital requirement thresholds are triggered on a case basis and in the aggregate.
  • More than half of credit booms examined that started at an initial credit-to GDP ratio higher than 60 percent ended up in crises. This ratio needs to serve as a primary quantitative credit risk trigger for central banks and federal agencies.
  • Fiscal policy falls short in curbing credit overheating in the short term, even when coupled with monetary or macro prudential policies. Fiscal policy providing tax code provisions to limit borrowing can bolster the overall health of an economic boom, but possibly may not aid in curbing a specific credit overheating.

As global markets become more sophisticated and fast paced, we see the need for central bank decision making for the financial system, which entails a marked focus on credit risk and macroeconomic indicators. We expect to see the US Federal Reserve and central banks in general employ a well structured mix of financial policies to manage credit booms, mitigate associated risks, and turn around “creditless recoveries” into long term economic stability.

SOURCES

Giovanni Dell’Ariccia, Giovanni, Igan, Deniz et al. “Policies for Macrofinancial Stability: How to Deal with Credit Booms.” The International Monetary Fund Staff Discussion Note. June 2012.

Matthews, Steve. “Yellen Is Watching These Four Indicators for Signals on When to Raise Rates.” Bloomberg Business Online. March 2015.

The US Federal Reserve Regulatory Reform. “Resolution Framework.” The US Federal Reserve Online. March 2015.

Van den end, Jan Willem et al. “The Interaction between Central Banks and Government in Tail Risk Scenarios.” De Nederlandsche Bank Working Paper. March 2013.

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Why Financial Education?

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It is a sad fact today that most people starting with students are financially illiterate.

Here are some sobering facts:

  • The average score on a freshman “financial literacy exam” was 59%, according to the JumpStart Coalition.
  • The average student has roughly $23,000 in student loans, $4,000 in credit card debt and four credit cards.
  • An average of 7% percent of graduates default on their student loans within the first few years.

Here’s what students are begging to understand:

  • 84% say they need more education on financial management, according to Sallie Mae.
  • 62% say their knowledge of credit reports is either fair or poor, according to the Consumer Federation of America.
  • 60% have only a vague understanding of their debt, according to TheFreeLibrary.com.

So what can we – as parents, activists and educators do?

Start talking

Dedicate a portion of your time with your children and financially illiterate friends to money. Encourage them to share their struggles and successes. They like hearing from one another. They trust each other. Because people generally aren’t as comfortable talking about money as we are other topics, it’s important to foster these important discussions. Pushing people to get outside of their comfort zone will make the experience more memorable and more effective in their drive toward financial independence.

Bring problem-solving to the discussion

Feeding young and even older minds financial facts does little to increase financial intelligence. The trick is engagement. Researchers from the JumpStart Coalition found that financial literacy is really a measure of problem-solving ability rather than a mere awareness of financial facts.

Establish and nurture identity

It is a fact that when you lose your identity, you stall growth. You face closing doors. You lose freedom. The same is true for financial identity. Most people don’t know how to effectively budget, manage their debt loads, or save. If they’re lucky enough to find jobs, they face starting salaries that have remained stagnant for more than a decade. Yet, if they can learn the basics of money management and problem-solve their way out of sticky financial situations, to be their own financial advocates, and learn where to get help they’ll be more likely to find success.

Bottom Line:

Most of us are not doctors but know what to do to take care of our health. We get this knowledge from our parents, peers, our regular reading, TV etc…. We try as far as possible to follow the advice on balanced diet, Exercise, rest, and minimize/ eliminate bad habits like smoking and drinking. I would like to think of “financial education” in the same way. We all need money to ensure a good life and we need to take care of it. You don’t have to be a mathematics or financial genius to understand this. Here are my basics:

  1. Live within your means. Ensure you can pay for what you buy.
  2. If you borrow money ensure you can pay the EMI. Check to see if you can still pay for it if interest rates were to rise/ you were to lose your job.
  3. Protect what you have. Insure your life, Health and assets. You wouldn’t leave your house unprotected, don’t do it with your life or health.
  4. Plan your future expenses like child education, buying a home, Retirement etc….. See how much you need and save accordingly. There are plenty to tools that will give a good estimate of what you need.
  5. Inflation would eat into your savings, so invest in something that will give a long term return higher than inflation.
  6. Last but most important. Stay away from get rich quick schemes. Getting a good physique is a long term & constant effort, so is accumulating wealth. Get rich quick schemes are like steroids they will do more harm than good.

Most people can understand and follow these rules. Of course you may need advice from professionals from time to time, but subject the professional advice to test of reason ability. If the advice is too good to be true, it probably is.

Share your thoughts…

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Central Banks: A Question of Governance

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Fiscal year 2015 is upon us, and is fast becoming the year of historic monetary policy changes in light of an appreciating US currency and, in turn, a blanket decrease in European and Asian economic growth.  Since late 2014 and in full swing 2015, the Danish central bank, the Swiss National Bank, and  the Bank of Russia cut key interest rates, with probable Turkish Central Bank short term rate cuts to follow. The Bank of China has recently reduced its requirement ratio as well to encourage growth. In the US it is expected that the Federal Reserve raise short term rates by mid-year 2015, a policy change that has not been effectuated for over three years. It is apparent that governments are depending heavily on central banking to modify economic growth patterns as a short term solution.
While the spotlight is fixed firmly on central bank monetary policy to control the global economy, should central banks be fully responsible for financial stability? From a governance perspective, central banks act first and foremost as an independent or fully state-run agency to ensure adequate capital liquidity.  The gist of central banking is to control the effects of growth expansion or decline, and not necessarily to be the institution to structure economic growth itself. In addition, one of the tenets of central banking is to oversee a sovereign’s commercial banking system, and be thus supported simultaneously by government legislature.
If this foundation of central banking was kept constant, we would not have had such financial turmoil in 2008. However, lack of commercial bank corporate governance due to lobbying influence has vastly undermined central banking effectiveness in the long term.
In layman’s terms:

  1.  Short term upon short term upon short term monetary rate fixes does not equal proper long term decisions. Decisions that should be made with no biased influence from legislature.
  2. The global monetary system has moved from fully secured to almost totally unsecured asset-backing over the past 40 years. Most world currencies are much less asset-backed than ever before.

Both very simple reasons listed above explain why at anytime an industry receiving the most ‘creative’ cash flow (derivative upon derivative) will experience the dreaded bubble. And, while it is natural in the scheme of a global economic cycle to have peaks and troughs, the mass non-collateralization of currencies, followed by a now endemic financial culture of sophisticated derivative creation leads to unsustainable growth. It’s less long term growth and more adrenaline rush. We have more monetary policy magicians at work than real doctors of the art.
The Bank for International Settlements examined the central bank’s role in being the overseer of global financial stability in its May 2009 publication, Issues In The Governance Of Central Banks. The article points out that while central banks are needed for monetary stability, having the central bank be the main institution for overall financial stability gives unwarranted responsibility, and unnecessarily overlaps with government functions:
Governance arrangements for the financial stability function are generally less settled than for the monetary stability function…apart from the lender of last resort function and various regulatory powers, there are no central bank policy instruments that are uniquely suited to ensuring systemic financial stability. Instruments that might influence financial stability have other primary roles…Using such instruments for ends other than their primary purpose inevitably involves trade-offs.
It is therefore ill-advised policy to depend solely on the central banking model for ongoing global financial stability. Yet, from a governance perspective can individual banks be allowed full deregulation? Deregulation makes sense in a free market economy. However, judging from the shenanigans of 2008, we need checks and balances in our global banking system. In the US, bank regulation took a dive in December 2014: Section 716 of Dodd-Frank financial law, which would have forced big banks to keep their derivatives mostly separated from their insured deposits, was repealed by the U.S. Congress, with planned repeals to follow in FY2015. Can a global economy with rampant recession afford the repercussions of a huge financial crisis within the next two years? Probably not: short term policy issued by a sovereign’s central bank cannot fully override financial policy decisions made by legislature, based on corporate influence.

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