August 27th, 2011
in Op Ed
by Guest Author Dan Flemming
Perhaps my career experience makes me more sensitive to national security issues than others may be. Nonetheless, I am dismayed that the national security risks stemming from failures in the financial system are not more widely discussed. U.S. National Security is tied to government financial behavior, U.S. banking behavior, U.S. financial industry practices in general and effective auditing across the board.
Follow up:Risky Business
There is much evidence today that the U.S. banking and financial systems are no longer conservative and appropriate risk management practices have not been used. In addition, I conclude that the U.S. political system does not meet reasonable integrity goals and is experiencing a failure due to human factors.
There are only two choices in controlling U.S. banking risk and associated national security risk to liquidity problems and financial crises like the one in 2008:
- National banking regulations to establish and preserve conservative banking principals; and
- Industry self-regulation through industry associations and certifications.
An optimal system would utilize some features of both options.
A History of Degradation
We can trace a history of how the degradation has progressed. The history is a specification of poor business practices, improper auditing processes and simply poor political and policy choices. Here is a (partial) list:
- “Guns and butter” policy by Lyndon Johnson for the Vietnam War led to increased government debt and, in effect, borrowing from Social Security to help pay war expenses. The pillaging of Social Security, Medicare and Highway Trust funds continued from that time forward.
- Liberalization of Savings & Loan regulations led to spectacular mismanagement and the S&L crisis of the late 1980s.
- Failure to follow through from the lessons of the S&L crisis so that similar financial failures continued to occur.
- Repeal of the Glass-Steagall Act (in 1999) that had kept commercial banking relatively stable since the 1930s.
- Poor accounting practices, especially forward looking, for Social Security and Medicare.
- A revolving door for personnel has been created between government policy makers, financial regulators and financial institutions.
- Bosom buddy relationships have developed between rating agencies and the firms being rated.
- Accounting scandals of the early 2000s (Enron, Worldcom, etc.) were systemic warning signals that were ignored.
- The inability of political and financial leaders at the highest levels to see the financial crisis was imminent, even in the last few months before the final collapse in the fall of 2008.
- The use of U.S. funds (via Federal Reserve) actions to provide trillions of dollars to non-U.S. entities in the months and years following the 2008 collapse has been done with little transparency and is only becoming evident long after the fact.
National Security is an Issue
The systemic risk associated with financial institutions is a national security risk because the position of the U.S. in the world is primarily the result of our financial strength. We are weakened if the rest of the world loses confidence in us financially.
Our security is also supported by a strong military. That cannot be maintained if our finances are corrupt.
Our security is supported by our citizenry, which support will be weakened if the citizens become impoverished by ill-advised bank actions.
We have gone through an episode (housing bubble) that saw banks making hundreds of billions (trillions?) dollars in loans that cannot be paid back because the equity backing has evaporated and the debtors’ incomes have been diminished. We are now going through another episode where money has been lent (and appears will be further lent) to sovereigns that cannot repay.
It seems there is no global body that will ever be able to regulate or solve risk that manifests from the lower level of finance. We must return to conservative ethics and practices in banking and finance.
What is Taken for Granted should Return
Banking today is taken for granted by most Americans even though we see banks as another big system we can't control. For banking, just like government systems, we simply want transactions to work in a straight forward way, through checking and savings in the case of banks. Banks used to make an effort to appear conservative and show that they followed strict principals. Today banks seem just to get bigger each year and there is not any obvious effort to become more stable and to have a primary business of handling deposits, checking and savings.
The commercial financial banking system is the foundation upon which business is built. Business is the structure which provides employment for our citizens and forms the backbone of our national security.
About the Author
Dan Flemming is a Systems Analyst and Logistician. He has utilized dozens of defense systems to identify bottlenecks, problems, systemic issues, and solutions across agencies within the Department of Defense.