Will Basel III lead to another financial meltdown and future taxpayer bailouts?

Will Potter, a second year economics student at the University of South Carolina, has written an account of Basel III for the university newspaper The Gamecock. Bankers recently met in Basel, Switzerland. The weekend meeting updated agreements on bank reserve requirements—how much a bank must have on hand in case customers show up en masse demanding their money. That sounds like a good idea considering the fiasco we call the financial meltdown.

Did those bankers learn anything? Apparently not, other than the fact they can do what they want because they have a limitless government-backed cushion.

The goal of Basel III was to increase levels required for reserves. But bankers can get creative, so they set different levels for liquid assets.

Potter explains Basel III in simple English that even a political columnist can understand: “Sixty percent of the requirements will consist of level 1 or cash, central bank reserves and sovereign debt. Forty percent of the requirements will consist of high-quality liquid assets such as GSEs — Fannie Mae and Freddie Mac. The federal government recently took over both Fannie and Freddie. Banks will flock to the GSEs because they offer more reward than traditionally safer treasury bonds. Fannie and Freddie will be more reckless with their investments because they will be in the portfolios of most banks. The government will have to bail them out again.”

What was at the heart of the meltdown, other than regulators who didn’t regulate and who are still on their regulatory jobs?

Fannie Mae and Freddie Mac.

Potter offers a prediction I agree with: “Basel III will drive bank money globally from safe, private investments into riskier investments of questionable paper like sovereign debt and Fannie and Freddie paper. Instead of making banks safer, Basel III will reproduce the causes of the current recession in 2018 and beyond. Basel III is essentially a secret agreement to funnel money from the private sector to the government and its cronies.”

You may be asking yourself why the regulatory bill passed in the U.S.appears to be useless.

In an article at Minyanville.com, Anthony Randazzo explains that phenomenon: “Moreover, since the Dodd-Frank Act left the tacit ‘too big to fail’ system in place for the United States and the European Central Bank has created a bailout fund for member nations (and the banks that own their debt), financial institutions don’t have the necessary incentives to properly police their own capital.”

The US Report interviewed Professor Bill Black, an economist, about the meltdown. Black believes the same overseers who missed the meltdown are still in key positions.

John Carney at CNBC puts Basel III in context for the taxpayer. “Global banking regulators may be close to reaching a deal on bank liquidity requirements that could saddle the U.S. taxpayer with supporting Fannie Mae and Freddie Mac for eternity.” Now we know Carney was right.

So far, Carney said taxpayers have “been forced to pony up around $150 billion” for the GSEs.

What does this mean for consumers and Main Street? Be careful where you place your money and how you spend it.

What does it mean for the taxpayer? We’re still the golden goose for the government, bankers and cronies.

Will Basel III lead to another financial meltdown and future taxpayer bailouts?

You betcha. (Commentary by Kay B. Day/Sept. 16, 2010)