Can We Avoid Another Cataclysmic Meltdown Of The Global Financial System?

How Will Meaningful Reforms to Our Financial System Impact The Future of  New Innovative Projects?

As previously mentioned, we have recently abandoned a ten-year effort to develop a number of wood-waste-to-biofuels plants, because the obstacles encountered became insurmountable. Not mentioned is my continued interest in finding opportunities to rejoin in such project development efforts as soon as some of the key impediments are mitigated.

One objective of this article was to articulate why at the very least, we need to reform our broken financial system before additional attempts to develop such projects are undertaken again. This begs the question as to how long we can expect to wait  before such efforts can be restarted.  Answers to this question depend on what we believe the reforms  that are proposed could do to encourage development of new innovative projects, particularly those that are in our area of interest. In the following discussion, we try to answer the question of how well we think these reforms will work in supporting new innovative project development.

Effectiveness of Proposed Reforms

If  we are able to privatize the mortgage securitization firms , they will then have a monetary incentive not to engage in as much speculative trading activity as the do today. Instead it is logical to assume that they will curtail strategies that primarily focus on running up the value of assets they hold, as such strategies are risky, especially if they have to bear losses that come from short-term casino style investing. Instead, such firms will be looking to invest in and loan to businesses that operate in the real economy that offer potentially high rate of return, over longer time periods. This  should be of specific benefit to developers of new innovative projects.

If we make it harder for state-run mortgage securitization firms create derivative products that obscure the toxicity of sub-prime mortgages through bundling, they  will have to curtail their purchases of sub-prime mortgages. This will force mortgage originators to return to more prudent lending practices. Borrowers will have to meet higher standards, and over time, this should lower defaults and foreclosures.

If private mortgage securitization firms are prohibited from derivatives trading using government backed borrowed funds, they will become more risk averse, while at the same time they will be able to do less damage to our financial system.

If homeowners are subjected to LTV limits that can be dynamically adjusted to reflect significant changes in housing prices, it should result in having fewer upside-down mortgages  during periods in which housing prices  are declining. Hopefully a self-correcting mechanism of this type could mitigate the severity of the real estate bubble formation and bubble bursting cycle.

These examples are included to illustrate how some of the proposed reforms could work. Not discussed are the “fixes” previously discussed in the synopsis of “Movers and Takers”, especially those dealing with breaking up TBTF mega-banks and those that provide incentives for American companies to reinvest in business activities that are part of the real economy.

At the end of the day, I am hopeful that reforms will be made that will lead to a more functional financial system. At the very least, I am still confident that by addressing the housing market’s problems first and by fixing the “mortgage machine” it will be the best way to avoid another cataclysmic meltdown.

However, I am a realist when it comes to when I think we can substantially correct the course we are on. I also believe that new innovative projects will be supported again, once the financial system is no longer so broken.

Unfortunately, I expect that it will take at least ten years before our financial system is adequately fixed and that I will not be in any shape to participate in development of any new biofuels projects, as I have already reached the age of 81.