I think we've been lulled into thinking "one side" is ramming laws and reform down the other's throat, but Wall Street has owned both sides in mind, body and soul for a long time now. Paul Krugman's gives a summary of what's going on . http://motherjones.com/kevin-drum/2010/03/dismal-outlook-financial-reform — By Kevin Drum| Wed Mar. 24, 2010 11:23 AM PDT I'm going to keep collecting reactions to Chris Dodd's financial reform bill until I feel like I've made some sense out of it. First off, here's Ryan Avent on Dodd's approach to dealing with banks that are too big to fail:To address TBTF concerns, the bill is relying very heavily on resolution authority, as opposed to measures limiting firm size or leverage or interconnectedness through direct means or the use of strong incentives. So you ensure that some firms will be really big and systemically risky, and then you give regulators discretion to use or not use resolution authority. Discretion, under these circumstances, is exactly what you don't want. It creates doubt in markets that regulators will actually pull the trigger, which will lead to greater risktaking by firms, which will make it more difficult for regulators to pull the trigger in times of crisis. In fact, it's probably even worse than that. The problem with resolution authority is that it's like a nuclear bomb: it causes a lot of damage and you don't want to haul it out except as a last resort. So the default position for regulators is always going to be the same as it is for the banks themselves: do everything they can to avoid using it. Troubled banks will propose plan after plan to unwind their risky positions and earn their way back to solvency, and regulators, who are terrified of pulling the trigger on a big bank that might still have a chance of survival, will allow things to continue spiraling. And when the **** finally and irrevocably hits the fan, the problem will be massively greater than anyone ever thought it could be. Much better, then, to try to keep banks from getting into crisis in the first place. That means reasonable leverage and capital regulations. Mike Konczal compares the House approach on this to Dodd's approach:In both bills, regulators have discretion in how to set limits, as determined by internal risk managers. In the House Bill though, there’s a strict limit: no systemically risky firm can have leverage greater than 15-to-1. In the Senate, the FSOC will make recommendations to the Federal Reserve. The Federal Reserve will do like, whatever it wants — it could follow the recommendations. Or it could not. This solution in the House Bill is a satisficing solution — there are almost certainly firms that could handle being leveraged 16-to-1. However we don’t trust the regulators to be able to detect that firm and also not bend the rules for firms that couldn’t handle that leverage. So we write down a clear rule. And these clear rules are exactly what the lobbyists are going to go after. The House bill is the bare minimum that's likely to work. And even at that it depends heavily on defining exactly how leverage is calculated; keeping a gimlet eye on bank shenanigans at all times; defining "bank" broadly to mean virtually any big financial institutions; getting buy-in from other countries; making sure the relevant regulators consider bank safety to be their primary mission; and then applying leverage constraints in other areas, such as residential and commercial loans. In other words: even the House version isn't all that likely to work. But it's way better than the Dodd version. Congress shouldn't micromanage, and regulators should always have the ability to tighten standards on individual banks, but Congress should put in place an absolute ceiling that can't be easily wisked away by the SEC or the Fed when times are good and everyone thinks they're going to last forever. So that's where we are. We have a House bill that at least has the right idea, even if it probably isn't either broad or deep enough. We have a Senate bill that, even before it goes through the legislative meatgrinder, is woefully inadequate. And we still have months and months of negotiations to get through, all of it done in the shadow of a massive lobbying campaign from every financial institution in the country to water things down even more. And that's despite the fact that, as near as I can tell, that nobody really disagrees about the general shape of the problem here. There's pretty much universal agreement that reining in leverage is the single most important thing we can do to moderate future financial crises. Color me pessimistic that this is likely to turn out well.
The public radio show "market place" had a very good piece last week on the financial reform bill. The financial services industry has spent over $0.5B over last the 12 months in Congressional lobbying fees alone. That's a TON of lobbying time, getting their message and preferences in front of the reps. Actually, it makes the term "reps" more ridiculous than ever. Here is where I think Dems have really failed us in this Congress. Lock those clowns out and get to work on real financial reform while you have a good majority. But no, as Krugman suggests, they are also owned. From what I can tell, and especially from Krugman's article, the exact same scenario will truly be able to play out again.
this is really not fair. the contention isn't that no one wants to do it, the problem is its complicated. this isn't 1936
The argument put forward by Major back in the day was that it was important to bail out the banks immediately and deal with reform later. The counterpoint made by myself (and others) was that deferring the regulation would limit it's effectivity, since the corporate desperation aspect would be gone. And this has turned out to be true - now that the system is fortified we see massive intervention by corporate lobbyists seeking to maintain the status quo. I don't see regulation occurring on the scale needed (or demanded) because we orchestrated the recovery backwards.
I think you are not reading this article correctly. Yes corporate lobbyists are involved, they always will be. But they are not really the problem. the problem is defining the best set of regulation. for instance, one thing I've been reading every now in then is that even if you had regulation that is being proprosed the regulators are behind the banks in the products that are offered. for instance, the government never really understood credit default swaps until it was too late.
Can you point to a specific problem with the current legislation? This is the same nonsense that went on with health care reform - everyone jumps on every single little thing that occurs as part of the process and assumes that's the death of it, and therefore they were right. The latest seems to be that both the banks and the GOP might be willing to back off on the Consumer Protection Agency, and that both the House and Senate are not backing off on the derivatives regulation. Volcker still believes some of his core regulations will be included as well. We'll see where it all goes, but we don't have a bill yet to be criticizing at this point. Everyone is just saying different things to try to control the direction of the debate. I stand by that point. Both that the bailout was not going to be an endless suckhole of money, and that reform will come later when things can be calmly looked at. From the article, I would point to this: Troubled banks will propose plan after plan to unwind their risky positions and earn their way back to solvency, and regulators, who are terrified of pulling the trigger on a big bank that might still have a chance of survival, will allow things to continue spiraling. And when the **** finally and irrevocably hits the fan, the problem will be massively greater than anyone ever thought it could be. Dissolving banks isn't always the best solution. TARP was one of those risky plans that the banks and regulators would propose - and had that authority been built in and used to resolve Lehman, we could have avoided much of this massive disaster. Each of the other banks would have needed saving, but it could have been done in an orderly manner, and less than 18 months later, the vast majority of that would have been paid back, at a profit to the taxpayer. Whatever the end result of the regulation is, the progressive left (Reich, Krugman, etc) isn't going to be happy, and they are going to complain that it wasn't strong enough. Part of this is because they hate the big banks and think of them as the "enemy", and part of it is that one of their goals of regulation is to punish rather than reform. This is one of the big reasons NOT to irrationally try to pass regulation in the midst of the worst turmoil - the regulations would have been driven entirely by angry populism with banks viewed as the bad guys. At the end of the day, what you really want is regulation that rewards banks for actions that support the health of the larger economy, and discourage actions that negatively affect the economy. That wouldn't happen with regulations created in a "we hate the banks" culture. At the same time, the right isn't going to be happy with the end result either, because there will be restrictions on banks to control their size and their risk taking. To me, if neither extreme is happy, it's more likely to be a decent piece of legislation.
Major: Thanks for the post. I don't actually disagree with any of it, although I note you avoided the rather sticky issue of lobbying in the process and the effect it is no doubt having on negotiations.
Sorry - I don't doubt that lobbying will have its influence. In moderate amounts, I'm actually not opposed to lobbying in theory. I watch CNBC all day long every day (I work from home) and many of the Reps and Senators are total morons - even the ones on the banking and finance committees. Maxine Waters, in particular, is a total clueless idiot who doesn't understand how banks work and certainly shouldn't be drawing up regulations. So from that perspective, I think lobbyists provide basic information that is much needed. That said, it only works if both sides are lobbying. Here, you have the banks with undue influence, which is no doubt a major problem. The only positive is that it's counterbalanced to some extent by the anti-Wall-Street sentiment out there right now. No one wants to be seen as catering to Wall Street, so that limits some of the excesses. It's not an ideal situation, but realistically, I don't know of a better solution. Overall, I don't think trying to regulate in October 2008 would have been better. While you might have gotten some stronger good regulations, I think you'd also lock in some really, really bad non-well-thought-out things that would be bad for the overall economy. I think it would have exacerbated the crisis by putting excess restrictions on banks that could have otherwise fixed themselves with the TARP assistance.
Bull**** like this makes me tune out teabag talking points about "ramming stuff down". I'm not disagreeing that there has to be a solid counterpoint. I don't really trust Chris Dodd to do the right thing. I just find the prevailing opposition lacking, brazen and/or immoral. Planet Money Podcast, Auto Lenders, and an Amazing GOP Machine by Mike on March 14, 2010 I was a guest on NPR’s Planet Money on Friday’s episode, Attack of the Special Interests, where I help explain some of the issues related to the CFPA, resolution authority, and derivatives reform coming out Monday, and how the special interests will try to weaken them. There’s a really awesome moment in it. They asked me about the House’s CFPA exemptions that have been carved out by special interests, and I mention how auto loans have been exempted. I told them that it was put in by a congressman from California who owned a bunch of car dealers, but I wasn’t sure of the congressman’s name. So they had two additional interviews lined up after me, Rep Brad Miller (D – NC) and Rep John Campbell (R – CA), congressmen they discuss issues with for Planet Money, and right before they start the interview with Campbell their producer figure out it was Campbell who put in the auto loan exemption! So if you listen you can hear him defend it after being called out as the pointman of the exemption I advised Planet Money to watch for. Heh. An Amazing Machine Here’s my real problem, and it’s a serious one. Campbell asked for an auto loan exemption to be put into the CFPA, moving it into the direction of a crony corporate welfare bill. He then voted against the final bill. He also voted for a last minute amendment – the “Idaho Amendment”, which came very close to passing – that would have killed the original CFPA in the bill and replace it with a significantly weaker version. Follow this pattern, but in slow motion. It shows up in health care, the stimulus and everywhere else in 2009, but with financial reform it is very easy to see. Democrats wants a bipartisan financial reform bill. So they take a good CFPA and water it down and give all kinds of crony exemptions so Republicans like John Campbell will support it. Then Republicans vote against it anyway. The Republicans then hire Frank Luntz to come up with language about how the CFPA is a bad idea because Elizabeth Warren and Obama are in the pocket of auto lenders and are engaging in crony capitalism, and how heroic people like John Campbell stood up and voted their conscience. As a machine, it’s amazing. If this GOP good-policy-killing-and-deception machine was a car it would get like 100 miles to the gallon. It’s a terrible thing to do, to score cheap political points at a moment when the country desperately needs to get its arms around financial reform, but man is it efficient. And it’s working every time. Is it a good idea to trade auto exemption for a Republican vote? Honestly I have no idea, I’m not a politician and I can’t follow all the horse trading going on with those kinds of things. But if you are going to trade a crony favor for a Republican vote, you should actually get the vote! Call me old-fashioned. So good for Chris Dodd for going it alone with coming up with a financial reform bill. It would be one thing if weakening the bill would bring bipartisan support; instead it is all just an amazing headfake by the Republicans to get to eat the cake of crony capitalism but also call the Democrats gluttons during the midterms. Additional I did get one thing wrong; I said that Campbell owns car dealers. He does not. He did for 25 years, but not anymore, and as he clarified for Planet Money: “I own real estate in which a couple of my tenants are car dealers.” He doesn’t believe that there is anything wrong with this exemption. I was actually uncertain on how big of a deal this exemption was until I was convinced by friend of the blog and MMBM co-author Raj Date’s writing on this matter. Here is his Auto Race To The Bottom policy paper over at Cambridge Winter, which is your required reading of the day if you are interested in consumer financial access and reform, and a brief summary of it he wroteat Baseline Scenario (notice the special guest appearance by shadow banking!): …Even by the low analytical standards applied to hastily arranged, crisis-driven corporate welfare initiatives, the exemption of auto dealers from the CFPA appears profoundly ill conceived….Dealers are not a niche part of some obscure and immaterial market; they are the single largest channel (with 79% market share) in the origination of auto loans and leases, a business that (at more than $850 billion in outstandings) is larger than the entire U.S. credit card industry…Moreover, auto finance is demonstrably susceptible to unfair and deceptive practices, and those practices are demonstrably not held in check by private market forces alone…. The auto finance market consists of two basic distribution channels: the dealer (or “indirect”) channel, which is generally funded by a handful of large national banks and Wall Street capital markets platforms; and the retail (or “direct”) channel, which generally consists of credit unions and community banks. By artificially distorting the auto finance market in favor of the dealers’ distribution channel, the exemption encourages the primacy of Wall Street funding sources over traditional bank deposit funding. As evidenced by the crisis, intentionally chasing businesses from traditional banks and credit unions into Wall Street funding models creates the real potential for disruptive volatility over time. Finally, the exemption also offends even the most basic principles of regulatory fairness. Free-market adherents should be dismayed by the notion of specially permissive regulatory treatment for some classes of politically powerful market participants. We should not be stacking the deck in favor of the already-dominant players with the most dubious customer practices (auto dealers and the captive finance companies and Wall Street houses that fund them), and thereby discriminating against competitors with more transparent, customer-friendly business models (community banks and credit unions chief among them).
Chris Dodd's bill is basically a Federal Reserve Empowerment Bill. It greatly expands the Fed's ability to regulate, buy assets, and enforce anti-trust laws. If anyone thinks that will help at all, they haven't been paying attention. The Fed's regulatory record is downright awful, and they have been more of enablers of these crises than anything. Besides that, the Fed's accountability structure is so poor that this invites the foxes to rule the henhouse, especially since the board of governors is elected by the banks that they are supposed to be regulating. Dodd's bill has Citigroup's fingerprints all over it. The truth is that we don't need more regulations, we need more enforcement of fraud regulations. If we aggressively went after the fraud that caused the banking crisis, we would significantly reduce the moral hazard we created from the bailouts.
