Speechification AlertPosted: September 12, 2009
Well, it’s my turn to listen to a Obama Speech. Those speeches usually have the same dizzying effect on me that tennis matches do. Instead of watching balls go back and forth rhythmically while lulling me to sleep, I get to watch the head of the President. Teleprompter Right, 1,2,3 to Teleprompter left, 2, 3 …
So the speech is on bank reform which is something I’ve been on about for months now. It’s the anniversary of Lehman’s demise. Stories abound on the Grey Lady today including this call by Dr. Tyler Cowen of George Mason University. He’s a little libertarian for my taste on policy–even managing a h/t to Ayn Rand and Atlas Shrugged–but he gets it all in a way that only an economist could.
But we are now injecting politics ever more deeply into the American economy, whether it be in finance or in sectors like health care. Not only have we failed to learn from our mistakes, but also we’re repeating them on an ever-larger scale.
Lately the surviving major banks have reported brisk profits, yet in large part this reflects astute politicking and lobbying rather than commercial skill. Much of the competition was cleaned out by bank failures and consolidation, so giants like Goldman Sachs and JPMorgan had an easier time getting back to profits. The Federal Reserve has been lending to banks at near-zero interest rates while paying higher interest on the reserves the banks hold at the Fed. “Too big to fail” policies mean that the large banks can raise money more cheaply because everyone knows they are safe counterparties.
President Dwight D. Eisenhower warned of the birth of a military-industrial complex. Today we have a financial-regulatory complex, and it has meant a consolidation of power and privilege. We’ve created a class of politically protected “too big to fail” institutions, and the current proposals for regulatory reform further cement this notion. Even more worrying, with so many explicit and implicit financial guarantees, we are courting a bigger financial crisis the next time something major goes wrong.
We should stop using political favors as a means of managing an economic sector. Unfortunately, though, recent experience with health care reform shows we are moving in the opposite direction and not heeding the basic lessons of the financial crisis. Finance and health care are two separate issues, of course, but in both cases we’re making the common mistake of digging in durable political protections for special interest groups.
I have to admit that I’ve written about similar concerns, however, I can tell Cowen and I may differ on how to correct the situation. That’s typically true of most economists. We agree on the root causes because of our grounding in shared theory but argue which policy might be best based on our political bent. I continue to argue for the role of government as rule setter and referee. However, I really do prefer independent bureaucrats in the position of auditor and enforcer. Congress, however, still has to write the law. This action, to date, has been missing.
So, MarketWatch has provided a pre-speechification programme so that we can get our score card ready. The speech is supposed to “rekindle” interest in regulatory restructuring. I’m not sure we need restructuring so much as we need laws that recognize the systematic problems we’ve developed in financial markets since quants have turned asset pricing into a physics exercise, financial innovations have become exotic, and the entire set up is now one big cartel waiting to pounce on the unsuspecting business sector and consumer. We now have a small number of banks capable of funding the really big capital undertakings and who knows what priorities or friends they’ll choose to fund over positive net present value projects? This should be enough to send any capitalist running for government regulation. Also, get ready for lack of services and fees that would make a loan shark blush. This should make any advocate for the little guy scream for the same. Today, I am the jade dakini. It’s happening in Europe but I doubt it will happen here.
So, what is Obama said to be inkling tomorrow that will be undoubtedly be sacrificed to the demons of political expediency down the road?
Obama is scheduled to speak midday at Federal Hall in New York to discuss steps the administration is taking to revive the economy and what efforts it is taking to phase out its bank bailout programs. He is also expected to press Washington lawmakers to move quickly to enact regulatory restructuring legislation.
Lawmakers on Capitol Hill have come under criticism of late for a failure to move quickly enough to reform the financial sector, one year after credit markets came to a grinding halt, private investors pulled their money out of the system and bank lending froze.
Regulatory reform is still a long ways away from enactment, even though the Obama administration throughout July and into mid-August submitted over 600-pages to lawmakers on Capitol Hill of what it would like to see in regulatory reform.
The proposals seek to install new regulations for opaque derivatives transactions, set up a Consumer Financial Protection Agency for mortgage and credit card products, establish rules giving shareholders a say on executive and employee pay, and create a systemic risk regulator that would set capital standards for big banks while setting up a process so that a mega-insolvent institution’s failure does not cause collateral damage to the markets.
Yeah, and less than two months ago we were discussing a robust public option in health care and look where we are now. There’s still the built-assumption that we’re going to live for some time with “mega-insolvent institutions” like Citibank. I’ve gone over the ridiculousness of this strategy a dozen or so times over the last year and hate to revisit it. I’ll just suggest you google “Japan”, “lost decade”, and “zombie banks”. You’ll find the words “stagnant economy” and “L-shaped recession” come up frequently with said searches. That’s the shorter version of why removing systemic risk is a much better idea than finding ways to cope with it. Coping with it will cost jobs and any hope of a robust recovery. (That is for every one but the bankers who are merrily on their same bonus and pay paths, unlike the rest of us.)
So, remember that huge advantage democrats were supposed to have this year? Yet again, the one almost democratic sounding provision brought up by Barney Frank is the one that will most likely gum up the entire process, imagine that!
House Financial Services Committee Chairman Barney Frank, D-Mass., has indicated he plans to support a controversial “cram-down” legislation, if it is introduced, that would allow bankruptcy judges to modify mortgages for troubled homeowners on the verge of foreclosure. If introduced, the measure is likely to be packaged as part of a larger regulatory reform bill, which could delay the broad restructuring package because of bipartisan opposition to it, Petrasic said.
Bankruptcy judges currently aren’t allowed to perform cram-downs, which are reductions of a borrower’s principal amount or changes to their interest rate or other terms of a mortgage contract.
“Cram-down is throwing a stick of dynamite into the whole process,” Petrasic said.
Cram-down failed to pass in 2008 because of bipartisan opposition led by Republican lawmakers. House GOP members are expected to bring up their opposition to cram-down at a press conference scheduled on Tuesday afternoon to examine their perspectives on the government’s intervention in the financial markets.
Petrasic said GOP lawmakers are likely to argue that cram-down will destroy the discipline of the mortgage contract process and discourage banks from lending to potential borrowers with less-than-perfect credit ratings.
So, you gotta love that last statement. For some reason a cram-down destroys the discipline of the mortgage contract process, but fraud, mispricing of risk because of implied government bail-outs, and confused regulatory responsibility for credit default swaps doesn’t mess it up at all.
Then there’s that little battle over turf that’s been set up by Treasury. Who gets the new responsibility for protecting the consumer? Traditionally, it has gone to the Fed who controls the truth-in-lending laws enforcement, but many politicians are hesitant to farm that out to what they view as a black hole over which they cannot benefit. Unlike Fannie and Freddie whose regulation is left to Congress (which explains why they basically became a congressional gift basket),the Fed and the FDIC are quasi independent. The SEC is subject to more congressional whim and K-Street whimsy. The last discussion on this topic led to the infamous profanity-laden temper tantrum of Timmy-in-the-well-again-Geithner.
Elizabeth Warren, Economic Goddess of the TARP program, has already explained the banks’ response to the Consumer Financial Protection Agency (CFPA). Let’s just allude to a similar response that can be viewed in vampire movies when creatures of the night are exposed to garlic, wooden stakes, and holy water. It involves a lot of hissing, spitting, and teeth gnashing. Since both creatures are after our blood, it’s no surprise.
The big banks are storming Washington, determined to kill the Consumer Financial Protection Agency (CFPA). They understand that a regulator who actually cares about consumers would cause a seismic change in their business model: No more burying the terms of the agreement in the fine print, no more tricks and traps. If the big banks lose the protection of their friendly regulators, the business model that produces hundreds of billions of dollars in revenue — and monopoly-size profits that exist only in non-competitive markets — will be at risk. That’s a big change.
Warren wants to regulate non-bank lenders. Ex Fed Chair Paul Volcker wants to regulate Money Market Accounts. SEC head Mary Shapiro is none to happy about excessive bonuses on Wall Street. Since these are all people in the know, you would think we’d get some forward momentum. Ah, but it’s still all Kabuki. Call together the big names into a blue ribbon panel so we can look like we’re accomplishing something (aka 9-11, Iran, etc.) then completely ignore their advice. Isn’t that just the way it is?
So, now it’s going to be another speechification but isn’t that just the way it is too?