The Manhattan Institute’s Nicole Gelinas recently wrote an essay critiquing the Dodd-Frank financial reform law and titled “Too Convoluted to Succeed.” It’s worth reading to get a sense of what the conservative critiques of the law actually are — and of whether wonks on the right have any viable alternatives.
Reviews of the final Volcker rule have been mostly positive among financial reformers and, perhaps more tellingly, mostly negative among banks. Speaking for the Financial Services Roundtable, Tim Pawlenty warned that the rule "will reduce needed access to capital." That's Wall Street for "ouch". If the banks didn't say that, you'd know the Volcker rules wasn't worth the paper it was printed on. (On the other hand, shares of both JP Morgan and Goldman Sachs rose on Tuesday.)
In all the excitement, a lot of commentators have been writing posts arguing that the Volcker Rule is either unnecessary or perhaps even counterproductive. Both Matt Levine and Tyler Cowen have summed up these cases well.
Since everybody likes "transparency," and since misinformation spreads like wildfire when it comes to the Federal Reserve, it’s important to understand what this bill does and doesn't do. And if it passes, we should understand how the Federal Reserve itself will be complicit in it.
When it comes to financial regulation, there are no substantial issues on which tea party Republicans differ from Wall Street.
This fact may surprise you, because the latest argument among conservatives is that the tea party agenda isn't shaped by the financial sector. In fact, they'll say, the tea party is where the smartest ideas on financial reform are being generated.
Zach Carter has an excellent article revisiting Janet Yellen's 1997 Senate confirmation hearings. Among the revelations is that Yellen, who was up to lead President Bill Clinton's Council of Economic Advisors, supported the repeal of Glass-Steagall, NAFTA and chained-CPI.
Which isn't such a surprise. Another way of saying that is Clinton chose a chief economist who supported his economic policies.
Deputy Treasury Secretary Larry Summers was a little over halfway into his testimony in July 1998 when he acknowledged the degree to which his actions undermined the independence of the Commodity Futures Trading Commission (CFTC).
As Summers told a Senate committee, referencing his conflict with Brooksley Born over regulating derivatives: "We understood the seriousness of making this proposal. To question an independent agency's concept of its jurisdiction and then to propose legislation that would temporarily curtail that agency's ability to act is not something we do lightly. We concluded, however, that such legislation was necessary."
The strangest part of the increasingly bitter shadow campaign for chairman of the Federal Reserve is that the contest is not really about monetary policy. It's about financial regulation.
The two leading candidates for the job are Janet Yellen, the current vice chairman of the Fed, and Larry Summers, the former Treasury secretary and an economics adviser to President Obama. When it comes to monetary policy, they don't differ drastically. Both support the Fed policy to maintain low interest rates and continue asset purchases -- no premature "tapering" -- until unemployment falls significantly.
On Sept. 11, 2001, Roger Ferguson, the mild-mannered vice chairman of the Federal Reserve, found himself unexpectedly asked to play the role of first responder in what could've been a global financial meltdown.
The World Trade Center housed some of the world's most important banks and investment firms, and the terrorist attacks left southern Manhattan, the nation's financial capital, in physical ruin. If the nation's banking system were to freeze up, then the economic damage from the attacks also could have been monstrous.
A certain narrative about the Dodd-Frank Act, which celebrates its third anniversary on Sunday, is starting to get set in stone. This narrative, which Noam Scheiber laid out in a recent book review, is a little too self-satisfied about what was accomplished, and downplays the more aggressive ideas that were considered.
Sunday is the third anniversary of the Dodd-Frank Act. To get a sense of how implementation has been going, I asked 16 people at the forefront of the debate to answer two questions: What has gone better than you had expected? And what has gone worse? Mike Konczal
Sheila C. Bair served as the 19th chairman of the Federal Deposit Insurance Corp. for a five-year term, from June 2006 through June 2011.
Last week saw the first hearing in the U.S. government's court case attempting to hold ratings agencies accountable for their role in the financial crisis. Reforming the ratings agencies has turned out to be a difficult process. One would think that such an obvious institutional failure should prompt quick and definitive reform, not just from the government but also from the private sector. But that hasn't happened.
Few policy ideas have energized activists in recent years quite like calls to bring back the Glass-Steagall Act of 1933. Nobel laureate economist Joe Stiglitz, among many others, fingered 1999 s partial repeal of the law as a contributing factor behind the financial crisis. Signs calling for its return, such as the one that Gossip Girl and Margin Call star Penn Badgley's holding in the above photo, were a common sight at Occupy protests in late 2011. Sens. John McCain (R-AZ) and Maria Cantwell (D-WA) proposed legislation in 2009 to bring back the repealed parts of the law, as did Reps. Maurice Hinchey (D-NY) and Marcy Kaptur (D-OH).
Federal regulators are increasingly paying attention to Bitcoin, the decentralized virtual currency. Last week, two of the most senior figures of the Bitcoin community trekked to Washington to try convince D.C.'s power brokers that they are eager to work with federal officials. But that may prove easier said than done.
Sherrod Brown and David Vitter have a new bipartisan bill to end Too Big to Fail. Here's what it does.
Sens. Sherrod Brown (D-Ohiol) and David Vitter (R-La.) have been working on a bill to block the largest banks and financial firms from receiving federal subsidies for being deemed Too Big to Fail. On Friday, a draft version of that bill was leaked to Tim Fernholz of Quartz, much to Vitter's chagrin. So, what does the bill do?
One of the biggest problems with financial reform is having to discuss issues that most people find painfully boring. For instance, "derivatives."
But "derivative" is an important word! And the concept is crucially important to both the financial crisis and where reforms need to go. There's a reason why Warren Buffett said, "Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." And why Bill Clinton said he was wrong to avoid regulating derivatives when he had the chance. These financial instruments played a central role in the financial crisis, culminating with the collapse and bailout of AIG.
Attorney General Eric Holder said something in Senate testimony that many had thought, but had never heard admitted at a high government level. "I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them," Holder said. Too big to fail, in other words, has become too big to jail. That's got lawmakers talking about breaking up the banks again, if only to ensure that our basic laws can be reasonably enforced.
With Romney's defeat, the Dodd-Frank financial regulations are here to stay. But that doesn't mean the debate over them is finished. Bloomberg View recently estimated that the law provides the equivalent of an $83 billion subsidy to the biggest banks — a figure questioned by Wonkblog here — and skeptical lawmakers quickly used the number as a cudgel against the reform.
Talk about burying the lede. In the final two paragraphs of his New Republic review of Greg Smith's "Why I Left Goldman Sachs," Lewis, the most celebrated financial reporter in the country, calls for breaking up the big banks:
If Goldman Sachs is going to change, it will be only if change is imposed upon it from the outside—either by the market's decision that it is no longer viable in its current form or by the government's decision that we can no longer afford it. There is a bizarre but lingering aroma in the air that the government is now seeking to prevent the free market from working its magic in the financial sector-another reason that the Dodd-Frank legislation is still being watered down, and argued over, and failing to meet its self-imposed deadlines for implementation. But the financial sector is already so gummed up by government subsidies that market forces no longer operate within it. Could Goldman Sachs fail, even if it tried? If someone invented a cheaper way to finance productive enterprise, would they stand a chance against the big guys?
Along with the other too-big-to-fail firms, Goldman needs to be busted up into smaller pieces. The ultimate goal should be to create institutions so dull and easy to understand that, when a young man who works for one of them walks into a publisher's office and offers to write up his experiences, the publisher looks at him blankly and asks, "Why would anyone want to read that?"
President Obama begins his second term confronting a familiar and frustrating incongruity: the gap between how much he has changed and how little about the country seems different.
A partial accounting of Obama's first term reveals more accomplishments than most presidents secure in two. The health-care law, of course, is almost certainly the most significant piece of social policy passed since the Great Society. The rescues of the financial and auto sectors, though begun under President George W. Bush, were mostly carried out and completed under Obama. The Dodd-Frank financial reforms included the creation of the Consumer Financial Protection Bureau. The stimulus financed long-term investments in everything from weatherization to electronic medical records and high-speed rail.
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RCP Obama vs. Romney:Obama +1.0%; 7-day change: Obama -2.7%.
On several occasions, Paul Ryan has suggested he supports breaking up the nation’s largest banks to prevent future bailouts for too-big-to-fail firms. But he’s never quite proposed a policy to get there.
“If you’re a bank and you want to operate like some nonbank entity like a hedge fund, then don’t be a bank. Don’t let banks use their customers’ money to do anything other than traditional banking,” Ryan told constituents at a town hall meeting in Mount Pleasant, Wisc., on May 4.
This implicit support of the Volcker rule— a key feature of the Dodd-Frank financial reform law that prohibits banks from making speculative bets for their own profits—is unlikely to sit well with the likes of JPMorgan Chase and Citigroup. Neither company would comment for this article.
Ryan reiterated his distaste for mega banks in a July interview on CNBC regarding former Citigroup chairman Sandy Weil’s support of breaking up big banks. The congressman, who voted against Dodd-Frank, said the law “will consolidate the system to very large interconnected firms that have political connections.”
He called for replacing the law with a regulatory system that includes greater transparency and “does not put the government in the way of adding more moral hazards to the marketplace and triggering higher likelihood of taxpayer bailouts.”
American Bankers Association chief executive Frank Keating said he hopes Ryan will keep an open mind about financial reform. Keating is encouraged by Ryan’s understanding of “the fiscal cliff, the great fear of national insolvency…the very real challenges facing the American economy.”
This week marks Dodd-Frank’s second birthday, and my how the legislation has grown. This infographic from the law firm David Polk shows how big Dodd-Frank is getting — and how much bigger it’s likely to get:
Here are two more data points on Dodd-Frank’s second birthday:
On Wednesday, Goldman Sachs CEO Lloyd Blankfein was asked whether he would, if given the power, repeal the legislation. “Would I push a button and eliminate Dodd-Frank?” he replied. “No, I would not be happy about letting the field lie unregulated.” Blankfein went on to say that there were parts of the law, like the Volcker rule, that he doesn’t much care for, but he was clear that Dodd-Frank is better than nothing. Whether that qualified endorsement from a key bank would increase or decrease most Americans’ trust in the law is, I think, an interesting question.
The idea, admits tax lawyer Lee Sheppard, would prompt bankers to “look at you balefully, like you just ran over their dog.”
But advocates for higher taxes on Wall Street trading hope the proposal gets a second hearing--particularly since JPMorgan’s messy loss has raised new questions about the risks that big banks are still taking. They argue that a tax on trading would not only raise needed revenue, but also help curb some of the speculative, risky activities that make the markets so volatile--preventing, perhaps, the next “London Whale.”
Dick Berner didn’t foresee the 2008 financial crisis. But he was among the first to predict the economic downturn that led up to it. In late 2007, as an economist at Morgan Stanley, Berman forecast a recession in 2008 due to a significant housing slump, a weakening job market and higher energy costs while most other major financial firms were still sanguine about the economy’s prospects (you can see him interviewed on “Charlie Rose” here). President Obama has now chosen Berner to become the government’s oracle for the U.S. financial system, charged with foreseeing the next big threat before catastrophe comes down the pipe.
Two weeks ago, I criticized Jon Huntsman for running a conventional campaign that promised a new tone but shied away from offering new or bold ideas. But there are signs that that’s changing. Maybe.
James Pethokoukis reports that Huntsman is unveiling a plan to “set a hard cap on bank size based on assets as a percentage of GDP.” If banks exceed that cap, they get taxed. Huntsman says we should “impose a fee on banks whose size exceeds a certain percentage of GDP to cover the cost they would impose on taxpayers in a bailout. The fee would incentivize the major banks to slim themselves down; failure to do so would result in increasing the fee until the banks are systemically safe. Any fees collected would be used to reduce taxes for the broader non-financial corporate sector.”
In recent days, more than 900 cities have hosted protests under the Occupy Wall Street banner. But the enthusiasm for intervening in Goldman Sachs’s affairs hasn’t trickled up to the GOP presidential campaign. There, the candidates want to leave Wall Street alone. And this isn’t just a passive disinterest in the finance sector’s affairs. They want to deregulate -- actively and aggressively.
“I introduced the bill to repeal Dodd-Frank,” bragged Rep. Rep. Michele Bachmann at last week’s Bloomberg/Washington Post debate. It’s true. Her bill is H.R. 87. It repeals the law in 67 words. It says nothing about any replacement. If it passed, Wall Street would be operating inside the exact same regulatory structure it had in the run-up to the crash.
But Herman Cain was not to be outdone. “Repeal Dodd-Frank, and get rid of the capital gains tax,” he countered. Repealing the capital gains tax would make it vastly more profitable to earn a living through investment income rather than wage income. A hedge-fund manager, for instance, might escape income taxation entirely. It would give smart, young college students even more reason than they have now to go into the hedge fund game than, say, medicine.