Thursday, July 15, 2010; 7:29 AM
The financial-regulation bill might pass today. Or, if Republicans filibuster and force Reid to file cloture (which requires two days to "ripen" into an actual vote), it will pass Saturday. Either way, by the week's end, financial-regulation reform will join health-care reform, the stimulus, tobacco regulation, Ted Kennedy's Serve America Act, and much more in the 111th Congress's outbox. This has been, by far, the most productive Congress in memory. Whether that's a good or a bad thing will depend on your perspective.
Wonkbook includes a range of perspectives today on the financial-regulation bill. In the end, it's both much more and much less than "Wall Street Reform," which is the Democrats preferred term for the bill. In the "more" column, the legislation creates a Consumer Financial Protection Bureau, which will have authority over everything from credit cards to payday lenders, influencing many industries that we tend to think of as Main Street businesses. In the "less" column, the structure and size of Wall Street will, with some exceptions relating mainly to the Volcker rule and derivatives, remain intact.
The biggest transformations will take place among the overseers: A regulatory structure is being created to help regulators detect and avert crises, and, if that fails, respond once they've begun. As part of that, the Federal Reserve is gaining new powers, a systemic risk council is being formed, resolution authority is being created and defined, and shadow banks are being brought out into the sunlight. Will it work? As you'll see, there are a range of opinions on that.
Meanwhile, the Fed is likely to sit on its hands even as its own forecasts say the economy is deteriorating; Reid is trying to broker a deal between utility companies and environmental groups; Democrats' inability to agree on a budget means they won't be able t use budget reconciliation on a jobs bill next year; and Minority Report's tech inches ever closer to reality.
Welcome to Wonkbook.
A 12-page summary (pdf, but worth it) from Deloitte advising its financial clients as to what they can expect from the new law: "Because the new U.S. law is complex, it can be helpful to remind ourselves that its underlying purpose is relatively simple and has two powerful strands: 1. 'De-risk' the financial system by constraining individual organizations' risk-taking activities and capturing a broader set of organizations', including the so-called "shadow" banking system, in the regulatory net 2. Enhance consumer protections."
"As the details of the new law turn into specific regulatory requirements, there will be business impacts across all of financial services, not just banking. Some of those impacts are obvious. For example, the need for "arm's-length" swap desk affiliates combined with the move from over- the-counter to exchange trading for derivatives, tighter constraints on leverage and risk-taking, and higher liquidity requirements imply lower profit margins in future from those activities."
Despite lowering estimates for economic growth and inflation, the Fed won't pursue additional stimulus, reports Neil Irwin: "Fed leaders expect the jobless rate to be 9.2 to 9.5 percent in the fourth quarter, and to still be 8.3 to 8.7 percent at the end of 2011, both slightly higher than in April forecasts. But they see little threat from inflation, forecasting that prices will rise 1 to 1.1 percent this year...Still, the minutes make clear that Fed leaders still anticipate a continued economic recovery, suggesting that most of the policymakers would still resist any push to take new steps to support growth."
What the Fed could do to spur growth, but won't: http://bit.ly/dxxnmO
Harry Reid is brokering a climate deal with utility companies and environmental groups, report Darrel Samuelsohn and Coral Davenport: "Majority Leader Harry Reid's top energy aide, Chris Miller, nudged the small group to the bargaining table earlier this month in the hope they could resolve more than a decade of dispute on Clean Air Act regulations and reach agreement on a first-ever cap on greenhouse gas emissions. So far, sources close to the talks said, the two sides are holding firm in their demands. The power companies want relief from the air pollution rules as a price of entry into negotiations if they are going to accept a mandatory carbon limit that won't apply to other industries. The environmentalists are saying no."
Democrats are forgoing a budget, and thus losing the chance to use budget reconciliation on a jobs bill in 2011, reports Annie Lowrey: "While the distinction between an enforcement resolution and a full budget is largely technical, there is one crucial difference: Under the enforcement resolution, Democrats can no longer use a parliamentary tactic known as budget reconciliation next year ¿ a process Democrats had hoped might allow them to pass key pieces of legislation, such as a jobs bill, with 51 votes in the Senate, as opposed to the usual 60 needed to overcome a filibuster."
Genre bending interlude: The Morning Benders cover Joanna Newsom and J Dilla at the same time.
Still to come: FinReg special; The BP cap test faces further delay; a new CEA report says the stimulus has created over three million jobs; the GOP wants Senate hearings on Donald Berwick; and Minority Report's sci-fi tech becomes a reality.
Simon Johnson thinks it will fundamentally change American banking: "Just over a hundred years ago, the United States led the world in terms of rethinking how big business worked - and when the power of such firms should be constrained. In retrospect, the breakthrough legislation - not just for the US, but also internationally - was the Sherman Antitrust Act of 1890. The Dodd-Frank Financial Reform Bill, which is about to pass the US Senate, does something similar - and long overdue - for banking."
Despite canning a $19 billion fee, FinReg will still include charges on banks: http://bit.ly/cSGGO3
Harvey Pitt argues it won't help federal regulators: "What was, and is still needed, is a regulatory regime with better flexibility that is more nimble, and able to spot potentially damaging trends before those trends become full-blown crises. Instead, what we have is a bill that makes government less nimble, and more ponderous. The systemic regulator--the FSOC--can override decisions of individual regulators. The Consumer Financial Protection Agency can bog down any other agency by encumbering agency rules or policies."
FinReg vastly improves crisis response, writes Ezra Klein: "By placing derivatives on exchanges and clearinghouses, by creating a systemic risk council, by forcing banks to provide "funeral plans" that explain how to unwind them in the event of a failure, by creating an Office of Financial Research to collect daily data and provide quick analysis on transactions, there's much less chance that a financial crisis would leave regulators totally confused about what's going on, and who owes what to whom."
Paul Volcker gives FinReg a solid 'B': http://nyti.ms/bEPGLB
The U.S. Chamber of Commerce remains opposed: "The final bill leaves the regulators with quite some work to do -- 533 regulations, 60 studies and 94 reports. To put this into perspective, Sarbanes-Oxley required 16 new regulations and 6 studies. That's right, the Dodd-Frank bill is over 30 times the size of SOX."
Daniel Indiviglio looks at how FinReg could either end or encourage the market's preference for mega-banks: http://bit.ly/dhfxXw
What matters is the regulators, writes Tim Fernholz: "Unlike battles in Congress, where organizers have a short time to exert political pressure, rule-making is a war of attrition in the trenches, often over years. Without someone at the top committed to real reform in the agencies, reformers don't have a chance."
The Roosevelt Institute publishes a range of takes: http://bit.ly/aABjSI
Americans for Financial Reform make their case for the bill: http://bit.ly/a5nNR9
The Council of Economic Advisors estimates the stimulus has saved or created three million jobs and will save 500,000 more this year, reports Jared Favole: "The report, which will be fully unveiled by Vice President Joe Biden late Wednesday morning, shows that for every dollar spent under the Recovery Act for renewable energy and other projects the private sector is spending $3, according to a White House official." Read the report (PDF): http://bit.ly/9KUl3Y
Greg Mankiw is skeptical: http://bit.ly/bVXM2D
There will be yet another Senate vote on unemployment benefits on Tuesday: http://politi.co/9ABnUf
China is beginning to adjust to an era of slower growth, report Andrew Batson and Bob Davis: "Higher wages at home and low-wage competition from other countries will make it harder for China, already the world's largest exporter, to maintain rapid export growth. Real-estate bubbles have developed in places like the tropical island province of Hainan, prompting the government to take steps to try to cool those markets so they don't threaten the financial system. The favorable demographics that have supplied manpower for economic growth are changing. ..The labor pool is expected to peak around 2015, and then decline, according to U.N. projections."
Max Baucus is pushing for a permanent extension of some Bush tax cuts, reports David Rogers: "'With today's budget picture, it's no longer clear that we can afford large tax cuts for the most well-to-do,' he said, opening a Finance Committee hearing on the subject Wednesday. But in wrap-up comments later, Baucus made clear that he will push for a permanent extension of those provisions that affect middle- and working-class families.. Senate liberals are increasingly agitated, after being hammered by Republicans for months regarding health care and spending. Vermont independent Sen. Bernie Sanders, for example, wants an estate levy even stricter than that of the House."
Raghuram Rajan explains how economic inequality fueled the financial crisis: "the political response to rising inequality - whether carefully planned or the path of least resistance - was to expand lending to households, especially low-income households. The benefits - growing consumption and more jobs - were immediate, whereas paying the inevitable bill could be postponed into the future. Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly."
Dani Rodrik says a specter of "market confidence" is spooking policymakers: "Few can predict which way market sentiment will move, least of all market participants themselves. Even with hindsight, it is sometimes not clear why markets go one way and not the other. Similar policies will produce different market reactions depending on the prevailing story, or fad of the moment. That is why steering the economy by the dictates of market confidence is a fool's errand."
Matt Miller argues Obama's hardly too tough on business: http://bit.ly/aO4PW7
David Wessel searches for politically palatable stimulus spending: "There's talk in Washington about a federal highway and surface transportation bill, the one form of spending about which some deficit-phobes are enthusiastic. Or perhaps a public-private infrastructure fund of some sort that would leverage taxpayer money and draw some cash out of corporate coffers, and might help beleaguered state governments at the same time."
TED interlude: The scientific advisor to Minority Report shows that the film's computer interfaces are no longer science fiction.
David Roberts argues that a deal with utility companies that compromises clean air standards is worse than no action at all: "I've resisted the repeated tendency of greens to say this or that compromise renders the climate bill 'worse than nothing,' but this deal really would do that: it would make the bill worse than nothing..The new Clean Air Act regulations are going to have bigger, faster, and more substantial effects on the power sector than any watered-down utility-only cap-and-trade system. Those regulations will eliminate more pollution, shut down more dirty coal plants, and avoid more greenhouse gases than a utility-only cap-and-trade system."
Andrew Revkin notes a utilities-only carbon cap was first proposed by George W. Bush: http://nyti.ms/aj8bQO
Brad Plumer explains why electric cars aren't catching on: "We're bumping up against a weird psychological fact about American car consumers. As a Better Place official explained to me, market research shows that most drivers want to feel like they can just get into their car and drive cross-country if they have to anytime they want. So even if they never drive more than 40 miles at a time in practice, they still get nervous about buying cars with short ranges. That's why these EPA rules matter."
BP's "integrity test" of the new oil well cap has been delayed yet again, reports Joel Achenbach: "BP said that the leak in what is known as the choke line could be repaired and that its effort to close the damaged well, and shut down the flow of oil permanently, would resume. But video streams from the seafloor showed a chaotic plume of oil and gas continuing to surge from one of the outlets on the 75-ton cap installed earlier this week. It was unclear late Wednesday whether the leak would be a momentary hitch in the much-anticipated 'integrity test' on the well, or if it would put the operation in grave peril."
Animated lecture interlude: Daniel Pink (and cartoons) explain what motivates humans.
Senate Republicans appeal to Max Baucus for a hearing on Donald Berwick's appointment to run Medicare and Medicaid, reports Jennifer Haberkorn: "[Republicans on the Finance Committee] argue in a letter to Committee Chairman Max Baucus (D-Mont.) that Berwick needs to answer questions raised about his qualifications -- namely, question they have regarding his statements in support of the British health care system and rationing. The letter was signed by all 10 Republicans on the committee. After the recess appointment, Baucus said he was "troubled" that Berwick didn't go through the standard nomination process."
Mitch McConnnell responded to Berwick's appointment by blocking two judicial nominees: http://bit.ly/dmWqqI
Joel Klein, Michael Lomax and Janet Murguia argue against paying to stop teacher layoffs with Race to the Top funds: "A growing coalition of advocates for equity and excellence-- including education and civil rights groups and members of Congress from both sides of the aisle--have united to oppose these cuts. Meanwhile, Mr. Obama and Education Secretary Arne Duncan have offered to work with Mr. Obey to find other ways of funding the Edujobs bill. But unless and until they find a solution together, the Senate should reject the Obey amendment. The choice it proposes--between a reformed educational system and preservation of teachers' jobs--is a fundamentally misguided one. Our students need and deserve both."
The House is considering regulating airline fees: http://politi.co/cD7xE0
George Loewenstein and Peter Ubel argue behavioral economics has become overused: "Take, for example, our nation's obesity epidemic. The fashionable response, based on the belief that better information can lead to better behavior, is to influence consumers through things like calorie labeling -- for instance, there's a mandate in the health care reform act requiring restaurant chains to post the number of calories in their dishes..Obesity isn't a result of a lack of information; instead, economists argue that rising levels of obesity can be traced to falling food prices, especially for unhealthy processed foods."
Early Alzheimer's diagnoses can reduce health care costs: http://bit.ly/9MOMoW
Closing credits: Wonkbook compiled with the help of Dylan Matthews and Mike Shepard.