For Dennis Kelleher, trying to calculate the final price tag of Wall Street reform is pure folly—partly because he thinks it's simply impossible, and partly because he believes those demanding it have vested interests in using such costs to strike down reform.
"Many of the costs and benefits of financial regulation simply cannot be quantified," Kelleher, head of advocacy group Better Markets, said in a speech on Monday at the Peterson Institute for International Economics. "How do you quantify the human costs that all the economic wreckage has inflicted? Searching and not being able to find work for years…lost retirements, educations and dreams. How do you quantify that? You don't."
Kelleher's underlying argument is that the cost-benefit analysis that the financial industry is demanding of federal regulations is too narrow in defining "costs" and "benefits"—capturing only their impact on Wall Street's bottom line rather than accounting for the massive toll of the last financial crisis on ordinary Americans and the benefits of preventing the next one, according to a new report from his group Better Markets.
Kelleher, among the few pro-reform advocates lobbying the Hill, is particularly disturbed by a decision by the D.C. District Court last year that ruled the Securities and Exchange Commission must produce a cost-benefit analysis of a new Dodd-Frank regulation that gives ordinary investors more power over the membership of corporate boards. Industry groups like the Business Roundtable, which filed the suit against the SEC, are "trying to get economic agencies out of the business of economic analysis and get the federal courts to decide instead."
Instead, he says, agencies like the SEC should consider for themselves how regulations might affect "competition, efficiency, and capital formation"—one factor but not the only one that should guide their decisions.
But for many of the economists in the audience at the Peterson Institute, Kelleher's call to junk cost-benefit analysis of Dodd-Frank was throwing the baby out with the bathwater.
Without such calculations, "you are making assertions and not defending them with any empirical evidence," said Howard Rosen, a visiting scholar at the Peterson Institute, visibly frustrated as he stepped up to the microphone. "In this building, I think the frustration is that we need to support these things with substance."
"You weaken your case when you basically say there's no possible way to measure the benefits of this protection because they're almost limitless," asserted Bill Cline, another economist at the Peterson Institute.
So why not propose an alternative cost-benefit analysis that did try to capture the societal costs and benefit regulation? For example, the Congressional Budget Office has calculated that the 2008 financial crisis essentially doubled the federal debt to $7 trillion to $8 trillion, noted Simon Johnson, the MIT economist and another Peterson fellow.
Presumably, economists at the CBO could evaluate such risks when they're scoring regulations and find some way to quantify them—an approach that Johnson, an outside advisor to the CBO, is currently advocating. Even if the total costs are impossible to quantify fully, independent offices like the non-partisan CBO could at least calculate how regulations could reduce the probability of catastrophic financial events, based on historical precedent, for instance.
Kelleher insisted, however, that it would be impossible for officials in Washington to sort out a fairer, more rational way to come up with a cost-benefit analysis. If it came up in Congress, for instance, legislators "would not engaged in a full faith debate." Besides, he said, conducting such analyses would require cash-strapped agencies "to hire enormous amounts of economists." That said, Kelleher told the audience of number-crunchers, "That's probably good news here."