Wednesday, May 5, 2010

As The Financial Regulation Wheel Turns, Crushing You Underneath

Here’s the latest financial regulation maneuvering:
Aides to the committee chairman, Christopher J. Dodd, Democrat of Connecticut, and the panel’s senior Republican, Richard C. Shelby of Alabama, said the two senators had agreed to scuttle a $50 billion fund proposed by Democrats.

The fund, which was opposed by the Obama administration, drew criticism from Republicans who had warned that it would promote rather than prevent taxpayer bailouts of failed financial companies.

Under the deal, the Federal Deposit Insurance Corporation would finance the liquidation of failed financial companies, using a new credit line with the Treasury Department backed by the failed company’s assets. The money would be recouped later through the sale of assets, with shareholders and creditors forced to take losses.
This is a nice thing to say ahead of time, but will it actually happen in the thick of it? Will regulators say, well, gee whiz, let’s totally break down this bank and leave whatever people work for it jobless?

Derek Thompson points out a related problem:
But the new plan leaves open the same question: what happens when lots of banks start to fail together? The liquidation process will be so onerous and ugly that in future severe crises where we've got widespread problems in the industry with multiple systemically crucial banks -- the once-every-three-generations kind of catastrophes -- the government might not have the stomach for widespread liquidation.
Just so. We’re not interested in circumstances where, say, just one bank fails. I suspect the system we had pre-crisis would have been just fine at that. The problem is when a number of them fail all at once.

The important side benefit of a pre-paid rescue fund is that the tax would discourage big banks from forming (since there’d be a bigger tax the bigger your assets were). So I’m not a huge fan of this proposal, although it’s not completely awful.

It appears that the fight over the consumer finance protection agency is ongoing; according to this John Harwood blog post, lobbyists are still fighting for the CFPA to be housed “within existing regulatory structures,” i.e. within the agencies we’ve already captured heh heh heh. And it’s important to note that the CFPA will have more scope than just Wall Street: car dealerships, to take one example, are complaining that the CFPA will regulate them too. They use the argument that the bill “includes Main Street auto dealers who had nothing to do with the financial meltdown.” This is true. Yes, auto loans really didn’t have much to do with the meltdown that we happened to have.

But think of this analogy: when you’re sick with HIV, it can be one of any number of diseases that finally kills you. In our case, it happened to be subprime and Wall Street chicanery. But the underlying problem is the fact that Americans took on too much debt because their wages weren’t rising commensurate with their increased productivity. So it’s a mistake, in this analysis, to focus solely on the disease that actually did the deed but think about the diseases that plausibly also could’ve done the deed. And auto loans are often prone to gimmickry and trickery; therefore they ought to be more tightly regulated. Anyway, you don’t hear as much press coverage on the matter, but it’s definitely encouraging that the lobbyists are still trying to fight it—if they weren’t, something’s wrong. (Here’s Brian Beutler on the subject:
Consumer Protection: Likewise, the GOP will try to weaken the authority of, or even eliminate entirely, the Democrats' plan to create a new federal agency to protect consumers from predatory financial practices. This also will be a tough climb for the Republicans. But the consumer financial protection agency has become the focus of the GOP's critique of the bill in recent days, and if the Democrats shield it from any major changes, Republicans could line up to filibuster the package all over again.
Personally, I wish there was more reporting as to the exact authority of the CFPA at this stage. Lobbyists and the GOP would like it weaker, but how weak is it already? Is this like public option, where the Democrats were in effect defending a very minimal, very weak public option? Things I want to know. This report from Mother Jones gets into some of the details, while this Wall Street Journal article reveals that the CFPA would be housed within the Fed and have jurisdiction over financial institutions with over $10 billion in assets, which is somewhat disappointing.)

James Kwak also writes about financial reform in big-picture terms that are discouraging. Financial reform has turned out to be too similar to health care reform: some nice changes that will make life better for some people, but not really the root-and-branch attacking of the system you’d like to see that’s equal to the scope of the problem we face. Unfortunately, unlike health care reform, I think financial reform will be difficult to tweak or change, because eventually public outrage must diminish and public attention must be distracted. It’s the way of the world.

No comments:

Post a Comment