Can the Real Economy Speak?, The Republican Response to Financial Reform

Just Fox asked a great question about a month ago: “It’s very much a compromise plan, meaning that we’ll be hearing a lot from both consumer advocates and banking lobbyists about its flaws. But what about corporate America? What does it think about financial reform?”

Yglesias and Ezra Klein had a response, as well as Kevin Drum pointing out that “business executives tend to stick together.”

The question is kind of funny when you think about it though. Who will help the industrialists and the real economy speak? If only wealthy industrialists and real economy leaders like John Olin, Joseph Coors and Richard Mellon Scaife had gotten together and funded some sort of institutions that could come up with policies that would help protect the real economy from the excesses and explosions of financial bubbles and Wall Street’s concentration and size.

(I’m a simple ROI kind of guy, and if I was funding a soft socialist welfare state in DC that did nothing but cheerlead Dow 36,000 and The Greatest Story Never Told economy and The Ownership Society while the deregulated credit markets were doing nothing but producing trillions of dollars of absolute garbage, what kind of return would I mark that as?)

It seems that all that investment has gotten them a lot of contorted arguments that the CRA was something other than a complete success, that Fannie wasn’t a dupe of the big MBS dealers but the mastermind, and that, of all the things to believe, the response to something like the complete disaster of Lehman Brothers’ bankruptcy is to double down on the bankruptcy process for large systemically risky financial firms.

GOP Retort on Financial Reform

I mentioned how strange the GOP bill would be when it first showed up in the House. But here it is. McConnell: ”The way to solve this problem is to let the people who make the mistakes pay for them. We won’t solve this problem until the biggest banks are allowed to fail.”

Simon Johnson says: “This proposal is dangerous, irresponsible, and makes no sense. The bankruptcy process simply cannot handle the failure of large complex global financial institutions – without causing the kind of worldwide panic that followed the collapse of Lehman and the rescue/resolution of AIG.” And he’s right.

In fact, let’s go to the bankruptcy judge in charge of the Lehman case (my bold):

“I have to approve this transaction [Barclays offer] because it is the only available transaction. Lehman Brothers became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets. This is the most momentous bankruptcy hearing I’ve ever sat through. It can never be deemed precedent for future cases. It’s hard for me to imagine a similar emergency.”

And Lehman wasn’t even that big of a firm. Could you even imagine bankruptcy the next time through? If the bankruptcy judge himself is saying that this is a disaster and can never be repeated, why would you want to repeat it?

Two Points.

1) I think it is safe to say that the Republicans will just repeat Frank Luntz’s talking points the whole time. But here’s an opportunity for the GOP: Explain how your new and improved bankruptcy would have handled Lehman Brothers in Fall 2008. Let’s assume McConnell’s plan was in place January 2008 – what would be different?

(Treasury and Democrats could also use this opportunity to walk us through how resolution authority would have worked had it been in place in January 2008, and Lehman had triggered a prompt corrective action final whistle June 2008. How much would it have cost the resolution fund? I’m getting different answers, and getting a rough estimate and a walked through timeline on how Lehman would have been resolved would help people defending resolution handle these attacks. And it’s a simple wargame.)

Whatever doubts I have about resolution authority, and I have many, doubling down on bankruptcy without a very explicit set of scenarios in which it could have solved Lehman’s problems other than wishin and hopin “they’d be too scared to fail” isn’t an answer. Honestly, it’s the most bizarre reaction one could have.

2) The most obvious problem with us having some “Too Big To Fail” institutions right now is that it is it is cementing a derivatives dealer oligarchy that is already pretty powerful. Who would you rather trade a derivative with, a random dude who might collapse with a second dip or someone Treasury and the Federal Reserve is fairly explicitly standing behind?

Of course Republicans almost entirely (88%) voted against sensible Gensler-style derivatives language in the Frank Bill coming out of committee.

So the one part where their critique has some traction, they are silent. It’s also the part that is most profitable to Wall Street. Think that’s a coincidence?