I have an explainer on Why We Need a Volcker Rule online at The Nation. Hope you check it out.
Watching the Volcker Rule evolve, it’s clear that the lack of a regulatory agency closely associated with it is hurting its chances. I write: “Most of the other major pieces of Dodd-Frank are matched with an agency that wants strong implementation. The FDIC wants to end ‘too big to fail’ through resolution authority. Gary Gensler at the CFTC wants to see strong derivative rules. The staff of the CFPB wants to see their agency start off strong. But no single regulator is trying to get the strongest Volcker Rule possible. Assigned to five different agencies, it is important that activists fight for a strong Volcker Rule to be enacted.”
I thought that before I read The Escape Artists by Noam Scheiber, and that book makes me think it even more. Others have reviewed about how well the book shows the deficit hawkery of half of the core Obama team (and Obama himself), the political choices made on the depth of the problem in late 2008 and the squandered year of 2011 – check out Rich Yeselson at The American Prospect here - and I agree.
But I think the book is also a solid walkthrough on the creation and passage of Dodd-Frank. For example, it describes how Geithner didn’t want to go hard on derivatives. Scheiber quotes a financial industry lobbyist as having Geithner tell him “Don’t worry about derivatives, I think you’ll like what you see on derivatives.” Start weak, and then the industry can weaken it further. The book then walks through how Gary Gensler of the CFTC, formerly of Goldman Sachs, lead the fight to make derivatives much stronger through forcing them onto exchanges. Gensler goes as far as to write a public letter to Congress on how weak the initial bill Treasury submitted to the House was – something a lobbyist tells Scheiber “It’s just not done…People don’t do that.”
(When Gensler doesn’t make a comment on the Lincoln derivatives amendment/Section 716, a set of reforms the administration wanted to kill, Rahm Emanuel is quoted by Scheiber as saying “Get that cocksucker in here so I can rip him a new one.” Heh.)
Shelia Bair was doing the same thing on resolution authority and other related FDIC powers. Elizabeth Warren was taking the fight over a consumer financial protection agency to the media. Scheiber writes about a meeting where Geithner yells at regulatory heads for being “off the reservation” for going to Congress and not airing their concerns on Dodd-Frank internally. But this shows how important individual people were to getting Dodd-Frank to be stronger, and how important they were in making it weaker.
The Volcker Rule, however, wasn’t proposed by an agency or Treasury but by Volcker and later the President. Now that we are to the implementation stage, the people most associated with wanting a strong implementation (Volcker, Senators Merkley and Levin) are on the outside of the rule-writing. Ideally the Treasury Secretary would lead the charge, but Geithner never saw it as a priority. Scheiber writes that Geithner “said he still didn’t believe the provision was necessary, but if embracing it would win over Volcker and defuse criticism from the left, he was open to it.” That period is now past.
One of the conflicts history is most likely to remember – the conflict between saving the financial sector and saving underwater homeowners and the real economy – is presented in the right light here. “Romer believed in the power of stimulus over bank bailouts because she saw it in the data. When she studied the Great Depression, the subject on which she’d built her academic reputation, she noticed that the banks began to recover only towards the end of the 1930s, even though the worst of the bank runs had ended in 1933. What had come in between was four years of solid economic growth….Clearly it wasn’t enough to make sure the banks didn’t go under. You had to help borrowers, too.”
Slight issue. One thing that wasn’t included was the administration’s lack of push and support on bankruptcy reform. Summers is described as “perhaps the administration’s biggest proponent of a more aggressive assault on the housing morass” and thus the best hope for those worried about balance-sheet implications for the recession. Scheiber talks about how the second round of stimulus is held-up to get homeowner relief and goes on to describe, correctly, HAMP as a kick-the-can initiative - but misses that cramdown was actually the other big promise in that arrangement between the administration and a group of senators. And subsequent bankruptcy reform attempts are something that both Summers and Geithner pushed back against. In the book Summers wants to use overwhelming force to write-down housing debt, ignoring that bankruptcy is the fairest and closest to the ground means of handling this problem and sharing the losses among different agents.
Even now, the rental market is about to go into chaos mode because bankruptcy is still a mess for homeowners and there are more foreclosures to come. History should judge the administration poorly for this mistake.