Greeks, Romans, and The Permanent Committee to Save the World Forever Bill

Paul Krugman writes about the current financial reform efforts, and uses a great metaphor for regulatory regimes. Greek armies were specialized and fought better when they had great leaders, while Roman armies were more generic but robust to poor leadership. “And in the end, since mediocre leaders are the norm, the Roman way prevailed.” Heh.

I hate to say this, but the most “Roman” part of the Frank House bill, the clear rule of a 15-to-1 leverage requirement for large systemically risky firms, the part that is exciting to me and to others pushing for strong financial reform, was a fluke. Here’s Ryan Grim, November 20th 2009, Rep. Jackie Speier’s Tough Bank Amendment Passes With Room Nearly Empty:

Don’t sleep on Jackie Speier. The freshman Democrat from California came into the House Financial Services Committee room Thursday ready to fight for her long-shot amendment to limit the leverage ratio for big banks…Lobbyists and committee staffers expected that the amendment…would only get a roll call and that it’d be soundly defeated, bounced by a coalition of Republicans and bank-friendly Democrats, who call themselves ‘New Democrats.’

Instead, there were barely any lawmakers in their seats when her amendment came up during an all-day debate on comprehensive financial regulatory reform. One of the two or three Republicans in the room asked for a roll call, but then quickly reconsidered and withdrew the request.

“I was thrilled,” said Speier, who wouldn’t confess to being surprised that she won. She guessed, instead, that the initial objection was simply Pavlovian.

“There’s a knee-jerk reaction to just oppose everything on the other side,” she told HuffPost. “I think what my Republican friends realized was that after going through this financial nightmare, to somehow argue against putting a leverage cap when we know that what happened was many of these companies — the Bear Sterns, the Merrills, the Lehmans, were all leveraged 30-1 — if we really are going to be real about tamping down that kind of behavior in the future, coming up with a reasonable leverage cap makes sense.”…

“There’s a pattern here,” says Speier. “We put these good laws in place, whether it’s Glass-Steagall or, in that case the SEC cap. But then the industry comes to us and says, ‘Oh, this is cramping our style. We could make’ — of course they don’t say it this way — ‘we could make so much more money if you just lifted this cap.’ And they were right. They made a lot of money and they also brought the entire country to its knees.”

Go Jackie Speier. But note that this snuck by in the House, and if it isn’t in the Dodd Bill, it is very likely to just be dropped in conference committee. Nobody seems all that excited among the administration, lobbyists or Congress to put an actual hard rule the financial sector will have to play by into the final bill. Why is that?

The Permanent Committee to Save the World Forever Bill

Krugman wrote: “I’m all for passing reform. But I’m not that optimistic that it will work, even if it passes.” And in general I get a “is this it?” when people see the reform bill in play. Why aren’t they pushing for more structural changes to the financial sector? Why not some hard caps on size of liabilities, like the Volcker Rule (which wasn’t even mentioned by Geithner at his recent AEI speech).

What story of financial reform is told with this bill? It isn’t a story where the financial sector isn’t too far out of control, too top-heavy and concentrated and opaque and gigantic. And it isn’t a story of regulatory failure, where regulators were asleep at the wheel, corrupted and captured through assumptions of how the world works and a revolving door of influence with the biggest firms, or where they were simply outmatched in knowing what they needed to do.

It’s a story where the regulators just needed a bit more power, a little more legal scope, and a greater extension of what jurisdiction the Federal Reserve has in order to rush in and save the day. A story where the Federal Reserve can successfully carry out prompt corrective action, detecting problems early and guiding banks back to health, on an institution with $2 trillion dollars on its sheet. A story where that institution’s off-balance sheet and the warehouse of derivatives it holds are no match for our regulator’s stare. But more importantly, it is a story where the regulators will be able to sweep in during a moment of crisis and keep the financial sector working no matter what.

I don’t like the idea of the Saving the World Forever approach to financial reform for three reasons: (1) I don’t think it’ll work. The biggest banks are all bigger now, and I worry they may even be emboldened in the medium term once the economy starts to pick up again. The Lehman bankruptcy report by Jenner shows that the Federal Reserve, after they were called in by the SEC after the SEC was in over its head, were not stellar when it comes to get accurate valuations of the books (a review by Frank Partnoy here) (2) We are in a lot of trouble if this goes bad and we have another financial crisis in 6-8 years. (3) There are alternatives (also my recommendations and comments on the Dodd Bill here) that involve stricter rules, better regulation of derivatives, smarter resolution authority, etc. These would supplement the ability of regulators to be smart and use their discretion well. Some of this is very low-hanging fruit in terms of changing the bills currently in play.

This entry was posted in Uncategorized. Bookmark the permalink.

7 Responses to Greeks, Romans, and The Permanent Committee to Save the World Forever Bill

  1. Pingback: FT Alphaville » Further reading

  2. clarence swinney says:

    Savings and Loan turned loose from 400 local owners to Wall Street Robbers like Milken.
    Milkin now worth 10 Billion from Corporate Raids destroying corporations and jobs.

    1999– Changed FDR riule keeping local banks from Gambling Vultures Wall Street.

    Reagan Deregulations
    Bush excessive Deregulaitons

    All needed is read Preface and first chapter of Joseph Stiglitz book Free Fall.

    Reagan+Bush Tax cuts kept 26,000 Billion going from Rich to Treasury
    Today, we would have a 14,000 Billion surplus


    1980—-10 Billionaires
    1989—–51 Billionaires
    2008—-403 Billionaires

    2007—Top 10% owned– 70% of Total Financial Wealth
    2007—Top 20% owned –93% of Total Financial Wealth

    30 Million owned America’s Wealth
    120 million owned 7%.

    Why are Socialists happier than Capitalists?

    Your answers above.


    clarence swinney old ugly honest and beautiful inside

  3. Pingback: FT Alphaville » The Dodd bill has an is-ought problem

  4. Pat Moore says:

    In the current political climate, we can’t create and pass a bill that will be effective. We need to do three things that politicos can do: Repeal Gramm Leach Bliliey, ban naked short selling, restore the uptick rule.
    Then, we have to install some tough regulators – maybe send Eliot Spitzer to a priest for absolution and put him in charge of the SEC.
    While imperfect, the repeal of GLB has the benefit of restoring a regimen that worked for nearly 70 years.
    Pat M

  5. Lucy Honeychurch says:

    We had regulations in place that worked since the Great Depression. When we repealed those rules (and passed others, more favorable to banks) the result was The Great Recession.

    Why are we now trying to reinvent the wheel? Dodd’s bill took 2 years to germinate. Good grief. Why not just dust off some of the old rules, repeal those that have been passed in the last 10 years, and call it a day?

    This is a puzzle to me.

    Could it be that our politicians are so beholden to bank campaign donations that – even without the ideological frosting slathered on by the ‘invisible hand’ sugar junkies (like the now-discredited Greenspan, Summers, Geithner, et. al….) – everyone still aspires to make membership in The Growth Club? Incroyable!

    If this is true, which I suspect it is, we’ll never get our economy fixed until we Federalize all election campaign funding.

  6. Pingback: FT Alphaville » Derivatives reform: Swap-ocalypse Now

  7. carolinamind says:

    As Lucy stated so clearly, (bcked up by the federal record), all of this once was illegal. Let’s make it illegal again and, yes, federalize election campaign funding. We will always need pitchforks and torches if this doesn’t happen.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s