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?

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

  1. josh says:

    is there anything for the greater good that the GOP will vote for? is there some “away” that they and their supporters can get to where the effects of their actions will not be felt? i guess that is the most troubling thing to me – that all the GOP actions and proposals seem so lemming like to me.

  2. Lil'D says:

    Not at all clear. The point of party politics, of course, is to get power. That drives all parties. However, if one goes from out of power to in power, then what? Sometimes we get action that is well motivated. Though the current lineup looks like:
    GOP: “cut taxes!”
    Dem: “here, let me give you something and please keep voting for me”

    We could use some real financial reform,
    a true end to torture (and IMO the “war” on terror) & human rights violations by the US,
    some serious efforts towards climate change,
    but we ain’t gonna get it, because there are too many vested interests.

    Game theory predicts bad things for the 21st century, I’m afraid

  3. billw says:

    Give it a break. We are where we are because of Democrat policies. They had their way for years, paid everyone off, and told Bush and the Republicans to shut up. Now we are paying for their ignorant policies. Here I will disagree with you Rortybomb, I much better favor the Austrian school solution. Keynesian solutions have been tried many times now, and they never work. McConnell said let the TBTF fail , he did not say that the government would not take any necessary actions to maintain the world markets. I think that any ruling government will do that, just that the Republicans feel that the government should be involved as little as possible.

  4. Wayne miller says:

    BillW: You have got to be kidding. The Rs think that the government should be involved as little as possible. Really. Perhaps Secretary Paulson’s three pager that last weekend in September – you remember – the give me $700 billion with no recourse to my actions memo- perhaps that exemplifies your philosophy.

    Sorry pal. Right or wrong we don’t live in that kind of system and the very nature of Paulson’s first shot at solving the problem spoke volumes about the level of responsibility with which the Republicans dealt with the banking system during the Bush years.

    Oh yes, then there is the part in which they systematically went through Treasury and the Fed and forced early retirement on all of the people who actually knew how to run a regulatory agency. You didn’t know about that one – did you Bill?

    Get off your high horse.

    Its philosophical horse shit like those of you who sustain EITHER party’s point of view that has kept us from every reaching a solution to any vexing problem we face.

    A pox on both your houses.

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