– David Dayen: “Only, outside of a couple upstart groups like A New Way Forward, the progressive movement determined it not a cause worth fighting for. It’s just a plain fact that breaking up the mega-banks would have 10,000 times the impact of the public option – or auditing the Fed, for that matter – and absolutely nobody in the progressive coalition cared.”
A New Way Forward deserves a round of applause for the work they put into this, as does everyone else who wrote, organized and fought for it. But the administration was against this amendment from the get go. When even Austan Goolsbee tells American Banker that size won’t be a priority for their Too Big To Fail policy, it’s about as all hands on deck as you can get. The administration is even against the leverage cap in the SAFE Banking Amendment, worried it would tie our regulators hands when they go to negotiate Basel III. Treasury Secretary Geithner has circulated letters saying that having a hard leverage cap would ruin “flexibility” of the regulators “to successfully negotiate a robust international leverage ratio” that doesn’t “leave U.S. firms at a competitive disadvantage to their foreign peers.”
– This is an old battle in financial reform for liberals. To what extent should you break up and silo large banking oligarchies and to what extent should you codify and accept the oligarchy and try to manage them? From Ellis W. Hawley’s The New Deal and the Problem of Monopoly (1966):
On one hand, there was a growing belief that banking was one of the “natural monopolies,” one of those areas of economic endeavor that should be centralized and then subjected to strict controls or transferred to the state…
The anti-trusters found it difficult to agree among themselves…from the standpoint of the economic planners, most of the Brandeisian ideas were either meaningless or positively harmful. As they saw it the solicitude shown for little banks and manteur bankers seemed only to weaken the banking system, lower the quality of its services, and prevent its integration into a program of centralized planning. The efforts to subsidize small business and promote decentralization were essentially wasteful and futile. And the attempts to promote fair practices and business honesty bore little relation to the real problem of economic concentration. They did nothing…about the problem of mobilizing capital and regulating its use.
As we’ve discussed before, FDR was able to make an interesting split where he didn’t create a highly concentrated private banking industry like most other industrialized countries. I think this administration’s course of action between these two choices was settled in favor of the large concentration with Diana Farrell’s quote: “We have created them [our biggest banks], and we’re sort of past that point, and I think that in some sense, the genie’s out of the bottle and what we need to do is to manage them and to oversee them, as opposed to hark back to a time that we’re unlikely to ever come back to or want to come back to.”
Here’s hoping that this doesn’t go the opposite of Farrell’s goal, and that the banks aren’t the ones that will manage and oversee the regulators. Here’s hoping prudential regulation and the threat of resolution are credible on a firm with nondeposit liabilities equal to 6, 7 or 8% of GDP as well as significant political power. Because if it isn’t, and they get capital cheaper from that, we just got a bunch of new GSE-like firms in the financial economy. If the silo-ing of business lines gets gutted in the Senate, which we will find out this week, we are basically going into a new future for the American financial economy that will look depressingly like what we’ve just come from.
– Even Hank Paulson says: “In our haste to deal with the flaws in the non-bank financial system, we should not move ourselves back to a system of consolidated, monolithic commercial banks.” I assume that the word monolithic was chosen for effect.
– As Simon Johnson points out, in response to the sometimes implicit and sometimes explicit arguments that large, concentrated financial sector will be more stable, self-regulate and respond better to government regulators than a less concentrated one:
Which are the huge global banks that Senator Dodd, Jamie Dimon, and Larry Summers think we should be emulating? Surely not the Chinese – their governance failures are profound and complete; this is state banking run amok. Surely not the British – after all Mervyn King and Adair Turner, the top authorities on those banks, are globally the most articulate officials on how good finance has gone so deeply wrong. Surely not the Canadians – those myths have been long exploded (and without dissent, in our conversations with the Bank of Canada).
And surely you are not proposing that the continental European banks are a model of anything other than ineptness, blind herding, and the transition from being “too big to fail” to “so big that even when you save them, you get an economic catastrophe”?
There’s still a lot that can change or stay in the bill, but I do think that the SAFE Amendment failing was a major setback for financial reform.