Since the Dodd-Frank financial reform act was passed, there have been more than a few flashy headlines hinting that all might not be well in the regulatory world. Subprime mortgage bonds are gaining popularity again. The Consumer Financial Protection Bureau (CFPB) is shying away from regulating credit cards. And of course JP Morgan Chase lost more than $2 billion because of risky trading. Some in the media and political class believe that Dodd-Frank and other regulatory tools like the forthcoming Volcker Rule should be enough to prevent a future collapse; others vehemently disagree. As the second anniversary of Dodd-Frank comes up next month, I caught up with prominent finance writers on opposite sides of that divide to get their reflections on where we have come and where we need to go.
Progressive economics blogger Mike Konczal, who writes for the Roosevelt Institute at Next New Deal spoke at a conference in Chicago earlier in the month. I was able to catch up with him afterward as well. He counted Dodd-Frank as one of the bigger ideas that Congress enacted during Obama's first term and an overall good piece of legislation. He took the long view, noting how the evolution of the ideas behind the regulation were rigorously debated over time -- and will likely improve the landscape with time. He highlighted how Elizabeth Warren, now a Senate candidate in Massachusetts, was one of the first to float the idea of a Consumer Financial Protection Bureau, back in the summer of 2007. The blogosphere was boiling shortly thereafter, as policy makers and activists contributed to the overall sausage making of the bill. Konczal, a former financial engineer, got his own start by blogging about the financial reform movement after the crisis and quickly picked up followers because of the depth of his discussion.
Konczal views Dodd-Frank in historical terms. "Dodd-Frank modernizes the New Deal and supports it," he said. It allows the Federal Deposit Insurance Corporation (FDIC) to take down troubled shadow banks, he said. Recently the FDIC has reported it will be able to do so if push comes to shove. This was a major point for Konczal. "The way people fail and the consequences for every other player matter," he said. "We want to make sure they fail in a way that keeps the business going." The CFPB, which Warren headed for a time, provides more transparency for derivatives by putting them on exchanges that allow for more shared information. Another major move, according to Konczal, is the fix that allows states to regulate mortgages. They had been prohibited from doing so under a federal preemption law.
Konczal also noted that there were more areas for financial reform to take place. He singled out allowing bankruptcy for defaulted school loans that currently do not have that option. And he thought that the growth of crowd-funding and Occupy Wall Street's Move Your Money campaign were positive developments that could empower alternative ideas in finance.
Nomi Prins, a senior fellow at Demos and the author of the popular book on the collapse It Takes a Pillage, is of a different mind. "Dodd-Frank didn't change the landscape of banking at all," she told me via e-mail. "The biggest banks are bigger than they were pre-2008 Crisis and post Glass-Steagall repeal in 1999; they have larger derivatives positions, and reside on more explicit and implicit federal assistance than before the crisis."
She sees the efforts as muddled from the very beginning: "It would have been better to assess and modify the loans themselves from the get-go of the crisis (if not before, but that's besides the point) to determine what was losing value and work toward restructuring at the customer level, while forcing banks to unwind related leverage and derivatives positions and taking losses up front -- instead of this slow burn we're experiencing in the global banking system, notably in the U.S. and Europe, lasting now nearly 4 years. Instead, we're left with bleeding customers and gambling banks."
Perhaps the most patent point of departure between Konczal and Prins is in their reckoning of the total cost of our efforts to help Wall Street, which is still being debated and colors many people's perception of post-crisis and Dodd-Frank era finance. Konczal pegged the total real losses from the bailout as between $50 and $100 billion. He was most likely talking about losses from the Troubled Asset Relief Program (TARP), which is projected to lose around $70 billion.
Yet the guarantees (the government's ability to cover possible total losses) matter too, Prins wrote. Compared to the standard story of a $700 billion TARP package, the actual bailout could be much costlier with these figures included. Prins' Bailout Tally Report arrives at a figure of $13.3 trillion for all measures and guarantees doled out by the Federal Reserve, Treasury Department, FDIC and others. The New York Times tallied the total cost to be as high as $12 trillion. Bloomberg cites the Government Accountability Office's estimate that the "total transaction amounts" for Fed lending was $16 trillion, but notes that a more realistic amount is around $7 trillion for total potential commitments.
When asked about guarantees, Konczal classified them as "accounting." Aside from costing the public money, banks could be using the guarantees as cover to take on more risk, Prins wrote. She also noted that banks' own tricky accounting enabling them to keep private their mark to market positions might obscure their potential for big losses.
Not surprisingly, Prins is pessimistic about the future, writing, "There will be more crises guaranteed." And Konczal is optimistic that future solutions could combat financial problems and the other major problems in the offing, such as the strain on the social safety net and climate change. "I am surprised, even though I shouldn't be, at how quickly good ideas are disseminated," he said
Whose vision better reflects the truth about the financial system will likely be decided by history. If safeguards like Dodd-Frank fail to prevent another crisis, there will have to be a serious reexamination of the system. As the physicist Niels Bohr said, "Prediction is very difficult, especially about the future." Yet people in the future will be able to point to our regulatory structure as either preventing or permitting another collapse.