In January 2010, after Scott Brown's upset victory in the special Massachusetts Senate election, a panicky President Obama managed to sound like a populist for a couple of days. He called for a tax on banking profits and drafted Paul Volcker to appear at a quickie press conference so that the administration could call for something dubbed "The Volcker Rule."
Volcker, an impeccably conservative former Fed Chair skeptical about the abuses of financial de-regulation, was one of the few elder statesmen in 2010 with any credibility. Though Volcker was an early supporter of Obama and adviser to the campaign, Treasury Secretary Tim Geithner and economic adviser Larry Summers managed to marginalize Volcker because the old man turned out to be leery of their schemes to prop up the big banks without cleaning them out. Even worse, Volcker was nostalgic about the 1933 Glass-Steagall Act, which had staved off big trouble for more than half a century by requiring that federally insured commercial banks stay out of the inherently speculative investment banking business.
Financial lobbies had finally succeeded in getting Glass-Steagall repealed in 1999, with Summers and Geithner cheering. Now the president, in big political trouble, was sending for Volcker the way one breaks glass in an emergency. But the so-called Volcker Rule, a phrase the White House made up, turned out to be Glass-Steagall lite. Unlike the 1933 statute, Obama's so-called Volcker rule did not separate commercial banks from investment banks -- a nice clear bright line that was easy to police and hard to evade.
Rather, the administration's proposed Volcker Rule limited how much "proprietary trading" big consolidated banks could do. Trading, however, is only one of the many kinds of mischief bankers get into when the mix commercial banking and investment banking. The version of the rule that was included in the Dodd-Frank Act left details to the regulators.
Now the regulators have produced a 298-page set of proposed rules, and nobody is happy. The regulators have invited comment on no fewer than 350 questions. Bankers say the whole thing is too bureaucratic and will cut into their profitable lines of business. Consumer groups warn that the thing has too many loopholes. Wiseguys on Wall Street say it is child's play to disguise a proprietary trade for the bank's own account as a customer trade.
All, of course, are correct. It would have been far better policy to return to the simple bright line of the Glass-Steagall Act.
If you want to be a commercial bank, with federal deposit insurance, access to Federal Reserve advances, and a Good Housekeeping seal from regulators, great. You will have to follow closely policed rules. Alternatively, if you want to trade and speculate with your own money, go to it. But don't grow so big that you can bring down the whole system, stay out of the commercial lending business, and don't expect the government to bail out your bad bets.
That system worked very nicely. It was almost impossible to evade, and it didn't require 298-page regulations, with legions of regulators to police the creative evasions and gray areas.
The entire banking system has become far too complex -- too complex for economic efficiency and too complex to regulate. Over at the Commodity Futures Trading Commission, they are having a hard time deciding how to carry out the Dodd Frank Act's provisions on derivatives. And the Federal Deposit Insurance Corporation has just issued the first draft of government regulations on how to proceed when a "systemically significant" large bank gets into trouble. This is also full of gray areas.
But most of the complex financial instruments invented in the last two decades do not add to economic efficiency. They only add to risk, and to the outsized profits of insiders.
Investors and borrowers did just fine before credit default swaps (CDS) were invented in the 1990s. CDS mainly added to the system's leverage, opportunities for reckless gambling, and potential for collapse.
Let's face it: There will never be enough regulations and regulators to police all of the gray areas in a system this complicated. The best remedy is drastic simplification. We need a simpler banking system, and clearer and more straightforward laws like the Glass-Steagall Act. The Obama administration proposed an ambiguous "Volcker Rule" rather than a clean return to Glass-Steagall because the so called rule would be easy to evade and would not interfere in any fundamental way with Wall Street's current business model.
It was Henry David Thoreau who observed, "Our life is frittered away by detail... simplify, simplify." He could have been speaking of the financial collapse and the hapless, half-baked remedies. So forget the Volcker Rule. When it comes to banking, we need a Thoreau Rule.
Robert Kuttner is co-editor of The American Prospect and a Senior Fellow at Demos. His latest book is A Presidency in Peril.
"Everything should be made as simple as possible, but not simpler."
"The significant problems we face can not be solved at the same level of thinking we were at when we created them."
Change the level of thinking. Look at underlying or root causes, identify problems, set priorities, consider reality-based options, & implement reality-based solutions.
Creative/critical thinking skills & then rational persuasion.
Robert Dahl has described ways governments use influence:
• Rational Persuasion, the nicest form of influence, means telling the truth & explaining why someone should do something, like your doctor convincing you to stop smoking.
• Manipulative persuasion, a notch lower, means lying or misleading to get someone to do something.
• Inducement still lower, means offering rewards or punishments to get someone to do something, i.e. like bribery.
• Power threatens severe punishment, such as jail or loss of job.
• Coercion is power with no way out; you have to do it.
• Physical force – is backing up coercion with use or threat of bodily harm.
"Thus, we can tell which governments are best; the ones that use influence at the higher end of the scale. The worst use the unpleasant forms of influence at the lower end."
-Robert A. Dahl
To this end I submit the following link.. please read and comment if you like.
http://www.cato.org/pubs/regulation/regv25n1/v25n1-7.pdf
Jeff Madrick take on this is very helpful in understanding the causes of the collapse.By enabling banks to buy higher rated securities,the government allowed the banks to make all kinds of foolish investments in mortgage-backed and other collateralized debt securities. The banks weren't forced to do this.They choose to buy mortgage-backed securities on their own and they did it because they could make a lot of money and they didn't stop to consider the risk (maybe because they knew the taxpayer would get stuck with the bailout tab like with the S&L scandal).
Further more,commercial conventional banks didn't do most of the lending.By the mid-2000s, about 75% of the nations lending was done by nonregulated institutions but by "shadow banks".The main cause of the crisis was the over-the-counter derivatives,which were not regulated and led many bankers,hedge funds, and investment banks astray by thinking they had adequately insured their investments and could take on more risks.This could have been stopped but it wasn't.REGULATORY FAILURE WAS THE MAJOR CAUSE OF THE CRISIS.
You completely (as most liberals do) ignore the cheap money policy insituted by the FED that inflated home prices beyond reason.
You mention lenders other than banks as being unregulated. Mortgage brokers were really not unregulated. Any loan that was originated by a broker was almost always funded through one of the commercial banks. There were a few exceptions like Countrywide but they fell under the same lending rules as any bank. So your contention that there were many unregulated companies is not correct.
Derivatives did not "cause" the collapse.....the equities underlying the derivatives are what caused the collapse....and what were those????...too many bad loans.
Regulation is just not going to prevent that most of the time.
I still contend that the main cause was loose FED policy combined with an activist government that was pushing homeownership as some kind of right. They pressured banks into lowering lending standards to achieve this goal. Eventually the market could no longer sustain itself.
Thanks for playing though.
The best remedy is PRISON TIME.
It's because of this very thing - the reason why so much of what has gone wrong - that continues to do so. Lack of imprisonment. Goldman-Sachs is a perfect case in point. No one was taken to trial and imprisoned; this tells them that they can continue to do the same-old, same-old. They are so evil.
Just like the Army does to its soldiers, we have to "break" them to make them fit to live among us.
I've often said they need to be put on a choke chain like unruly dogs and taught to behave.It may seem harsh but that is nothing to the cruelty of the poverty it has caused in this country.
We have a great Constitution but it has been badly miss managed. Right wing radicals on the Supreme Court want to rewrite it to reflect their narrowed view-points.
Our greatest battle is the one against voter disinfranchisement. As we have seen before,you can win an election and loose it at the same time. Election integrity is one of the most compelling calls for action today. The election will be over-turned without a watchful eye at the ballot box.
"Age of Greed:The Triump of Finance and the Decline of America, 1970 to the Present" by Jeff Madrick, is a great read. He details how this began and who is responsible.
Furthermore, since the non-banks would be more profitable, the bulk of capital would migrate there. Commercial banks would be starved fro funds, since they no longer have a monopoly on deposits.
That would be Elizabeth Warren who is running for Scott Brown's seat in Mass. If the people in her district are smart enough, they will do this very thing!
That's the wrong direction.......unintended consequences of regs and the moral hazard of bailouts were significant CAUSES of all this.
Simplfing tehe reg burden would go a long way to making things better and fairer.
You all....probably will not study nor acknowledge one of the biggest ways any business can get so big in the first place.......I beleive a big part of it is the regulations themselves. Allow me to explain.....
Regs often cost business a lot of money to comply with...especially when they have become as complex and all encompasisng as they have. Bigger more established businesses, have a much easier time absorbing these costs than do smaller upstart businesses...thus giving the bigger business a distinct advantage in the marketplace. In many cases, you will see big businesses actually supporting certain types of regualtion...because they know it will squelch some of their potential competition.
Overall, liberals and other lovers of stifling rules on the marketplace seldom stop to analyze these unintended consequences of thier beloved rules.
- Liberal commentators, such as Robert here, eager to pin all this on the "big, bad banks" always completely ignore the impact of the cheap money policy instiuted by the FED from 2001 to 2006 (actually they are STILL setting rates on the cheap). I think more than anything else this is what drove housing prices into unsustainable highs which ended in the very predictable collapse in housing prices....a classic boom-bust cycle. Again....this development had NOTHING to do with the repeal of G-S.
- Liberal commentators also ignore some regs that were ADDED over the last 10-20 years some of which exaserbated the situation with unintended consequences. One example was the Basil regs...one of the provisions of Basil was to set reserve requirements on differnt types of loans. Mortgag paper, deemed low risk, had one of the lowest requirements for reserve....which encouraged many banks to "load" up on mortgage paper....in hind sight a foolish move for many.
But one thing I do agree with Robert on....regs should be simplified....what a concept.
It's like the typical rich brat; everything is given to them and there are no consequences, so they just keep doing what they're doing. Got drunk and wrecked the car? Daddy will just by me a new one.
You want responsibility? When they fail...let em fail. The government has to simply let banks or any other business stand on there own. The best thing we can do is NOT more regualtion but an end to ALL business subsidy.
I have no problem with unchecked greed and runaway individualism.
Government's basic role is to provide a stable environment for markets to operate in....it should not be in the business of legislating morality.
I don't think the repeal was instrumental in the development of the real estate meltdown. Consider these observations and facts:
- G-S had nothing to do with the fact that the meltdown occured because too many mortgage loans went bad. You might try to connect the dots on this by citing the higher level of loan bundling into bond instruments (ie: CDS equities) but you would be leaving out the real reason for the increases in this practice: Banks, pressured for decades by regulators and activists, lowered lending standards (so that "everyone" could own a house) to placate them. In order to reduce exposure on the growing resultant category called sub-prime the banks increasingly sold off loan portfolios in an attempt to reduce their exposure to risk on these loans. I do not believe the practice of selling off loans was illegal under G-S as banks had been doing this for decades....selling mostly to Fannie and Freddie - that is what they were created for. Indeed, most commercial banks hired investment bankers to put together the deals...again not prohibited by G-S.
Are you serious? You can read the President's mind? After three years of 100% Republican obstructionism, you have the audacity to claim that President Obama stands in the way of banking reform? How Orwellian of you.
with: "The Obama administration proposed an ambiguous "Volcker Rule" rather than a clean return to Glass-Steagall because the so called rule would be easy to evade and would not interfere in any fundamental way with Wall Street's current business model."
You'd think Bob Kuttner would still be smarting from running to the media with the story that Obama was going to announce cuts to social security in his State of the Union Address. Or then insisting that he'd announce those cuts as part of a deficit reduction package. Or that he'd announce those cuts... sometime.