There’s another column today in which regulatory reform figures prominently. It’s Paul Krugman’s column on the still-floundering banking system:
The main thing for the time being is probably to do as much as possible to support job growth. With luck, this will produce a virtuous circle in which an improving economy strengthens the banks, which then become more willing to lend.
Beyond that, we desperately need to pass effective financial reform. For if we don’t, bankers will soon be taking even bigger risks than they did in the run-up to this crisis. After all, the lesson from the last few months has been very clear: When bankers gamble with other people’s money, it’s heads they win, tails the rest of us lose.
Interestingly, different commentators are looking at the White House’s reaction to the situation in banking and drawing opposite conclusions.
Yves Smith thinks all the talk of reform has been kabuki:
Dear readers, do you think the Adminstration’s supposed fury is sincere, or merely playing to the crowd? Actions speak louder than words. The Administration, ONLY because the public was rip-snorting mad, announced plans to have tougher reforms in June, with details of various measures coming over July and August. Many have been largely empty (grand promises like clawbacks, with no follow up of any substance, juxtaposed with the spectacle of the poor pay czar Kenneth Feinberg floundering with a hollow mandate). Worse, the supposedly substantive ones have been an utter joke. The “derivatives” (read credit default swaps) reform was misguided from the get-go. I was an early fan of the idea of putting them on exchanges, but I am now persuaded that that will never work (unlike real derivatives, you cannot have adequate initial margining. It would kill the product, hence you will have an inadequately capitalized exchange. And in the 1987 crash, the Merc was on the verge of failure, and if it had gone down, it would have taken down the NYSE, so exchange failures can propagate into related markets).
But not to worry, we won’t get that far, the Administration’s proposal had an industry-favoring loophole you could drive a truck through: only “standardized” contracts would trade on an exchange (or via a clearinghouse). So this reform was mere window dressing.
So why is the Administration so angry? It isn’t that there is no reform. There was never any intent to have real reform.
Well, good news kids: It appears that the White House has had enough; They are finally beginning to push back against the banking lobby. Obama adviser Valerie Jarrett was quoted as saying “We are disappointed by the lobbying of anyone in the financial industry against regulatory reform.”
That is a very broad statement — in my read, it suggests a major change in policy is about to occur.
Even Larry Summers, the former hedge fund employee who has been way too friendly with Wall Street’s banks, may be finding religion.
Frankly, I’m concerned about the prospects. It may be understandable for the Secretary of the Treasury to be BFF’s with the CEO’s of the big New York banks but it certainly makes me wonder whether whatever reform emerges will be directed at helping the banking system or helping the bankers. And when you consider the different treatment that Bank of America and Wells Fargo appear to be getting from the New York banks it gives one pause.
I’m still waiting to hear what sort of regulations will be proposed that might actually have a chance of revivifying the banking system rather than pounding another nail into its coffin. Maybe someone can point me to an update. My intuition is that present situation wasn’t so much caused by a lack of regulation as by misregulation or dysregulation and a failure of enforcement. Bright, shiny, new regulations probably won’t do much to help that. I’m reminded of Ambrose Bierce’s definition of a conservative:
CONSERVATIVE, n. A statesman enamored of existing evils, as opposed to a Liberal, who wants to replace them with others.
Is the Obama Administration liberal or conservative?