The Other Side of the Question

In mulling over the question of whether the passage of the continuing resolution omnibus spending bill (shortened to “CRomnibus”) by the House was a good thing or not, something that caught my eye was the unanimity with which the amendment to Dodd-Frank in the bill was condemned. Being something of a contrarian I always wonder what the counter-argument might be.

It was darned hard to find one but I finally located an argument in favor of the amendment at Powerline of all places (not regular reading for me) in the form of a lengthy quote from an unnamed “expert on risk management in the banking industry”. It’s long and dry and has a number of digressions but having read it I have a much better understanding of the political contours of the issue.

The “expert” makes one other good point that is too frequently ignored: a good deal of the federal government’s attention in the financial crisis was devoted to bailing out government-sponsored enterprises (GSEs), the public-private hybrids which fulfill functions which in most developed countries would be performed by government agencies, e.g. Fannie Mae and Freddie Mac. From my point of view those are pretty good things to hate. I can’t figure out why political appointees doing the work of a federal bureaucrat should be paid the wages of a Wall Street Banker. Maybe it’s just me.

It’s a pretty sad state of affairs when the news media whether broadcast or print are in such lockstep on an issue that you can find hardly a mention of what the other side of the question might be. You can find positions arguing in favor of torture but not in favor of repealing an obscure provision of Dodd-Frank. What a strange world we live in!

7 comments… add one
  • Andy Link

    I think GSE’s are a political “win” for pro and anti-government partisans and I think the public tolerates them because of bad arguments which are convincing to the general public. Growing up I always heard it argued by proponents that GSE’s combine the best of government protections and regulations with private innovation and nimbleness. Of course it doesn’t work that way in reality – we get the worst of both worlds and not the best.

  • TastyBits Link

    This is the problem that Glass-Steagall was designed to fix. There is no good solution that allows co-mingling of funds.

    Under G-S, the regulated institutions cannot become too big to fail. The private institutions can become as big as investors will support, and they can fail.

    Under G-S, the GSE’s were limited in how big they could grow, and therefore, they were limited in the amount of damage they could cause. This is not limited to the GSE’s. They just happened to be in the right place at the right time.

  • CStanley Link

    I agree with Andy’s statement that we get the worst of both worlds with GSE’s but politicians are able to present as though the hybrid is the best of both.

    IMO we’ve lost any meaningful center in our political system, and one of the key role of centrists should be to nurture the creation of hybrid policies that combine ideas from both sides of the political spectrum in ways that actually work. There is so much corruption throughout the political spectrum now that the policies that get any bipartisan support are based on horse trading of favors, thus guaranteeing that the interests of the politicians comes before the public good.

  • Ben Wolf Link

    I stopped reading the “expert” at:

    Indeed, most of the largest banks which were perfectly healthy were forced to take TARP funds so that there would be no stigma attached to the few large unhealthy banks–and the MANY unhealthy small community and regional banks.

    Anyone with half a brain knows the forcing of TARP onto the biggies was horseshit, a made-up tale to give the CEOs cover in going whole-hog on government cash. Furthermore the claim our largest banks were healthy is a outright lie; they still aren’t really solvent six years on.

  • My own view is that whether cash was forced on the banks or not it was largely a sideshow to the real problem which was not cashflow but, as you point out, solvency. The reason that the banks still aren’t solvent is that the solutions have concentrated on problems other than the one they have.

  • Tom Lindmark Link

    Perhaps you missed the Friday WSJ opinion piece on the Dodd-Frank minor tweak. It certainly did not amount to condemnation.

  • Guarneri Link

    Speaking of disaggregation………

    The issue wrt to the risk mgmt guy has two dimensions. In point of fact his explanation comports with all that I experienced while at a bank. The only possible bone of contention is that the book of business or exposures in push outs for customer accommodation is larger than he represents. I doubt it. And heaping any scorn on “risky” interest rate hedge products as more dangerous than the underlying structured loans is just ludicrous. One wonders what kind of answer you might get from ms Warren or Pelosi on this inquiry.

    The second issue is actually different. Are the banks currently solvent? If they are not the legislation doesn’t matter, and D-F has pushed out the wrong stuff. But more germane, I defy anyone to “properly” value the banks assets. Sure, there are all kinds of techniques and norms applied. But don’t kid yourselves. They are more like brackets than point estimates, and still dubious.

    And no, the banks accumulation of reserves is not evidence that the banks believe they are undercapitalized. It is just, if not more, likely that it’s just been a better (risk adjusted return) way to park money during a period of scarce properly risk/return adjusted loans. We wouldn’t want a bank stampede back into subprime would we??

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