There’s one teeny, tiny, little problem with Steve Rattner’s prescription to regulate the big banks rather than break them up. The financial crisis of 2008 was a regulatory failure.
As I’ve pointed out before it wasn’t that no regulations were broken, that the regulations were inadequate to prevent the abuses, or that the appropriate agencies didn’t have the authority or resources they needed. It’s that regulators didn’t do their jobs. No amount of regulation will compensate for regulators who won’t do their jobs. Who guards the guards?
Regulators of big banks are usually installed in them. “Going native” is inevitable. This is so well-documented not to mention obvious that I would hardly believe that it’s in dispute.
Regulatory capture isn’t a corruption of the system. It is the system.
The financial crisis of 2008 was a regulatory failure.
Well, Rattner isn’t going to mention that his former boss completely failed at his old job before taking over the Treasury gig, is he?
(Really, the only place for Geithner to fail up to now is the Presidency. I should start buying up Geithner for President domain names now? Do such speculative endeavors count as entrepreneurism?)
This is why Dodd-Frank is such a joke. Virtually all authority is vested in the Treasury Department’s regulatory framework, which it will never bother to use. Neil Barofsky argues that was entirely the point.
Ben
I can’t speak to how Dodd Frank enforcement will be used for big firms. But I can tell you unequivocally that it is destroying smaller investment firms.
We have, in fact, suspended fundraising because we just don’t want to deal with this crap. I know people don’t believe me when I make this point, but when you’ve made your pile, and the government comes along and tells you that they are going to make your life difficult or tax it all away if you go forward, you just give them the finger and fold up shop. It’s not worth it. Many small businesses are in this mode right now.
Team Obama is completely antithetical to growth and employment. We have decided to just “drop down” to an ultra low volume, very situational investment posture. It’s a shame. We have made a lot of money for pensioners and endowments; created a lot of jobs. but screw this. It’s just not worth the agony.
@Drew
I can’t speak to how Dodd Frank enforcement will be used for big firms. But I can tell you unequivocally that it is destroying smaller investment firms.
That is a feature not a bug.
… We have made a lot of money for pensioners and endowments; created a lot of jobs. …
Apparently, you have not gotten the memo, but jobs are created by government spending the money it gets from taxing the fat rich. Everybody knows this. How many more times must President Obama repeat this before you accept this. He has said it at least three times.
“What i tell you three times is true.”
Thanks, TB. Now I don’t have to write that comment.
Oh, Al Lewis on CBS Market Watch has finally given this era the name it deserves: The Golden Age of Unemployment. He also goes ahead and calls it a depression.
Yesterday I saw Bill McBride on Calculated Risk say that those calling a recession have a lot of ‘splainin’ to do. Personally I’m thinking that those calling this a recovery have a lot of ‘splainin’ to do, given that the only reason the UE-3 rate is under 11% is because the government doesn’t want to count everyone anymore.
Lewis also has the kernel of an interesting idea here:
The idea? That the pols are drawing this out to insulate themselves, at the cost of all those whose lives have been wrecked by the bad economy. A sudden crash and then a quicker recovery would be less good for the pols and the bankers, but it would be better for the millions of people that lost jobs and can’t get anything in return. By the time the economy recovers we’re not going to have any skills left. I’m already two generations behind on MS Office software (to pick a small example) and I’m about to fall behind a third generation. This prolonged agony so the pols and their friends can keep their jobs has completely screwed all the rest of us.
@Icepick
… This prolonged agony so the pols and their friends can keep their jobs has completely screwed all the rest of us.
I am not that cynical. I think they generally do what they think is right, and it just happens to help them. This is actually a positive feedback loop, and everyone they know agreeing with them does not help.
I am a knowledgeable, and I only respect knowledgeable people. Knowledge people have recognized that I am knowledgeable, and therefore, my thoughts are logical. Logic is required for rational thought, and rational thought is correct.
Therefore, I am correct, and anybody who disagrees with my correct is either stubborn or stupid. The stubborn are not stupid, and they know that I am correct. Their refusal to acknowledge my unbiased/pure views must be because they are biased/evil.
I think this is probably what many people think, probably unconsciously. However, I think it is flawed (BTW not accusing you of this here TB).
For example, there are at least two methods of evaluating uncertain outcomes. Loss aversion and risk aversion. Both are valid ways of dealing with outcomes that are perceived as being random. Both are, in my opinion, rational. However, one person who is loss averse might make rather different decision than a person who is risk averse. Is one evil/biased? No.
I think the same thing holds in general. People arrive at different ways of dealing with a given issue, and that does not make them irrational. Going from I’m rational and do X to, you didn’t do X therefore you are irrational and irrational is bad, therefore you are bad is not good reasoning. Not even all that logical or rational, IMO.
That’s an important point that’s lost on too many. Individuals have different perceptions and relative valuations of risk and reward. That’s no more right or wrong than my liking Pinot Noir is wrong and you’re liking Cabernet Sauvignon is right. They are different tastes and preferring one over another is neither arbitrary nor imaginary.
I am not that cynical.
Give it time.
“As I’ve pointed out before it wasn’t that no regulations were broken, that the regulations were inadequate to prevent the abuses, or that the appropriate agencies didn’t have the authority or resources they needed. It’s that regulators didn’t do their jobs. No amount of regulation will compensate for regulators who won’t do their jobs.”
You neglect the importance of the deregulation that occurred over the last 30-40 years. We should remember that regulators actually did stop a subprime eruption in the 90s. We should remember that the unwillingness to enforce is at least partially a reaction to the guiding ideology of the leadership in the executive office, and at the Fed. Maybe there is a reason we had such financial crises as we had in the 80s and the 2000s.
Steve
Connect the dots for me, steve. How does deregulation induce regulators to ignore infractions of the regulations that remain in place?
@steve
Two big contributing factors to the financial crisis of 2008 was the repeal of Glass–Steagall (Banking Act of 1933) and the refusal to regulate CDS’s. This occurred in the 90’s, and it was done under the leadership of a Democratic President.
Sub-prime loans are a legitimate banking activity. For a sub-prime loan, income is verified, and the payment must be less than a certain percentage of income. The difference between prime and sub-prime is credit history, and this would include no credit history. The lender does due diligence, but because of the increased risk, the borrower is required to pay a higher interest rate.
To my knowledge, neither Senator Dodd nor Representative have any idea of what, why, or how of the 2008 financial crisis, and I suspect that neither really cared. They crafted legislation for a fantasy world to solve fantasy problems.
Tastybits- There were earlier rulings on derivatives in 89 and 93, IIRC, that had already exempted derivatives from regulation. There was also the 2004 ruling that allowed banks to pretty much set their own capital requirements, and the 2005 ruling that exempted derivatives from clawbacks. While both parties played a role in the deregulation, I think it would be difficult to claim that the Dems were the more aggressive party on deregulation. Meh. They are both guilty here, it is just a matter of degree.
I think the real key is Dave’s question, the answer to which I just brushed by as I was short on time. I think that when the regulators, the people who appoint the regulators, the people monitoring the regulators and those being regulated all believe the same things, you are bound to get in trouble (what is sometimes called deep capture). Unless you think there might be a probllem, you will never go looking for one. You will ignore evidence of problems sitting right in front of you because you dont believe there could possibly be anything wrong.
As a consultant, I find it hard to believe you have not seen this. When we have had to take over other practices, they often did not seem to realize they had much of a problem, even though it was staring at them for a long time. The problem usually seems to start at the top where the owner/leader of a practice has a set belief and cannot change. Sometimes the midlevels and other workers can see the problem, but sometimes they have bought into the leadership view so heavily they dont see it either. Meh. Maybe this is unique to medicine (though heaven knows I saw it in the military also).
Steve
So where exactly do you disagree with Dave? Sounds to me like you just have a knee jerk reaction: we just didn’t have enough regulation.