So Much For Real Financial Reform

I haven't read too much on the financial reform bill that's comprehensive, probably because the House and Senate versions need to be reconciled. But the economists I read seem to be down on it as not doing enough.

Robert Reich wrote Obama's Regulatory Brain. "The most important thing to know about the 1,500 page financial reform bill passed by the Senate last week — now on he way to being reconciled with the House bill — is that it’s regulatory. It does nothing to change the structure of Wall Street."

"First, although the Senate bill seeks to avoid the “too big to fail” problem by pushing failing banks into an “orderly” bankruptcy-type process, this regulatory approach isn’t enough. The Senate roundly rejected an amendment that would have broken up the biggest banks by imposing caps on the deposits they could hold and their capital assets."

"Another crucial provision left out of the Senate bill would be to change the structure of banking by resurrecting the Depression-era Glass-Steagall Act and force banks to separate commercial banking (the classic function of connecting lenders to borrowers) from investment banking."

While I think reinstating Glass-Steagall would probably be a good thing, I haven't read anything that said repealing it was a contributing factor to the crisis and I've seen some things saying it was helpful because it allowed some financial firms to buy distressed firms that they otherwise wouldn't have been able to.

Still his overall point is: "The interesting question is why the president, who says he wants to get “tough” on banks, has also turned his back on changing the structure of American banks — opting for a regulatory approach instead. It’s almost exactly like health care reform. Ideas for changing the structure of the health-care industry — a single payer, Medicare for all, even a so-called “public option” — were all jettisoned by the White House in favor of a complex set of regulations that left the old system of private for-profit health insurers in place. The final health care act doesn’t even remove the exemption of private insurers from the nation’s antitrust laws. Regulations don’t work if the underlying structure of an industry — be it banking or health care — got us into trouble in the first place. "

On the point that big banks are too big to fail and therefore should be broken up, Mark Thoma doesn't completely agree. With more smaller banks, one bank failing isn't going too be too much of a problem, but there are still systemic failures that would bring down multiple banks and collectively they would still be too big to save. He does say that breaking them up would be good because it would curtail their political power. On the structural/regulatory point he says, "Much of the change that is needed is structural in nature, but not all, e.g. I'd categorize leverage limits, which I view as critical to minimizing the fallout when problems occur, as regulatory. However, as noted above structural change is harder than imposing new regulations... If we cannot muster the political will to make such changes in light of the most devastating financial collapse since the Great Depression, that does not bode well for the future."

James Kwak comments on the Regulation vs Structural Change issue. "I would add that Obama is also a political pragmatist with a strong belief that getting something done is better than nothing. I think that on health care he and the administration probably did the best they could. Remember, they barely got a majority in the House, then barely got sixty votes in the Senate, then barely got a majority in the House again (to pass the revised bill), and public opinion was very divided. But on financial reform I think they could have gotten more done. First of all, public opinion wanted more; and second, the administration lobbied against some of the most far-reaching changes, such as Kaufman-Brown and Blanche Lincoln’s derivatives spinout provision, and Merkley-Levin never got a vote."

Today, Simon Johnson is depressed. The Last Hold Out: Senator Blanche Lincoln Against 13 Bankers. "By now you have probably realized – correctly – that “financial reform” has turned into a victory lap for Wall Street." Paul Krugman lists some other Reasons To Despair about the economic recovery (specifically "the mindset of policy makers").

Still, is Obama really just giving gifts to corporations? On Monday Krugman tried to measure this objectively. "How can you do that? Follow the money — donations by corporate political action committees. Look, for example, at the campaign contributions of commercial banks — traditionally Republican-leaning, but only mildly so. So far this year, according to The Washington Post, 63 percent of spending by banks’ corporate PACs has gone to Republicans, up from 53 percent last year. Securities and investment firms, traditionally Democratic-leaning, are now giving more money to Republicans. And oil and gas companies, always Republican-leaning, have gone all out, bestowing 76 percent of their largess on the G.O.P."

"One answer is taxes — not so much on corporations themselves as on the people who run them. The Obama administration plans to raise tax rates on upper brackets back to Clinton-era levels. Furthermore, health reform will in part be paid for with surtaxes on high-income individuals. All this will amount to a significant financial hit to C.E.O.’s, investment bankers and other masters of the universe." He also cites the disappointment by the left. "So what President Obama and his party now face isn’t just, or even mainly, an opposition grounded in right-wing populism. For grass-roots anger is being channeled and exploited by corporate interests, which will be the big winners if the G.O.P. does well in November."

"So where does that leave the president and his party? Mr. Obama wanted to transcend partisanship. Instead, however, he finds himself very much in the position Franklin Roosevelt described in a famous 1936 speech, struggling with “the old enemies of peace — business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.” And that’s not necessarily a bad thing. Roosevelt turned corporate opposition into a badge of honor: “I welcome their hatred,” he declared. It’s time for President Obama to find his inner F.D.R., and do the same."