So, now that the big, noisy fight over healthcare is over, sort of, we can finally move on to focusing fully on financial reform, and not a minute too soon, either.
This Senate plan of Chris Dodd’s moved past the committee yesterday. Republicans, led by John Boehner and his punk-staffer fighters, are still bitterly griping, and the Treasury Secretary is trying to sound a rather populist note, “Listen less to those whose judgments brought us this crisis,” he said.
But we wonder if anybody in Washington has really learned any valuable lessons from our little object lesson in financial Armageddon.
For all the talk of a consumer finance protection agency and a oversight council, can we just have some rules? You know, rules, like the ones that keep the financial industry on an even keel for like 70 years or so.
The Dodd bill focuses more on councils than on rules. That’s a mistake. These bankers are clever folks; it took them decades to get around the Roosevelt-era laws, but they eventually did it. It will take them far less time to navigate around some agency or council tasked (and likely underfunded and understaffed) with watching them. Rules, while they can be and obviously have been evaded — we’re talking to you, Lehman Brothers — are still harder to get around.
It’s nice, this idea of some regulators to keep an eye on the shop, so to speak. But regulators have a horrible habit of falling asleep just as the regulated are getting frisky. What I’d much to prefer to see are concrete rules. You wouldn’t need agencies and councils if you had hard laws that governed banks’ behavior.
“We will not get there through increased regulation or supervision; we will not get there by improving system ‘resilience,’ “ Randall Wray, an economic professor at the University of Missouri, writes. “We will not get there by propping them up with trillions of bail-out funds whilst waiting for them to fail so that we can resolve them.” Wray proposed some very simple rules:
1. After January 1, 2011 the FDIC will no longer provide deposit insurance to any financial institution that holds more than a one percent share of insured deposits. For the purposes of calculating market share, a bank holding company must include deposits of all subsidiaries — with the one percent share restriction applying to the aggregate total.
2. After January 1, 2011, institutions that issue FDIC-insured deposits are restricted to holding cash, reserves at the Fed, whole loans and corporate and government bonds. They may not hold any securitized products or derivatives; they may not move anything off-balance sheet; and they may not hold interest in any subsidiaries that are not subject to the same rules.
“These two measures will eliminate most of the advantages to bigness. By restricting access to insured deposits, large institutions would face much higher costs of raising funds,” he writes. “It is expected that under such conditions, the market would downsize most of these institutions and that the trend toward concentration of deposits in the hands of a few megabanks would be reversed.”
Meanwhile, Barry Ritholtz offered up his prescription, which also relies less on councils and agencies and more on rules. He says six areas, such as derivatives, nonbank lenders, the ratings agencies (remember them?), leverage caps, the SEC, need total overhaul. He also says he would not give the Fed more power. And he also proposes a 1% cap of total US assets on banks, like Wray:
Nixon Treasury Secretary George Shultz famously said “If they are too big to fail, make them smaller.” Put caps on percentage of total US assets allowed. I suggest 1%. Break up insolvent, incompetent megabanks — like Citi and Bank of America. And I would carve up JPM as well. Separate the depository banks from the investing houses. (restoring Glass-Steagall will do that.)
If and when we get financial reform, we can move on to the next reform movement: Washington. The reason the banks did eventually get around the rules is because they foisted political capture upon Washington. That’s the next movement, and it won’t be led by either Republicans or Democrats.
With any luck, we’ll get some actual, real, hard rules, and it’ll take Wall Street another couple decades to get around them, and juice some megabubble that’ll lead to some massive crash (that’ll lead to some post-apocalyptic, “Escape from New York” kind of world.) Just about the time I’ll be getting ready to cash in my 401(k) and retire to Mexico.
Hope I get out before the crash.