Yves here. Normally, it would seem to behoove Naked Capitalism to analyze the provisions of a proposed rollback of Dodd Frank which may come up for a Senate vote this week. But with the bill already having a dirty dozen Democratic co-sponsors, the die is already cast.
So we’ll offer a few high-level observations instead:
Banks have not been suffering in terms of profits, so exactly what is the problem that needs to be solved? And that’s before you get to the fact that banks enjoy such extensive subsidies that they should not be treated like private businesses but regulated like old-fashioned utilities. The idea that banks have a right to earn more that a modest level of profit to help fund expansion in line with overall economic growth is in fact detrimental to the economy.
In fact, as we’ve also pointed out, policymakers and elected officials should be seeking to shrink the financial sector. In recent years, a raft of studies have found that for developed economies, bigger financial sectors are a drag on growth. The IMF concluded in 2015 that Poland had the optimal level of banking system development. More than that could be productive only if financial firms were well regulated.
In fact, as currently configured (the weak post crisis re-regulation didn’t do enough to change this overall picture), the banking sector is extractive. We’ve regularly cited a seminal paper, The $100 Billion Dollar Question, by the Bank of England’s director of financial stability, Andrew Haldane. He ompared the banking industry to the auto industry, in that both produce pollutants: for cars, exhaust fumes; for bank, systemic risk. While economists were claiming that the losses to the US government on various rescues would be $100 billion (ahem, must have left out Freddie and Fannie in that tally), they ignored the broader costs (unemployment, business failures, reduced government services, particularly at the state and municipal level). His calculation of the world wide costs:
….these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.
It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.
That means a banking industry that creates global crises is negative value added from a societal standpoint. It is purely extractive.
But our feckless Congresscritters are all too happy to throw pretty much everyone under the bus to curry favor with pet donors.
Contrary to bank-promoted urban legend, there isn’t a shortage of liquidity. Even back in the stone ages of my youth, investors didn’t complain about a lack of liquidity in the bond markets. Moreover, there is evidence that too much liquidity is a bad thing, because it makes unproductive speculation too easy.
Similarly, blaming Dodd Frank or other bank regulations on supposedly too little small business lending is another canard. First, unless the cost of money is their biggest expense, entrepreneurs don’t borrow because money is cheap. They borrow because they see an opportunity. And for businesses of all sizes, retained earnings is the most important source of expansion capital. Businessmen are mindful of the dangers of leverage.
Second, as we’ve discussed regularly, the reason banks do so little in the way of small business lending is they started abandoning it in the late 1980s and early 1990s as they turned branches into retail stores. They went to using FICO-based scoring to originate various loans and sold most of them into securitizations. They stopped training credit officers who were able to analyze the risks of lending to idiosyncratic businesses, and to the extent that there will still old-school branch managers who had those skills, they cut or got rid of their ability to make discretionary loans and also gutted the higher level supervisory apparatus for small business loans.
Despite bank whinging about complexities and cost, guess what? It will cost them money to undo the procedures they’ve put in place for Dodd Frank compliance.
It’s fair to say that some provisions of Dodd Frank were not well specified, particularly the Volcker Rule, where there were better approaches for retraining banks’ taking proprietary bets either on their trading desks or in prop trading groups. While facilitating a customer trade does involve betting house monies, Value at Risk was well-suited to measure whether trading desks were doing prop trading on the sly. But the banks go.
Oh, and last but not least, the proposed legislation will make it easier to get away with discrimination in mortgage lending. If you think this is just people of color issue (which is bad enough), you need to think twice. In New York City, where discrimination is permissible in co-ops (the legal structure is you aren’t buying housing, you are buying shares in a co-op corporation, which then gives you a proprietary lease to “your” unit, and the co-op requires buyers to answer extensive questionnaires and be interviewed in person), single women and single men are not even shown apartments in certain buildings because they will never be approved, and many of the most exclusive buildings also have quotas for Jews.
By Jake Johnson, a staff writer for Common Dreams. Follow him on Twitter: @wordsofdissent. Cross posted from Alternet
The Massachusetts senator refuses to let a “Bank Lobbyist Act” pass without a fight.
Cooperation between Republicans and Democrats has become something of a rarity in today’s polarized political environment—except when it comes to a select handful of objectives, like enriching Wall Street banks.
If passed, the legislation—derisively labeled “The Bank Lobbyist Act” by Warren and other critics—would make it more difficult to combat racial discrimination by big banks, provide regulatory relief for more than two dozen of the nation’s large financial institutions, and eliminate many consumer protections put into place after the 2008 financial crisis.
The Senate – with the support of some Democrats – is set to start debate on a bill to roll back regulations on the same big banks we bailed out a few years ago. If we lose the final vote next week, we’ll be paving the way for the next big crash. https://t.co/i7HO3AvNJ9
— Elizabeth Warren (@SenWarren) March 2, 2018
We’ve been down this road before. Whenever things are going ok in the financial system, the lobbyists flood the halls of Congress & convince politicians to roll back the rules – because what could possibly go wrong? https://t.co/7rUKIajJ8Q
— Elizabeth Warren (@SenWarren) March 2, 2018
In a Twitter thread on Friday, Sen. Elizabeth Warren (D-Mass.) called attention to a massive bank deregulation bill (S.2155) that could reach the Senate floor for a final vote next week, and highlighted the fact that a dozen Democrats are providing crucial support for the measure.
In addition to Sen. Angus King (I-Maine), the 12 Democratic senators currently co-sponsoring the deregulation measure are: Doug Jones (Ala.), Joe Donnelly (Ind.), Heidi Heitkamp (N.D.), Jon Tester (Mont.), Mark Warner (Va.), Claire McCaskill (Mo.), Joe Manchin (W.Va.), Tim Kaine (Va.), Gary Peters (Mich.), Michael Bennet (Colo.), Chris Coons (Del.), and Tom Carper of Delaware.
In a video posted to Twitter on Friday, Warren explained that this bipartisan effort to fullfill “the wish lists of big bank lobbyists” goes a long way toward illustrating how Congress works for the wealthiest at the expense of the majority of the public.
Watch:
The Senate should be working to #EndGunViolence. Instead, Mitch McConnell is teeing up legislation on what he thinks is a much more pressing issue: fulfilling the wish lists of big bank lobbyists. pic.twitter.com/Lwu0SOnFSc
— Elizabeth Warren (@SenWarren) March 2, 2018
Dubbed the “Bailout Caucus” by the advocacy group Rootstrikers, the Democrats backing the deregulation bill—introduced by Sen. Mike Crapo (R-Idaho) last November—have deep ties to the financial industry.
Earlier this week, a coalition of advocacy groups—including Rootstrikers, Public Citizen, and CREDO—delivered 450,000 petition signatures to members of Congress demanding that they reject Crapo’s measure.As Talmon Joseph Smith observed in an article for The New Republic on Thursday, “Nine of the 12 Democrats supporting the deregulatory measure count the financial industry as either their biggest or second-biggest donor.”
“Do not collaborate with Donald Trump and Trump Republicans to deregulate big banks,” CREDO’s petition reads. “We need to finish the job of Wall Street reform and end a dangerous and rigged system that puts our economy at risk, not roll back the reforms already in place.”
Warren is hardly the only Democrat who has joined advocacy groups in opposing the deregulation bill, which would gut the already limited Dodd-Frank regulations put in place by the Obama administration following the 2008 crash.
“It’s a whose-side-are-you-on moment,” warned Sen. Sherrod Brown (D-Ohio) in an interview with the Huffington Post. “Are you with the big banks and the Wall Street operators who wrecked the economy and got big bailouts, or are you with families and workers?”
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Thank you, Yves.
It won’t surprise, but will certainly sadden, you to hear that Andy Haldane is not being considered for the succession to Mark Carney from July 2019. Some reckon that Haldane’s a closet socialist, as if it’s a bad thing. His differences with Carney don’t help, either. Carney has muzzled him to an extent.
Raghuram Rajan has emerged as a dark horse. It’s felt that he has the chops for what will be a difficult decade ahead for the British economy. When I heard that, I joked to the journalist that, at least, we’ll have someone aboard who has been around for IMF bail-outs.
The only internal candidates are reckoned to be Sir John Cunliffe, deputy governor for financial stability, former sherpa for EU affairs and former Treasury official, and Ben Broadbent, deputy governor for monetary policy, former chief economist at Goldman Sachs and former Treasury economist. As the road to Brexit becomes more difficult, Cunliffe may yet end up working on that thankless task.
Yes, I was disappointed Haldane didn’t get it after King – not that I expected him to, he was always an outsider.
My understanding is – and it may be miles wrong, you’re likely to know better CS – that is was actually King who brought Haldane where he is and supported him, and that they were on quite friendly terms towards the end of King’s time at BoE?
Thank you, Vlade.
Likewise, I was disappointed that Haldane did not get the job after King. Haldane was considered a bit too young and inexperienced by some, but I thought his thinking was streets ahead of his peers and superiors.
You are right about King bringing Haldane through and supporting him. King gave him a bigger budget than is normal for that post. Carney slimmed Haldane’s budget when, in effect, Haldane was sidelined to the post of chief economist.
I forgot to add, Vlade, that Haldane became a bit of a protégé of King. Paul Tucker was a protégé of Steady Eddy George. It’s felt that the Goldman gang at Threadneedle Street sticks together. They have American backers like Donald Kohn and Kevin Warsh aboard, too. That last point begs the question of WTF we need Kohn and Warsh for.
The other contenders are from the colonies, Glenn Stevens from Australia and Alan Bollard from New Zealand. They were contenders last time.
Zambia’s Stanley Fischer was the back up to Carney, but is considered too old now and, in any case, has retired.
Agreed, but King, Tucker and Haldane worked very closely and effectively together on the Vickers reforms, and while they didn’t beat Treasury, getting ring-fencing was still a pretty important victory. So I could be wrong, but my impression was that Tucker and Haldane forged a good relationship in the trenches.
Thank you, Yves.
I agree.
I don’t know how keen Tucker was on full separation. He supported ring fencing. Likewise, with Adair Turner.
There are few giants like them left.
I forgot to add something that amazed me when the US fin reg process kicked off. CNN’s Fareed Zakaria said, on his Sunday show, that the overhaul could be perceived as anti-semitic and would hurt Obama at the polls. That was an interesting way of skewing, if not shutting down, the debate.
Having worked for Barclays from 2014 – 2016 and since the EU referendum at its German twin, I see the benefits of the stronger UK regulatory system. My employer’s feet have not been held to the fire, so it has not been forced to get its act together. UK host state supervisors are better than German home state ones.
I used to like fareed shows, soured when he said trump bombing Syria airport finally made him presidential.
Though I guess that just says presidents have to get the bombs dropping to be a real one.
I though Haldane’s chances were good only if Paul Tucker became Governor first, which had reasonable odds of taking place until Barclays messed with Tucker. Tucker was aligned with Haldane and probably would have helped Haldane get more governing experience. Haldane is an absolutely brilliant economist but that doesn’t mean he could necessarily manage anything more than a small team of smart grad students.
It was clear Carney didn’t at all like Haldane’s unassailable insight into very thorny banking issues. It would be very hard to win an argument with Haldane on the merits. Carney is more bank friendly than any of King, Tucker, and Haldane were, and having someone both smarter than Carney is (which would sting, a smart guy like Carney doesn’t like being outclassed) and not on the same page agenda-wise was never gonna fly. I expected Carney to marginalize Haldane pretty pronto.
Thank you, Yves.
That’s fair.
My dream scenario is that MacDonnell puts Haldane in down the road or parachutes him into the Lords as a minister.
Carney is on the margins of the Chipping Norton Set. His brother in law Lord Rotherwick owns the Cornbury estate in Oxfordshire. This is where some of the contact was made with Cameron and Osborne, who live up the road from Cornbury.
On liquidity – the problem IMO isn’t so much the needless speculation it engenders, but that the all vaunted liquidity exists ONLY when you don’t need it.
There is a case of supporting liquidity – at the time of crisis. I.e. if there was a requirement that whoever acts as liquidity provider, must do so in good and bad times at a certain minimum level, then supporting liquidity may have a leg to stand on. But liquidity for liquidity sake, provided only when no-one needs it, is just another form of subsidy.
Thank you and well said, Vlade.
King talks about that in his memoirs, too.
At HSBC, we had Jardine Matheson as a client and founding shareholder. One of the execs and family members said that liquidity was the worst thing that could happen to a bank. “We know what the banker is going to do. It’s just a question of which wall.”
I never understood the argument that all markets must be liquid. I have a pile of ossified cat turds in my basement – should there be a liquid market for those? If not, why must there be one for CDS and other potentially toxic assets that only people interested in fraud would seem to want to buy and sell in the first place?
Some financial products need to go back to being flat out illegal.
Thank you.
One school of thought in banking wants to revert to Basel I, so simple capital rules and no liquidity and leverage rules, and ban certain products.
A liquid market for bonds etc. means that bank runs (or equivalents) are harder to come by, as liquidity crunch won’t turn into credit crunch.
That doesn’t mean all has to be liquid of course – but say, when SNB released CHF peg, there was, for a considerable period no market in CHF at all. This was an idiotic move by SNB, and was the reason why the CHF moved so massively (20% on the day), killing companies in its wake (because how do you deal with such vol as a small company? The no of SME bankrupcies spiked in the few months after this)
Czech National Bank had a peg too. Unlike SNB, it even telegraphed up front when abouts (give or take a few days) it would release the peg. CZK liquidity in the markets is trivial compared to CHF (which is still small beer compared to USD/EUR). The scene was, in theory, set for even worse wash than CHF, as there was tons of speculators long CZK (to the point where they held most of CZK govt debt). As a note – it was not unusually before the peg for speculators to sell knock-out options (ones where if the price hits certain level, the option is null and void), and then trade small amount of CZK in Aussie timezone which moved the rate a lot, creating a spike – and killing the option. Free money.
When it came to the crunch though, CNB said they would not tolerate Swiss-like unorderly unwind, and would stand by providing liquidity (and I believe it also made it clear to the banks providing CZK liquidity, that if they misbehaved around that, there would be consequences). In the event (a year ago or so), CZK in fact weakened a bit, then strengtened about 2% in a week, went back, and then started a very linear, non-volatile strenghtening since.
No companies were hurt ;) (well, not immediately due to the vol).
That’s a difference liquidity can make.
Thanks vlade. You are far more financially literate than me and I’m not up on all the acronyms you’re using, but I think we’re in agreement.
To phrase things a little different than my first attempt, I can understand why as a society we would want a liquid market in say, used automobiles as there are many reasons a buyer and seller might want to exchange a vehicle. There are also very valid reasons why we do not have a market for used underpants.
In the financial realm, we as a society need to decide what investments are the 2 year old chevys and which are the dirty underwear and stop letting the charlatans pretend like all investments are AAA (if you can just find the right corrupt ratings agency).
I’ve never liked the ‘caveat emptor’ notion. If we are going to have a civil society, those selling snake oil need to be taken out of the marketplace.
Caveat emptor works only if there is no asymetric information. Well, there ALWAYS is asymetric information.
If liquidity providers (which are not only banks – and I believe it would be relatively easy and straightforward to define liquidity providers – for example by having an average holding period of less than a three months) would be required to provide liquidity at some minimal level at all times, then dangerous products would be way too expensive to trade – you’d be open to someone dumping turds on you at the worst time. But talking about high liquidity at good times, no liquidity at bad times is priviledge w/o responsibility.
Doug Jones (Ala.)
So happy that all that Bru ha ha last year over the special election resulted in a Blue dog that will vote with the Republicans on gutting regulations.
Joe Manchin (W.Va.)
After what has happened with his daughter’s MBA, and the EpiPen pricing fiasco, what does it take for this man to be voted out?
What does it take to vote Joe Manchin out? It takes every single Berniecrat in West Virginia voting FOR Manchin’s Republican opponent to make their anti-Manchin votes count the most. And if there aren’t enough Berniecrats in WV to deprive Manchin of the victory numbers by voting solid Republican, then even that won’t do it.
But without that, nothing will do it. Berniecrats ( or even moderate Warrencrats) will have to be willing to endure years of Republican pain in order to exterminate the Manchinoids from the Party. And they won’t be willing to endure that pain until they adopt the extermination of the Manchinoids from the DemParty as the Very First and Most Primest Directive of all, before EVERYthing else in politics.
Yeah, I chuckled at Jones (AL) starting to make his bones already. Another victory for the back row kids.
Well, with Tim Kaine supporting the new legislation, at least we can better understand why HRC selected him to be her Vice Presidential candidate in 2016, rather than Elizabeth Warren. Nothing to do with her “responsibility gene” and everything to do with her ongoing need to keep her big Wall Street donors happy.
Selecting Warren would have cut the Wall Street spigot right off, and welded it shut.
I would have thought she would have always known that, and the chance for veep, or treas sec, would only come with a Bernie pres.
I still assume she knew that, and just thought Clinton would be too big an enemy, plus Bernie had no chance. Imagine if she had the stones to jump early with Bernie…
Let’s not forget that Dodd-Frank wasn’t exactly the reincarnation of Glass Steagall in the first place. I had some trouble finding a link to the Daily Show video from a few years back where John Oliver did the Schoolhouse Rock “I’m just a bill” routine for Dodd Frank, but you may be able to view it here.
The law doesn’t do much in the first place and they still want to help gut it – the Dems clearly have zero fecks.
Question: my Senator Jon Tester says that his support of the bill is to correct unfair and unnecessary regulatory burdens on small banks and credit unions. Is this a case of throwing the baby out with the bathwater or a cynical dodge?
As long as I can remember, every single piece of pro-bank looter legislation has been justified by claiming it helps “small business lending” or “small banks”.
Granted, I’m not familiar with the actual text, but I’m VERY familiar with the talking point.
There is next to nothing in Dodd-Frank that hurts small bank or small business lending. There are a few things that make life a little bit more onerous for the big capital markets players. Those things, we’re told, are stopping small business lending. They’re not.
One example is how underwriters made a big fuss about risk-retention rules in CLOs. Those rules got torn up in a recent court decision, anyway. The lobbyists’ talking point was around “small business lending”. It isn’t remotely true.
If you want to increase small business growth, put money in their customers’ pockets.
Weirdly, “small banks and credit unions” do not seem to appear on the list of banks with assets
between $100 billion and $250 billion, who would be major beneficiaries of the bill:
I’m old enough to remember when Jon Tester was a Blue America favorite.
I suppose that with property prices perhaps as far as they can be pushed & it appears in some cases declining, consumers up to their necks in debt & an apparent lack of yield out there in many forms, that the banks are desperate to scrape further into the dark recesses of an increasingly empty barrel.
Tightrope walk with another bailout safety net ?
+1000
We are living within an economic/political “Criminal Enterprise”.
In a letter to senator Sherrod Brown the former head of the FDIC, Shiela Bair, opposed this Bill (S2155). She had serious issues with sec 402 of the bill which would allow the minimum SLR or Supplemental Leverage Ratio to be reduced for the big banks. The SLR is the ratio of tier 1 Capital to total assets not just the Basil risk weighted assets.
Cry me a river, Faux-cahontas. You had your chance in 2016. You could have endorsed Bernie, but you chose to sit on your hands on the sidelines instead. #BernieWouldHaveWon.
When it’s too late, people like this esteemed Massachusetts Madame Senator will moan about these issues. Same old, same old.
Oh come on, don’t be bitter. I didn’t like her actions in 2016, either. You’re never going to like EVERYTHING anyone does. That’s okay, she’s still an ally.
Yes, she’s too timid as a leader and doesn’t push hard enough for big ideas. She does, however, call out bad bank behavior and mostly votes the right way on big issues.
She’s not as good as Bernie, but she’s a pretty good senator.
After Bernie wins in 2020, she’ll be a very good treasury secretary.
To me, this is more evidence that even if Trump loses the Senate in the future 2018 midterms, Establishment Democrats will not be doing what is best for society but rather their donors.
When was it ever different?
If you want progressive results you need progressive people.
No place for us progressive frogs in the neoliberal scorpion party
Need more frogs.