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Tuesday, February 23, 2010

"Prospects For Financial Reform"

Simon Johnson notes some the shortcomings of current legislative proposals for financial reform:

Prospects For Financial Reform, by Simon Johnson, Baseline Scenario: The best opportunity for immediate reform of our financial sector was missed at the start of the Obama administration.  As Larry Summers and Tim Geithner know very well – e.g., from their extensive experience around the world during the 1990s (see Summers’s 2000 Ely lecture) – when a financial system is in deep crisis, you have an opportunity to fix the most egregious problems. Major financial sector players are always good at blocking reform – except when they are on the ropes. ...

Naturally, the Obama administration’s generally weak and unfocused financial reform proposals have morphed into generally weak and unfocused congressional bills. The overall narrative has been lost – despite moments of clarity from the president (e.g., when he spoke first about the Volcker Rules, but this was spun away within 12 hours by Secretary Geithner and others on the team). ...

Sadly, the consumer protection agency is likely to be gutted as the price of bringing Senator Corker on board.  This is of course an affront to everyone who has been – and continues to be – ripped off by the financial sector. ...

Then he gets my hopes up a bit:

Some limited change may now emerge from the Dodd-Corker compromise. I expect we’ll see a version of the “resolution authority”... No doubt there will be some sort of “systemic regulator”...
Despite – or rather because – of all the arrogance and misbehavior among our more prominent financial players, we are making progress on the bigger agenda: Changing the consensus on what is regarded as safe and sound in all kinds of banking. ...
Very few people now claim that serious reform is only proposed by people carrying pitchforks; that myth is long gone. The middle of the consensus has started to move, against mega-banks and against dangerous overborrowing by the financial sector. This will be a long hard slog, but we are finally heading in the right direction.

And then I read this:

Volcker Gets Vaporized, by Paul Vigna: If this is true, and I’m a different P.V., I think I’d be pretty PO’d:

The Obama administration is backing off a plan to bar commercial banks from engaging in proprietary trading, favoring instead a watered-down version of a key tenet of the proposed “Volcker rule” governing how banks operate, according to people familiar with the situation.

Sources told The Post that instead of issuing an outright ban on prop trading — or trading done on behalf of only the bank itself — the White House will propose that federally insured banks keep higher cash reserves if they want to run such trading desks.

The about-face comes amid signs the administration faced an uphill battle selling lawmakers and Treasury officials on an outright ban.

So let’s get this all straight: the White House brings Paul Volcker on board last year because they needed somebody with some gravitas who commanded respect..., finally unleashing him last month on the banks with this Volcker Rule. Now they’re back-tracking on it?
Not that I want our colleagues upstairs at the Post to be wrong, but on this one I want them to be wrong. Are we to assume that the White House, with majorities in both houses, with half the country ready to tar and feather the bankers, with the obvious, desperate need for root reform after the worst financial crisis in 80 years — a near-total, self-inflicted meltdown caused precisely by a lack of regulations — can’t get its own proposals through Congress and the Treasury Department?
Is the banking lobby that powerful?...

That question will answer itself when we see what kind of reform emerges from the legislative process, but so far the answer appears to be yes.

Update: This comment came via email (from a trusted source):

Professor Thoma,

Just saw your post on financial reform, and for what it's worth, it wasn't the Street that killed the Volcker Rule. It was the Senate. The Street (smartly, for once) largely hung back and let the Senate get rid of the Volcker Rule.

It's a lot of inside baseball, but the way the administration proposed the Volcker Rule essentially guaranteed that it would never see the light of day. It royally pissed off the Banking Committee members, because they'd been working in pairs on a bipartisan bill for months, with no inkling that anything like the Volcker Rule was in play. There's no way they'd ever agree to drop everything and revamp a key portion of their bill just to hand the President a political victory (on their political turf, no less).

The Banking Committee had also been considering the Frank-Treasury discussion draft from October to be "the administration's view," and it's a major legislative faux-pas to throw a new proposal in there so late, and so publicly. If the administration really wanted the Volcker Rule, they would've approached Dodd/Shelby (now Dodd/Corker) privately and haggled over the legislative language for weeks before announcing it. It's petty, I know, but that's the way it works.

FWIW, the most aggressive opponents of financial reform (by far) have been the insurance companies. They seem to be violently opposed to pretty much everything in financial reform.

The financial industry may not have been directly involved, but Senators attempting to get rid of the Volcker rule and other regulatory interventions will likely expect their reelection campaigns to be well financed by those they are defending.

    Posted by on Tuesday, February 23, 2010 at 11:25 AM in Economics, Financial System, Politics, Regulation | Permalink  Comments (8)


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