Posts Tagged ‘financial regulation’

Dammit Janet, I love you!*

9 October 2013

I am very pleased with the president’s nomination of Janet Yellen to be the next Federal Reserve Chair. Ms. Yellen has impeccable credentials, the best economic forecasting record of any recent Fed official, and appears to take the regulator part of the Fed Chair job seriously.

This last part is important. Larry Summers, the original front-runner for the job, helped push through the key deregulation of the late Clinton years, has dismissed the idea that it contributed to the bubble or crash, and has basically never admitted a mistake in this area. Alan Greenspan was essentially hostile to financial regulation, and bears as much responsibility as anyone for the housing bubble of the 2000s. Ben Bernanke has acknowledged that the Fed failed as a regulator during the housing bubble, but he was a Fed governor for most of that bubble and Chair for the last two years of it. Economist Bill Black finds Bernanke to have been sorely lacking as a regulator. The Fed’s main regulatory task is to try to detect and reduce systemic risk, i.e., risky activities that threaten the larger financial system and economy. Granted, Yellen told the Financial Crisis Inquiry Commission in 2010 that she failed to see several of those risks (securitization, credit rating agencies, Special Investment Vehicles) when she was San Francisco Fed President in 2004-2010, but on the other hand she was among the first at the Fed to publicly call attention to the housing bubble

Granted, monetary policy, not financial regulation, is the main part of the job. I agree with those who have said she will probably be very similar to Bernanke as far as that goes, and I’d call that a good thing. The Fed needs to do what it can to pull us out of this Little Depression, and since interest rates cannot fall below zero, additional measures like buying long-term bonds and mortgage-backed securities (i.e., quantitative easing, or QE) make sense, as long as they work. Yellen is often stereotyped as a “dove” because in recent years she favored expansionary policy and did not state that inflation was an imminent risk, but those recent years were the Little Depression that began in 2008. When unemployment is not the nation’s biggest problem, Yellen is more concerned about inflation. Such as in the roaring 1990s, when Yellen was Clinton’s Chair of the Council of Economic Advisers and then a Fed governor. With unemployment down to its lowest levels in decades, Yellen was an inflation “hawk,” as Matthew O’Brien details.

Whether the Senate is capable of that much nuance as it considers her nomination remains to be seen. I expect she’ll win majority support, including a handful of Republicans, and that Republicans will resist the temptation to filibuster her nomination. The right-leaning American Enterprise Institute offers several reasons why an anti-Yellen filibuster would be a disaster. Then again, flirting with disaster seems to be the Congressional Republicans’ game plan of late.

PS Here is a recent (Nov 2012) interview with Janet Yellen.

* Title stolen from EconoMonitor, who of course got it from Rocky Horror:

The Regulator Guys

18 June 2009

The Obama Administration’s new Financial Regulatory Reform plan hit the streets yesterday.  At 85 pages, it’s a lot to digest.  Today’s Washington Post has pretty good coverage, including this excellent summary chartJoe Nocera of the New York Times has some pointed criticisms, the gist of which is that Obama’s reforms, unlike FDR’s, do not go far enough.

Probably the biggest step forward is that the plan calls for giving someone the authority to close and liquidate insolvent financial behemoths like AIG and Citigroup.  Right now, the FDIC can shut down failing banks, but nobody can do the same with financial supermarkets like AIG and Citigroup.  In a similar view, it also empowers the Fed to oversee huge, systemically important financial institutions and require them to hold more reserves and take fewer risks.  Both of these changes seem to go a long way toward resolving that tension between moral hazard and “too big to fail.”

Another step that looks welcome is the establishment of a Consumer Finance Protection Agency, along the lines suggested by the estimable Elizabeth Warren, the Harvard Law Professor who chairs the Congressional Oversight Panel that monitors the TARP bailouts.  In this 2004 interview with Bill Moyers she offers a critical, detailed assessment of credit-card-company abuses and sensible ideas for reform.  Her two-part interview with Jon Stewart this past April is worth watching as well.  Warren has been rumored as the person to lead this new agency.  Had an effective consumer protection agency been in place earlier this decade, we might have avoided the stampede into dubious adjustable-rate mortages and option ARMs.  Not surprisingly, the financial services industry is critical of the idea of such an agency.


Still too big to fail

11 June 2009

. . . and too big to regulate.  JP Morgan Chase, Goldman Sachs, Morgan Stanley, and seven other megabanks got permission from the Obama Administration to repay their combined $68 billion in TARP debt to the government.  The government made a profit on the loans, and the banks are now out from the under the thumb of the TARP restrictions on executive pay and hiring.  Win-win, right?

Well, no, not for the taxpayers who are still implicitly on the hook for these ten behemoths should anything go wrong.  They are no more regulated than they were before the crisis, and there is no FDIC-like resolution system in place that would allow for the orderly failure of these financial supermarkets should they become insolvent (again?).   It would be rational for their managers to conclude that the institutions are still “too big to fail” and to return to reckless decision-making a la “heads I win, tails the taxpayers lose.”  Today’s Financial Times has an excellent editorial on the matter.   Wish I’d written it myself; the next best thing is to cut and paste most of it here:


Geithner 3.0: What a difference a day makes

24 March 2009

This is the most sensible thing I’ve heard from him yet — a proposal for FDIC-type powers for the government to temporarily take over too-big-but-failing-anyway financial institutions like AIG, clean house, and sell off their remaining assets.   I once thought the FDIC already had those powers, but apparently that’s so only for regular commercial banks, not bank holding companies or other financial Goliaths.   (FDIC Chairperson Sheila Bair explains it here.)

The new proposal doesn’t necessarily conflict with anything in yesterday’s plan to subsidize the worst financial institutions by overpaying for their worst assets, but it does suggest that the Obama Administration really does have plans to regulate them and is not kidding itself (Pollyannish recent rhetoric  to the contrary) that all of them are fundamentally sound.


Michael Lewis on the financial mess

5 January 2009

Great op-ed by Michael Lewis and David Einhorn, “The End of the Financial World as We Know It,” in Sunday’s New York Times.  Epic, too — two full newspaper pages.  I’ve been a big Michael Lewis fan ever since Liar’s Poker, but this is in a different category — not breezy and funny as usual, but serious and long on specifics.  Einhorn is a president of a hedge fund, so the relative wonkiness of the piece likely reflects his contribution.

Some highlights from the first half:

“Americans enter the New Year in a strange new role: financial lunatics.

“… the collapse of our financial system has inspired not merely a national but a global crisis of confidence.  Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?….

“The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

“It’s not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.”

The first half also tells “the strange story of Harry Markopolos,” an officer at a Boston investment management company who blew the whistle on Bernard Madoff’s Ponzi scheme for nine years beginning in 1999 with repeated communications to the S.E.C. that got ignored.   (Lewis and Einhorn tout Markopolos as a natural for the S.E.C.’s next Chief of Enforcement.  If only.)


Now this is more like it

18 December 2008

Today in announcing his nomination of Mary Schapiro to head the Securities and Exchange Commission, President-elect Barack Obama picked up where he left off on “Meet the Press” on 7 Dec., when he declared his support of strong regulation of financial markets.  Obama’s two-minute statement today was strong as well:

“… regulators who were assigned to oversee Wall Street dropped the ball.”

“Financial regulatory reform will be one of the top legislative priorities of my administration.  And as a symbol of how important I view this reform, I’m announcing these appointments months earlier than previous administrations have.”

“Instead of appointing people with disdain for regulations, I will ensure that our regulatory agencies are led by people who are ready and willing to enforce the law.”

All this is in marked contrast to what I read in The New York Times on Thansksgiving eve, in a profile of the next National Economic Council Chair, Lawrence Summers, who appeared to dismiss the notion that deregulation was a major factor in the crisis (New York Times, 25 Nov. 2008).  David Leonhardt of  the Times put it this way:  “As Treasury secretary starting in 1999, he shepherded a couple of bills that helped deregulate financial markets, and he has made it clear that he doesn’t buy the notion that these laws caused the financial crisis.”  Either Summers is shooting down a straw man that says the laws were the sole cause of the crisis (which I don’t think anybody is arguing), or he’s saying the laws did not contribute to the crisis, period.  Leonhardt interrupts his glowing profile to state, “I wish he and other Clinton administration alumni were a bit more introspective about what they might have done differently.”  Me, too.

I stated these concerns a couple weeks ago on the old version of this blog, 25-26 Nov. 2008.  Here’s the rest of it:

The Best and the Brightest?

Thou shall not crucify mankind on a cross of financial innovation

18 December 2008

I’d been meaning to use that line for a while, and Yves Smith of Naked Capitalism provides a perfect opening this morning, with a nice long post that I hope he won’t mind my cannibalizing.  Smith argues that many of the recent Wall Street bonuses are not just excessive, but a form of looting:

“It was looting, and it is high time the media starts describing it in those terms.”

While most of us might picture a looter as some guy breaking into a store during a blackout and stealing TV’s, Smith is serious.  He rests his definition on a 1994 NBER paper by economics Nobelist George Akerlof and David Romer, which concludes:

“Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.”

Exactly, says Smith, who says the investment bank executives did exactly that:  “pay themselves more than their firms are worth and then default on their debt obligations.”  He laments that nobody in the media has put it this bluntly, let alone called it looting.  More often it gets ignored, or seen as an inevitable by-product of that almighty engine of progress, financial innovation.

I agree with Dean Baker’s repeated argument that the U.S. financial sector has been bloated beyond rationality and that the economy would function better with a smaller, simpler financial sector that didn’t try to peddle so many dubious-to-worthless products to households, consumers, institutions, etc.   Smith, impatient with those who “are still urging that we not squelch ‘financial innovation’,” offers up a gem of a quote from Martin Mayer, who called financial innovation

“… a way to find new technology to do what has been forbidden with the old technology….Innovation allows you to go back to some scam that was prohibited under the old regime.”