Posts Tagged ‘james kwak’

Financial reform bill: Better than nothing

22 May 2010

This week the Senate passed a financial reform bill that’s at least a bit tougher than looked possible a couple weeks ago.  Paul Krugman has a concise rundown on it right here:

“What’s good? Resolution authority, which was sorely lacking last year; consumer protection; derivatives traded through clearinghouses; ratings reform, thanks to Al Franken; tighter capital standards for big players, although with too much discretion to regulators.

“What’s missing? Hard leverage limits; size caps; not much in the way of restoring Glass-Steagall. If you think that too big to fail is the core problem, it’s disappointing; if you think that shadow banking is the core, as I do, not too bad.”

Dean Baker has some additional words here on Al Franken’s credit-rating-agencies reform amendment, which would eliminate the huge grades-for-sale conflict of interest of having companies being rated pay the rating agency for their work.  Instead, the Securities and Exchange Commission will assign the rating agency for each new securities issue.

The Senate bill also includes a Consumer Financial Protection Agency, which will be technically independent, as reformers had been pushing for and industry had been furiously opposing.  However, the agency will be housed within the Federal Reserve, which reformers had opposed because of the Fed’s dismal track record on consumer protection over the past decade.  Supposedly the agency will not have to answer to the Fed’s leadership, but we’ll have to see how that works out in practice.  I have not yet seen any word on whether the fabulous Elizabeth Warren, the Harvard Law professor who had been advocating for this agency, would still be interested in heading it.

All told, the bill still leaves much to be desired — Simon Johnson and James Kwak at The Baseline Scenario decry its lack of hard capital requirements or bank size restrictions — but looks a whole lot better than nothing:

Exiled From Main St. / Start Breaking Up

18 April 2010

Thomas Hoenig, president of the Kansas City Fed and one of the most incisive critics of the “too big to fail” policy, has an op-ed in today’s NYT about the current financial reform bill before Congress.  He says it does far too little to end “too big to fail” — while it sets up a mechanism for big failing financial institutions to be put under FDIC receivership, those financial institutions would still have the political clout to snag a bailout instead.

This may be true, but it seems to be a drawback in any financial reform bill that doesn’t call for the biggest financial institutions to be broken up into smaller ones that are not too big to fail, i.e., which can go bankrupt without significant systemic risk to the economy.  Koenig has spoken elsewhere on the need to break up the biggest banks.  It’s a position that finds favor among many liberal economists,including James Kwak of the Baseline Scenario (see previous link).  Rep. Paul Kanjorski of Scranton, PA has proposed an amendment to give the government power to preemptively break up any financial institution whose failure would impose giant costs on the U.S. economy, but the Senate Banking Committee apparently has nothing like that on the table yet.  Alas, the political clout of the big banks may well be enough to make bank size restrictions a non-starter in the Senate.  Simon Johnson of The Baseline Scenario says much the same thing here.

Hoenig says that another provision of the bill actually makes things worse by narrowing the Fed’s supervisory role to just the nation’s 12 largest banks, most of which are headquartered in NYC.  I do not know what the logic of this provision is, and Hoenig doesn’t say; maybe the idea is for the other banks to be supervised by the FDIC and/or other agencies instead.  Whatever it is, Hoenig thinks the Fed needs to give just as much attention to the other 6,700 as to the top 12.  As he points out, that would seem to be the whole point of having 11 regional Fed banks besides the one in New York.

UPDATE:  Simon Johnson puts it a lot more plainly right here.  For the record, Paul Krugman has his doubts that breaking up the banks would help much — see the last three paragraphs of this recent column.  I’m with Simon Johnson here.  By all means, crack down on fraudulent finance at institutions large and small, but I don’t see how you limit the power of the big banks without limiting their size, too.

Devil’s Dictionary: “the blame game”

8 February 2010

‘the “blame game”

(defined, in Washington, as someone else pointing out something you did wrong)’

James Kwak, in The Baseline Scenario, regarding arguments by a Bush II administration National Economic Council director about who is or isn’t responsible for the deficits that President Obama inherited

Quote of the day (II)

24 January 2010

A good day for metaphors:

“Bernanke is an airline pilot who pulled off a miraculous landing, but didn’t do his preflight checks and doesn’t show any sign of being more careful in the future – thank him if you want, but why would you fly with him again (or the airline that keeps him on)?”

Simon Johnson, opposing the reappointment of Ben Bernanke as chairman of the Fed.  Johnson’s preferred alternative appointment is a surprising one — so surprising that he himself scotched the idea as “crazy.”

Zombie Bankhouse?

7 July 2009

I admit, I really don’t know if any major U.S. banks are insolvent or if the banking system as a whole is insolvent. A few months ago, it seemed to be conventional wisdom, with few dissenters outside of Tim Geithner’s Treasury Department. But around the time of the Treasury’s “stress tests” of the largest banks on May 7, which incredibly nearly all of those banks passed, the stock market was once again smitten with the banks.  As John Authers of the Financial Times notes, the S&P 500 Financials Index rose 8.3% the next day, to 175.8, a level more than twice as high as their March low. Financial stock prices have since tumbled by about 14% to 151.5 (as of July 6), but they’re still 85% above their low. A healthier sign still is that credit default swap contracts for bank loans and bonds indicate that the market thinks bank credit is slightly less risky than it was two months ago. Are we out of the woods yet?

Doubtful. The banks still aren’t lending (business and consumer loans are down slightly, real estate loans are about the same), and they’re still sitting on vast piles of reserves ($688 billion, up from $2 billion a year ago). Possibly this is just a rational response to a recession and a general worsening of consumers and firms as credit risks, but it looks like a continuing credit crunch, in which even good credit risks can’t get loans, and it does not look like the behavior you’d expect from healthy banks.

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