June 07, 2010 07:58 PM UTC

Why the Bank Regulations Matter

• 17 Comments
• by: DavidThi808

(Because I care and I only have a few weeks left as guest editor – promoted by Danny the Red (hair))

In most legislation we understand that politics forces trade-offs and those with the most money tend to get their way. So we celebrate the health-care bill we got even though the insurance companies were able to kill single payer, the public option, and Medicare buy-in. We moved forward and as the changes that we did gain are implemented we can adjust and improve. That’s politics in a democracy.

But in some cases key issues must be addressed. If they are not, then we face ongoing disasters. For example off-shore wells must be fail safe and regardless of oil company lobbying to save a couple of bucks, we must have regulation that makes this absolute. (And like most laws like this, it is cheaper for the oil companies long term to have this regulation.)

The same holds for regulating the large banks. The FDR Administration put in a series of regulation that dramatically reduced the size and length of recessions. These regulations stood us in good stead until the ’80s. Then we had the gradual unraveling starting with allowing the Savings & Loans to run up major debts to their short term advantage, and then left us with the debts when it crashed. This unraveling continued with the culmination being the revocation of Glass-Steagall.

And out of that we got the Great Recession which we are still stuck in. We stopped it from being as bad as the Great Depression, but we’re now stuck with 18% true unemployment/underemployment. And the government stimulus is rapidly running out with no more coming, so we could easily see the economy head back down. All of this is due to our present lack of serious effective regulation of the banks.

Here’s the key issue we need to face, if we don’t bring in real regulation, then the banks will continue to place large bets, keep the profits, leave us with the losses, and continue to drive us into deep recessions. And if we continue to merely pretend to address the core issues, while leaving the banks to fuck with our economy for their short-term profit, they will continue to wreak devastation on the economy and on people’s lives.

So where do we sit at present? From Simon Johnson:

More specifically, however, it’s not that “people in the same field begin to think alike”, but rather that “people who are supposed to regulate” begin to see the world through the eyes of the biggest private sector players.  Note, for example – and this is important – most hedge fund managers agree big banks are dangerous and will again mismanage risk in a reckless manner.

…

The people in charge of our strategy towards big banks are not fools and they are not corrupt; they are also not doing things just because someone on Wall Street calls them up.  Our top policymakers are simply convinced that what is good for the biggest and most dangerous element on Wall Street is good for the American economy.

This is cultural capture in its purest and most extreme form.  It increasingly stands out as a problem both in the US context and around the world.  Unfortunately, the White House and Treasury may be the last to realize this.

What’s key to the above is that not just the government regulators, but most in Congress, including Senators Michael Bennet and Mark Udall probably truly believe they are doing the correct thing, while setting us up for regular ongoing deep recessions. We’re all just as screwed as if they did it at the behest of the lobbyists, but this probably means it will be much more difficult to get them to vote for effective regulation.

And from Matt Taibbi:

It’s early May in Washington, and something very weird is in the air. As Chris Dodd, Harry Reid and the rest of the compulsive dealmakers in the Senate barrel toward the finish line of the Restoring American Financial Stability Act – the massive, year-in-the-making effort to clean up the Wall Street crime swamp – word starts to spread on Capitol Hill that somebody forgot to kill the important reforms in the bill. As of the first week in May, the legislation still contains aggressive measures that could cost once-indomitable behemoths like Goldman Sachs and JP Morgan Chase tens of billions of dollars. Somehow, the bill has escaped the usual Senate-whorehouse orgy of mutual back-scratching, fine-print compromises and freeway-wide loopholes that screw any chance of meaningful change.

…

Then reform advocates started reading the fine print of the Lincoln deal, and realized that all those Wall Street lobbyists had really been earning their money.

That same day the GOP amendment failed, the derivatives expert Adam White was at his home in Georgia, poring over a “redline” version of the Lincoln amendment, in which changes to the bill are tracked in bold. When he came to a key passage on page 570, he saw that it had a single line through it, meaning it had been removed. The line read, “Except as provided in paragraph (3), it shall be unlawful to enter into a swap that is required to be cleared unless such swap shall be submitted for clearing.”

Translation: It was no longer illegal to trade many uncleared swaps. Wall Street would be free to go on trading these monstrosities by the gazillions, largely in the dark. “Regulators can’t say any longer if you don’t clear it, it’s illegal,” says White.

…

Whatever the final outcome, the War for Finance Reform serves as a sweeping demonstration of how power in the Senate can be easily concentrated in the hands of just a few people. Senators in the majority party – Brown, Kaufman, Merkley, even a committee chairman like Lincoln – took a back seat to Reid and Dodd, who tinkered with amendments on all four fronts of the war just enough to keep many of them from having real teeth. “They’re working to come up with a bill that Wall Street can live with, which by definition makes it a bad bill,” one Democratic aide explained in the final, frantic days of negotiation.

…

The Senate is designed to function as a kind of ongoing negotiation between public sentiment and large financial interests, an endless tug of war in which senators maneuver to strike a delicate mathematical balance between votes and access to campaign cash. The problem is that sometimes, when things get really broken, the very concept of a middle ground between real people and corrupt special interests becomes a grotesque fallacy.

In other words, it started off with the Senate stepping up to insure that banks could no longer devastate the economy for their personal short-term profit. And it ended up with business as usual. And my bet is that after it is through the conference committee, the few good things remaining in the bill will have been emasculated. Yet our congressional delegation is bragging about how they have addressed financial regulation. It’s in their own interest to believe they have fixed this so I don’t expect much introspection on their part.

There are a large number of very knowledgeable people who think we have done nothing to stop a reoccurrence of our present mess. There is no downside to taking effective action (aside from reducing Wall St bonuses from obscene to excessive). There is a giant upside to avoiding another giant recession. Or as I put it to a senior Bennet campaign worker:

Issues like this are too important to subjugate them to political advantage. I’m not on your side, I’m on the side of what’s best for our country.