Financial regulatory reform: Not over yet

By Felix Salmon
June 29, 2010
Chris Dodd is looking to possibly beef up the FDIC enormously, and Democrats are wondering whether they need to remove $19 billion in new bank taxes in order to pass Republican procedural hurdles in the Senate.


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It seems that financial regulatory reform is not a done deal after all: Paul Kanjorski says that the reconciliation negotiations might be reopened, Chris Dodd is looking to possibly beef up the FDIC enormously, and Democrats are wondering whether they need to remove $19 billion in new bank taxes in order to pass Republican procedural hurdles in the Senate.

It would be a fiasco of tragic proportions if the banks managed to remove these taxes from the final bill, essentially absolving themselves from cleaning up after their own mess. The arguments against the taxes are weak indeed: either you simply oppose all taxes on principle (which seems to be the Scott Brown stance, and which is fiscally disastrous), or else you’re forced into John Carney’s corner.

Carney is worried that we don’t know exactly where the tax will be applied — but that’s a feature, not a bug. Setting up the tax in great deal ex ante is essentially just asking banks to spend millions of dollars on tax consultants who can help them skirt the new levies. And as the risks in the system evolve and change, so to should the way that they’re taxed. It’s right and proper that the newly created Council for Financial Stability will be charged with taxing systemic risk, rather than having a bunch of politicians try to do so at the beginning and then watch as the banks and other financial institutions nimbly sidestep the new taxes.

An increase in the FDIC premium would be a gift on a platter to banks like Goldman Sachs and Morgan Stanley which don’t have insured deposits — not to mention non-bank players like Citadel which are systemically very important. I’m unclear on what exactly this Republican “procedural hurdle” is — I thought that after reconciliation, you just needed a simple majority to pass a bill. But I’m getting very annoyed about it.

Comments
10 comments so far

You mean ‘conference negotiations’, not ‘reconciliation negotiations’.

Posted by ginsbu | Report as abusive

Felix:

In the Senate, conference reports can be filibustered but cannot be amended.

Posted by jfxgillis | Report as abusive

You wrote:

“oppose all taxes on principle (which seems to be the Scott Brown stance, and which is fiscally disastrous)”

Scott Brown is very popular in Massachusetts right now, much more so than John Kerry for example.

That’s just it. Folks say the Tea Party movement has no core principles but that is absolutely not true. They are vehemently antitax. That is their alpha and their omega.

Fiscally disasterous maybe perhaps a fiscal disaster is what is needed to bring public spending under control.

Posted by DanHess | Report as abusive

The single best way I can see to bring public spending under control is to zero out military spending.

What the heck — let’s do it.

Posted by wcw | Report as abusive

Out of control healthcare spending has one job to do, to distract public attention from Pentagon and Wall Street prodigality. And it does it well.

If for no other reason: single-payer. Now. But there’s another: you can’t grow a healthy economy on promissory fumes and sick people. All that does is prolong the agony, of which we seem to be in for lots more before things get better.

Posted by HBC | Report as abusive

Ex post taxation seems like a pretty severe bug, actually. It makes decision making harder, because every business decision that might be taxed now depends (upredictably) on a the regulator’s decision.

But worse than that, it’s an invitation to corruption and crony capitalism. At least now we can see the banks lobbying Congress; if all it takes is some bribery (or more subtle forms of regulatory capture) to control $19 billion, that’s a problem.

It’s probably better to just tax systemic risk, which is admittedly hard. Leverage is a pretty good proxy for it, though: Simply taxing borrowing would provide an incentive to avoid the sorts of risks that exacerbated the crisis.

Posted by jleonard | Report as abusive

wow, US military spending is around 600 billion and the US federal budget is around 3.8 trillion with a deficit of 1.4 trillion. Maybe you are thinking if the US zeros out medicare and social security then the budget will be balanced….

Also post-facto taxation is something any reasonable person would oppose, today it is boo-hiss bad banks and tomorrow some other random baddie.

Posted by Danny_Black | Report as abusive

jleonard, leverage isn’t the issue and will always mislead you as a couple of seconds thought should show. Think about the sharp movements in assets that happened in 2007-2008 – as they happen in EVERY crisis – and naively thinking all debt is equal when the banks that ran into a wall were the ones with ultra-short term financing vs those with more locked in repos.

The real issue is liquidity not leverage. As long as a company is liquid it can’t go bankrupt and as they say profit is an opinion and cash is a fact. The regulations should be focusing on mismatches between maturies for liabilities and assets.

Posted by Danny_Black | Report as abusive

Let it be clear that the trashing and watering down of the bill is a bipartisan effort.

“How N.Y. Dems united on Wall St. bill”
http://www.politico.com/news/stories/061 0/39140.html

Wall Street’s people in Washington are and have long been Democrats, starting with the congressional delegations of New York. Who else is taking care of his constituents? How about the author of the bill himself, Chris Dodd, who’s Connecticut has a private sector that is close to 50% finance related?

The bill is garbage and it is the fault (goal?) of the authors. We all have seen Ritholtz’s report card which give the bill a C-.
http://www.ritholtz.com/blog/2010/06/gra ding-financial-regulatory-reform/

It is worse than doing nothing because it ends the discussion of regulatory reform. The main ‘improvement’ is tightening of lending standards, but the market took care of that already anyway.

Posted by DanHess | Report as abusive

You’re right about the mealy-mouthed bipartisanship involved, Dan (Hess, not the weirdo). It’s the same chickenspit mentality that dare say nothing about the cost to the American taxpayer of Pentagon excess to the tune for 2011 of over $1.6Trillion, incl. $400Billion in interest for past profligacy. It’s the biggest thing giving Government a bad name, making even this failed financial regulatory Bill look uproariously successful by comparison.

Of course, when s’orlrightreally-ists like that other Dan (the excitable one) say they only feel like they spent $600Billion on war games, it just goes to show that they’re really getting nowhere near their money’s worth.

America has a military problem. But you’re right to point out that it also has a bipartisan problem when it comes to asking and telling what the military and the so-called banks of Wall Street keep costing this country. It’s almost as if they really want you to know how much they’re capable of wasting.

Posted by HBC | Report as abusive
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