James Pethokoukis

Politics and policy from inside Washington

Passing financial reform is no miracle

Apr 22, 2010 14:08 UTC

Jonathan Chait over at TNR is strangely amazed that financial reform may happen:

What’s happening with financial reform right now is unlike anything that’s happened since I’ve been following American politics. Look at the fundamentals of the issue. This is a matter where a massive industry — one that accounts for close to half of all corporate profits — is adamantly opposed to new regulation. The merits of the issue are so mind-numbingly complex that even economists and policy wonks sound distinctly fuzzy on the details. Throw in a Republican Party that had pursued, with evident political success, a policy of total obstruction. I’d tell you this was a formula either for defeat or a toothless reform.

And yet a substantial reform now appears close to inevitable. It’s not a toothless reform — a set of derivative regulations more hawkish than anybody could have dreamed possible a couple weeks ago just passed through the Agriculture Committee. It’s one of those strange moments when the normal laws of politics have been suspended.

Me:  I am more amazed that given the magnitude of the financial crisis and the level of public rage, the banks weren’t broken up and turned into quasi-public utilities. But Wall Street can thank the White House for that. After passing the stimulus, it decided to focus on healthcare. Time passed, passions ebbed, and the lobbying effort cranked up. But the aftermath of the crisis (+Goldman) always made it likely that reform would pass.

COMMENT

Hi, Bro
I want you to put an eye on thai protesters because they will be a big crack down. The red shirt changing their color nw that mean the sign of losing.

Posted by tahanlaoboy | Report as abusive

The latest on Obama and the VAT

Apr 22, 2010 13:51 UTC

OK, here is what President Obama said on CNBC to reporter John Harwood about a value-added tax:

HARWOOD: If reducing consumption is a good idea, could you see the potential for a value-added tax in this country?

OBAMA: You know, I know that there has been a lot of talk around town lately about the value-added tax. That is something that has worked for some countries. It’s something that would be novel for the United States. And before I start saying that this makes sense or that makes sense, I want a better picture of what our options are. And my first priority is to figure out how can we reduce wasteful spending so that, you know, we have a baseline of the core services that we need and the government should provide, and then we decide how do we pay for that. As opposed to figuring out how much money can we raise and then not have to make some tough choices on the spending side.

Me: Well,  I certainly agree with the general principle that we should optimize government and then see how much money we need.  But the important thing here is that a) despite Ways & Means Chair Sander Levin badmouthing the idea and b) 85 Senate votes against the idea, c) the White House won’t rule the idea out. Not all.   I also noticed that  the NYTimes has yet to run a correction on Hardwood’s piece that the WH has run the numbers on how much they think a 5 percent VAT would raise (nearly $300 billion a year). That, despite the WH saying they have not done so. It should also be noted that Obama seems to be qualifying his pledge to not raise middle-class taxes as applying only to income taxes.

COMMENT

“Obama seems to be qualifying his pledge to not raise middle-class taxes as applying only to income taxes.”

He has to, because other wise he’s already broken it for all the smokers who are happily uninsured and like to go tanning.

Posted by drewbie | Report as abusive

Growth is the key to US fiscal recovery

Apr 21, 2010 18:50 UTC

The Obama deficit commission has its first meeting next week. And when the panel  finally releases its report after the election, I am sure it will contain an unsurprising mix of tax increases and spending  cuts as a way of dealing with the deficit. But a new report from the  wealth management group at UBS  looking at public sector debt dismissed that policy prescription:

Although fiscal discipline is important, on its own it has rarely been enough to lower a country’s debt ratio. Fo example, since 1980 some 30 countries have undergone exercises in fiscal discipline and many of them have achieved significant reductions in their debt-to-GDP ratios.

However, the overall level of debt hardly ever diminished. At best, fiscal austerity helped to slow down the increase in debt, the actual reduction of the debt ratio was in practically all cases attributable to higher economic growth (often helped by falling interest rates and privatizations). Unfortunately, the growth outlook for the advanced economies is anything but encouraging over the medium to longer term, especially in comparison with the past two decades.

Now the UBS piece argues that the US will try to inflate its way out of its debt problems. Yet I think the report too easily dismisses the prospect for faster-than-expected economic growth. Remember that all those scary CBO deficit forecasts assume long-term growth of around 2 percent, less than two-thirds its historical average. That ability to generate high growth (or hinder it) is the lens though which every new government policy needs to be examined.

COMMENT

CDNrebel, good points, there are still dividend rates that can fall, it is called ‘ploughback’, another name for going on a financial diet.

Posted by Ghandiolfini | Report as abusive

Liberals hit Senate financial reform bill

Apr 20, 2010 17:24 UTC

As HuffPo puts it:

A coalition of former regulators, left-leaning economists and Democratic insiders have slammed the Senate’s version of regulatory reform in a letter to the parties’ two leaders, warning that the current bill won’t prevent a future financial crisis.

One of the signers is liberal think-tank economist Dean Baker. I e-mailed him and asked about the letter’s claim that the Dodd reform bill does not “eliminate a perpetual system of government sponsored corporate bailouts financed by the government or private industry.”

His speedy response:

To my view, the biggest failing is that it does not end TBTF banks. As a practical matter, I really doubt that any regulator is going to stand up to Goldman, Citi or any of the other big banks and tell them they can’t do something that is making them lots of money, but poses serious risks to the system. It would have helped if we had fired Bernanke, so that regulators understood that there was downside risk from failing to do their job and crack down on the big banks when necessary. But if Bernanke can get reappointed, even after allowing the worst economic disaster in 70 years, there is little hope that future regulators will take large personal risks to confront major banks when there is no downside to ignoring their practices.

COMMENT

Hey people. Just pull their business license. Everyone has to be accountable including big business, including banks, drug companies, oil companies, and manufacturers. It is not a right to operate a business in the US. Wake up America

Posted by fred5407 | Report as abusive

Why we shouldn’t break up the big banks

Apr 20, 2010 16:51 UTC

Tyler Cowen gives it his best shot and ends with this recommendation:

If you do wish to break or limit the power of the major banks, running a balanced budget is probably the most important step we could take. It would mean that our government no longer needs to worry so much about financing its activities. Of course such an outcome is distant these days, mostly because American voters love both high government spending and relatively low taxes.

3 TBTF loopholes in the Dodd bill

Apr 20, 2010 16:37 UTC

The wonderful Nicole Gelinas explains why she does not think the Dodd bill ends TBTF (as outlined by me):

1) Title II, which starts on p. 107, explains how “orderly liquidation authority” would work. When the Treasury and a panel of judges have determined that a financial firm is unsafe for bankruptcy, the FDIC would take over that firm. In “liquidating” the company, the FDIC would figure out who — of the firms’ lenders, other creditors, and shareholders — would get what. On the repayment list is “any amounts owed to the United States, unless the United States agrees or consents otherwise” (italics mine). That speaks for itself on whether taxpayers will be “exposed to a penny of risk of loss.”

2) More important, though, what does it mean to “liquidate” a company? … The bill does not ensure that lenders will take losses. Instead, it merely directs the FDIC to operate under a “strong presumption” (p. 131) that “creditors and shareholders will bear the losses of the financial company” (p. 132).

3) A hundred-odd pages later, the bill offers a big loophole for lenders in a crisis. It says that the FDIC, “with the approval of the [Treasury] Secretary, may make additional payments or credit additional amounts to or with respect for the account of any claimant or category of claimants of the covered financial company” — that is, to lenders — “if the [FDIC] determines that such payments or credits are necessary or appropriate to minimize losses” to the FDIC (p. 241). It wouldn’t be unreasonable for a lender to expect the government and the FDIC to use all of the discretion the bill affords them to guarantee financial firms’ debt in a future systemic financial crisis, just as happened this time around.

4) Finally, Geithner’s language — he wants to “dismember” failed financial firms “safely” — is interesting. Three months ago before Congress, Geithner had this to say about the AIG bailout: “We didn’t rescue AIG. We intervened so we could dismember it safely.” True, that was the government’s intent in the fall of 2008. But AIG is still with us; the stock trades at nearly $40.

Faith-based financial reform

Apr 19, 2010 18:46 UTC

The timing of the Securities and Exchange Commission’s suit against Goldman Sachs may sway a few doubters. But U.S. financial reform is still partly a matter of faith. That’s one reason for the partisan bickering. Preventing future government bank bailouts relies heavily on Wall Street believing new rules will be enforced and failures will be allowed. For skeptics, though, the current Senate bill leaves enough wiggle room to induce doubt.

On paper, Democrats have a case to support their convictions. Their bill gives regulators new authority to wind down non-bank financial institutions. Tougher new capital and leverage requirements, as well as limits on risky activities, are supposed to make failures much less likely. A $50 billion bank-financed pool would fund resolution costs — though this whole idea may yet be dropped.

The trouble is, teetering banks and their creditors might still assume that while not too big to sue — as Goldman can attest — Uncle Sam would still think them too big and interconnected to fail. And that’s the problem for many Republicans. The bill tends to favor discretion over hard and fast rules. While the feds would have the authority to shut down institutions, for instance, they wouldn’tbe required to do it. History hints that regulators and politicians will continue to be tempted to rescue banks in a crisis, a point made by several regional Federal Reserve Bank presidents who doubt the efficacy of the Dodd bill.

And those new rules on capital, leverage and risky activities will be spelled out only later by a new systemic risk council. The government would be able to guarantee financial firms’ debt without any automatic triggering of the resolution process. And it’s still fuzzy how the challenge of winding down cross-border obligations and operations would be met.

There’s an argument for leaving less to officials’ discretion. If the threat of liquidation isn’t credible, banks will operate — and investors will treat them — as if a government backstop still existed.

If the Democrats’ reform bill passes in its current form, believers might then look for signs that it’s working. One would be that big banks can no longer fund themselves so cheaply. Especially since the recent crisis, big banks — with, say, more than $100 billion in assets — have been paying less interest on deposits and debt than smaller brethren.

If that too-big-to-fail subsidy doesn’t narrow significantly, Republicans would be justified in calling for a reform revival.

COMMENT

Supply Siders had blind faith that self interest would preserve us, and their regulatory appointees considered themselves redundant, despite overwhelming historical evidence, and material incentives to the contrary.

Posted by loguealator | Report as abusive

U.S. financial reform is still a matter of faith

Apr 19, 2010 17:54 UTC

The timing of the Securities and Exchange Commission’s suit against Goldman Sachs may sway a few doubters. But U.S. financial reform is still a matter of faith. That’s one reason for the partisan bickering. Preventing future government bank bailouts relies heavily on Wall Street believing new rules will be enforced and failures will be allowed.

For skeptics, though, the current Senate bill leaves enough wiggle room to induce doubt.

On paper, Democrats have a case to support their convictions. Their bill gives regulators new authority to wind down non-bank financial institutions. Tougher new capital and leverage requirements, as well as limits on risky activities, are supposed to make failures much less likely. A $50 billion bank-financed pool would fund resolution costs — though this whole idea may yet be dropped.

The trouble is, teetering banks and their creditors might still assume that while not too big to sue — as Goldman can attest — Uncle Sam would still think them too big and interconnected to fail. And that’s the problem for many Republicans. The bill tends to favor discretion over hard and fast rules. While the feds would have the authority to shut down institutions, for instance, they wouldn’t be required to do it. History hints that regulators and politicians will continue to be tempted to rescue banks in a crisis.

And those new rules on capital, leverage and risky activities will be spelled out only later by a new systemic risk council. The government would be able to guarantee financial firms’ debt without any automatic triggering of the resolution process. And it’s still fuzzy how the challenge of winding down cross-border obligations and operations would be met.

There’s an argument for leaving less to officials’ discretion. If the threat of liquidation isn’t credible, banks will operate — and investors will treat them — as if a government backstop still existed.

If the Democrats’ reform bill passes in its current form, believers might then look for signs that it’s working. One would be that big banks can no longer fund themselves so cheaply. Especially since the recent crisis, big banks — with, say, more than $100 billion in assets — have been paying less interest on deposits and debt than smaller brethren.

If that too-big-to-fail subsidy doesn’t narrow significantly, Republicans would be justified in calling for a reform revival.

COMMENT

JJWest: Praise from the IMF should usually be regarded with suspicion. That said, adapting the Canadian banking system to America might be more difficult than imagined. Canada’s banking system is dominated by five very large institutions that operate everywhere in the Dominion, followed by some regional banks and a large number of very small local credit unions. Some international banks – chiefly HSBC – have a strong presence here as well. Would Americans be happy with a small number of gigantic banks – they’d have to be gigantic to cover all of the US – dominating the landscape? What about too big to fail? I think the real key would be simplifying regulation. Canadian banks, all of them, are overseen by one federal regulator only, the Office of the Supervisor of Financial Institutions (OSFI). That’s it. Nothing at the provincial level. On the other hand, American banks are overseen by the Fed and what appears to be a confusing array of federal and state regulators, all with their own budgets and turfs to protect. Would these groups willingly give up their poweer and perqs to simplify and strengthen bank regulation at the federal level? That, I believe, is the real problem, one not given to populist speech-making.

Posted by Gotthardbahn | Report as abusive

Team Obama already running the numbers on a VAT

Apr 19, 2010 12:55 UTC

Talk about burying the lede. This from the NYTimes and my pal John Harwood:

One way to reach that 3 percent [deficit-to-GDP] goal, by the calculations of Mr. Obama’s economic team: a 5 percent value-added tax, which would generate enough revenue to simultaneously permit the reduction in corporate tax rates Republicans favor.

Me. Not only does it look like they are considering a VAT, the only offset would be lower corporate taxes. The whole thing would be a net tax increase, obviously. I mean, that is the whole point, despite all the talk about its efficient, pro-growth effects. A VAT of that size would raise $250-$300 billion a year in new tax revenue.

COMMENT

Not sure why Obama should give a hoot what Republicans want, since the people don’t either. And I don’t like VAT on principle. Still…

Given a choice between that, cutting Defense Pork or asset-stripping Goldman Sachs to achieve realistic budget aims, some fool somewhere’s always gonna be crazy enough to pick VAT.

Posted by HBC | Report as abusive

SEC tries to ride Goldman back to credibility

Apr 16, 2010 19:07 UTC

Can the Securities and Exchange Commission ride Goldman Sachs back to credibility? Perhaps, but it will take more than one high-profile lawsuit to restore the reputation of America’s top financial cop. L’Affaire Madoff was pretty close to a brand killer. But the move is powerful evidence — and warning — that the agency is out of the doughnut shop and back on the beat.

The all-points bulletin went out not long ago. Under the leadership of a new chairman and enforcement director, the SEC’s Obama years have marked a hard switch from the laissez-faire enforcement posture of the Bush administration. In 2009, the regulator opened twice as many investigations as in 2008, with fines up 35 percent. The new assertiveness helped tamp down talk on Capitol Hill that the SEC should be merged with the Commodity Futures Trading Commission or subsumed into a giant super-regulator.

But aggression can also lead to unforced errors. The regulator was impatient with the New York attorney general’s office during its tag-team litigation effort against Bank of America. So it dumped its legal partner and went it alone. The result: A judge threw out a $33 million SEC fine against BofA regarding bonuses paid to Merrill Lynch employees. And the judge called a later $150 million settlement between the two sides “half-baked justice at best”.

The SEC also failed to execute in its case against Cohmad Securities and the firm’s involvement with Bernard Madoff. In February, a federal court dismissed the SEC’s “flimsy” charges that Cohmad helped enable the notorious Ponzi schemer. And little has transpired in the more than nine months since the agency filed an insider trading complaint against former Countrywide boss Angelo Mozilo.

So a failed case against Goldman for alleged securities fraud might leave the SEC in worse shape. It would also open the watchdog to charges that the timing of its charges, right in the middle of a debate over financial reform, was merely an attempt by the Obama administration to intimidate Wall Street into supporting its get-tough legislation. But in the meantime, the financial industry will be looking hard over its shoulder for the first time in years.

COMMENT

Something really doesn’t add up here. Quite aside from the questionable timing – as Mr. P noted – of the charges against Goldman, it now appears that two other politicians facing difficult elections or by-elections in the coming weeks are now piling onto this bandwagon. Gordon Brown, facing near-certain defeat in the UK general elections, is reportedly ‘shocked, shocked’ over this whole business and has renewed his call for increased taxation and regulation of the world’s banks, while Angela Merkel of Germany, facing an awkward by-election so close that it compelled her to nearly scuttle an aid package for Greece, is now demanding an investigation of Goldman’s actions in Germany. This is all quite aside from Mr. Obama’s trying to get his stalled financial regulation package through the Senate, so it does seem awfully convenient for a number of embattled politicians. Perhaps I’m wrong, and maybe Goldie is indeed guilty of these allegations, but given the SEC’s track record and apparent turf-defending in recent months, as outlined by Mr. P, it’s hard not to be somewhat sceptical of this whole Goldman business.

Posted by Gotthardbahn | Report as abusive
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