James Pethokoukis

Politics and policy from inside Washington

Banks: No friends left in Washington. Except Barney Frank. Kind of

Jun 17, 2010 18:54 UTC

U.S. financial reform keeps getting tougher on big banks — so they need to take friends wherever they can find them. Right now, that means Massachusetts Democrat Barney Frank, the liberal chairman of the House Financial Services Committee.

Not that Wall Street can afford to be choosy right now. Much to the industry’s dismay, sweeping regulatory legislation became more draconian as it moved from the House to the Senate. America’s continuing economic woes kept the spotlight on Wall Street’s role in the financial crisis, as did the Securities and Exchange Commission’s lawsuit against Goldman Sachs.

Senate Republicans, potential allies, were of no help. By not offering legislative amendments at a key stage of the Senate debate, they created a playing field for moderate Democrats to battle liberal Democrats. Even worse, the Obama administration, a moderating force behind the scenes despite some populist presidential rhetoric, has also been on the sidelines of late. Just as negotiators from the two chambers began hashing out a deal, the Gulf oil spill began monopolizing White House attention.

There was a moment when there was a real chance, for instance, that banks would have to dump their highly profitable derivatives desks. But Frank quickly jumped out and said the notorious Senate provision went “too far.” It now seems likely that banks will be able to keep those units as long as they are separately capitalized. In addition, Frank has been more sympathetic towards the financial sector’s positions over changes to deposit insurance, rules regulating credit raters and how the president of the New York Federal Reserve bank gets appointed.  Frank realizes that an overly strict bill risks alienating the few Republican senators who might actually vote for it.

Not that Frank is doing the banks’ bidding. He supports a stricter version of the Volcker Rule than passed the Senate, one that could ban most proprietary trading and investment in private equity and hedge funds. America’s most unpopular industry should consider it a trade-off – for banks keeping their swaps desks – from one of the few friends it has left.

Watching the watchmen

Jun 17, 2010 18:38 UTC

A good piece on financial regulatory reform over at VoxEu:

Furthermore, the bill does not address the risk of political capture. The same politicians calling now for stricter lending standards called for extended home ownership only a few years ago. The future roles of Fannie Mae and Freddie Mac are notably absent from this Bill, and neither is the issue of mortgage subsidisation being addressed. And there seems to be rather more political oversight than less. While accountability of regulators is important, the line between accountability and capture is a thin one.

Will the new framework help prevent the next crisis or at least reduce its probability significantly? The answer is a firm no, not because the reform steps are damaging or wrong, but simply because they only provide the framework, within which the different actors and most importantly regulators, central bankers, and politicians will act. As shown clearly on this site by Ross Levine (2010), it was the violation or intentional ignoring of rules that led to the build-up of the bubble and the subsequent bust, not the lack of regulatory power or proprietary trading.

Me: Thus all the concern about regulatory discretion …

Here’s what’s missing

Jun 17, 2010 18:09 UTC

How to lower the unemployment rate. How …  to … lower … the unemployement … rate. Lesse, I dunno …maybe growth the economy faster? Here is a bit from the UCLA Anderson Forecast:

Significant reductions in the unemployment rate require real gross domestic product (GDP) growth in the 5.0 percent to 6.0 percent range. Normal GDP growth is 3.0 percent, enough to sustain unemployment levels, but not strong enough to put Americans back to work. As a consequence, consumers concerned about their employment status are reluctant to spend, and businesses concerned about growth are reluctant to hire.

The forecast for GDP growth this year is 3.4 percent, followed by 2.4 percent in 2011 and 2.8 percent in 2012, well below the 5.0 percent growth of previous recoveries and even a bit below the 3.0 percent long-term normal growth. With this weak economic growth comes a weak labor market, and unemployment slowly declines to 8.6 percent by 2012.

Tepid growth leaves plenty of excess capacity, subdued pricing power and very little inflation. This will allow the Federal Reserve to postpone interest-rate increases that the Forecast expects to come late this year or early next, as the sustainability of a modest recovery becomes clear and as the need for preemptive action against future inflation begins to dominate monetary policy decisions.

Me:  I know it’s easier said than done. But everything government does from now on needs to be optimized for growth.

COMMENT

It’s apparent from the recent employment stats that companies are really cracking the whip on their current employees, rather than bringing on more help. Average workweek hours are up, overtime up, factory workweek up and so on. Companies aren’t hiring, I would guess, because of the endless uncertainty emanating from Washington. Obama and his minions keep threatening new regulations, new taxes, new this, new that without any regard for the legitimate concerns of business over how much all this will cost. More and more I believe industry wants to hire but will wait until the dust settles in Washington. That means November at the earliest before the employment stats start improving.

Posted by Gotthardbahn | Report as abusive
  •