I’m pleased as punch to see that New York lawmakers appear to have struck a deal to repeal the Rockefeller Drug Laws. I can honestly say that I never thought I’d live to see that happen, and that I take it as a sign that we’ve reached a new era where real progressive change is possible. Not guaranteed, put possible.
And that leads me to the big story in this morning’s Washington Post.
Treasury Secretary Timothy F. Geithner plans to propose today a sweeping expansion of federal authority over the financial system, breaking from an era in which the government stood back from financial markets and allowed participants to decide how much risk to take in the pursuit of profit…
…The nation’s financial regulations are largely an accumulation of responses to financial crises. Federal bank regulation was a product of the Civil War. The Federal Reserve was created early in the 20th century to mitigate a long series of monetary crises. The Great Depression delivered deposit insurance and a federally sponsored mortgage market. In the midst of a modern economic upheaval, the Obama administration is pitching the most significant regulatory expansion since that time.
And, indeed, they are. The sweep of their regulatory ambition is much broader than I had assumed even two days ago (and I have been an optimist from the beginning). Even the framing is bolder than I anticipated.
An administration official said the goal is to set new rules of the road to restore faith in the financial system. In essence, the plan is a rebuke of raw capitalism and a reassertion that regulation is critical to the healthy function of financial markets and the steady flow of money to borrowers.
The man so derisively referred to as ‘Timmeh’ hasn’t just won over the endorsement of Nouriel Roubini for his banking plan. He’s introducing a broad regulatory plan that will do, among other things:
1. Vest a single federal agency (probably the Federal Reserve) with the power to police risk across the entire financial system
2. “…define which financial firms are sufficiently large and important to be subjected to this increased regulation. Those firms would be required to hold relatively more capital in their reserves against losses than smaller firms, to demonstrate that they have access to adequate funding to support their operations, and to maintain constantly updated assessments of their exposure to financial risk.”
3. new statutory authority to take over too-big-to-fail non-depository institutions (like AIG), in effect nationalizing them.
4. “…expand oversight of a broad category of unregulated investment firms including hedge funds, private-equity funds and venture capital funds, by requiring larger companies to register with the Securities and Exchange Commission. Firms also would have to provide financial information to help determine whether they are large enough to warrant additional regulation.”
5. “…call for the SEC to impose tougher standards on money-market mutual funds, investment accounts that appeal to investors by aping the features of checking accounts while offering higher interest rates.”
6. “…a plan to regulate the vast trade in derivatives, complex financial instruments that take their value from the performance of some other asset. Derivatives have become a basic tool of the financial markets, but trading in many variants is not regulated. Credit-default swaps, a major category of unregulated derivatives, played a major role in the collapse of AIG.”
You will probably hear rumblings from some people that are never satisfied that the plan doesn’t call for restoring the Glass-Steagall Act. One of the reasons that Phil Gramm had the support of over ninety senators and Bill Clinton and then-Treasury Secretary Larry Summers for repealing Glass-Steagall was because foreign countries were not governed by the law. That allowed foreign financial institutions to offer one-stop shopping and gain a competitive advantage. For the same reason today, the solution to our too-big-to-fail problem is not necessarily to restore Glass-Steagall. Geithner’s proposals appear to tackle the problem from a different direction. Rather than force the break-up of giant financial institutions by statute, he requires them to hold vastly greater capital reserves and takes away their ability to mask their liabilities through derivatives speculation and other silliness.
Geithner and Obama did not decide to play small-ball with these proposals. They are going FDR-deep. The ultimate success of their plans (assuming they pass through Congress) will depend in part on their ability to convince foreign countries like Germany and Switzerland and the UK to impose similar regulations. I think that will be a huge part of Obama’s agenda at next month’s G20 summit.
Some people will keep telling themselves that Obama is a DLC democrat who is in the pocket of an frozen-in-Clinton Era-amber Larry Summers. Meanwhile, the guy is pushing along like his middle name was Delano.
