Two of the leading voices for financial reform have made uncharacteristically business-friendly noises lately. Does it represent a change of position, a misunderstanding, or have they always held those opinions?
For more on pruning back executive power see Pruning Shears.
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Two recent financial reform developments jumped out at me for the cognitive dissonance they caused. First, the Senate released a proposal to create a resolution authority for large financial firms. Yves Smith had previously dismissed the idea as a boondoggle for several reasons, including this: “Investment banks were seen as normal enterprises, at risk of bankruptcy, before the meltdown, yet that did not prevent Bear, Lehman, and Merrill from getting themselves into trouble that ultimately proved fatal. And the leaders of these enterprises did not take meaningful financial hits…a lesson surely not lost on other bank CEOs.” In other words, the specter of a government euthanist will not scare anyone straight.
The Senate’s action was immediately preceded by Tim Geithner’s extravagant praise of the skill, foresight, wisdom and courage of Tim Geithner. His basic message was: at the most acute part of the crisis we pulled the economy back from the brink through bold, decisive action. If the timing of the bill and the braggadocio are not coincidence the message seems to be: We were lucky enough to have someone as great as Geithner at the helm this time, but we need legislation to make sure it gets taken care of next time (that the bill postulates a next time has not seemed to trouble many observers).
In Simon Johnson’s response he coins a phrase – “too big to save” – that I hope becomes part of the discourse:
In truth, “too big to fail” is not the worst thing we should fear – our financial institutions are now on their way to becoming “too big to save”. In 1929-30, even if the federal government had wanted to put in place a big fiscal stimulus, it could only have mounted something around 1 percent of GDP; the financial shock of that day was much bigger.
Government had enough money to bail them out this time, but the ongoing consolidation of the financial sector combined with the increased risk taking that comes with implicit taxpayer guarantees means the next crisis will involve actors the government literally cannot save.
(On a related note, it seems entitlement (Social Security/Medicare) and military spending (which is ostensibly discretionary but functionally mandatory given our imperialistic nature) probably helped cushion the blow caused by the collapse of private sector spending. None of that was in place during the Depression and that had to have made it worse, no? In short, yay socialism!)
The conceptual flaws and inadequate scope of a resolution authority seem obvious enough that the remarks of Federal Deposit Insurance Corp. Chairwoman Sheila Bair caught me off guard: “Ending too big to fail by creating an effective resolution regime that will apply to large financial institutions is the key to ensuring that we end the need for future bailouts.” I have a vague but favorable impression of Bair, based mostly on liking how she rightfully and openly antagonized Geithner last year. I may have overestimated her commitment to reform, or mistaken a salvo in a turf war for a willingness to stake out a politically unpopular position. Either way, her remarks brought me up short.
So did TARP overseer Elizabeth Warren. She has been a tireless champion for financial reform, as a quick review of her Huffington Post tag list shows. She always seems to be on the right side, and emphatically so. But on two separate occasions recently she has been agnostic on the location for the proposed Consumer Financial Protection Agency (CFPA).
In a HuffPo interview she said, “Where the agency sits on an organization chart is less important than its functional independence.” Then to Charlie Rose: “This is less about real estate and more about genuine independence.” (But in the same response acknowledged the Federal Reserve is “not interested” in regulating areas covered by the CFPA where it already has authority!)
The idea of “functional independence” seems plainly unrealistic. Real estate matters. Position on the org chart matters. If the CFPA is ultimately in Ben Bernanke’s chain of command – even only by a long, dotted diagonal line – it will inevitably reflect his priorities. Functional independence requires actual independence. I simply do not understand why Warren treats it so lightly, even if accompanied by the good things she mentions such as a separate funding source. It seems like a very Wall Street-friendly position to take from someone who has consistently prioritized Main Street.
These criticisms of Bair and Warren are not intended to be harsh, stinging rebukes. I think highly of both of them, and on the topics where I formed my good opinion of them I hope they succeed. But on these two issues it would be nice to hear at least a little elaboration from them.
