Financial Regulation on the Front Burner?

Nate Silver thinks that financial regulation will be the big political issue of the first half of next year. And for better or for worse, he thinks the central political issue — the “public option,” if you will — will be TBTF and breaking up banks.

I have been skeptical of this. I have been following the conventional wisdom that public anger has receded into confusion, health care has taken over the stage, and no one can get interested in financial regulation — it’s just too boring. Also, I thought the fact that financial regulation doesn’t break down along party lines hurts its popular appeal. In particular, it leaves liberal Democrats very confused (conservative Republicans have an easier time — oppose anything Obama wants).  But I suppose I could see breaking up banks — now that it’s come back from several months in the wilderness — becoming a rallying issue. And health insurance is intrinsically boring, too. In any case, Nate Silver knows politics a lot better than I do.

(Also, according to Silver, we are “Volckerists” and the other side are the “Summersists.” We could do worse.)

By James Kwak

43 responses to “Financial Regulation on the Front Burner?

  1. This sounds like wishful thinking.

    Maybe if the economy takes another leg down and the stock market tanks and Goldman Sachs continues to make record profits… Maybe.

    But short of that? Very doubtful. Where will the impetus even originate? The administration has made its position quite clear: We “need” too-big-to-fail banks.

  2. Where the actual people, you know the 345 out of 350 million Americans come down on this, or anything else, has never even entered into the calculus.

  3. Obama brought back Clinton’s economic team. This is not unreasonable given that Obama took power in the middle of a financial crisis of historic magnitude.

    But it strikes me that Larry Summers and Tim Geithner are “relics” of a failed paradigm and their true constituency is limited to Wall Street. Obama needs to bring in some new people. How about Joe Stiglitz to start with.

    Other nominations?

  4. Also, I don’t think liberal democrats are confused as a whole (Some still think Obama just needs more time. These will NEVER learn.)
    Liberal democrats generally want to spread the wealth around. Therefore, they want regulations if not an entire restructuring of the finance sector in this vein.
    But as I said before, popular sentiment can be safely ignored because around the time of the next election people will just vote for or against abortion/gun control/race relations/marriage/fuel economy or whatever irrelevant side-issue political strategists can think up.

  5. Paul Volker and Elizabeth Warren are right there for him to see and hear.

    He obviously ignores them, suggesting his election was effectively bought by the financiers.

    Obama is just a front man.

  6. Everyone needs to go, tippy. Every last one of them. To bring in the big-name econ guys is to invite more pain. If we must preserve the Rube Goldberg device (which we don’t), we need to bring in engineers. Give the Fed, treasury, finance and econ advisors one month to educate the engineers, and then let them have at it. This does not mean “financial engineers;” this means skilled individuals who can plan, fix, cooperate, and build things, that understand flows and feedback and have no vested interest in screwing things up.

  7. Likely still stung by the Saturday Night Live roasting, it may well prove impossible for the Adminsitration to resist the temptation to wildly overstate the significance of whatever weak tea legislation ultimately does pass.

    And you can see it already in the weird Kabuki theater being played out with the banks squealing about how too tough the proposed legislation is as the White House thunders about the need to curb financial services while all the insiders know that the banks have won all the major battles, as has been well documented here. Clearly setting the stage for a triumphal moment.

    Where I believe real political trouble can result for the Democrats, though, is if the economy continues to stagnate or worse, if new crises emerge that threaten the banks anew; say, the full collapse of the commercial real estate loan portfolios, or massive defaults among consumer credit card holdings.

    So where would we wind up? Still no real growth in employment, stagnant wages, consumer credit even harder to get (and more expensive and unforgiving as we already see) and perhaps even more help needed for the financial services industry. All after the president declared victory over the banks and salvation of the financial services system? Politically toxic stuff there, I believe.

    Hopefully none of this parade of economic horribles (and others) will result; let’s hope so for all ours sakes. But in any event, unlike the promises surrounding stimulus’ effect, I believe the president absolutely has to fight off the urge to overstate what so-called financial reform legislation accomplished. Preening over a supposed big win would feel good about now, I’m sure, but this one could snap back—big time.

  8. There is going to be a political movement. History guarantees it.

    There’s far too much real, historically justified and righteous anger (as opposed to phony teabagger hissyfits about “socialism”) over this to be dispelled by the lying “recovery” propaganda and supercilious lectures on misguided “populism” from the administration and the absolutely despicable mainstream media.

    We had flareups like the AIG bonus flap (those “bonuses” soon to be repeated, March 2010, according to what I read this morning) and since then the lassitude of confusion. People hear all the green shoots boosterism but they know it’s a sham, because they see how their own situation is only getting worse, more unstable, more fearful.

    And then they see how the banker orgy continues. The proclaimed “profits”. The unfathomable “bonuses”.

    Everybody understands that these banks are both bankrupt and destructive, that they continue to exist only because trillions in taxpayer money was stolen to prop them up, and that every one of these perps is incompetent at best, a hardcore criminal at worst, actually a ratio of the two and probably leaning toward the latter, so that not only does not a single one of them deserve a “bonus”, but they shouldn’t even have jobs.

    On the contrary, at the very least they should be in prison, and all the stolen wealth confiscated as restitution.

    Everybody understands this, and the rage has not dissipated, on the contrary it has become colder and more patient even as it intensifies.

    But it takes time for people to get over their sense of isolation and their conditioning that nothing can be done about it. (These are systematically reinforced by the MSM.)

    But the idea is getting around that we can and must resist this finance racket tyranny. We can, must, and will destroy this kleptocracy. The reason this isn’t yet clear is that the momentum is ponderous and slow at first, and therefore doesn’t fit into the news cycle except in seemingly ad hoc bits and pieces. (And of course there’s the media’s ideological bias against it.)

    But if we keep plugging away, we’ll get there. The public option is a good analogy. Even though the thing is still probably going to be gutted, the very fact that the idea and the term is even still part of the equation is ONLY because the grass roots forced it upon the process, directly in the teeth of the fierce resistance of Obama, the Democratic establishment, and the MSM.

    So when we picture the more ponderous but vastly longer and larger curve of the growing resistance against bank tyranny, we can picture how the bottom-up inertia of that movement is going to force itself upon this process.

    The lightning has already struck, but it will take time for the thunder to reach the ears of the blind.

  9. “it’s just too boring”

    You never know, a snappy slogan like ‘too big to fail is too big to exist’ might capture the attention. It works for me.

  10. How about POTUS seconding skills from the accounting/audit firms? If yes, what would cause Obama to decide to get a new team?

  11. What might cause Potus to decide to bring in a new team? Maybe focusing/fastening on the required outcomes (win the war)rather than do something to achieve what? (fight a battle)

    If he does, how about the president turn to the accounting firms with the team led by a Supreme court judge? Plus academic advisory group.

    What other possibilities?

  12. I think Silver offers a false dilemma: we must choose between Volckerist position and the Summerist position. Nonsense.
    Please let me know if Volcker stands square against all regulation and in favor solely of “a modern Glass-Steagall Act.”
    Are these two positions mutually-exclusive? The problems created by TBTF institutions are reportedly existential.

  13. Nouriel Roubini who gets not only the macroeconomic imbalances of the USA but also on the world stage; the the remedies that wont’ implode the whole ball of wax but also setup a positive economic feedback.

    We sorely need: a stark raving sane, sober adult. Politicians/supply siders/Randians/narcissists don’t count.

  14. Before you demean the teaparty participants en masse: John Adams (and other Founding Fathers) referred to those Colonists who participated in and died at the Boston Massacre as “rabble.”

    The term you used to describe tea party participants is a vulgar reference to a sex act which is irrelevant to our discussion on this blog.

  15. I’m a little skeptical. People do know know about the banks getting bailed out, but they really just don’t understand the issues. Or at least not enough of them do to make this a big issuie.

    I hope that I’m wrong. Maybe a couple more Taibbi articles will do the trick.

  16. It’s a Left and Right Issue, Not a Left or Right Issue

    There is a moral issue here that both left and right can agree upon. The moral issue is that the high risk, high leverage players , like Goldman Sachs have access to and finance their operations with near free Federal Reserve (taxpayer ) money. These funds are used to finance high risk ,high leverage speculative investments. It is gambling with taxpayer money, where GS reaps the benefits and the taxpayer covers losses in too-big-to fail.

    The solution is simple. The high risk , high leverage trading operations should be separated, stand alone operations, without access to Federal Reserve financing. Their operations will be financed solely by the private sector, which will impose a greater discipline. In the event of failure, the operations will be wound down.

    This will not solve “all problems” ,but I believe it points us in the right direction.

  17. Well said, Russ

    It takes time for anger and resentment to mobilize into action. I think that it is only a matter of time before people take action, hopefully political and not violent, and make it so that change is inevitable and profound in scope. Which possible tipping point (of many) will be the one that ultimately upsets the cart?
    The problem is that there are so many different ways this situation could play out, and many of the outcomes are ghastly. I think that a slow boil is the best way to do this, as it will hopefully allow for reason to prevail.
    The status quo sure looks an awful lot like the fall of Rome to me.

  18. The real world of finance is tax evasion, regulatory arbitrage, fraudulent bookkeeping enabled by OTC derivative deals. You can solve all the problems it creates by taxing the transactions, making them reportable to a central disclosure authority and forcing reporting corporate entities to account for them on a current basis. Proposed legislation to accomplish this is posted at:

    paskudnyaks.blogspot.com

    Refer your favorite Congressman

  19. I would also add operations experts – folks who understand how to build and run effective operations. Folks who understand and are focused on doing those things that produce good numbers as opposed to those who are merely focused on publishing good numbers. These folks have been sorely missing from our financial institutions of late.

  20. From http://en.wikipedia.org/wiki/Tea_Party_protests:
    “A protester’s sign at the April 15, 2009 Hartford, Connecticut Tea Party reads:
    ‘Teabag Washington? They have too many NUTS already!'”

  21. If the teabaggers can get over their xenophobia they might realize that liberals share their goal of changing the status quo.
    I don’t think they would put down their AR-15s long enough to contemplate that, though.

  22. Redleg, I agree whole-heartedly with you about shared goals. I hate labels because they reduce ideas to caricatures. From my favorite “liberal”: Mankind are greater gainers by suffering each other to live as seems good to themselves, than by compelling each to live as seems good to the rest.
    John Stuart Mill, On Liberty, 1859

  23. I think NS prediction may come to fruition, if only because bonus payout season will be well under way come January providing fresh blows to big financial institutions, exacerbating inequality and public anger towards finance-titled policy. Add in continually deteriorating employment figures and I believe the pitchforks will be sharpened come the Chinese new year.

  24. If there is a health insurance mandate w/o a public option or profit cap, I think we’ll see a tipping point. Just think what the outrage will look like if the government garnishes money directly from the people to line the coffers of for-profit insurance companies.

  25. I clipped this from a Bloomberg news item.

    Oct. 23 (Bloomberg) — New Jersey taxpayers are sending almost $1 million a month to a partnership run by Goldman Sachs Group Inc. for protection against rising interest costs on bonds that the state redeemed more than a year ago.

    Details at:

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aL8bFa17XvlM

    Here is an example of one derivative contract designed and sold by a financial outfit (Goldman Sachs?). The objective is clearly to make sure money for the derivative contract seller. Losers can only be the ‘sophisticated’ rubes who purchase such contracts. The banks have a zillion of these and are working like beavers with their super-computers and mathematics PhDs inventing more. The result can only be for GS to report ever more mind-blowing profits as such tricks bleed the dumb folk, in this case until 2019! Remember the GS capo is quoted as saying his duty is only to his shareholders. That is more more more profits! Years ago a quote surfaced ‘never give a sucker an even break’! Could be the GS golden rule emblazoned over their front door!

    This is an example of why the banks scream for no regulation of derivatives etc. You may ask how an intelligent academic can argue that derivatives should remain unregulated?

    BTW there is estimated to be about $600 trillion active in the derivatives global market. That is about 10+ years global GDP! Who knows what the risk is for derivative contracts? Could this enigma damage the economy? How is the President assured this is all known facts and covered risk?

    I wonder if Sam and James know the answers? I sure don’t.

  26. Lavrenti Beria

    “Everyone needs to go, tippy. Every last one of them.”

    And not just the advisors, the entire coterie that governs us, local, state and federal. We need to start all over again. We need a new constitution, one that’s impervious to the kind of abuse that permits gangs of special interest thugs – be they financial, arms, drug, or Middle East policy related – to stage de facto coups and steal the peoples’ democracy right out from under them. And we need an unrelenting justice for those that have both made and have been complicit in making the present siuation just what it is at the moment.

    Apart from extra-parliamentary mass demonstrations and strikes our situation is utterly hopeless. The corruption in the system is so all pervasive that the
    very thought of the franchise providing a basis for remediation ought now be considered certifiable. The problems we face are most fundamentally political, not economic. The economic trauma we’re experiencing has flowed from politics and it has all the force of law that only politics and politicians can give it. Try taking Citibank to court for raising your interest rates to 29.99% arbitrarily, or prevent Bernancke from gifting billions to cronies. You’d be more likely to succeed in making stones cry. And by all means, please, please don’t think that well intentioned people like big sis, Elizabeth Warren, ever will be of much help to you. I’ll take Liz seriously when I see her on a picket line.

  27. I couldn’t possibly agree with you more Jessica. Silver isn’t giving full representation of Volcker’s position on financial regulations in that post. ALMOST misrepresentation of Volcker’s stance. I have to say Jessica you’ve quickly become one of the better posters on this site.

    I also dare say, that Silver does NOT have a good grasp of politics if he thinks breaking up the banks will become the central political issue in the first 6 months of 2010. It shows extreme naiveness by Silver.

    Let me add, I would love it if on the political part of his comments Silver was right and I was wrong.

  28. I have met many many engineers whom I admired but let an engineer fix bureaucracies is a recipe for desaster.

    Engineers and paper pushers have different gut feelings.

    The ideal set is if they work together and synch their different world views which are according to me as follows:

    the engineer checks whether the screw holds tight i.e. tests his machine in any imaginable way, if it does everything is OK, but compared to my kind it is a short term OK

    the paper pusher is the perpetual fear monger whenever “innovation” is presented to him, quite often initially only motivated by a vague rumbling of the gut but in the long run /3, 4, 5 or more years) the things he thought would explode usually do explode which btw is why I’m sure that Dan has a point because I remember only too well how traditional type accountants were marginalized by the glitz and glamour figure jugglers in corporations

    and don’t give me that stuff about us paper pushers not understanding flows and feedbacks – whoever says that should read some history about merchants of old – it is in their tradition us responsible paper pushers work and we don’t mind you engineers your Leonardo da Vinci ancestor one bit, go on fly to the moon

    – to each his own but letting engineers loose on administrations has been as terrible in its consequences in my lifetime as was the dominance in my early years of slow moving timid intent on procedure and precaution merchant types.

    in Germany it was tried to train hybrids at universities – it just didn’t work, they weren’t really good at neither – much better have an engineer and a paper guy fight it out on even terms but do not make it two bosses – put a skilled mediator/negotiator on top who gets them going and keeps them in line at the same time and then let them engage the base and sort out the mess

  29. What skills do the ‘paper-pushers bring to the scene? Is your successful model a paper-pusher in a support role to the engineer in charge?

    Do you have any examples of long term successful firms where paper-pushers are the final decision makers over ruling engineers?

    By all means have adminstrator worker ants but ensure their direction and optimum traction comes from skilled people and not vice versa.

    I think you are maybe making a joke?

  30. What skills do the ‘paper-pushers bring to the scene?

    what do engineers know about administration? because they know how to fill out a cheque they think they know how to apply law to everyday administration – if you’d leave administration to the incredible stupidities technical people are capable of in this field you would soon find that proof of ownership of your house is nowhere to be found – ooops if I get it correctly that’s just what tech wizard kids have figured out how to apply to a lot of your mortgages

    I am not high enough in the social hierarchy to judge big scale commercial success of whoever, that I must leave to you – as to the more mundane stuff the best outcomes of any kind of projects involving administration was were both sides treated eachother as equals and took eachothers’s concerns seriously – and no of course the paper pushers do not have geniusses in their ranks that can come up to a da Vinci – never ever could the Medicis or Fuggers claim equal rank and it is in their heritage that paper pushing is done

    go ahead with your gloryfying of the dominance of the technical wizards as compared to the others – one day you’ll find that they will have “engineered” your bank account also – btw tell me of one technical genius who was capable of getting his stuff done without financing? and financing of the traditional solid kind and especially the documenting of it is certainly left best to us paper pushers with enough power allocated to us that smart aleck srew driver wielders cannot override our concerns

  31. and another point

    maybe viewed on a larger scale the whole mess is due to the fact that the computer may have forced screw drivers and paper pushers to work more closely together than ever before and that both have way too often behaved with monumental stupidity keeping up their age-old enmity and competition instead of finding ways to communicate and cooperate in beneficial ways.

    let me tell you from the base that only to find common language, deeply instead of superficially understand eachothers’ worldviews, is quite an achievement – which will of course never ever have a chance to spread widely wherever one of the two can’t give up its claim to superior genius

    come to think of it maybe that’s the major shift we are living through if it is one … on a par with the struggles between Pope and Kaiser of old which btw I think is capable of revitalizing any time or with the struggle of the military and the civilians for dominance.

    Well but of course any engineer can offer solutions for these constant problems if one would only let him run wild

  32. Hi Silke, I couldn’t find a reply button on your last post so have posted here.

    I hesitate to tell you that a multi-national bank has a country head man who is an engineer. Of course the unqualified paper pushers back at head office are undoubtedly plotting ever more devilish client robberies. Engineers are fine upstanding gentlemen all while villainous untrustworthy paper-pushers are to be carefully watched continually. Still I am sure you are familiar with such risk management requirements?

    I guess we need to kindly educate the paper-pushers and thereby change their disgusting paradigms. They may be thankful for release from their untouchable status? Think of all the Wall St. banking paper-pushers and their criminal propensity that we could negate.

    Maybe we should present this idea to Sam and James for forwarding to the President?

  33. re-hi notabanker
    present ideas to the president and whomever else you like I am out of here, way too many romantics venting ideas here

    just some last thought
    – no self-respecting paper-pusher I have ever met would think that diluting poisonous stuff (chemicals and mortgages alike) could solve a problem. Confronted with such schemes “my” paper pushers would worry themselves sick of what one diluted chemical would do when meeting another diluted one which any megalomaniac engineer I have met would call fear-mongering
    – no self-respecting paper pusher would ever believe in a continuous further higher faster or that the “service”-industry would make up for lost jobs
    – I do not know about the states but over here top management in companies has switched somewhere towards the end of the sixties almost completely to the screw-drivers which brought initially some urgently necessary changes (I am all for a continuous back and forth and against all final solutions like the romantic one that it is possible to reach a sustainable balance with anything) but then got caught up in hubristic self regard like that total opening of world trade and upholding of domestic industry would be possible because easily you could your own superior to all the rest countrymen educate to remain for all times ahead of those little tigers and similar inanities

    the trouble with us paper pushers is that we never put up a spirited fight but always leave you screw driver admirers to find out by breaking your head on the next “black swan” wall

  34. Apologies to my friend Silke. Don’t leave. I must confess to doing a bad thing – making a joke. It was very wrong and I trust you will accept my apologies. It is I who should go.

  35. oh and what you say about those banksters:

    do you realize that the majority of them was probably never educated in how to push paper physically? as far as I know they got it only theoretically from universities saturated with mathematical models of not their own design (or understanding) and they were probably told that those mathematical models were as sound as the fact that the sun revolves around the earth ooops did it again
    I don’t know today but in the old days whoever wanted to study one of the merchant things over here had to undergo an apprenticeship including examination at which he better did well if he aspired to a good university
    and that apprenticeship meant that he had learned such laughably!!! simple things like filing, keeping an account with paper and pencil, sorting piles of stuff by alphabet or numbers or subject really fast i.e. learning for what a rubber hood on a finger is good for and why self respecting typists should keep their finger nails short etc. etc.
    all kids’ stuff of course which today’s superior IQ-super-heavy minds have no need of knowing (and that’s exactly how they behaved when they entered real life)
    yes I confess to being guilty of nostalgia for the good old times when every payment, every letter that committed a company to something needed two signatures from separate “competing” unities – but of course today you have computers to foul up stuff and they are so much better than humans at it
    – my bet is that not only in finance but in the overall paper trail of rights/possessions/entitlements you have seen nothing yet.

  36. notabanker
    apologies fully accepted …
    and I realized it was a joke but I have seen this screw drivers vs paper pushers create so much misery and havoc and damage again and again and again that it is beyond what I can “consume” as a joke

    and I am out of here because I realized from this article in the by me detested LRB http://www.lrb.co.uk/v31/n20/brom01_.html that people singing eerily similar tunes as the ones quoted in the LRB are venting here and it doesn’t console me one bit that they probably come from the other side of the spectrum than the Fox News Crowd

    every time Jim Coffman dares to say something he gets the paper-pusher-bashing treatment and interest in how he perceives the more subtle flaws of the outfit he worked for is minimal or too timid

    but never mind my resolutions are always subject to “I can withstand anything but seduction” (freely translated from Oscar Wilde in German) and as long as I don’t cancel my e-mail subscriptions to this blog I’ll live an endangered life ;-)

  37. Haha!! E-mail subscriptions to “baselinescenario” would cause you to live an endangered life!?!? No. I’m just sitting here listening to classical music on a nice autumn Saturday…….Huh?! What was that?? A noise……..OH MY GOD!!! OH MY GOD!!! I THINK A GIANT SILVER BALLOON JUST KIDNAPPED MY SON!!!! NO! NOOOOOOOOOOOOO!!!!

  38. listening to classical music and yelling at the same time – mmmh?

    maybe reading some Oscar Wilde can cure that

    and thank you, Ted, I need all the help I can get

  39. I think you are spot on, unfortunately.
    But I think that the general population is starting to realize that the “conservative” paradigm of the last few decades had been actively redistributing wealth, bottom to top, and they don’t like it.
    It will be interesting to see how this plays out, since emotion doesn’t necessarily translate into action.

  40. Clarify: the population doesn’t “like it”.

  41. Were you surprised by the protests at the ABA meeting in Chicago?

    http://www.reuters.com/article/BROKER/idUSN2619805020091026

  42. I think the public (me included) are just overwhelmed with foolishness from this administration. It’s very difficult to be engaged on several enraging political bombs at one time ( and that appeared to be a feature rather than a bug). Right now it’s Health “Care”; next up will be Cap and Tax; then Bank Regulation. When we get to the banks, we start off with boards made up of “Community Organizers” among others (http://hotair.com/archives/2009/10/24/did-democrats-put-acorn-in-charge-of-regulation-for-financial-institutions/)and that will certainly arouse the public yet again. Then we’ll get to Immigrant Amnesty and who knows what’s next.
    Whatever, the public will, indeed, be involved.