The White House background briefing is that their proposals would freeze biggest bank size “as is” — this makes no sense at all.
Twenty years of reckless expansion, a massive crisis, and the most generous bailout in human history are not a recipe for “right” sized banks. There is a lot of work the administration hasn’t done on the details — this is a classic policy scramble, in which ducks have not been lined up. But we should treat this as the public comment phase for potentially sensible principles — and an opportunity to propose workable details. The banks are already hard at work, pushing in the other direction.
It’s a big potential policy change, and my litmus test is simple – does it, at the end of the day, imply breaking Goldman Sachs up into 4 or 5 independent pieces?
By Simon Johnson
The Baseline Scenario 
What did you expect????
One step at a time.
Before we can expect our government to do the right thing, we have to see whether it will do anything at all. The jury is still out on that.
I am encouraged that the debate is even getting started.
Agreed. After all, the ‘Audacity of Hope’ is predicated on there being SOME audacity (currently absent).
The jury has been out since Obama began his tenure. And whilst the jury has been out it would appear that our government has been doing anything but the right thing. I would be encouraged if a debate were starting but from my perspective today’s remarks were a political response and a cynical one at that given the banksters are collecting tens of billions in bonuses courtesy of the administration’s actions. Perhaps someone got to one of the jury members.
The unspoken part of Obama’s proposal is that he would withdraw the implicit US guarantee for the trading banks. That is a very important and necessary step and probably could not be done without some sort of split, such as he is proposing.
A quote today from S&P on Goldman Sachs as tangible evidence of its too big to fail status and related cost of borrowing benefit:
“our rating on GS incorporates two notches of enhancement for potential additional government support, as we consider the company highly systemically important. We are, however, cognizant that proposed legislation may restrict the government’s ability to extend such support in the future. Future ratings actions on GS could depend on the possible change in our view of government
support and of the risks inherent in GS’s business model.”
Well, the uncertainty on how serious they were sure lasted a long time.
The Obama Administration is a hot bed of deliberative types. President Obama strikes me, as a bureaucrat reading what the boss is like, as a careful conventional thinker type. A corporate lawyer type.
I was once at meeting where the CEO blew up at his General Counsel when the GC told the CEO that he could not legally do what he was comtemplating. The CEO became visibly angry and retorted ” Do not tell me what is illegal, I pay you to get me out of it after I do it”. President Obama is that lawyerly type who is now presented with real life political problems. He does not know what to do and is not the type that can instantly change views from changed circumstances as has always been required of Head’s of State that survive and prosper.
In this same political position , what would Churchill have done? President Obama is too deliberative to react timely. I do hope I am wrong though.
President Obama must react quickly with Augustan proscriptions if he reads the political consequences as requiring him to act hastily and without major error. I suspect such a reaction very much out of his character. A very difficult change. No sense of when a politician must go for the jugular?
“As-is”?! That can’t be right. Your source either is a saboteur or is misinformed herself. I hope.
Why has everyone changed their tune in a mere 3 hours since the announcement? In that span:
(1) TED goes from “ass kicking” to “wet noodle”
(2) Felix from “Three cheers!” to “…make that two”
(3) Rortybom from “big step… can’t believe today is happening” to “it begins… loopholes will be tested.”
I this just cynicism (or not letting your hopes get too high)? Or do we have real reason to think the intent of the proposed regulations is hollow? And why do so many immediately conclude that the banks will succeed in watering-down the regulation this time? What politician, of either party, could possibly think aligning themselves with bank lobbyists is a good idea in this climate? Aren’t anti-banker and anti-TBTF sentiments popular with just about every constituency right now?
I’m still hopeful.
Or do we have real reason to think the intent of the proposed regulations is hollow?
The answer to your questions is an unequivocal no*.
*assuming that it is coincidence that this new approach occurred withing two days of the defeat in Mass. as opposed to say six or eight months ago or for that matter six or eight days ago.
“What politician, of either party, could possibly think aligning themselves with bank lobbyists is a good idea in this climate?”
this climate??? you mean the climate that has been in place for the past 18 months as politicians from both parties showered the banks with untold riches
That the banks credit ratings are dependent on expected government support is ridiculous. If I was regulator I would like to see what credit rating the banks have without any government paid parachute.
Nemo: “I am encouraged that the debate is even getting started.”
Unfortunately, more than a year has been wasted!
And guess what: the supreme court has just given the banksters unlimited freedom to spend on lobbying!! Hence, a year is lost, the people have become angry, frustrated, etc. and the only jobs growth on the horizon is on K-street. Campaign finance reform is dead!
“Sweeping aside a century-old understanding and overruling two important precedents, a bitterly divided Supreme Court on Thursday ruled that the government may not ban political spending by corporations in candidate elections.”
“As Is?” Nonsense, it is not the size that matters it is the regulations that help them to be this size that matters.
How do they intend to adjust regulations so that they remain “as is”?
A forced “as is” can only mean that the banks is either left too big or that it is not as big as it could/should be.
At the end of the day Obama et al. will do nothing significant.
Obama has surrounded himself with the banksters right-hand-men. The few that aren’t are essentially lone voices.
Anything done will be done for show only.
I won’t change my analysis unless Obama tosses Geithner, Summers, and Bernanke to the curb, and the prosecutions begin – ideally, with Hank Paulson and Tim Geithner. At that point, I’ll believe he has “woken up.”
GEITHNER, SUMMERS and BERNANKE have GOT TO BE CANNED.
It’s pure showmanship at this time. The President needed to make a move on something to reverse coverage of their fail in MA. In the end nothing changes just like with the health care bill that never gets passed, a banking reform bill will bounce around until the outrage is a thing of the past
I don’t know why this needs any debating?! TBTF banks are simply too big to exist. PERIOD.
So then how do we shrink them down? I don’t pretend to know anything about high finance; but as common sense would dictate, I think there are a few things that can be done together to make it happen, without outright breaking them up by executive order. But first, define what TBTF is, say, by % of GDP. Then create regulations and taxes for banks exceeding that size, so that it’s simply too expensive and difficult for them to operate, such as
– create extra rules and regulations and ENFORCE them;
– raise capital reserve requirements;
– make borrowing rate higher;
– make tax rate higher;
I know some of these are wishful thinking on my part, but the idea is to make it less advantageous and profitable to operate a big bank, so the TBTFs voluntarily break up. They’ll cry murder, of course, but who cares?!
Lastly, make these rules air-tight so they can’t be repealed 50 years later.
Better late than never.
Too bad the SC made matters worse.
Big deal. Standard Oil was “broken up” too. To this day its progeny maintain a stranglehold on oil, but you can’t just point to one big clump (except exxonmobil/chevron) and say “monopoly.” In order to kill the beast you need to cut apart its nervous system.
Probably about the same as a cow paddy falling without a parachute.
What I don’t understand is why I haven’t seen any coverage of the apparent fact that the US and other countries agreed *over 10 years ago* to deregulate financial service, and are now *prohibited under WTO rules* from re-regulating.
This is why Glass-Steagle disappeared, and why it’s not coming back. That type of regulation is now illegal. I admit to feeling really foolish now for believing that there was any way of reforming the system.
If this is news to you, too, look at this article from April of last year on Public Citizen for more info:
http://www.citizen.org/pressroom/release.cfm?ID=2857
And why is it I seem to get the most accurate information about what’s going on by listening to a podcast by Max Keiser and Stacy Herbert — Americans who live in France? That’s where I first heard about this WTO restriction on stopping the banks.
Simon, have you talked about this and I just plain missed it?
We need some transparency on what the “DEALS” are that are so substantially foundation to our overall economy. What are the nature of these mega deal transactions…forget the nature of the institutions themselves.
What exactly are they financing that makes our entire economy shutter when it’s threatened…because it sure isn’t anything that is creating jobs or real equity in our infrastructure. It doesn’t even seem to “trickle down” to the middle range commercial banking system!
As you pointed out Prof. Johnson, I am discouraged by the fact that on one hand they are pushing for Bernanke to be reconfirmed (afraid perhaps of having to find someone else to do the job and go through the painful confirmations such as the likes of Geithner or Sotomayor, which granted could be a distraction from their focusing on the upcoming elections), but that is exactly my point. If the administration would have done the right thing from Day 1 in office, they wouldn’t even be worrying about the mid-term elections. Perhaps this is just a reflection of how broken our system is that someone like Obama that went in with so much fire under his belly isn’t even able to get things done and had the wind taken out of his sails…
I think the direction that we are going in (taking into account the recent ruling from the US Supreme Court on donations by corporations) is a sad statement for Democracy in the US. Has anything changed since Feudalism?