By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
When you strip away the disinformation, false promises, and wishful thinking, this is where we are on really reigning in the power of the country’s largest – and most dangerous – banks.
Senators Sherrod Brown and Ted Kaufman have proposed the SAFE Banking Act, which is an entirely reasonable and responsible way of limiting the size of our largest banks. It should be adopted as an amendment to the main financial reform bill now before the Senate.
As the New York Times points out today, there is growing support for this approach. But note that this article – while entirely accurate – was relegated to page B3; Sewell Chan’s original piece on this topic was a front page story on April 20.
The opposition to Brown-Kaufman at the highest levels of government (legislature and executive branches) is so strong that it is increasingly unlikely the amendment will even get an up-or-down vote on the Senate floor.
The NYT’s editorial page has endorsed Brown-Kaufman, as have a growing number of organizations that want to see some meaningful financial reform.
But opposition to Brown-Kaufman (and actually any real reform) is deeply entrenched among prominent senators and even the White House. They fall back on increasingly specious arguments, completely unencumbered by the evidence or any real head-to-head debate.
These people may well be soon forgotten – or even as widely disparaged in a few years as the once-ascendant Robert Rubin and Alan Greenspan are today. But for the moment their power on Capitol Hill is almost unbreakable.
This is not about ideology any more – it is hard to find anyone who will argue in public that finance is always good, unfettered finance is better, and largely unregulated big banks are the best. This is a major and encouraging break from the history of the past 30 years – as told, for example, in 13 Bankers.
The revolving door between Washington and Wall Street is also playing less of a role than in the past (again, we review the recent decades of evidence in 13 Bankers). To be sure, there are still plenty of lobbyists with Capitol Hill experience, but it is no longer fashionable for a top senator or treasury official to go easy on big banks and then slip into a comfortable boardroom for well-remunerated slumber (talk to Robert Rubin or Phil Gramm). We may see some of this, of course, but any such individuals will be pilloried indefinitely and without mercy; their names will live in serious infamy.
The lack of debate over Brown-Kaufman – and its likely demise – is all about money. There is a tsunami of contributions from the financial sector washing over Congress right now. When the dust settles, the pattern will be clear: Wall Street (legally) bought off key senators.
There will be a reckoning, to be sure, at the polls. The supporters of big banks will go down hard in November and in 2012; there are no secrets over this kind of time frame. But by then it will be too late for this cycle of financial reform – and there is on guarantee that the backlash will bring stronger reformers to power (in fact, the White House and the biggest banks would be quite happy to see non-reformers prevail.)
Call your senator, by all means, and urge support for Brown-Kaufman – or at least press them to allow a Senate floor vote on the issue.
Recognizing the paramount importance of money at this moment, you might also offer to send a $2 bill to every senator who votes for Brown-Kaufman.
If you haven’t seen the $2 in a while, stop by the bank and get one. Even if there is never anyone to whom it is worth sending, you can always pin it up in your kitchen as a reminder of what went wrong. It will be up to you which side to look at more often: Thomas Jefferson, who argued so powerfully against the dangers of a financial aristocracy (see chapter 1 of 13 Bankers); or the signing of the Declaration of Independence.
Update: Tiffiniy Cheng has a “whip count” and suggestions regarding how to sharpen everyone’s focus on key senators
The Baseline Scenario 
While Simon and James have fully captured the premise, there is a magnificent talk (and hairdo) on TED.com. It is called “Why Societies Collapse” and Jared Diamond is the speaker. I will post it in my site tonight. Like 13 Bankers, but in a non financial context, it explains the disfunction we see today and the consequence. It should be required watching for the Senate.
It is interesting that Jamie Dimon’s defense of financial behemoths in his recent letter to shareholders ran patriotism up the mast (America’s corporate giants need large American banks or they will go elsewhere). Samuel Johnson’s observations about patriotism immediately spring to mind.
More important, the constant innuendo is that these institutions are both efficient and good for the economy. There is not a shred of evidence to support the former claim, and when challenged not a word of rebuttal, nor could there be since the evidence isn’t there. And Andy Haldane’s Bank of England study puts the kibosh on the latter claim: the global financial giants are actually imposing a drag on economic recovery.
Having lost the TBTF argument, defenders of these giants have moved on to other arguments which, though themselves already discredited, are still echoing in Congress and the White House–sadly, perhaps long enough to influence the remainder of the current reform process.
It should be more than clear by now…. that President Obama (POTUS 44) was/is a market-oriented problem solver and views the arguments of Wall Street (by the way of Summers, Geithner, Romer, Axelrod, Plouffe, etc.) more compelling and also buys into the arguments of markets implosion if Wall Street doesn’t get it way–because, ironically that’s probably true–realizing that, President Obama doesn’t support the Brown-Kauffman amendment (even though there is little probable connection between to limiting bank size and impeding market functions and capitalism. Yes, Congress is ‘bought and paid’ for (also with your tax dollars), just remember that going into November’s elections: “But opposition to Brown-Kaufman (and actually any real reform) is deeply entrenched among prominent senators and even the White House. They fall back on increasingly specious arguments, completely unencumbered by the evidence or any real head-to-head debate.”
I always wish I could believe the optimism Simon always exudes, but I just don’t see it.
Is it only that my standards are extreme that it doesn’t look to me like Rubin or Greenspan or Gramm have suffered in any but the most trivial ways? Or that Dodd looks to be perfectly happily gearing up to do the same thing? (Even Fuld is still holding onto the hundreds of millions he stole.) The House had no problem letting Wall Street cadres write large parts of their version of the bill, and key parts of the health racket bill were written by insurance racket cadres. No one seems at all embarrassed by that, nor does anyone seem to care.
And while maybe they don’t argue their ideology in public as much anymore (though this blog and others just highlighted Summers very aggressively doing so), they don’t feel they need to, because of the stranglehold they have on the polity.
At least until the next, bigger crash, I don’t see that stranglehold being broken. What’s going to happen in November? Even if there really are large numbers of voters elementally angry about the great crime, will this vast mass refuse to vote for any establishment candidate? Will there be a mass, articulated rejection of both Washington parties?
Anything short of that, and it’s all talk, no action. It would prove the talk had no foundation, no resolve.
Oh they will vote!!! That is the reason both parties blame each other so that they can continue to bank on peoples inherent weakness….. Not wanting to admit that maybe it’s the senator they voted for, turned out to be the ass.
Die hard republicans are still blaming the democrats and die hard democrats are still blaming the republicans while the corrput politicians on each side continue to carry out their corruption
Break up the banks and limit their activities and they’ll go elsewhere – maybe. Vote out your incumbent senator or representative and your bacon will go elsewhere – definitely. If I’m in Barney Frank’s district, even that I despise him, why should I replace him with a junior member who is powerless to aid her (his) constituents? For the good of the country?
unless you have been living in a cave somewhere in Tibet this past 12 months then it should be very clear by now to you and to millions of very angry Americans that most politicians in Washington (including some in the White House) has been drinking the “kool aid” as supplied by the TBTF banks and the entire financial industry…this greediest and totally amoral entity – financial industry – will NOT go down quietly or without a NASTY fight…it is feeling very threatened right now and for good reason…the veil has finally been lifted and thanks to many financial experts/journalists and economists like Paul Krugman, Joseph Stiglitz, et al, but special mention to Simon Johnson and James Kwak, with the publication of their superb book – 13 Bankers – we are now finally seeing the deep dungy dark corners of this most hidden and shrouded area of U.S. commerce – the finance industry and its abuses, incompetence and outright frauds at all levels…we are seeing now these “cockroaches” scampering for their lives as the bright lights are finally focused on these lowlifes (albeit obscenely wealthy ones)…about time too…keep the boots on their throats…do NOT give in now…just keep the pressure…these arrogant bankers and their political backers and lobbyists have virtually ran this once great nation to the ground…the American people need to take the reins back…very soon… before it’s too late…for Europeans, it might already be too late for them..
Well, somebody better do something for the good of the country pretty fast. It may as well be you and me, Art.
Banks that won’t lend money and consistently cheat the public going elsewhere? What a fine idea. New and perhaps better institutions will replace them. Same with Senators and Congressional Representatives.
Thanks, 14 – we need all the ammo we can get to blast the calcified powers that be out of their safe little cocoons.
People have to fight harder. Don’t give up. Try more alternatives. Be relentless.
Freedom is not free.
We have to fight.
John
Obama was the only leader who could have pulled Brown-Kaufman off. He wants nothing to do with it. He’s a thin reed next to FDR on the prime issue of our time. Progressives have to wake up and face that fact. If Obama thinks he owns the left in a two party system, then it’s done. I’d advise branching out to alternative politics.
I’m not sure that breaking up the banks will have the desired effect. Paul Krugman recently stated in his blog that bank size was not a factor in the recent crisis and he provided two rationales.
1) The great depression was caused by a large number of small bank failures. This means that smaller banks won’t necessarily protect us from another crisis.
2) Canada weathered the recent crisis much better than most countries. While their top banks are smaller, they represent a larger percentage of GDP than American banks. Big banks did not hurt Canada.
Current debate is about financial reform and breaking up banks is an important issue but not directly tied to reform or preventing disaster.
“I’ll take my marbles and go home” is one of the mantras of the decade, when business is fighting regulation or playing one locale off against another for incentives to come to their town/state. The other mantra is “regulation will cost the consumer a gazillion dollars, and would just be prohibitive. Big Bidness has turned into an extortion racket that would make Tony Soprano envious.
One of my senators (the junior one) was a banker, the other is just a shill for big business, so NC probably won’t be very helpful. Still, I did call both offices and express my support for S3241.
FDR was from a rich and powerful background; being there, done that. He wanted to do more, and set civilization on the right track.
What we have now is greedy small millionaires, or would be millionaires, doing politics on the side, and wanting to strike it really rich, like the Clintons. So they seduce the banks, because the banks is where money is created.
Contrarily to what Simon breezily asserts, the door between politics and riches has never seemed so open before.
PA
http://patriceayme.wordpress.com/
When you have someone like Russel Roberts from George Mason (Ayn Rand) U agreeing with Simon Johnson, and even Krugman acknowledging that large banks need some downsizing, you’re probably getting to something very near the truth.
The key is, in my opinion, Treasury Secy Tim Geithner. He is the professional regulator over at the White House.
Sure he knows all the Wall Street crew personally, but he doesn’t NEED them. When he’s out he can get $20,000 or more per speaking engagement, pretty much forever. And a nice academic sinecure.
If he decides to downsize the bloated bank holding companies, and wins the politics over at Obama house, he’s going to go down in American history as one of the country’s most important Treasury Secretaries.
So Cowboy Up Tim. Time to win the World Series.
1) Great Depression was a very different situation in many ways. We basically fixed the nation’s vulnerability of large-scale small bank failure in 1933 with the FDI Act–which is why the FDIC has been able to take down well over 100 banks in the past year or so, just as we were able to do during the S&L Crisis.
2) Big bank situation in Canada is a different proposition (and then only for the time being). Much tighter regulation and conservative banking practices and culture (though not necessarily healthier overall–we shall see in different circumstances).
Ultra large financial institutions necessarily generate unmanageable complexity and regulatory challenges which, when coupled with the extreme interconnectedness the scale of their business entails, is what creates the problem. Not to mention excessive political power and the TBTF political problem when things go wrong.
I haven’t been reading the blog for a few days, but I already called my senators and Harry Reid’s office to push for my general premise of the Brown-Kaufman legislation. However, I have yet to see anything on the actual substance of it. Does this blog, or anyone else for that matter, have any link or reference to the language of the legislation?
Here is the link to the full bill:
Click to access SAFE%20Banking%20Act%2020101.pdf
This is embarrassing
http://www.c-span.org/Watch/Media/2010/05/06/HP/R/32589/Finance+industry+operated+under+flawed+policies+obscure+risks.aspx
Naturally there would be no evidence either way if the U.S. were the first to leap. But is it hard to imagine that a substantial portion of the trillions in assets currently held in U.S. megabanks would not go under management at non-U.S. megabanks? I rather thought it’s an obvious and plausible outcome, in many ways seeming more plausible than supposing that large institutions would trust a smaller bank to structure and manage their most sophisticated transactions. And please note, I’m not arguing against size and leverage limits; I just think a plausible (and perverse) outcome would be to expand the size and leverage of non-U.S. megabanks, posing even greater risks internationally. It is hardly reassuring or convincing to suggest that tax payers of those states would bear all the costs of a future TBTF scenario involving a foreign megabank, or that somehow the U.S. can effectively shield itself if a foreign megabank stands at the brink of failure. I hope it would not be our generation’s version of Smoot-Hawley, which many believe had the unintended consequence of worsening and extending the Great Depression. So unless someone could give a credible answer to these concerns about not magnifying the problem (or pretending a future TBTF scenario wouldn’t hurt the U.S. because it’s happening to someone else), it seems better to press the administration to take up size and leverage targets at the G20 level, at least among the states with megabanks. Many naysayers will say that can’t be done, but with the sovereign debt crisis raging in Europe there may be more of a window for consensus about effective reforms than those people credit. Keep in mind the biggest megabanks of all are European.
Krugman wasn’t factoring in enormous amounts of fraud, corruption, systemic relationships and the current state of American democracy (corrupt). He was being clever by half in making a finer economic point (economist). He lost the bigger picture (politics). The U.S. will not let the big banks fail no matter what this bill says, the Fed still retains exclusive emergency power to prop up a failing bank without tell you the identity of the bank or the amounts given.
If only he were market-oriented! Anything like a real market would have never let the situation get this out of control. Or a real leftist progressive, breaking what’s become a rigid oligarchy.
Obama governs like a lawyer (quelle surprise). More negotiations, more laws, more regulations, more structures, more fines, more people in charge in more and more positions, and status quo uber alles.
This is certainly a rare re-alignment forming, of left and right versus an establishment that’s lost any sense that’s there’s a world beyond their own, or that if there is, it’s one that they are in charge of.
It’s not that they’re evil, or even that they don’t think that they’re doing right by the country, it’s that they’ve become unmoored from society.
Tim’s running the other way at full speed. He’s the problem not the cure. The man gave Goldman et al 100% of their swaps and claimed their contract rights.
Then he tried to conceal the emails about it.
20,000? He’s going for 200,000 per
Just please be sure to ask why and think through it carefully. The bottom line is whatever the reform, it should be effective to accomplish what it’s designed to do. There are serious questions about Brown-Kaufman impacting U.S. competitiveness as to which I have not heard good answers. It plausibly could expand the size and leverage of foreign megabanks, posing greater systemic risks to the international financial system. I don’t think the “not my problem” response is reassuring or even valid, given what we’ve witnessed over the last several years. If the idea has such intellectual force, why not press the administration to raise size and leverage targets at the G20 level? It may take time, but these are complex issues and it would be better than having a well intentioned national response backfire.
The idea of size and leverage limits undoubtedly has force and appeal. Someone here told me recently that many European central bank people like the idea too. So why not seek consensus at the G20 level? It seems opportune as Europeans (who, by the way, have even larger megabanks than we do) contemplate serious reforms aimed at stabilizing their members’ financial systems. And it would seem far more reassuring to have a coordinated response to size and leverage targets, to reduce the plausible risk of regulatory arbitrage if one state acts alone.
“The supporters of big banks will go down hard in November.”
You are naive, Simon. This November, 33% of voters will vote for whomever Faux News / Rush Limbaugh tells them to vote for. Another 33% will vote for PC liberals regardless of their position on anything. The remaining 33% will look for an alternative candidate, but will find only libertarian-loons and fringe-types; many will either hold their nose and vote for one of the two parties or they will just stay home. To change the system we would need alternative candidates, but they would need a lot of money to fight the two-party system; those people tend to be friendly to Wall Street and/or large corporations. This election will achieve nothing.
DM, this is a fair question and it does need to be discussed more fully. Jamie Dimon made this very assertion in his letter to shareholders.
As I understand it, there are two main factors that would influence international competitiveness. The first is competitive efficiency. The second is market power.
As far as the first is concerned, the evidence suggests strongly that “smaller” financial institutions (though still very large–i.e. greater than $100 billion in assets) are more efficient than the ultra large ones that would be affected by the Brown-Kaufman amendment (which are likely all over $500 billion in assets). So, being more efficient, banks below the Amendment’s impact would be more competitive, all other things being equal.
The second factor is market power: if ultra large institutions are so oligopolistic that they can stifle the competitive threats posed by smaller, more efficient counterparts, then the smaller institutions would simply not be able to compete. This might suggest that we need ultra large institutions to go head-to-head with foreign, counterparts, assuming such large institutions don’t have other, countervailing costs (which they do).
However, this is where antitrust enforcement comes in, and we in the US have plenty of sanctions that can be used against foreign operators, just as Europe has brought American institutions such as Microsoft to heel. Furthermore, we should not assume that the behemoths abroad will not themselves be controlled, in the end, by their own governments for the same reasons. Numerous regulatory reforms pending abroad, including stricter capital and leverage ratios will have a significant effect on the ability of these institutions to survive in their present form.
Finally, international competitiveness concerns and envy/fear of Japanese banks were major driving forces leading to the repeal of Glass-Steagall. It turned out, as anyone who had bothered to look at such banks already knew, that the huge Japanese banks were disasters waiting to happen. It would be interesting to determine whether the few giant European banks that are not already mostly on life support and owned by their governments are a real threat in the long run. And, of course, the banks that were set free to grow extremely large, such as Citi, have hardly cloaked themselves in glory as a result of their “increased competitiveness”!
(4) the term ‘‘financial company’’ means any
nonbank financial company that is supervised by the
Board;
I don’t speak legislativese, so can someone tell me if this would be something like AIG?
I would like to see Simon and james’s response to paulson’s thoughts one reform.
Yes and other financial companies that own so-called “non-bank banks,” that don’t fall under the definition of a “bank” because they don’t simultaneously take deposits and make loans, as well as, investment companies, insurance companies, hedge funds, etc. designated as systemically significant.
In a fiery speech on the Senate floor, Russ Feingold conditioned his support for the Wall Street reform measure on adding a multitude of amendments that would break up the mega-banks, cap size and leverage and restore the firewall between commercial and investment banks. He even went so far as to say that he would not vote to end debate on the bill unless these and other serious banking reforms were part of it.
Democrats, with 59 votes, already need the support of at least one Republican to move forward at the end of the process with the bill. It’s likely that Ben Nelson won’t support the final bill, and now Feingold is the first to make the threat from the left to vote against ending debate without real changes to how Wall Street does business.
After saying that regulators have failed taxpayers over the last 30 years, Feingold laid out three specific amendments that would be needed in a final bill:
• The McCain-Cantwell amendment to reinstate Glass-Steagall protections
• The Brown-Kaufman Safe Banking Act to put a strict cap on size and leverage
• The Dorgan amendment, which is a variant of the Brown-Kaufman Safe Banking Act. It would “require a break up of those activities in the largest financial institutions in the country that represent an unacceptable risk the American economy,” according to Dorgan.
Earlier, Feingold expressed his full support, as a co-sponsor, for an amendment to audit the Federal Reserve. In his statement on that, he also threatened to filibuster:
“Congress’ recent history on regulating the financial sector is not a proud one,” Feingold said. “For the last 30 years, both Democrats and Republicans have consistently given in to the wishes of Wall Street banks and voted to weaken essential safeguards. Congress needs to get it right this time, and enact tough reforms that will actually prevent another crisis from happening. I will not vote to end debate on this bill unless and until it meets that goal.”
If progressive Senators, like Feingold (who’s up for re-election), use their leverage and force at least some fundamental changes to how Wall Street does business, they can really make those changes. And unlike on health care, I do believe that Feingold, at least, will be all too happy to walk away from a bill which falls down from that.
A vote on auditing the Fed could come up today, along with a Republican amendment to weaken the consumer protection agency. The latter is not expected to pass, even by Republicans.
I appreciate this very serious response. I partly understand your meaning and references, but to my admittedly inexpert way of thinking, one of the most straightforward and plausible outcomes of one state acting alone to set limits is large client institutions transferring their assets to the management of a foreign megabank. Yes, surely some assets would stay with the capped bank, and some may be re-absorbed in smaller domestic banks, such as U.S. community banks. But realistically, I think, many assets would just leave the enacting state. Not only could that entail a significant shift of wealth out of the enacting state, affecting such things as tax revenues, but also it could actually have the perverse effect of increasing the size and leverage of foreign megabanks, adding to the very instability, inefficiency, and oligopolistic effects that you seem to disfavor. Also it seems plausible to expect some level of ‘brain drain’ in the enacting state’s financial services sector, with the most talented and skilled individuals taking their expertise to a foreign megabank in exchange for the most lucrative compensation.
So I’m actually not questioning the desirability (including from an efficiency or antitrust standpoint) of having smaller banks. I only question the method of achieving this outcome: specifically, whether as part of a coordinated international response, or state by state. In my various postings to this site, I don’t have any reason to doubt other states may contemplate similar reforms. So my question often includes some variation of, why not debate this topic at the G20 level? There may be a particularly good opportunity for a meaningful and coordinated response in view of the sovereign debt crisis in Europe.
I believe the FDIC has the authority to wind down large banks as well. And this is referred to in the current legislation as a replacement for that $50 billion dollar resolution fund. Is there a difference between winding down one large bank versus winding down the same entity split into multiple parts?
As for your Canadian argument, I do agree with much tighter regulation. Namely stronger capital requirements and regulation of shadow banking. I believe both of those are covered in the current bill. Stronger regulation can be achieved without breaking up the banks.
The moral question is harder to answer. Are multiple smaller entities inherently less corrupt than one large entity? I don’t have the quote but Malthus says no. The moral issue is what I wrestle with the most but without hard evidence I would advise against emotional legislation.
You’re including lobby reform and political contribution reform in your argument. A group of smaller banks can form a PAC like the Chamber of Commerce and have a similar effect. A number of small entities can influence politics as much as a large entity.
Breaking up the banks does not solve this.
To say that smaller banks are inherently less corrupt dismisses collusion. Is there hard evidence that smaller entities are less corrupt?
Points well taken. Without some concerted international cooperation none of this reform is going to work well or at all. The problem is that, while many international banking regulators, as well as Gordon Brown in the UK and Nicholas Sarkozy in France, believe we need an international enforcement mechanism, you and I would probably agree that this is a very remote political prospect given that Europe cannot even agree itself. However, as Joseph Stiglitz has observed recently, the US can impose its own enforcement on foreign banks and on US banks who choose not to ply by the rules. Regressive as this might be, we may eventually have to contemplate such a solution.
An ex-Englishman should know that the Queen reigns, whereas the banks should be reined in.
Actually I think the amendment to which you refer, doing away with the $50 billion fund and requiring costs of seizure to be fully paid ex post, is a good one. But the scope of receivership for the FDIC in the seizure of any large conglomerate is indeed going to be much more complicated than the kinds of receiverships the FDIC has done before. At the same time no more complicated, and much more expeditious (at least for affected depositors) than traditional bankruptcy.
I am not sure I would agree that the bank breakup amendment can fairly be characterized as emotional: this issue has been on the table for quite a long time now, is supported by some leading present and former regulators, and there are a number of (admittedly incomplete) studies that lend empirical support the proposition. The sudden change was when Senators Brown and Kaufman offered the amendment, so it seems a though this is a new issue. Sen. Sanders had offered something similar a few months before, but Senators Brown and Kaufman add some weight to the process, perhaps particularly with Sen. Kaufman being from DE (which is a leading state in bankruptcy expertise).
Re: @ DM____Top “20” Banks in the World: UK (4); France (3);USA (3); Japan (2); Switzerland (2); Germany (1); China (1); Romania(1); Spain (1); Netherlands (1); Italy (1).all data 1/2008. Note:…They all have a live-cultural-handpulse on the entire World’s, “Central Banks”. PS. England is behind the steering wheel,…?
Who are these candidates to vote FOR? The Asses and the Elephants are not challenged by any political party. If YOU wanted to run, where would you get the money? Who would you sell YOUR vote to? Many of the people reading and replying to the blogs are the Choir. Out of the choir must come LEADERS. Charismatic, articulate, flexible, reasonable, human beings; need to step up and declare their desire to serve WE THE PEOPLE rather than the corporate interests entrenched in Washington.
Comments?
Re: @ Beth____So,you want pork in your diet? The dilemma facing todays, American Democratic,and Plutocratic – yes,I said Plutocratic Republic is the splintering of our ideologies being pitted against,”Democratic Socialism,and Republican Capitalism” right down the middle! Both sides ensnared in a Rubik’s-Cube (the “Law of Large Numbers”,and I mean USD!),disguised as a pair of “Dice”,to be rolled in a “High Stakes Crap’s Game”, DC Style that’s unfortunately been fixed by the odds-makers who also own the house! The Socialist painted-up the appropriate color “Pink”, with their “Rubik Cube Dice” weighted ,and rigged with a aboriginal gyroscope as its central axis. Whereas the Capitalist encapsulated themselves in their usual hardline baby-blue color “Rubic Cube Dice”, retrofitted with a dysfuctional compass which usefullness serves only as a pedestal for a pendulum that’s lost its parochial way! The game begins,and the public anxiously anticipates as the dice are rolled in this,”Winner-Takes-All” DC Crap’s Game. Over in seconds the dice come up “Snake-Eyes! Absurdly,and actually paradoxically this “DC House” wins again! Ironically,…yet predictably the public is once more saved from themselves, by these bloodsucking parasitic leaders we call “Politicians”. Oh the horror that the “DC House” has yet too imagine?
There was this guy — Barack something — he seemed promising. What happened to him anyway?
Re: @ Lawrence Baxter____Please elaborate your logic regarding Japan having a major driving force repealling the “Glass Steagall Act”?
Re: @ Anonymous____The fed cannot print more money,period. Think of it as the non-proliferation treaty between the world’s central banks…all coming to the stark dramatic revelation that the paperweight is has as it’s foundation has been saturated with spilled-ink,that just can’t manifest itself into another entity?
Re: @ saucymugwump____Naive you say? Simon is so ahead of the curve that he’s explained away any,or all plausible arguments to the contrary. My monies on Mr. Simon Johnson & Mr. James Kwak! PS. The foundation that’s now being laid in Washington is built on quicksand.
Re: @ Ken Ward____The Queen is bought,and paid for by the “Rothschild Family”!
Re: @ Barbara____”59″ votes,…and believe me ,this Brownie guy from my home state of “Boston” is gonna get tossed in 2012. He’d better apply for a homestead in Alaska,and live amongst the Moosehead Palin’s Herd!
Simon knows more about economics than all of us here put together. However, my post regarded politics and voting, subjects more akin to viewing crystal balls. I know lots of people fed-up with Obama and Wall Street, but who get almost 100% of their information from Faux News. I also know lots of liberals in love with the first black president. They will cancel each other out.
I recently attended a town hall meeting with my Republican Congressman. 90% of the comments from the audience were along the lines of “Just keep saying ‘NO!’ to the Democrats,” “We all know that cutting taxes creates jobs,” or “We need less government.” These people were opposed to Wall Street reform; they just want an end to bailouts.
As I respond to your article, always more than a bit too optimistic, I am watching the financial plague beginning to take spread in Europe, where Greece has (like our largest banks) hidden its debt until it is too late, and now will rely on an ineffectual aglomeration of terrified Europeans to support them through this crisis. And, as you have so eloquently written, the contagion will spread. Our stock market responded realistically, because we can see ourselves in the shoes of the Greeks, Portuguese, Spanish, Italians, and Irish, without the will to tame our largest banks which are successfully hiding the rest of the immense future financially catastrophic iceberg from us as well as possible. Of course, nothing will work to cure the world’s financial ills but a unified, concerted, international effort. To the heart of your article, the Brown-Kaufman Amendment stands as one of the three essential pillars for potential reform (in my opinion the other two are full derivative trading transparency and full transparency and auditing of the FED). Like any good sugar daddy, the FED has created the ultimate spoiled brats which will ultimately break the system (if its not already completely and unalterably beyond repair).
Meanwhile, like a hoard of Roman Neros, our Congress fiddles while America burns, refusing to do anything which would hurt their plutocratic partners in big corporate America (note I say corporate, because it is not just Wall Street that is killing us, it is also the rest of the oligarchy).
Sure. In the late 1980s and early 1990s numerous articles and reports were run about the huge size of the (mostly Japanese) foreign banks. The only one that appeared comparable, and then only near the bottom of the “Top Ten” list, was Citi. Many pundits expressed the view that American banks needed to get a lot bigger in order to be able to compete. Some of their writings can easily be found in the American Banker and in various books extolling the virtues of (large-scale foreign) universal banking.
I think there was even some merit to the argument, at least as far as geographic expansion was concerned. After all, at that time the biggest US banks were only a tenth of their current size and technological developments offered genuine opportunities for capturing economies of scale across larger territory. But other factors, such as bureaucratic inefficiency on the part of many foreign and particularly Japanese banks were overlooked. As it subsequently turned out, the dinosaurs proved to be just that.
So size was not the real prerequisite for international competitive success. In fact many American banks were part of highly effective strategic alliances and correspondence systems, and to this day even the largest banks almost invariably join loan and investment underwriting participations, which helps to spread the risk.
The argument for extreme size is, in my opinion, a makeweight. This is of course a subject requiring much greater discussion so I don’t do it justice here. But even so I have given more explanation than that which underlies the regular, bald assertions to the contrary.
For the record: I just phoned Amy Klobuchar’s Washington office after seeing her cast a “Nay” vote for TBTF. And said: I would do all in my power to make sure she does not get re-elected.
And while it may be true she’s still in office for two more years…I sense some of the masses are waking up.
Translate: Like the war vote…this is a vote I don’t think one will be able to shake off no matter how much time passes.
This…is gonna stick.
Re: @ Anonymous via Lawrense Baxter____Japan in the 80’s,and early 90’s ? The yen had maxed out during ( a decade or so before Glass Steagall was repealled in 1997?) 1980/1985 period. Thus Japan’s GDP was on a crash course. They priced themselves out of the “Exporting Business” (their one,and only revenue,…sound familiar?),and fast approaching the 90’s their GDP was falling off a cliff – “The Bubble Economy” as coined by the rest of the industrial world. Ironic isn’t it – Bubble Economy”, none the less their GDP growth has been stagnant from the 90’s to present, or at best isolated on a humbled island.
Re: @ saucymugwump____Did you ever think…there was a possibility that the small sample of comments could have been from an already prejudiced groupthink mindset that’s, “Thick as a Brick”? Remember this,…It’s gotta be in your backyard, and its gotta be your ox that’s getting gored to resonate…and from what I’ve read,and seen crossing this country – everywhere,and everything has been soiled, and contaminated – a modern day demographic anomaly. I really feel sorry for these blockheads, whether they be Dem or Gop, for their complacency will create much anquish in their personal lives.
Voted down as an Amendment to Dodd’s legislation
http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=111&session=2&vote=00136#position
U.S. Senate Roll Call Votes 111th Congress – 2nd Session
as compiled through Senate LIS by the Senate Bill Clerk under the direction of the Secretary of the Senate
Vote Summary
Question: On the Amendment (Brown (OH) Amdt. No. 3733 )
Vote Number: 136 Vote Date: May 6, 2010, 08:47 PM
Required For Majority: 1/2 Vote Result: Amendment Rejected
Amendment Number: S.Amdt. 3733 to S.Amdt. 3739 to S. 3217 (Restoring American Financial Stability Act of 2010)
Statement of Purpose: To impose leverage and liability limits on bank holding companies and financial companies.
Vote Counts: YEAs 33
NAYs 61
Not Voting 6
All true, earl.florida. I was around then and remember how dumb the references were. That doesn’t mean they weren’t made.
I am not sure what point you are trying to make. If it is that Japanese banks were not invoked as part of the argument in favor of ultra large scale banking, which got wrapped up in the whole universal banking debate, then you need to go do some research.
Sorry that was me forgetting to fill in my name. :-)
I just want to cry… it was gaining momentum so fast!
But then the Daily Kos said some senators are going to consolidate some other amendments together into a package next week, which probably will include aspects of Kaufman-Brown. Our thanks and love to Dr. Simon Johnson and the team at “A New Way Forward – we have to keep on!
Go here to see the ROLL CALL
http://senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=111&session=2&vote=00136
VOTE OUT every NAY and NOT VOTING in 2010/2012!!
This is crucial. “We the people” are sick and tired of the corruption, greed, and evil pervasive in both the financial system and politics. The corrupt self-serving politicians must go!!!
We sure do need to create our own leaders out of our own bottom-up movement, and evenutally form parties to run them for at least local and state level offices.
As for the scam federal “elections”, the rational and moral thing to do where it comes to these rigged elections is either to refuse to vote in them while publicly affirming that it’s a boycott; or, if people really want to partake of the voting process, there should be an agreed upon none-of-the-above write-in line.
The language should be something like: “This is a fraudulent election between two corrupt candidates from two corrupt parties, and I refuse to endorse this fraud by voting for either side of the sham.”
Maybe that could use some editing, but that’s the gist of it.
I have attended a few town hall meetings over the years. It was not that long ago that only 20 people would attend. This last meeting had hundreds of people attending with standing room only. After people would make the comments I previously mentioned, along with nasty comments about healthcare reform, the audience would break into cheers. These were not a “small sample of comments” as you put it. My question regarded the H-1B / L-1 visa programs, a method of replacing hundreds of thousands of Americans with mainly Indians and Pakistanis. Only a few people applauded. In other words, this audience was indoctrinated by Faux News and was pressuring our congressman to fight Wall Street and all other reform. I sincerely hope you and the others are correct, but if I had any money I would spend it shorting Wall Street reform and the euro.
Yes, there’s a very good graphic illustrating this in a recent Economist (available online). I don’t doubt these institutions have significant influence in all host states, though it’s probably also fair to say there is strong populist sentiment everywhere that some reforms are vitally needed aimed at stabilizing the overall system. The boom/bust cycles are simply too severe. So I wouldn’t yet give up hope. It just needs to be a thoughtful and, I suspect, coordinated international response. I’m actually a bit relieved Brown-Kaufman did not pass, as I never saw good answers to the possibility of unintended negative consequences of one state’s acting alone on this issue.
@ Lawrence Baxter: Thanks for an engaging discussion. I would agree it’s very hard to see the finish line on this, and it’s a long course. But what gives me optimism despite the prevailing mood among any given set of officials is that the system seems stretched to a point of dysfunction, resulting in severe boom and bust cycles that seem to play out on an increasingly frequent basis. The system clearly seems to need to come under some better (and better coordinated) management given the size and scale issues. Indeed, I don’t think this idea was even on anyone’s radar several years ago, and would have probably seemed ridiculous to most power brokers prior to 2008. Yet in the world’s largest national economy we’ve just had a vote by roughly a third of its high legislative chamber in favor of size and leverage limits. Not an insignificant recent history, particularly occurring in the midst of a sovereign debt crisis in Europe, which megabanks also are close to the heart of. So I don’t think we’ve seen the last of this debate, and my intuition (though admittedly not well informed) is the thinking of power brokers in the G20 states is shifting on a near daily basis on these issues of systemic risk and effective stabilization measures.
Re: @ DM___The “Economist” is wholly owned by “Sir Evelyn de Rothschild’ another self-serving “Fabulously Biased” vacuous media advocacy propaganda mindsowed navigation tool – deflowering the eye’s of good minds?
Re: @ Anonymous via Lawrence Baxter____You spoke of the unwinding of Glass Steagall as a pre-emptive strike to ward off the Japanese Behemoths ,regarding their said prowess infringing unimpededly on America’s Real Estate,and various periphial industrial markets that of,and said at a certain time in history – being gobbled up during their “Int’l. Shopping Spree”, I presume? My answer to you (its a free world that makes capitalism work,and we all have rules to follow too make it congenial) is ,”So What”! America has been doing this for years,and other countries/nations have – no big deal. But,too justify that the “Glass Steagall Act” was a impending hamstring,or more aptly said a, “Millstone” around our financial banking industries neck hampering said competitiveness is hogwash. Thanks :^)
earle, I agree entirely. By the time G-S was repealed they had moved onto other arguments because the Japanese banks were by then basket cases. The point I was trying to make is that the paranoia about foreign competition is and was nonsense.
DM, I would agree with you completely. It is interesting how other ideas that were off the radar screen only a year or so ago are also finally getting heard. The only cause for pessimism for me is that it usually takes things getting a lot worse before we finally get real reform. But its Friday and I can be talked out of that gloom!
I’m shocked. Shocked! The Money Party won again.
or as a headline I saw more accurately put it:
Congress Goes to Bat For Wall Street, Rejects Plan To Break up the Banks
Tim Cox @ goooh.com has a simple idea
that will work but it requires participation
by the electorate that will take more than 10 minutes….
Congressional policy hearings are like examination papers:
• “C” papers provide an answer ($100 Billion in capital, $1trillion in liabilities, 12:1 leverage ratio, pick any number but this just kicks the can down the road until you really need intermediation for third world growth. The flip side of TBTF is TSTS (too small to settle) counter-party risk.
• “B” papers provide metrics to their answer to connect the factual dots to their rationale (how can US dollar be currency of settlement without TBTF prop desks providing liquidity to trade deterministic money market instruments versus indeterminate NINJA securities, and
• “A” papers ask the right questions to address foundational issues.
Therefore I argue that the nuclear question is:
If complexity exists, there is uncertainty. Can regulators govern both risk and uncertainty with the legacy, one-size-fits-all deterministic regime?
Stephen A. Boyko
Author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of five SFO articles on capital market governance.
http://w-apublishing.com/Shop/BookDetail.aspx?ID=D6575146-0B97-40A1-BFF7-1CD340424361
Short answer in my humble opinion: no!
If there is ever a chance of doing it properly (which is an open question), the regulation of complex financial conglomerates is going to need a much broader and more powerful infrastructure than the one we have, and it will certainly have to be vastly different from the model developed for regulating traditional depository institutions. Basel II is in complete disarray and in the US we don’t even have a financial conglomerates directive, as is in place in Europe (not that such a directive is the right way to go, but at least it is a step ahead).
I am sure that there are many things we would want to address, but at the very least I would suggest that we have to develop a culture that respects a government role in regulation (for all industries that generate externalities, not just financial services) but that also insists on more sophisticated regulation and incents highly sophisticated regulators and empowers regulators to take unpopular action while the party is still on. We don’t have that now. Regulation has for nearly four decades been treated like an embarrassing necessity at most, to be avoided wherever possible. We see the inevitable result in financial services, mining, and oil and gas production, to name some obvious examples.
Yet there are still those who think that we should rely on market regulation alone (as if markets would even exist without a governmental framework). Ironically, some of the most prominent are themselves the direct beneficiaries of government assistance or contracts; they seem to experience no embarrassment in making these assertions even though to do so is rather like criticizing farmers with one’s mouth full.
To achieve real regulatory reform, policymakers have to move beyond risk management to randomness governance of both determinate and indeterminate underlying economic conditions. Trying to govern both risk and uncertainty with the legacy, one-size-fits-all deterministic regime is analogous to having one set of driving instructions for both the U.S. and U.K., the information does not correlate. The result is larger and more frequent boom-bust cycles.
BTW, I have no use for state-sponsored capital cronyism. Reference Brenda Jubin’s book review – scroll all the way to bottom of site.
http://readingthemarkets.blogspot.com/search?updated-max=2009-10-15T06%3A23%3A00-04%3A00&max-results=7
I enjoy reading these comments because often there are well informed and creative suggestions like this posting. Perhaps one feature of modern financial risk management markets with generally salutary effects is the use of improving computer modeling techniques (assuming large enough computational resources and data sets). When separated from human shortcomings like hubris and greed (and worse), these techniques may help economies to function more efficiently. I’m guessing that regulators have tended to rely predominately on human judgment to monitor and regulate financial markets, and to detect violations. Perhaps the regulators themselves, if they could attract similarly talented individuals, can develop models to help them identify emerging bubbles and proactively focus resources in those areas, so they don’t chronically seem to be behind the curve. Within a concentrated suspect market, randomization techniques (as suggested) might help regulators to determine if there are systemic problems either requiring more aggressive enforcement of existing rules, or development of new regulations to address the emerging risk. The public sector will necessarily be somewhat behind, because the regulators are by definition responding to existing conditions, but an expanded use of computer modelling with good heuristics might help to focus scarce resources wisely.