Tag Archives: regulatory reform

Expert Panels and Bipartisan Consensus

Last week, Planet Money aired an interview by Adam Davidson with Barney Frank, the blunt and colorful chairman of the House Financial Services Committee. Davidson and Frank had a pitched disagreement over the question of whether it made sense to appoint a bipartisan, expert panel to take some time – figures between one and three years were thrown around – to study the causes of the financial crisis and, on that basis, recommend regulatory changes. Davidson thought it was a good idea; Frank thought it was nonsense.

I’m with Frank on this one, and the argument applies to the Financial Crisis Inquiry Commission, also known hopefully as the “New Pecora Commission,” appointed by Congress to study the causes of the crisis.

Continue reading

Larry Summers on Preventing and Fighting Financial Crises

This fall I am taking a course on the “international financial crisis” taught by Jon Macey and Greg Fleming (yes, the former COO of Merrill Lynch). The first assigned reading is a speech that Larry Summers gave at the AEA in 2000 entitled “International Financial Crises: Causes, Prevention, and Cures,”* summarizing the state of the art in preventing and combating financial crises. It’s based on experiences from emerging market crises in the 1990s, and doesn’t even contain a hint that something similar might happen here; however, few people could fault Summers for making that oversight back in 2000, and I certainly won’t.

Many people, including Simon and me, have discussed the similarities between our recent financial crisis and the emerging market crises of the 1990s, so I’ll be brief. The main similarities are excessive optimism that creates an asset price bubble, a sudden collapse of confidence that causes the rapid withdrawal of money and credit, a liquidity crunch, and rapid de-leveraging that threatens solvency. (We have also argued that there are political similarities, but let’s leave that aside for now.) The biggest difference is that instead of being compounded by flight from the affected country’s currency and government debt, in our case the exact opposite happened; investors fled toward the U.S. dollar and Treasuries, making things easier for us than for, say, Thailand. Also, to a partial extent, the parallel requires an analogy between emerging market countries and United States banks; for example, the issue of bailouts and moral hazard arises in the context of the IMF bailing out Indonesia and in the context of the United States government bailing out Citigroup.

Summers’s speech makes a lot of sense, so I’ll just highlight a few points he makes that I think are particularly instructive given our recent experience. I think these are all excellent points. For each one, I’ll quote from Summers, and then comment on its relevance to our situation.

Continue reading

The Republican Consumer Financial Protection Plan

Last week, Simon criticized Jeb Hensarling’s article on the Republican approach to consumer financial protection, saying “the only tools they propose are those that have been tried and failed, repeatedly, in the recent past.” However, Simon couldn’t get a copy of the Republican plan at the time, so he asked for help. Sean West of the Eurasia Group helpfully tracked down the latest copies of the documents, which were in the public domain: section-by-section summary; draft bill.

And … there’s nothing there.

Continue reading

This Is Their Reform Strategy For Big Banks?

Anil Kashyap is one of our leading researchers on banks.  His book with Takeo Hoshi on the evolution of the Japanese corporate finance is a must read on the twists and turns that built a great economy and then laid it low.  And he has many other papers and relevant recent commentary.

Professor Kashyap has a sharp perspective the administration’s financial sector reform thinking, in part because he has long worked alongside key people now at the National Economic Council (the NEC, by the way, has disappointingly little transparency; even Treasury is more open).

So we should take him seriously, writing Tuesday in the Financial Times, on the importance of the proposed new “funeral plans” for banks. Continue reading

Too Big To Fail, Politically

What is the essence of the problem with our financial system – what brought us into deep crisis, what scared us most in September/October of last year, and what was the toughest problem in the early days of the Obama administration?

The issue was definitely not that banks and nonbanks could fail in general.  We’re good at handling some kinds of financial failure.  The problem was: a relatively small number of troubled banks were so large that their failure could imperil both our financial system and the world economy.  And – at least in the view of Treasury – these banks were so large that they couldn’t be taken over in a normal FDIC-type receivership.  (The notion that the government lacked legal authority to act is smokescreen; please tell me which statute authorized the removal of Rick Waggoner from GM.) 

But instead of defining this core problem, explaining its origins, emphasizing the dangers, and addressing it directly, what do we get in yesterday’s 101 pages of regulatory reform proposals? Continue reading

Regulatory Reform For Finance: Three Views

There are three views on who exactly is behind financial regulatory reform package that will be officially presented Wednesday lunchtime (update: NYT.com has the draft).  Each view has distinct implications for political dynamics going forward.

The first view is that Tim Geithner and Larry Summers have genuinely become radical reformers.  They see the error of the ways they pursued during the 1990s – both in terms of financial deregulation for the United States and in their advice to other countries, particularly through the capital market liberalization policies urged upon the IMF.  They now seek to put globalized finance back in its box and will pursue any sensible means possible to this end.

This view is not widely held. Continue reading

Remember Chuck Prince!

This week the administration begins a serious behind-the-scenes charm offensive on its regulatory reform plans.  The argument seems to be: we are where we are on banks’ solvency/recapitalization, so let’s not argue about that; it’s time to strengthen financial regulation in line with our G20 commitments. 

But there is a serious dilemma lurking behind the foreshadowing, the rhetoric, and the talking points.  (Aside to Treasury: please find somone other than big financial players to endorse your next 100 days report; many taxpayers will find p.5 of your first report particularly annoying – if you don’t understand this point, you are too close to the big banks.) 

Here’s the problem.

Continue reading