One Last Thought on FDIC and Political Will

So this is Mike Konczal signing off for the week – I’d like to thank James and Simon for giving me the opportunity to guest-blog here. And I’d like to thank all the readers and commenters for sparking discussions and refining my thoughts about many of the issues here.

You can follow my blogging at the rortybomb blog, and I’m also on twitter.

I want to close on one last note about where we, as a country, need to go from here. As a longtime fan of The Baseline Scenario, I read that there’s a project here to show the way in which capture by the financial industry has taken place in this country; through regulatory capture, through social networks and connections, etc.

There’s another element to it as well, and that’s what we as a country expect our government to be able to do about it. I want to point out this netroots nation video of Chris Hayes, an editor at The Nation, talking about The New Deal versus today (5m20s start):

Think about FDIC, how would we design FDIC today?…What we would do is, we wouldn’t set up an independent government agency which works very well, has worked smoothly, has prevented bank runs, since the bad old days of bank runs…we wouldn’t do that today. The banks would be like ‘what? you are just going to step into this market?’ What we’d do today if we were designing FDIC is we’d choose a bunch of the banks and we’d subsidize them insuring other banks…

The Home Ownership Loan Corporation…we have a lot of foreclosures, a lot of people underwater on mortgages. What are we doing? We are subsidizing the lenders with public dollars and telling them ‘if we give you guys some money, will you go help those people?’ And surprise, surprise, they have not really gotten their asses to do it. Now the Home Ownership Loan Corporation was faced with the same exact problem…and it went out and bought the mortgages and directly re-negotiated the terms of the mortgages, and it was very, very successful.

This is a massive conceptual problem.

I find this fascinating because I completely agree that, if we were to encounter bank runs for the first time today, this is how we’d try to set up FDIC. FDIC is an example of a government program that works, and the banks-insuring-one-another-with-public-money is exactly the kind of operation we’d expect to fail. I also find it fascinating because I believe part of what happened in this crisis is that we started a banking system in the capital markets, a ‘shadow bank system’ if you will, that collapsed in a new 21st century style bank run, and going forward we need to find a way to regulate it properly to make sure it doesn’t happen again (here’s interview I did with Perry Mehrling about it).

It’s one thing to identify the problem – finding the will to conceptualize the problems, and begin to fix them, is the other half of the solving the problem. And that is what this country needs more of, less hoping that the problems will fix themselves if we shove enough public money to private parties, and more of working to find the solutions ourselves.

Thanks for the great week all!

29 thoughts on “One Last Thought on FDIC and Political Will

  1. If the events of the past two years are not enough to generate the political will, what would be?

    We lost this fight before it started, I think.

  2. In the summer of 2008 Hillary Clinton proposed starting up a new HOLC to deal with the mortgage crisis. She gave several interviews about it and wrote a long opinion piece about it, arguing that we had to help Main Street before we helped Wall Street. She went into great detail about the success of FDR’s HOLC program.

    The idea’s been around for a while, even if Netroots Nation wasn’t listening.

    Nemo’s right that we lost this fight before it started — in the summer of 2008.

    When you ask if the last 2 years weren’t enought to generate the political will, you have to look at how that will was channeled, deflected, and mesmerized by money and slick advertising. If Netroots Nation can’t figure out how/why they ended up voting for the candidate who whipped for TARP now now now and didn’t even hear the candidate talking about HOLC, didn’t even hear it being proposed in the first place so that they could at least bring it to the attention of Candidate TARP — well, I guess we’ll end up in the same place again and again, no matter how much will is amassed.

  3. Thanks for posting this, and you’ve done a great job this week.

    I would just add this thought. At a time when a lot of people on the left are getting angry at Obama for being “too” conciliatory and bipartisan to be effective, I think it’s important to point out that as far as the financial/regulatory crisis goes there really is no “left/right” divide. Granted, the Republicans have been MIA on this question, but so have the Dems (with a few exceptions). No, we can’t look to Washington for salvation here. But intellectually speaking this country is united in wanting better, smarter oversight of Wall Street. The Nation, NYTimes, WSJ, all good financial and economics bloggers whatever their slant–we’re all reading from the same page.

    That is a good start, though of course politically insufficient to get anything done. Still, it should be pointed out as often as possible. There is NO left-right split on this one.

  4. I disagree. So long as nobody has a concrete, serious proposal for reforming the finance industry on the table, everybody agrees we need reform. But once pen is put to paper, the vested interests will get their knives out, the disinformation campaigns will roll out, the big money lobbyists will weigh in. And they will all play up those aspects of change they oppose that push ideological buttons. Presto–the left/right divide emerges (as one of many other divides). Just look what’s happening with health reform as we speak–that started out as something that everyone seemed to agree needs to happen.

  5. > It’s one thing to identify the problem –
    > finding the will to conceptualize the problem

    Is it possible that the world-wide financial system has become too large to govern?

  6. Rooting out regulatory capture is an important purpose, but as the dominant line of inquiry (i.e. public choice theory) it has often blinded us to regulation, like the FDIC, that has served the common good. In a new chapter (, Leight writes:
    “[D]espite the existence of a significant body of criticism, the public choice account of policymaking still remains enormously influential both inside and outside the academy. In the words of one analyst, “Governmental efforts are viewed as inevitably flawed. . .all things ‘public’ have become suspect. For some, the only public purpose worthy of respect seems to be the elimination of the public sector” (Mashaw 1997, 23). This view, dominant in both politics and the academy, has been crucial in sustaining the wave of privatization and deregulation evident in the American economy over the last two decades.”

    I think Leight and Mike point us in the right direction: we need to devote more time to thinking about the regulations we positively affirm and why. Neither government or markets are perfect, but there are emergent possibilities to be found in both.

  7. Well, the private bank reinsurance model sounds awful, but on the other hand, it’s assumed in that quote that the FDIC works well, but how well is the FDIC working now really? What grade would you assign its performance and why? I’ve read a wide spectrum of opinion on whether they doing a satisfactory job considering the nature of the problem, or whether they have failed miserably both to prevent recklessness and adequately value risk and fund their (now depleted) reserves.

    In good times, of course FDIC seems to work fine. But in bad times, FDIC can always go to the Treasury – or assess dramatic “extraordinary circumstances” increases in deposit-insurance rates on the few responsible, healthy banks we have left in this country – to pay for bailing out the hopeless gamblers. What, after all, are we going to do – stop insuring deposits? Of course not. Being FDIC means never having to say you’re sorry, or worry about running out of money.

    The FDIC performs valuable investigatory and regulatory roles in normal times, but exists primarily to prevent bank-runs in a crisis and attempts to self-fund through a tax on deposits so Uncle Sam isn’t required to pay the bill. However, when all is said and done in this downturn, I estimate that the taxpayer ponies up the vast majority of the money used to repay depositors – and so in that sense FDIC has failed.

    And how is that much better than some kind of big-bank reinsurance scheme over small banks that, if it also failed in the same way, would have to be bailed out by the Treasury as well? Again – I think this is a bad idea, but perhaps FDIC isn’t the best thing we could have come up with either.

  8. All sorts of people are saying all the right things, but doubtful this is having any effect on the quality or quantity of capture. 50,000 UBS accounts out there, for example, and they intend to prosecute only about 4,000 which they deem worthy, by standards that they haven’t shared with us. Limited hangout is everywhere.

    Mike, we hardly knew ye.

  9. I find that the complexity of the financial world as it is now, makes it impossible to establish effective regulations. The complexity of the instruments combined with the complexity of the regulation gives you complexity squared. Playing for the defense against someone who wants to game the system is quite a challenge, and more so when you add the sorry fact that the time needed to execute an action is only a fraction of the time needed to control that action.

    We need to make the world simpler in order to make it a world under the rule of law. Today large parts of the financial world is only formally under the rule of law. De facto the rule of law is unenforceable due to the complexity squared.

  10. A good thing to do is reread a history of the Banking Acts of 1933 & 1935. For instance, FDR did not support Deposit Insurance. The congress basically passed it. Oddly, many who were for it wanted to preserve the banking system of the time. My heroes, the signers of the Chicago Plan, were for it as a transition to an early form of 100% Reserve Plans. The debates are remarkably relevant for today, no matter what you believe. I support a modern version of the Chicago Plan of 1933.

    Your posts were very interesting.

  11. I’m going to disagree with you – I do not think that the last 8 years, and even this last year, have resulted from a lack of “political will”.

    The intensity of political debate hasn’t been higher in decades. Voter turnout has significantly increased, and now matches 1968 levels (even though many more families now have two jobs and thus more severe time constraints).

    Public discourse has increased. Donations to political candidates from SMALL DONORS has massively increased (although small donor contributions have gone to the national level while large donor contributions skew to specific candidates).

    The political will – in the sense of a will do get something done – exists.

    I think the problem is an abundance of stupidity and self-delusion, both in the general population and the intelligentsia, combined with a concentration of resources in the hands of people that are very skilled at taking advantage of that stupid, self-delusional people.


    1) Certain concentrated interests have extensive resources to defend those interests

    2) Many people, though passionate that something needs to be done, disagree about what…’

    Point 2 is not inherently bad (so long as time constraints can be put on debate). The challenge is point 1 and point 2 in combination – which yields a highly mobilized “passionate” ideological group that actively defends the interests of a narrow group with concentrated resources.

    I’m not sure if I would call this “lack of political will”. A LOT of political will went into electing someone who aggressively promised change, and a lot of that will feels betrayed.

    I’m not even sure I know what “political will” is… Electoral passion? Ability of elected leaders to act with a modicum of competence? And what is lack thereof? The structural failure of democracy? Polarization of the electorate? An electorate with a desperate need to externalize their own personal failures that has effectively been brainwashed by self-indulgent media personalities to believe it’s someone else’s fault?

    For all of Barney Frank’s lamentable and embarrassing policy moments over the years, I have to say he hit this one on the head:

  12. Congress people and government officials and their staffs used to write regulations and send them to the industry groups for their approval. They came back with so many revisions that now they just let the financial firms write their own regulations.

  13. Ech, even worse. It’s said only 27-35% of the world’s offshore funds are with Swiss Banks (more correctly “in Switzerland). Maybe we can claw back enough to build a few good soup kitchens.

    Any one have a link to a list of the worst offending banks and havens?

  14. Cheers Yakkis. Odd lists… No Panama, which is reported to be #2 on the bad banking behaviour scale, and Mexico which I’ve never seen quantified, Luxembourg. Dutch Antilles, Canadian Banks… I think this is what they call “systemic.”

  15. Is it possible that the world-wide financial system has become too large to govern?

    Peer Steinbrück, the German finance minister, has said NO*)
    – so even though he seems to be stepping constantly on the feet of his European counterparts, there’s hope that something will get hatched but that it will bind/govern all of the EU-27 is hard to imagine let alone the world

    *) while being grilled publicly about HypoRealEstate our own 35 bn + unknown baby, now 90 % state-owned (hypo-thek=mortgage)

  16. the Fürst of Liechtenstein recently raged a storm by kind of claiming that Swiss and his banks had been in the business of actively saving Jews from the Nazis
    – he made it sound like he was applying for a place in Yad Vashem
    I guess it’s all a question of perspective ;-(

  17. the Fürst of Liechtenstein recently created a media storm by kind of claiming that Swiss and his banks had been in the business of actively saving from the German Reich
    – he made it sound like he wanted to apply for a place in the Pantheon of the Righteous of the Nations due to these exertions

    I guess it’s all a question of perspective ;-(

  18. sorry, pushed the wrong button – the above is a comment on Yakkis and Uncle Billy above re bank-regulation

  19. The object of any improvement in regulation should incentivize bankers to police one another. After Glass-Steagall, if not before, investment banks were partnerships with most of the partners’ personal capital tied up in the business. There were no non-partner owners. Changes in the laws made during the WJC presidency allowed Mr. Gutfreund to be the first to change his IB from a partnership to a public company. Soon all the other IBs, perceiveng the advantages, did the same. The partners cashed out first selling ownership to the public. The partners, now management, retained control of the bank’s cash flow and continued to pay themselves on the scale of IB partners, so cashing in again. Since now it would be the stockholders and not themselves who bore the losses when they materialized, the partners cashed in a third time in a manner of speaking. The taxpayers gave them TARP $$$ which they used to buy government paper at 2% while paying 0% interest on it. For such genius they decided they deserved lavish pay and cashed in again. They are only able to do this by sharing their good fortune generously with DC pols.

    Any publically owned IB too big to fail needs to be regulated in detail like a public utility in terms of its leverage and the nature of its investments and the moneys available to pay management and staff. If big investment winnings went to the shareholders instead of employees, the incentive to gamble irresponsibly would be reduced. IBs set up as partnerships would self-regulate, as it would be the partners’ own capital again at risk.

    Attorneys’ firms are legally required to be set up as partnerships because the law recognizes that the only effective check on the professional misbehavior of attorneys is their partners’ common interest in reining it in. They all share liability for the consequences of any misconduct by one of their partners.

  20. “The object of any improvement in regulation should incentivize bankers
    to police one another.”

    Yes – that is what keeps acceptable behaviour up in any group, village or society but this instrument is very very hard to keep within limits it tends to become impolite and nosyparkering
    when “we” through it out before at and after 1968 it was still at its stifling suffocating best – so it has to be tried to find a new livable measure of it.

  21. Mike Konczal always does a thorough job with his posts. “Baselinescenaro” was very fortunate to get him to donate some time to bequeath us with lots of great information. Yay!!! I nominate Mr. Konczal for financial blog world MVP!!!!

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