The Remarkable Ms. Warren

She’s probably already said this before, but I just saw this in an interview by Tim Fernholz, which I completely agree with:

“There are a lot of ways to regulate ‘too big to fail’ financial institutions: break them up, regulate them more closely, tax them more aggressively, insure them, and so on. And I’m totally in favor of increased regulatory scrutiny of these banks. But those are all regulatory tools. Regulations, over time, fail. I want to see Congress focus more on a credible system for liquidating the banks that are considered too big to fail.”

But what really caught my eye was this: “I’m teaching my classes, doing my research, and helping out where I can.” I always assumed she took a leave from Harvard Law School when she became chair of the TARP Congressional Oversight Panel. Now that is remarkable.

By James Kwak

148 thoughts on “The Remarkable Ms. Warren

  1. She is a small good thing coming out of all this badness…and I greatly appreciate her. Thank you Ms. Warren, if you haven’t got one of those lately.

  2. The right way to deal with ‘too big to fail’ financial institutions that are in trouble is bankruptcy. That will break them up. There is plenty of capital out there that will be looking to make some easy money buying up the pieces.

  3. I agree they should have done that. U.S. lost the credibility for BK and I don’t think they can get it back. As anyone who buys their kid candy bar at the supermarket checkout line knows.

  4. Too bad that she won’t be allowed to do much after this. She’s pissed off too many bankers. But seriously, if Time needs a person of the year…

  5. Any friend of financial innovation (Warren) is either just playing a role, or completely missing an important point. Now they’ve got Volcker coming publicly against innovation, which is good in and of itself, but one wonders if it isn’t just smooth-talk.

  6. Elizabeth Warren has displayed gross ignorance of finance, how it works, what it’s for, and how it should work.

    Her “Consumer Protection Agency” is a typical example of the idiotic FAIL ideas that come out of Harvard Law School — namely, have one group of corrupt bureaucrats look over another group of corrupt bureaucrats who are meant to watch over a corrupt group of industrialists.

    She’s pathetic as a Populist. She’s pathetic as a policy wonk. It’s just warmed over know-nothing socialism who thinks the solution to every problem is more well meaning bureaucrats looking out for “the people”.

    To focus banks on making loans that will get paid back you need to… focus banks on making loans that will get paid back. It’s easy to see what enables this and what detracts from it. I doubt Warren knows the left side of a balance sheet from the right, or could tell a flow of funds statement from a flow. Or a fund.

  7. Miss Warren is not an attractive woman in a superficial sense, but she’s sharp, well educated, and cares about the society around her. One thing that has fascinated me about this big mess caused by large banks poor executive management is many of the heros have been females. Brooksley Born, Sheila Bair, Miss Warren.

    But then again we have ugly witches like Melissa Bean. Representative Melissa Bean of Illinois is not only an embarrassment to her gender (see here for proof ), but Bean is also a pus infected scar on the human race.

    If you’d like to phone Melissa Bean and ask her why she made it easier for national banks to escape stricter state level banking laws which would protect depositors and consumers please feel welcome. Please don’t mention how bad Representative Bean’s hair looks, as that is a separate issue.
    In Illinois: 1701 E Woodfield Road, Suite 200, Schaumburg, IL 60173 | (847) 517-2927
    In Washington: 432 Cannon House Office Building, Washington, DC 20515 | (202) 225-3711

  8. Elizabeth Warren For President.

    How about this for a campaign slogan: We know whose side she is on.

    And Bill Black for Vice-President. Here’s a slogan for him, too: Someone’s got to hold them accountable.

  9. Miss Warren has an attractive mind and heart. She has a glow of warmth in her smile and attitude which can disarm even the more cynical among us. And as future Attorney Kwak says, a terrific work ethic.

  10. Yes, those bank CEOs have shown so much skill with balance sheets recently. Zero capital to cover losses on credit default swaps. Playing a game of bridge in Nashville as their company does a swan dive into the toilet. Letting managers of derivatives trading departments run off to London with millions after they ran the insurance company into the ground. Why would we want a well-educated woman from Harvard keeping an eye on them??

    I don’t know why we have referees at football games?? The coaches know more about football than the referees!!

    And what about those silly policeman in their funny blue uniforms. Did they ever sell and get high on cocaine before they arrested a drug dealer??? That has gotten on my nerve for years now…. Oh well…. What is toothless redneck to do…? Guess I’ll go to the teabaggers protest tomorrow…. Glen Beck promised he’d teach me how to read after I purchased some gold bullion.

  11. Follow the money. Who funds her work? Center For American Progress helps her with some of the slicker videos we’ve seen of her. She is the Leo Gottlieb Chair at Harvard. Leo Gottlieb was attorney to big oil. The people who endow chairs have no influence on the work of the people that occupy those chairs? Doubtful. Some of her more interesting work was done for the Ford Foundation (if you want to see why this is significant, research the Ford Foundation).

    But this looks like a particularly juicy clue, and perhaps James Kwak can weigh in here on the significance:

    Back in the early years of the 21’s century the FCC was auctioning off wireless spectrums, very very valuable ethereal real estate. A little company called NextWave stepped up, made a $5M down payment on about $4 Billion worth of spectrum, magically won at auction despite being little more than just a registered business name, and then used legal judo, going bankrupt, and what looks like securing the sale of the spectrum before actually taking full posession of it by actually paying for it. Guess who was Amici Curiae for the supreme court? (And working on behalf of NextWave or its “creditors”?) Prof. Warren and two other very savvy b/k attorneys.

    If I remember correctly… I was astounded at the time.. take possession of $5 Billion of spectrum with a $5 Million down payment… there was a vulture fund involved (NextWave creditor?) that spent a nice chunk of change flying out and lobbying the proper people in Washington.

    James, are you familiar with this? After looking at the Certiorari can you discern exactly what Prof. Warren’s role was in the NextWave miracle? There were a fair number of articles at the time if you need further background.

    If it turns out that Prof. Warren was indeed advocating or opining on behalf of NextWave or its creditors, it would not look good. Any misrepresentation here is unintentional, and it could very well be the case that she and her fellow scholars were making the opposite case. Legal Eagles, please weigh in.

  12. Since you malign Socialism, I presume you prefer Capitalism.

    Please enlighten me, and the rest of us here, just exactly how TARP, massive guarantees, free (0-.25%) money at the discount window, changing the rules to allow for spontaneous bank holding company status, changing accounting rules, providing special retroactive tax benefits, and entering into grossly commercially unreasonable transactions in massive nreach of fiduciary duty with financial institutions that would have, and should have failed due to their own idiocy, paying AIG counterparties 100 cents on the dollar, etc. can even remotely be considered “Capitalist”.

    We have socialized the risk. The Oligarchs have privatized the profits. Capitalist finance doesn’t work this way-except maybe in your world-where banks can socialize the risk, and privatize profit. The rest of us non-TBTF folks are limited to being full time capitalists. Elizabeth Warren, as TARP Watchdog is pointing this dichotomy out.

  13. I think that on this issue the benchmark measure of whether or not someone is truly interested in the public good, as opposed to being a criminal hack, is whether one publicly advocates the aggressive, proactive breaking up of the TBTFs. (NOT just “resolution”. If you have to resolve something it’s already too late.)

    It’s not clear what Warren is talking about in this interview. In the quote above she seems to say break them up (“liquidate”), but later in the interview says she doesn’t want to “destroy” them.

    Maybe given the differing contexts the first quote was the real one and the latter was boilerplate; it’s hard to tell. But that’s an example of the pitfalls in trying to figure out what most of these people advocate. First and foremost they’re mostly timid politicians who don’t want to make clear statements of principle or policy advocacy.

    I would recommend against either kind of extreme attitude where it comes to someone like Warren.

    Her observations and recommendations have often been excellent, and in that sense she’s doing some good work. To simply slam everyone who’s within the establishment as equally malevolent and useless is a defeatist, flat earth attitude.

    On the other hand, hagiography based on just some good statements is also unwarranted. Warren has also been willing to play the flunkey role, as in her recent statements about the TARP. She hasn’t said all she could, for example when you compare her with Volcker or Barofsky.

    Of course, for now all anyone like that can do is talk.

  14. “Too big to fail” is laughable. Did the bank get big because it offered the best service, the most security, and was simply better than the competition? If so, why would anyone want to break up an example of success and stability?

    Or did the bank get big because it was propped up by the government. Did the bank get capital from the FED at below market interest rates (like 0%)?

    If it’s the latter, whatever you do to the big bank — liquidate, insure, regulate — is just dealing with the symptom. The real problem in the latter is the government and the FED.

    But back to your post — what is remarkable about teaching full time and overseeing $700b in one’s spare time? The only remarkable thing is that the Warren’s big idea is just more of the same (regulation, forced liquidation, and taxation).

    “Forced liquidation” is just an alias for “bailout” — everyone still gets paid if the government forces a big bank to liquidate. With Free Market liquidation, the only losers are the ones involved with the failed enterprise. Government liquidation moves those losses onto everyone. Great idea Elizabeth. Maybe she should take a leave from Harvard and spend more time on this TARP thing-y.

  15. Ted K: I have no love for bank CEOs. Pity Warren is as bad but even more clueless. At least bank CEOs get paid out of their evilness. Warren honestly thinks she is doing good, and her righteous sanctimony coupled with her obvious incompetance is why I decide to, net, hate her more.

    Hillbilly: It’s very clear to me out of this whole fiasco that banks are not private sector entities in any way. They are partnerships with the Govt (to be charitable) or giant sucking squids (to be accurate). Therefore, I have no idea why you are bringing “capitalism” into a discussion of banking at all. I’m just wondering why people are kowtowing to this obviously incompetent regulator wannabee who has no idea who finance works.

    Is it too much to ask for regulation with a brain?

  16. @zanon
    i really can’t tell what you’re actually saying. is it simply that bureaucrats are bad and since warren is a bureaucrat, then warren is bad? is that all your huffing and puffing is saying? instead of saying what you’re *against*, can you elucidate what you are *for*? use bullets if that helps. am happy to help you form basic arguments that make sense and add to some semblance of meaningful debate, but so far i really am not getting what you’re saying. so much anger, so little sense. let’s hear it.

  17. Gong: I am simply pointing out that Elizabeth’s Warren solution is crap, and whenever she opens her mouth it reveals a complete ignorance of how finance works and how regulation works.

    And yet she is being lauded on this forum. For what? Creating another set of plum jobs for her Harvard Law School cronies? Are Harvard Law School professors really that hard up? At least those who have not relocated to Washington DC?

    You ask for what I suggest — it’s very simple. The point of banks is to make loans that will be paid back. Now, look at how banking works today, and look at everything that supports that, and everything that negates that.

    Now look at what Warren, Geithner, et al suggest and see if it focuses on this simple point or not.

    I am for anything that focuses banks on this core task, and against anything that detracts from it, whether that’s spouted by Bernanke, Warren, Geithner, or Blankfein.

  18. What a mix of views about a lady pursuing her personal views about national political action. She is pursuing what she believes is tending to the national good.

    Do the posts here illustrate the political spectrum of national angst? It seems there has been nothing but national social agony for as long as I can remember.

    The Eurocentric Socialist way seems a guaranteed failure in the US. The Laissez Faire Capitalist way is demonstrating it’s obvious failure in the US. All that is left is the ” Third Way” of Mussolini’s and we seem to have tried middle ways that have no chance either.
    Does that leave no way except a battle for ideologies until only one is so dominant it will suppress it’s opponents?

    There is an interesting lecture about this problem in the current New York Review of Books titled ” What Is Living and What is Dead in Social Democracy” by Tony Judt a professor at NYU.

    At long last will the US national penchant for irrational paranoid politics simply overwhelm the society by preventing any effective national solutions?

  19. bankruptcy doesn’t work for banks. i have seem some credible sources (aka lawyers) point out that if they go bankrupt the FDIC insurance of deposits won’t be worth the ink on paper. it would all get tied up in court potentially for decades. thats the real reason we have the FDIC to begin with. and bank runs would return with a vengence

  20. That is what is one of the more confounding questions of this mess?? How can Obama, who seems to be an intelligent man, listen not only to Wall Street, but only to Rubin’s very narrow branch of Wall Street???? Does Obama trust his own quick assessment ability so much that he fails to take a deeper view of this problem??? Are Larry Summers (of Harvard infamy) and Rahm Emanuel (of Freddie Mac infamy) see here,0,5682373.storyfiltering
    Filtering the information and viewpoint Obama sees???? Why isn’t Obama coming out publicly and slapping the wrist of Goldman Sachs??? Why are the incredibly wise words of Paul Volcker muted at the White House??? Cannot Larry Summers Gargantuan sized arrogance stand to ALLOW opinions wiser, more insightful, more experienced, more knowledgeable than his own???
    I suggest Larry Summers hand this article to Obama tell him to reread it several times, while you take a 3 day trip to Harvard to apologize for your jumbo elephant sized arrogance.

  21. That should be a period or an exclamation mark at the end of the first sentence in my post just above, anything BUT a question mark. Unfortunately my typing skills are almost as bothersome and annoying as Larry “Cosmos-Ego” Summers’ arrogance.

  22. When asked if the banks were too close to the government in a CNN interview earlir this week, big sis couldn’t quite manage a response. All the interviewer got from her – all anyone ever gets from her – is a boatload of moralizing. The TARP outrage notwithstanding, this gal, herself, is a waste of taxpayer money. If we were looking solely for a conscience – which is all she’s contributed in this oversight assignment of hers – we’d have called the nearest church. High sounding thoughts are no substitute for moral courage. All Elizabeth Warren has succeeded in doing is sounding like a female Obama. Haven’t we had enough Obamas at this juncture?

  23. Any sound bank can be liquidated in a satisfactory manner.

    Why the regulators could not detect a deteriorating financial position before it reached the unsound stage is a mystery to me.

  24. The banks and investment banks sought state aid to ” bail” them out. Note just how fast the surviving investment banks became state sponsored Bank Holding Companies. Seeking state support is a middle way , not a Laissez Faire way.

    Similarly, I remember Paulson immediately liquidating the Exchange Stabilization Fund to provide aid to failing money market funds. The Exchange Stabilization Fund was a state fund used to ” bailout” groups claiming to be Laissez Faire Capitalist in outlook.

  25. uh, letting Wall Street lose to do what they want, figuring that they would never, ever, do anything irresponsible. This is not me talking, but Alan Greenspan admitting they he was mistaken in his presumption that that oversight wasn’t needed because financiers would act responsibly in pursuing their interests, since it was in their interest to do so, instead of blowing up the system like they did.

  26. Why would you liquidate a bank with huge interdependencies when they may be recapitalized as was done historically with railroads as an example?

  27. Jerry J, that was a fantastic article. My favorite part was how Professor Judt compares current attempts to privatize traditional government services with 18th century tax farming. Thanks for the link!

  28. One last thought on Mr. Kwak’s post. I think Resolution is one of the more important things here. And it’s one of the reasons why FDIC has been a hero in this, is just by performing its original job. Letting these banks fail and then attempting to take leftover assets or inactive assets and put them back to efficient use in the private economy. We CANNOT save these banks again. Any type of future bailout cannot be performed DIRECTLY on banks. Also, if banks fail due to risky management/CDS trading there should be “clawbacks” on the salary of those managers (Examples: Joe Cassano, James Cayne). Any future bailout should be to the economy in general (with very specific/strategic fiscal spending on growing sectors of high potential).

  29. Anything involving Alan Greenspan and the Federal Reserve System is by definition the opposite of laissez faire.

    “Letting Wall Street do what they want…” — Without the FED, Wall Street could only access money that had been saved. In a system that relied on sound money, the cost of borrowing post 9/11 would be dramatically higher than 1% that Greenspan lowered interest rates to.

    Of course, if the FED is getting everyone drunk you need more regulation. But that’s not a free market. In a free market there would be no FED to spike the punch bowl.

    Just to verify, the “Greenspan Put” is your example of Laissez Faire monetary policy? Really?

  30. She doesn’t have the appropriate knowledge base for that. My guess is she would agree with that statement.

  31. There has been a hue and cry about liquidating the big banks since the financial crisis started even before Bear Stearns failed with no details of methodologies as a rule. Take Citi. Citi is an affiliated group of variously chartered foreign and domestic corporations with a common parent that is a US Bank Holding Company. Liquidation could mean simply offering the shares of the pieces to the public and distributing the proceeds to the creditors of the parent company. Each subsidiary is an entity in it’s own right that could also seek reorganization in it’s own right while the common parent is liquidated. Indeed, the subsidiary could vehemently resist bankruptcy and force the issue into the courts. All of this practically is a matter of interdependency of liability claims. Limiting that interdependency of legal claims is a function of how astute the CFO and General Counsel have been in preventing interdependent claims. Where interdependency claims exist a competent long term financial and legal administration would have mitigated the effect of claims. If these huge TBTF’s cannot be quickly broken up it means interdependency of creditor claims was not interdicted as a matter of policy.

    The fact of life is that these consolidated behemoth’s cannot be liquidated only broken apart with interdependent claims being extinguished by the court so that the stock of the major components may be sold in public or private offerings.

    Of course, I suspect there are major impediments due to carelessness and the political elites now understand those impediments as being a shattering of the present financial system if they were allowed to interfere.

    None of the big names favoring liquidation ever discuss this.

  32. “Regulations, over time, fail.”

    Bankers game the system and use it to their advantage. In a perverse way, big banks want to be regulated, but not too much. With regulation banks have the benefits of the U.S. government safety net – deposit insurance, access to Federal Reserve loans (discount window), implicit subsidies and lower borrowing costs, and of course bailouts.

  33. FDIC has been a hero? Sheila Blair has waited until the banks were underwater by 30-40%. They should have been put down long before, at much less expense to the FDIC.

  34. Dave, get over it. The Fed is not going away, even if it is rolled into the Treasury, of which it is actually a subsidiary. The Fed chairman and Treasury secretary confer every morning about day to day policy. The Fed only exists “independently” to keep a semblance of independence for the Fed chairman and government appointed board members.

    The international banking system is based on central banking, and the US not about to rock that boat as the issuer of the world’s reserve currency.

  35. Tom:
    (1) Jerry J claimed that Laissez-Faire capitalism has been demonstrated and failed in the US.
    (2) I asked for one specific example where Laissez Faire Capitalism has failed in the US.
    (3) You cited Wall Street under Greenspan.

    Regardless of the future of the FED, I’m sure you can admit that Greenspan’s policies were not really examples of Laissez Faire.

    So the question’s still out there, but don’t waste your time. There has never been a laissez-faire system in the U.S. — perhaps pre-1776, most notably Pennsylvania in the 1680’s, but certainly nothing to support the Jerry J’s initial claim.

  36. They (The FDIC) don’t have that authority until the banks are technically insolvent. It’s a crazy thing in this country we have called LAW. If you have a problem with that, vote more, and write your U.S. Congressman. There are bills going through the House and Senate now—H.R. 4173 which just finished in the House and will go on to the Senate. mainly composed by Barney Frank. Also there is a financial reform legislation being drafted in the Senate by Christopher Dodd

    Then you have folks like Republican Senator Mitch McConnell who want to put their finger in their nose and continue on allowing the credit default swaps which were the major cause of the crisis.

    You can contact Barney Frank here to give your opinions.
    2252 Rayburn Building
    Washington, DC 20515
    tel: (202) 225-5931
    fax: (202) 225-0182
    or in Taunton, Massachusetts
    The Jones Building
    29 Broadway
    Suite 310
    Taunton, MA 02780
    tel: (508) 822-4796
    fax: (508) 822-8186

    OR Contact Senator Chris Dodd,
    U.S. Senator Chris Dodd
    448 Russell Building | Washington D.C., 20510
    Tel: (202) 224-2823 | Fax: (202) 224-1083

    30 Lewis St Suite 101 | Hartford, CT 06103
    Tel: (860) 258-6940/(800) 334-5341 —CT only
    Fax: (860) 258-6958

  37. Whenever I listen to Larry Summers speak, I always come away thinking that some of his points are decent. But then I see the policies he crafts…

    He has taken a fairly strident stance recently against Wall Street firms, but where is the meat in the Obama agenda? I suspect the strongest message he could send that Obama is serious about reform would be to submit his own resignation.

    (And if I hear “Employment is a lagging indicator” even one more time, I think I might be overcome with nausea.)

    When considering why we have people like Matt in Rolling Stone going after Team Obama (after skewering Goldman Sachs with his Vampire Squid article), the answer is Larry Summers.

    Listening to this (and other clips) of Summers, it’s immensely clear that the reason we are not overhauling the system is because he (and his cohorts) are DEEPLY convinced the system only needs some minor fixes – but that at its core it is well worth saving.

    Already, the blogosphere is taking sides on Matt’s article…

    Matt may have gone overboard, but he has a very good point – look where Obama has spent his political capital since the election.

  38. Right, Credit Default Swaps caused everything. It certainly had nothing to do with our government’s monetary policy since 1971.

    You really think Chris Dodd and Barney Frank — both of whom have been in the office since ’81 and didn’t foresee this crisis — are going to save us in the future?

  39. Dave,

    I don’t know what you mean by “sound money,” but if you mean currency backed by gold or silver (which is what most people mean when they write about sound money), Pennsylvania circa 1680 is definitely not an appropriate example. See my comments here:

    You’re correct that a pure laissez-faire system has never existed in the United States. Such a system has never existed anywhere in the world and is unlikely to ever exist. My understanding of what Jerry J is trying to say here is that what many conservatives in this country call laissez-faire capitalism has been an abject failure. This strike’s me as an eminently reasonable criticism. Whether or not what the people on the right in this country call laissez-faire capitalism matches up with some fantastical version of laissez-faire capitalism that has never existed and never can exist is besides the point.

  40. I think I linked to the wrong comment about Pennsylvania in my post below, sorry. I have two comments about Pennsylvania in that thread, this is my first one:

    Also, if by “sound money,” you mean something else besides currency backed by specie I apologize and would be interested in hearing your explanation. I really enjoy economic history and rarely find many commentators who bring up historical examples.

  41. NKlein1553 – I never said that that sound money existed in Pennsylvania in 1680. You merged two completely different thoughts from two completely different posts.

    I agree with your last paragraph. I was trying to point out to Jerry J that he’s using words and arguments based on the a perverted definition.

    Are you saying that just because laissez-faire hasn’t existed, it’s OK to claim that it’s been tried and failed? Why not just use correct terminology?

    If Jerry had said “Government meddling in markets, price fixing interest rates, legal tender laws, and fiat currency has demonstrated it’s obvious failure in the US” I would have agreed with him :)

  42. Depends on how Barney Frank and Chris Dodd craft and specify the language of the bill. So far, Christopher Dodd’s bill is much more thorough than Barney Frank’s. Bad apples like Melissa Bean of Illinois keep trying to poke holes in the protections for consumers and water it down. We (the voters) will have to watch closely as the bills are being drafted.

    Whatever they end up writing and passing, it will be better than Republicans Mitch McConnell and John Boehner sitting there with their thumbs up their rear orifice.

  43. I do not know how to insert this in the proper place. There has never been a pure theoretical economic system anywhere. Free market, Communistic or otherwise. So, I guess words have lost meaning. I certainly have lived with hordes of Laissez Faire Capitalists that claim the US is as near a Free market System as possible so long as their are misguided pinkos and such around. Conversely, I know a bunch of Marxists from Marxist nations that claimed their system was Communist.

    The right wing in the US is bent on establishing a close to perfection Laissez Faire Capitalist System. Their practical version which means raiding the state coffers when they get in a pickle.

    Perhaps we need new terms to describe the mongrel versions of the theoretical that are so ardently belief structures of each ideology?

  44. Many Ayn Rand libertarian types view “sound money,” (that is money backed by gold or silver) as an integral part of laissez-faire capitalism (Greenspan’s about face on the gold standard is what estranged him from the quasi-cult objectivist society Rand and her followers set up). I kind of assumed you fell into that Ayn Rand, libertarian category, but you know what they say about people making assumptions. I apologize for the misunderstanding.

    Which then brings me to my next set of questions. The tone of your posts seems (to me at least) to indicate that you don’t think much about the government’s attempts to control interest rates via adjustments to the money supply. Is this correct? If it is, do you then think “sound money,” would be a viable alternative to current policy? What do you mean by sound money? Could you point to any historical examples where the monitary system you prefer produced particularly good outcomes?

  45. Jerry J, I didn’t know how to make my posts appear below other people’s comments either until StatsGuy told me you can click the little reply button below what other people write. If you click that reply button it will appear below the post of the commentator you would like to reply to.

  46. Sorry, I didn’t get the memo that the right wing in the US was now writing our dictionaries.

    Just because Glenn Beck’s tea bag brigade screams about laissez-faire capitalism under Reagan or Bush doesn’t mean it’s true… any more than Obama’s a socialist just because enough people yell about it.

  47. Dave, of course, there is a laissez-faire system in the US and there probably always will be. It’s called crime, and its one of the biggest business networks in the world, with its own underground shadow economy.

  48. My sense about Elizabeth Warren is that she is heading in the right direction, and pissing off all of the people who are making decisions against our best interests. When the Obama Administration offered her a job a few months ago, it was purely to get her out of their way, eliminate her direct access, and stick her in the back room – where she would have no impact and do no more oversight.

  49. Minor point: sound money isn’t backed back gold, but rather IS gold (or some other commodity). If a money replacement is issued, the currency would be backed by the commodity, but the actual money is still the commodity.

    I’m not sure why my feelings for Ayn Rand matter, but I have read parts of Capitalism: The Unknown Ideal (with Greenspan’s pro-gold essay). If you care, I’m prefer Murray Rothbard’s economic, historic, and policy writings to Ayn Rand’s fiction.

    Should the government fix prices on computers, cell phones, or breakfast cereal? No? Then why should they fix the price of money borrowing?

    Also adjustments to the money supply don’t just “control interest rates”, they affect the value of every dollar in existence. Just ask a Zimbabwe native with a newly minted one hundred trillion dollar bill.

    Government monetary policy should strive to protect savings, not debase them. The value of a saved US dollar increased by 100% in the first half of 19th century under a decent, but flawed bi-metal standard. Again, not ideal, you can’t deny that gold has a better track record of storing value than any central bank’s fiat currency.

    The debasement of the dollar means we can’t save dollars. We’re forced to invest via Wall Street. Since everyone’s dollars are in Wall Street, the government sees it as their responsibility to protect us by bailing out banks, thus further debasing the dollar. See the cycle?

  50. We’ve seen a little playfulness in the titles of past posts. Is the title of this one tongue-in-cheek?

    From review of “The Remarkable Farkle McBride”:

    “When Farkle McBride was a three-year-old tyke,/ All freckle-y, bony, and thin,/ He astonished his friends and his family alike/ By playing superb violin.” After his debut, the easily dissatisfied diminutive genius trades in his fiddle for a flute (“He went Rootle-ee/ Tootle-ee/ Tootle-ee Too/ With all of the winds at his side”), then a trombone and subsequently percussion, all to no avail. Not until he steps in for an ill conductor does he finds his niche; a gatefold spread shows him (“satisfied!”) in front of “all the instruments he ever tried.”

    Maybe closer to the mark:

    Against the Gods: The Remarkable Story of Risk

    (or maybe it was meant to resonate with The Talented Mr. Ripley?)

  51. Dave:

    “The debasement of the dollar means we can’t save dollars. We’re forced to invest via Wall Street. ”

    Yes, that is true – one goal of monetary policy is to close the savings/investment gap.

    But you don’t have to invest via Wall Street – you can go out and invest in energy efficient appliances for your house, in a business, a friend’s business, etc. And while it’s true that right now seems like a bad time to invest, if monetary policy were being implemented properly, that would not be the case.

  52. Last musing for the night: Ferrari P. Ward

    (cross posted at Naked Capitalism)

    As all this talk of social justice and injustice flitters through the blogosphere, Noam Chomsky comes up a lot. He was the “Ferrari P. Ward” Chair of language, bla, bla, bla back in the 60’s and 70’s.

    Who the heck was Ferrari P. Ward?

    The Ward family seemed to be worth $8M+ in the 60’s —- based on old newsclippings — and were considered “society” in Hartford, Conn.

    But who the heck was Ferrari P. Ward?

  53. Correction about the definition of “sound money,” well taken. Here’s one minor point of my own: according to traditional economics textbooks at least, the value of money is defined as the real interest rate (nominal interest – inflation). Therefore, your comment about adjustments to the money supply not just controlling interest rates, “but affecting the value of every dollar in existence,” is a bit redundant (but again we might not be understanding each others’ definitions here).

    As for the purpose of government’s monetary policy, I mostly agree with your assertion that priority one should be to protect savings (there is the full employment side of the picture to be considered as well), but I would probably phrase this statement somewhat differently. Instead, I would say the purpose of monetary policy is to stabilize the price level as measured by the real interest rate. Using this definition it’s not at all clear to me that pegging the value of a country’s currency to the price of gold, silver, oil, or any other commodity will result in greater price stability. Especially in today’s world of fierce competition over increasingly scarce resources. See this article for example:

    Part of the reason why gold was such a safe store of value in the early nineteenth century is because the Western European nations were able to monopolize its production and distribution so well. Even so there were many examples of rampant inflation, the rapid increase in prices following the Spanish Conquistadors pillage of South America being the prime example.

    While it is true that fiat currency systems have seen some particularly nasty examples of inflation, there are also many examples of remarkable price stability. We’ve mentioned Pennsylvania circa 1680 already. I, along with many, many economic historians, would also argue that Roosevelt’s decision to go off the gold standard in 1933 was a major contributing factor to reestablishing price stability after several years of massive deflation. More recently, the bank of Japan’s use of quantitative easing to establish a 0% inflation target could be considered an example of using fiat currency to promote price stability.

    In conclusion, I guess I’m not actually denying that gold has a better track record of storing value than any central bank’s fiat currency, but I certainly wouldn’t say the case is as clear as you seem to be believe.

  54. Zanon, it seems that you may not like EW’s sort of “Churchlady” attitude, but she has served a fiercely useful purpose, and by the way, she is 100% in favor of banks doing good, solid, lending business, in case you haven’t figured that out. Maybe you would rather continue the bigs on the dole while the economy continues to stall because they soak up everything to fatten their portfolios and the campaign coffers of those they support on the government side of their oligarchy scam. It seems to me that she just stands for fairness and transparency, and that she doesn’t need to be able to read balance sheets to have a clear idea of what is happening. I can and you can read balance sheets, but do we have the clarity of mind to refocus the market place as she is trying to do. I don’t think you have listened to her directly, but perhaps have derived opinions about her from misinformed blogs or others.

  55. And, so that makes us respect her more. She was hired as an attorney to represent a client, and won. That makes her a good attorney. I’m sure that if Wall Street hired her, she’d do a hell of a good job for them also. She’s smart and willing to roll up her sleeves and find answers, on any side.

  56. Actually, I am in favor of breaking up the big banks, but letting them do it all by themselves. Make them pay a reasonable rate, remove all FED and Treasury support, and let them worry about the toxically bloated balance sheets. Without trillions in guarantees and a literally free supply of dollars to churn in the market, they woundn’t last. They only grew to their current size after Glass-Steagall legalized gambling for financial institutions, and the government pushed housing for everyone without limits.

  57. Interesting, from Matt Taiibi to you guys, ranting about what the President hasn’t done. Well, guess what, it all really comes down to campaign finance and lobby reform. If we don’t do that, we will never break the downward trajectory of this country. All of the good ideas in the world won’t be acted on because they will change a status quo that serves the oligarchs who control things. Interestingly, whenever I watch the highly placed talking heads, they don’t ask the tough questions, ever, but on a rere occasion on will accidentally do so, but never follow up on the muddy, murky, evasive answers they get from anyone and everyone from the White House to Congress to the Departments. We are left knowing that no one will give a complete, reasoned response, ever.

  58. There is no laissez faire capitalism, and never has been. Between regulation, tax laws and government intervention, capitalism in any pure state does not exist and hasn’t in 100 years, at least. So, actually it has failed, to be present.

  59. Wow, James, you really got quite a discussion going, but very little of it seemed to focus on EW. I would love to see her in government, but I am afraid that that would tie her up too much. Perhaps some kind of super oversight capacity, not unlike her present post would be best suitable, so that she can maintain an independent voice. This is what we really need, unless she’d like to run for President, in which case she would have my vote, and those of millions of others.

  60. I have yet to hear a single utterance drop fro Warren’s mouth that demonstrates a clue

    if you can give me an unequivocal example I will change my mind. Her consumer protection agency idea reveals she is an ignoramous of the highest order although I am sure she is a clever politician

    If being a clever politician is enough then why not treat Maxine waters to the same hero worship? At least she’s less tiresome

  61. Absoletely. Your sycophancy crushes me. I understand bootlicking in a work environment, and amongst reporters. I even sort of understand it amongst bloggers hoping to get invited to the Treasury. But amongst anonymous commenters?! Is no one allowed to have a brain of their own?

    Feel free to worship at the feet of warren. Maybe she will notice you and bestow some favor. It’s worked out so well with Obama so far, hasn’t it? Those banksters are quaking in their shoes!

  62. ““I’m teaching my classes, doing my research, and helping out where I can.” I always assumed she took a leave from Harvard Law School when she became chair of the TARP Congressional Oversight Panel. Now that is remarkable.”

    LOL! You think there is some line between the democratic party and Harvard Law School? How naive.

    And yeah, when I want someone to run something, the first person I think of is an academic lawyer. That combination of worldliness and results-orientation really cannot be beat if you want good decision making.

  63. I havent read Professor Warren’s “Two Income Trap”
    book, but after listening to multiple long interviews with her about her theory, it seemed incoherent/poorly reasoned to me. Do any of your economists/finance/policy people have an opinion on here work there … I think we can slightly separate someone’s public service work and their intellectual creative works …
    she might be doing some good in her current gadfly role, but what she was saying previously didn’t make sense to me.

  64. Do you know what 90% of politicians in America and China, and almost any country you could mention major in??? Law. INcluding our great Host here, JD Kwak. Yes it means some selfish slimeballs get in, but it also means it’s quite a clever group. Which major did you think was best?? because in case you didn’t notice, most of the great people in life are University educated, INcluding Mr. Obama. Which major were you thinking our next great leader would come from???
    P.S. Mormon Psychos, who attended special programs at Yale for slow learners, now selling gold bullion to dupe their fans, DON’T COUNT.

  65. Also, it doesn’t count Alaska girls, who switched 4 different Universities (to experience diversity?? or to avoid being exposed???), and wanted a vacation in Hawaii and left after one semester, ’cause “oh no!!!! I see the Asian people!!! Mommy!!!! Confucius got almond eyes!!!!”

  66. By the way, you are the most absolutely suckiest poster we’ve ever had at “Baselinesceanario”. I thought you were the most gayest poster since David Brooks was reminiscing about when a congressman touched his thigh. But after further reflection I thought that David Brooks was a little gay in that story, but he at least was clever in his writings in general. OK? So PLEASE go to some Republican meeting in Iowa, where they are debating whether they should bribe Palin to give a speech for the

  67. Tom – Black markets, illegal markets, and underground markets reap huge benefits from Government intervention. By decreeing drugs (or guns, or whatever) illegal, the government cuts supply from “legal” sources but can’t cut demand by the same amount.

    Just like big banks will benefit from regulation, drug cartels benefit from the war on drugs.

  68. StatsGuy – will I get the same government supplied tax breaks if I invest in appliances, stockpile scotch, or buy bullion?

    Dollar debasement combined with our tax structure (specifically around 401(k) and similar retirement accounts) pushes most people’s money into Wall Street.

  69. Policy makers have it BASS-ACKWARDS!!!!

    If the history of the Soviet Union proved one thing, it is that nothing is “too big to fail (TBTF).” In the recently published “We’re All Screwed,” I argue that structurally flawed one-size-fits-all, SOX-type rule-writing fosters oligopolies not competition. It is disproportionate regulation that is the independent variable with first move advantage for driving Too-Big-To-Fail commercial parameters such as scale not vice versa.

    If Citigroup’s one-size-fits-all financial supermarket did not provide a net benefit, can there be a one-size-fits-all regulatory regime? Recent events have demonstrated that trying to cross-regulate with non-correlative information results in discontinuous governance that is dysfunctional.

    If there is complexity, there is uncertainty. Capital market governance must move beyond risk management to include uncertainty. This requires a “Gaulian Division” by segmenting governance regimes via cash flow into:

    1. Predictable: (GSA) money market (break-the-buck) instruments,
    2. Probable: (33-34 Act) earnings-driven issues and,
    3. Uncertain: (EntEX) event-driven issues (reference: ).

    Capital formation is the lifeblood of our free market economy. Economic development is a reflexive proposition between capital and labor. To create jobs requires the preconditions of commercially viable enterprises and related capital formation platforms. Absent a liquidity event that creates multiple returns of value, our economy will become ensnared in a recursive loop of inefficiencies that lead to ineffectiveness.

  70. “Please enlighten me, and the rest of us here, just exactly how TARP, massive guarantees, free (0-.25%) money at the discount window, changing the rules to allow for spontaneous bank holding company status, changing accounting rules, providing special retroactive tax benefits, and entering into grossly commercially unreasonable transactions in massive nreach of fiduciary duty with financial institutions that would have, and should have failed due to their own idiocy, paying AIG counterparties 100 cents on the dollar, etc. can even remotely be considered “Capitalist”.”

    Are you kidding? It’s the essence of capitalism. The State exists for the sake of the capitalists. As for free markets, history has shown that capitalists do not want free markets. Their statements to the contrary are just propaganda.

  71. I struggle with that – Obama’s campaign was incredibly well financed (to the point that the money was spent rather inefficiently). Moreoover, MUCH of that finance came from small donors. Increasingly, the parties have both relied on small donors – the primary impact of organizations like the NRA isn’t to donate money directly, but to rally members to vote and/or donate money.

    I am not laying down “astroturf” here. I strongly supported this administration (although that was largely a reaction to the catastrophic policies of the previous one). I still support it (particularly as the other side veers more to the right rather than center), and I’ve argued many times to be patient and forgiving.

    But the question has always been whether Team Obama has its heart in the right place and is simply making politically expedient compromises, or really doesn’t have its heart in the right place.

    The strange thing is, the “compromises” it has made with finance are politically INexpedient, which suggests that Team Obama’s heart is not in fact where we thought it was. And, listening to Larry Summers speak, I get the sinking feeling that is in fact the case.

    I keep hoping to be proven wrong.

  72. LOL Ted K!

    Why no earth do you think I am a republican? Why would I want to associate with those idiots?

    I’m sorry I gored your beloved Elizabeth Warren. It obviously hurt your feelings very much.

    Since you don’t recognize how obviously unsuitable academic lawyers are to be put in charge of anything, you obviously have either never been around them, or you had your head incased in cement when you were. A group of less practical, rule based idiots, coupled with massive arrogance, I have never found.

    After all, having a third party agency vet debt products worked so well with the ratings agencies, it just makes sense to do the same thing on the consumer side! Elizabeth Warren said so, so it must be true!

    Be careful with those homophobic comments btw. I’ll show them to Elizabeth and then you’ll NEVER be invited to her special events. Don’t you know, Homophobia is wrong.

  73. It’s complete crap, and Warren is an ignorant fraud. The book is as incoherent as her talks, but takes more time to get through.

  74. “Regulations, over time, fail.”

    Yeah, that regulation prohibiting murder has fallen on hard times, hasn’t it? What? It has actually grown over time, now covering “felony murder” and “depraved indifference”? Gee, maybe we have not given it enough time to fail. It has only had a few thousand years.

  75. ‘how can obama, who seems to be an intelligent man, listen not only to wall street but Rubin’s narrow branch of wall street?’

    wake up Ted. What Obama knows is how to get himself elected. He understands selling. He sold you his feel good persona. Those who know him best know him as an empty suit. It is all about HIM!

    Elizabeth Warren is lipstick on the pig. Those who offer solutions which carefully avoid stepping on powerful toes offer nothing. The entire system is corrupt and you might as well believe in Tiger Woods.

  76. What Larry understands is that the days of the entire globalization, financialization fantasy are strictly numbered. As an architect of the fiasco what can you expect him to preach but more of the same?

    The only questino is this: how much will the fat cats and their enablers have squirreled away when the entire system goes bust? That depends on how long it takes. As for a return to domestic prosperity, that is out of the question. There is simply no mechanism for inflating the consumer out of debt quickly enough. Of course, we could have a war….

  77. One of the people surely not responsible for the current disaster is Ayn Rand, whose work saw all of this coming in 1957.

    All you statists believe that if only your gang gets in charge of maximizing public welfare, everything will be hunky dory. Well, you elected your hero and how are we doing?

    The only moral monetary policy is one which preserves the value of money. Our monetary policy peserves the value of pull. Since 1913 the value of $1 has declined by 95%! Unless it declines by half within the next year or two the United States government will be bankrupt.

    Confusion and slight of hand regarding money was the camel’s nose under the tent. You will understand all this better when they begin issuing ration books and giving money away at the post office.

  78. Dave, if that were all that were to it, you would have a point. The point is that the people the rest of us call “criminals” think of themselves as outlaws, that is, folks who recognize that there are no “rights,” no “state,” etc. unless one agrees to these conventions. So they just pursue their own agenda based on “laissez-faire.” There are communities living “off the grid” that do the same, although it is more difficult now. But there are still outlaw areas within states, even the US, that the authorities leave alone, and some of them ate pretty large communities. So, my point is that if one really, really wants to live “laissez-faire” one can, but it isn’t for sissies. There is “law” in these places, but not formalized.

    Most people prefer the protections of society and institutional laws, and are willing to accept some limitations. Once you start admitting limitations, there is no end to it. Very few people would agree on just what should be in and what should be out. The reason that there is no laissez-faire state in the world today may be because no populace wants to deal with what it takes. As far as I can see most people s=most interested in laissez-faire are utopians of the right.

  79. She is that rarest of breeds in today’s political landscape -and financial arena – an honest broker……

  80. Great idea. God forbid we have anyone actually, you know, accountable for this stuff.

    Better to have a part time “super oversight capacity” where you float by, meddle, collect your paycheck, and are no where to be seen when it all falls to pieces.

    I’d be happy to do this. Authority without responsibility ALWAYS leads to great results!

  81. @Dave

    Fair enough.

    But then presumably you are not prepared to assert that Communism failed, either. For the system implemented in the Soviet Union and its satellites is not recognizable in the writings of Marx and Engels. Communism in its pure sense has never been tried, either. So we can agree that it never failed?

    Just making sure we are adopting consistent semantics here.

  82. CBS from the West: Definitely agree with you there. However my knowledge of Marx and communism is not too much. I tried to read Das Kapital, but couldn’t get through the first chapter :)

    But, don’t worry, I get just as annoyed with the semantics when people call Obama a communist.

  83. Ms. Warren serves a useful role for Wall Street. People point to her and assume that something is being done. No realizing that the joke is on Elizabeth. At the first opportunity, Summers and Geithner will be dousing her tired flame with a bucket of cold water. What will she have accomplished except making a tiny noise.

    If a Warren tree falls in the forest and no one is around to hear the sound, did it really even make one. Nope!

  84. You know zanon there are a lot of other people out there besides Elizabeth Warren who thought, and still think, having a strong Consumer Financial Protection Agency is a good idea.

    Are they all idiots and charlatans? I don’t really know much about Elizabeth Warren’s academic work so I can’t comment as to her intellectual capacity. For all I know you may be right and she is nothing more than a brain-dead talking head lawyer. But instead of engaging in more or less empty ad-hominem attacks why don’t you explain what precisely you think is wrong with forcing banks to offer consumers straight forward financial products and disclose in plain language the true costs of some of their more risky services.

    You write: “To focus banks on making loans that will get paid back you need to…focus banks on making loans that will get paid back. It’s easy to see what enables this and what detracts from it.” If it’s so easy why have most of the large commercial banks failed so miserably at it for the last several years? Are corrupt bureaucrats and perverse regulations *forcing* them to make such terrible decisions? If so, which bureaucrats? Which regulations? Please describe the mechanism through which these bureaucrats and regulations operate on our poor helpless bankers.

    My final question is this: do you really think the current situation, where bankers have carte-blanche to foist on consumers any kind of “financial innovation,” they can think up is a pro-market dynamic? In the first link I posted above, Steve Randy Waldman, who in my opinion is one of the most lucid economics/finance writers blogging today, and is quite widely respected on both the right and left, makes a pretty compelling argument that the CFPA would actually be a pro-market force. Since you obviously disagree why don’t you try spelling out what you think will work instead of just offering up bromides about how easy it is to reform the financial sector?

  85. Excellent point, Plebeianswillrevolt. The saving grace in all of this is that Elizabeth’s idiocy is effectively neutralized by her ineffectiveness.

    I have no doubt that her more rabid worshippers, particularly the racist, misogynist, and homophobic Ted K, will somehow spin this into yet another incredible strength that his Sun God made incarnate blesses us with. Or Dirk, assuming he can learn to spell/read/cut&paste.

    My two simple points 1) banks should focus on making loans that will get paid back, and 2) the regulating authority should be accountable for the quality of that regulation is still the only sane foundation to build any kind of financial system on. Warren’s inane prattling, following models that have so spectacularly failed not 18 months ago, reveals herself again and again to be what she is: a clueless apparatchik, disconnected from reality, and incapable of telling the left side of the balance sheet from the right, or telling a reserve account from a money market fund.

    Although I’m sure she can tell an umbra from a penumbra at 40 paces. You all are welcome to each other.

  86. Zanon, those are certainly good starting points for financial reform, but I do not think you have done nearly enough to show why the CFPA proposal put forward by Professor Warren and endorsed by many in the fields of law and economics (including our host) is counterproductive to the goals you express. The negative reaction you have gotten from many commentators here is more a response to your abrasive criticism that is mostly lacking in substance than to any hero worship of Professor Warren. Again, if you have substantive criticisms of the CFPA please make them. I, along with many on this blog, enjoy hearing opposing points of view. What we do not like is personal attacks devoid of substance. Attack the policy, not the messenger.

  87. NKlein1553: There is an analog to the consumer protection agency in the world of business lending. It’s called the “ratings agencies”. They are a small cabal of designated third parties, with lengthy Government connections and protections, whose job it is to keep companies from making bad investment decisions by assessing risk on their behalf.

    It is a model that has completely, utterly, and unequivocally FAILED.

    It failed for a simple, obvious reason: third parties don’t give a damn about risk assessment because it makes no difference to them whether they get it right or not.

    And yet, and yet, in the face of this, we have exactly the same model being resurrected, like some stinking cadaver exhumed from a swamp, with the tiresome prattling of Warren declaring it the Second Coming.

    The point of banking is to make loans that get paid back.’s-newfound-populism-all-hat-no-cattle.html

    It is simplicity itself to get back to this model. Any entity that has a reserve account (ie. is a bank) must keep all loans on its books and engage in no activity outside of credit extension, servicing and check clearance. Lift all limits on FDIC insurance permanently. Basically, outlaw any instrument that makes banks not focus on their point, the reason why they were given reserve accounts in the first place.

    Warren undermines this, revealing an ignorance as profound as her arrogance, by this corrosive third party revenant. I can smell the putrefaction of zombie bureaucrat flesh just considering the idea — can’t you?

    You’ve asked a fair question in a fair way — I’m sure I’ve made myself clear enough that you can list for yourself all the instruments that banks used to make loans that did not get paid back, each and every one of which has been protected by the Obama/Warren/Geithner/Summers/Bernanke administration and remains in effect today. This was a strategy they have found to be WILDLY PROFITABLE, and I have no doubt we’ll see them executing the same strategy again in a few years given how hard the Obama Govt has worked to maintain the status quo environment.

  88. Again, a fair question asked in a fair way. I answered you a few moments ago when you first asked it in an earlier post.

    As for hero worship of Warren:
    – “She needs to be nominated for People’s Magazine most beautiful woman for 2009. No Joke.”
    – “Miss Warren has an attractive mind and heart. She has a glow of warmth in her smile and attitude which can disarm even the more cynical among us”
    – “She is that rarest of breeds in today’s political landscape”
    – “A growing legend in her spare time”

    You be the judge.

  89. Essentially you are advocating what Kevin James at the Bank of England calls “narrow banking.” (Warning: PDF file)

    Combined with your visceral dislike of government bureaucratic regulators this makes for an interesting, if somewhat schizophrenic, dynamic. Who do you think is going to be “outlawing the instruments that make banks not focus on their point,” (i.e. originating loans that will be paid back)? It will be regulators. And they will probably have gone to law school to boot. The answer to the problems you cite is not to do away with regulations and regulators entirely, but to craft sensible regulations that promote transparency and competition. I believe the CFPA, in it’s original conception at least, contributes to this. This is from the Steve Randy Waldman piece I mentioned earlier:

    “Vanilla financial products would be extensively vetted and and their characteristics would soon become widely known. Inevitable malfunctions would be loudly discussed in the halls of Congress, rather than hushed-up in rigged private arbitrations. Vanilla products would face discipline both from private markets (no one is suggesting we forbid other flavors) and from a very public political process. Politics and markets are both deeply flawed, but they are flawed in different ways, and we should take advantage of that. In Arnold Kling’s lexicon, a market in which vanilla and exotic financial products coexist and compete offers the benefits both of exit and of voice. Rather than being anti-market, vanilla financial products would help correct very clear market failures that arise from imperfect information and high search costs. It is the status quo that is anti-market.”

    In short, I don’t understand why you think a Consumer Financial Protections Agency shouldn’t be able to exist in a world of narrow banking. I’d point out that in the article from Naked Capitalism you cite Marshall Auerback has nothing but complimentary things to say about the CFPA. In fact, I can’t think of a single proponent of narrow banking (this website’s hosts included) who does not also support the CFPA. Yes, regulators at the Federal Reserve, the S.E.C., and a host of other federal and private agencies abjectly failed to protect the safety and soundness of the financial system. But failing to prevent a crisis is not the same thing as causing a crisis. Let’s be clear about who caused the mess we find ourselves in. Without a doubt, those who bear the most moral and economic blame are the irresponsible bankers, mortgage originators, and credit card dispensers interested in short term profits at the expense of consumer safety. Reestablishing consumer safety as a principle concern of the banking industry deserves to be at the forefront of any reform effort.

  90. P.S.

    Point well taken about the hero worship of Elizabeth Warren. Isn’t it a shame that as a society we are so obsessed with finding heroes and villains in every day life. Much more than the objectification of women and the glorification of violence, this is Hollywood’s true sin. Tyler Cowen, who I don’t agree with on many issues but still respect a great deal, gave a fantastic talk on this topic recently:

  91. NKlein: I am not proposing narrow banking. Narrow banking simply punts the question by moving credit extension to another entity, bringing all the same problems along with it. FDIC does fine to protect depositors money, except it’s stupidly limited.

    What I am proposing is the common sense and obvious fact that banks need to focus on making loans that will get paid back.

    Anything that sharpens this focus is good. Anything that dulls this focus is bad. The CFPA dulls this focus, and is therefore bad. It dulls this focus because, at its heart, it believes there are good loan products and bad loan products, which is the type of asinine nonsense I expect out of a Harvard Law Professor/bureaucrat/political apparatchik (is there really a distinction any more?!). There ARE good loans and bad loans (ie. loans that get paid back and those that don’t) but this has as much to do with whom the loan was given to as the credit extension vehicle itself.

    Therefore, its existence means that banks will focus on getting their products passed by the CFPA, instead of, you know, judging the credit risk of the loan WHICH IS THEIR ENTIRE POINT. When the whole thing falls to pieces, as it will, the banks will say “well the CFPA passed the loan product!” and the CFPA will say “whocodanode”.

    “whocodanode” is an answer the CFPA is comfortable with because, they don’t give a damn one way or the other. They have plum jobs waiting for them after they have served their term, either back at Harvard Law School, or at the banks they regulated to advise them on how to get products passed by the CFPA.

    We have seen EXACTLY this dynamic play out in EXACTLY this way with the credit rating agencies with FAIL consequences not 18 months ago. I mean seriously, is memory that short? Is the point I am making that complicated?

    If Elizabeth Warren had said “we have 4 ratings agencies, who all failed, let’s add a fifth!” would the commentators on Baseline Scenario be vibrating with ecstasy they way they did to her extending another obviously wrong, failure, clueless, policy? Actually, probably yes.

    I am pro regulation that has a brain. And people wonder why I am neither Democrat or Republican. The very notion of competant Governance has become archaic in this cess pool.

  92. I think what Warren says is true, we need to regulate banks more and break them up so they are not TBTF. However it is easier said then done and she doesn’t seem to realize this.

  93. You kinda have a personal problem. I don’t think anyone here is giving you any credit about this far down in the page. Go see a shrink, you’ve got anger issues.

    “But those are all regulatory tools. Regulations, over time, fail. I want to see Congress focus more on a credible system for liquidating the banks that are considered too big to fail.”

    … is brilliantly put. Not unique (it’s being said in a few places more recently) but bravely and clearly said. The President should just come out and say those exact words but he won’t because he has no guts.


  94. I think at this point “knowledge” is actually a problem. We have insiders with great insider knowledge reaming out the system from the inside. Bad.

    What is needed is leadership. Someone who will step in front of the bull and grab it by the horns and wrestle it down. Knowledge helps, but reliance on knowledge alone will KILL you in this environment. Whoever does this job right is in future TOAST in the financial and political community (Paul Volker, anyone?) so they will need patriotic balls-o-steel (in the figurative sense) and a willingness to forgo personal riches and political influence for the balance of their career.

    Tough order to fill. Not many would do it. But Warren appears to have some of the chops for it.


  95. Sure. Because we have respect for the law. You don’t like the outcome, change the laws. That’s what RICO was for.

    Jeezuz. What’s your eff’n problem?

  96. zanon: “it’s very simple. The point of banks is to make loans that will be paid back.”

    Err, not exactly. It is to make loans that will mostly be paid back. Money is created when loans are not paid back, the way we do it now.

  97. You don’t need to destroy the oligarchs, simply render them permanently harmless. Forcing them to become humiliatingly puny accomplishes that.

  98. Would you agree that attorneys that represent organized crime are ballsy enough to do whatever they need to do to win? Including BREAK THE LAW? The LAW is meant (for non sociopaths) to work both ways, not just handicap the law abiding.

    That, cougar, is my eff’n problem. They can’t play nice, they can go live on a different planet.

  99. Zannon,

    “Narrow banking,” refers to policies that severely limit the kinds of assets banks may use depositors’ money to invest in (the PDF I linked to mentions only money market mutual funds, but I’ve seen other presentations exploring different asset classes that can be considered “safe”). If I’m understanding your argument correctly, your objection to “narrow banking,” as defined here, is you do not approve of third parties determining what is or is not a “safe investment.” Instead, you argue banks (where a bank is defined as any institution that has an account at the Fed) should not be allowed to make any sort of investment at all. In your words: “banks will keep all loans on their books and engage in NO activity outside of credit extension, servicing and check clearance” (emphasis mine). Basically, a bank just becomes a place to park your cash. If you want to earn interest through investment you’re going to have to go somewhere else. Am I understanding your argument correctly? If I am, can we then call this proposition “extremely narrow banking?” (trademark) =)

    While I wouldn’t go as far as you (I think some forms of securitization should still be permitted. For example, banks serving predominantly rural communities should be allowed to offer products that enable farmers to hedge risk), I readily concede that the burden of proof for introducing any new financial product should be on the individual proposing its use. As I am not qualified to debate the merits of the many different financial products used for securitization (where’s Bond Girl when you need her), let’s just assume your proposed firewall between the deposit insurance and investment functions of banks becomes a reality. Even so I still think there would be a place for a Consumer Financial Protection Agency.

    IMHO, if the events of the past year prove anything it is that banks have become either unable, or more likely unwilling, to judge the credit risks of the loans they originate. You seem to mostly attribute this failure to banks’ decision to outsource their responsibility to assess risk to third party rating agencies such as Moodys and Standard & Poor. I think this misconstrues the role rating agencies played in causing the financial crisis. Rating agencies were not paid to assess individual mortgage or credit card default risks, but to judge the safety and soundness of large numbers of these risks bundled into single collateralized debt instruments. Banks were able to market these instruments as safe to investors because they basically paid rating agencies to look the other way. Bankers had no incentive to do the hard work of assessing individual default risks on their own because they were able to earn large fees simply by pawning off bad risks to investors who were either too stupid or too greedy to look behind the AAA curtain. Obviously this dynamic has to change. We both agree on that. Your contention is we have a stark choice: either address the kinds of loans banks are permitted to make, or address the practice of allowing banks to securtize and market their loans to outside investors. If I’m understanding your arguments correctly, you would say addressing the second issue is far more important than the first. I on the other hand tend to see the first issue as more important. If banks did not make risky loans in the first place then there would be nothing to fear from securitization. Moreover, even if securitization were banned banks could still push destructive products on vulnerable populations. Exhibit one is the disaster that is the credit card market. In any case, I see no reason why we cannot address both these issues at the same time. Can you explain what exactly is stopping us from simultaneously erecting the firewall between deposit insurance and investment you propose and establishing a consumer financial protection agency?

    Finally, I do not think your comparison of the CFPA to third party rating agencies like Moodys and Standard & Poor is apt. Unlike third party rating agencies, the CFPA would not be an unaccountable private company. Its recommendations would be fully transparent and appointments to the agency can be made as long or as short as need be to insure independence and accountability. Banks would be forced to offer approved financial products, but no one would be forced to use these products. There is no reason why, as per your proposition, banks could not be forced to keep these products on their books indefinitely. All of this is not to say there is no danger of regulatory capture. But danger of capture alone does not warrant giving up on attempts to protect consumers. That’s nihilism. After all, for all its problems the F.D.A. functions reasonably well to protect consumers from dangerous products. I just don’t agree that having a similar agency to protect consumers from similarly dangerous financial products does anything at all to dull banks’ focus on getting consumers to pay back their loans. Maybe I’m wrong, but I don’t think I deserve to be called names for advocating this point of view. The same applies to Professor Warren.

    Anyway, sorry for how long this turned out to be. I’ve taken too much time on this thread so this is probably the last thing I’m going to write. It was interesting hearing your point of view, thank you for your explanations. I think if you had expressed your views in more detail earlier you wouldn’t have attracted as much vitriol. I know Ted K has expressed similar opinions about separating the investment side of banks out from the commercial lending side in the past. Interesting how people who have similar views can so quickly come to be at each others throats. Again, thank you for taking the time to explain your views more fully.

  100. Uncle Billy,

    I find the sentiment of you express here to be difficult to reconcile with many of your other comments where you warn readers to beware the leader who will supposedly emerge at the end game of our current economic crisis. When and if this demagogue appears he/she will, by definition, not come bearing a very nuanced story. Probably it will go something along the lines of this: “Mexicans are stealing your jobs. Oppress brown people.” Should we embrace that story? It’s certainly simple.

    As for Tyler Cowen being a “hack;” I don’t know, I find his writings at Marginal Revolutions to be rather interesting. His more academic writing is also quite accessible. While I don’t usually agree with him, I am certainly able to admit he presents his arguments in a clear and comprehensive manner. I don’t know if this is the appropriate forum for such a discussion, but if you have substantive criticisms to make of his work (as opposed to who pays him or what his grandfather’s middle name was) by all means go ahead and make them. But please, try keep the gossip to a minimum. I spend enough time with fourteen-year-old girls at work (I’m a teacher folks, get your heads out of the gutter). =)

  101. Uncle Billy,

    Your knowledge of Yiddish is impressive. Am I correct to assume your comment is directed at me? Or is it you who is “blundering around like a fart in the brine; and has no idea where he’s going or what he’s doing there?” If I am the one who is confused please feel free to explain why. I suspect you feel I do not fully appreciate the likelihood the CFPA will be captured. This is a fair criticism, but again I do not see why a fear of capture should preclude any attempt at all to establish an agency whose purpose is to protect consumers. You’ve done nothing to show that the actions you evidently prefer, breaking up big banks and limiting the marketing of financial products (actions I support by the way), cannot be undertaken in conjunction with establishing a consumer financial protection agency. Do you have anything to offer besides insinuation and innuendo?

  102. I offer a few things, Klein, which you would know if you’d been hanging around for more than a few minutes:

    1) Observations
    2) Suggestions
    3) Disgust
    4) Tempered optimism regarding human nature
    5) Rabid skepticism, and Turbocharged bullshit detector

    You seem to write in earnest, so I’ll just suggest you do more than just discuss current events with a cool head: Look behind the talk and what’s being presented to you and ask “why” much more frequently. To get at the answers to “why” you need to examine the people who are feeding you the trip, their backgrounds, relationships and motives. A fair number of very intelligent people who frequent this blog still don’t realize, and/or often forget, that it, itself, is a PR device. Ask yourself why no one grappled with the involvement of Warren with one of the biggest pirate raids of the early aughts. Warren has a warm, motherly manner and tone, as does the CFPA, and you.

  103. Consumer protection is directly correlated with consumer knowledge. Until consumers have skin-in-the-game in the form of either intellectual and/or financial capital, investor protection is a racket. Whether it is said by Don Corleone or Don Columbia Law School, protection is a racket. When is the last time an aggrieved customer got a check from a regulator? Everybody talks about shareholder rights. You cannot have shareholder rights that are disproportionate to shareholder responsibilities; otherwise, you create subsidies. It is either rent seeking on the part of the public sector or free riding on the part of the private sector. Disproportionate governance creates subsidies. It is similar to price support subsidies for dairy farmers. With controls, you get black markets and/or supply shortages. Conversely with subsidies, you get oversupply and excess capacity of products. It is not a market solution. Absent proportionality, your regulatory services are priced with an average cost model as a function of an unappropriated surplus in the name of investor protection.

  104. Really? The “oversupply and excess capacity of [innovative financial] products,” we currently see in the market is the result of the overly burdensome regulatory regime set up over the past thirty years or so? Got anything else to sell us?

    I’m all for increased consumer financial education (I’m a public school teacher who teaches personal finance classes occasionally), but first the playing field has to be made equal. There is simply no way that your average consumer is going to be able to understand the bewildering array of clauses and sub-clauses inserted into most current credit card, mortgage, and other financial service contracts. This is not a knock on consumer intelligence; the fact is many financial products are are purposefully made complicated to hide their true costs. This appears to me to be a clear case of market failure do to imperfect information, high search costs, and the necessity of having access to credit in a modern economy. The CFPA corrects this failure by offering consumers the option of choosing standardized financial products whose costs, risks, and benefits are spelled out in plain English. Again, all the CFPA does is provide consumers with an OPTION to purchase these standardized products (at least that’s the way I understand it, if I’m mistaken and the CFPA is mandating certain products be purchased I would not be in favor of it). If these standardized products are so terrible no one will use them. What’s to fear? Until the distributors of financial products and consumers are placed on a level playing field all your talk about balancing share holder rights and responsibilities rings hollow.

  105. LOL Uncle Billy, I’m going to choose to take your comments about my cool writing style and warm, motherly tone as a compliment. Even though I’ve only been posting comments here for a month or so, I’ve been reading this blog for about seven months now. I really do enjoy reading your comments and appreciate the information you bring to the conversation, it’s just that I really can’t see how providing consumers with an option to purchase standardized financial products whose costs, risks, and benefits are spelled out in plain English will lead to something sinister. However, I’m willing to be convinced if you can spell it out for me. I also want to apologize for the snarkiness of my last two comments, I regretted writing them as soon as I hit the submit button. My grandmother is always cursing at me in Yiddish to get a wife already so I guess I’m just sensitive to Yiddish insults. Not that I understand anything that’s being said without looking it up first.

  106. That hollow ring you hear has over forty years of financial services industry experience that include formulating regulatory policy for the National Association of Securities Dealers (“NASD”), managing regional brokerage operations for retail, institutional, and corporate clients, creating B3 (Brains, Bucks, and Been-there) metrics for economic development, and providing a practitioner’s perspective for the privatization of the former Soviet Union in the areas of corporate governance and regulatory development of the Ukrainian Capital Market. He holds a BA in history from Bates College, an MBA in finance from American University and has taught MBA-level management and finance at the Kogod School of Business. I serve on the Advisory Boards of Yorktown University and Teton Sands.

    Regulation creates oligopolies that favor the fat cats. You’re throwing Brer Rabbit in the briar patch. Just ask Madoff. It was competition Markopoulos that played Sherlock.

    Author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System”

    PS Twenty years of being regulated, no red marks on my CRD file. (Although that just proves the contrapositive)

  107. Great, you’re really smart and well qualified. I get it. Now care to respond to my comments?

  108. Fine, read the book so we are on the level playing field that you seek. To enter into such discussion you should have the qualified capabilities to meet your responsibilities. You probably have a driver’s license, but not a cab or 18-wheeler license. Regulation is operational insurance. Forcing the “noise traders” to become qualified is analogous to passing driver’s ed. in terms of the system becoming more efficient (minimize time, cost and effort. It is a market (vs. federalis) solution to the end-objectives that you seek.

  109. Der vos farshteyt zayn narishkayt iz a kluger mensch.

    I’m not against the CFPA, I’m indifferent. Most of the reason for the indifference is that I see the consumer use of financial products trending way down in the coming years. And, it’s a fig leaf being presented to us by a spokesmodel. (They come in both sexes; no slight intended). We are entering a downleg so big that things like this, I think become almost insignificant. People are going to be unemployed, and bartering and generally trying to survive. Financial products, imho, just won’t be much of a concern. It’s a feel good measure, meant to keep us puttering along as the economy ratchets down.

  110. A sheynem dank!

    That is certainly a possibility. Another possibility is that as the real economy continues to deteriorate more and more people will turn to credit cards and other financial products to maintain their standard of living. Looking at the data though, your position seems to be the correct one:

    Even so, on balance I still think establishing a consumer financial protection agency is a worthwhile goal to pursue. Even though credit card use has declined somewhat, debt is still a huge problem for many (including even me, and I teach personal finance occasionally). I just can’t believe that debt peonage for a large subset of our population is a necessary component of a modern twenty-first century economy.

  111. Advertise much? No, but seriously, insulting people is a real good way to get them to buy your book. They teach you that at one of the fancy schools you went to?

  112. Nklein: good to see you back here.

    “Narrow banking” operates on the assumption that banks use deposits to make loans, and thus they should only be allowed to make safe loans (ie by loaning money to treasury).

    This is incorrect. The general cluelessness on this point is why i hold academics and the politicians they direct — which includes the sainted Warren — in so low regard.

    Banks do not loan out deposits. By contrast, bank loans CREATE deposits. Therefore, the correct and sensible locus of safety is in the CREDITWORTHINESS of the loans which is the same simple point i make again and again. maybe too simple for people to understand. certainly too simple to make academic or political career out of.

    Narrow banking does not understand this. FDIC keeps deposits safe just fine, except it is limited (capped at $250K or whatever) which enables money markets which are terrible and unstable. Problem is keeping loans credit worthy. narrow banking is as clueless as the rest. it solves a problem that does not exist and makes existing problems much more worse.

    The ratings agencies are not private companies. They are public/private partnerships because they have been given special dispensation by Govt to be ratings agencies. One usually assumes that quasi-private companies in competitive market have more incentive to get things right than monopoly Govt agency. You live in a backwards land here where monopoly Govt agency with unfirable bureaucrats who do not care give a damn one way or the other. If you have no noticed SEC did not give a damn, nor did Fed, nor really did FDIC. Has a single bureucrat been fired because of rubbish decisions or mistakes? I have not heard of any and would like examples.

    But the complete lack of incentives to get things right is only one reason for complete failure. The other is simply that creditworthiness is not a function of financail product alone. it is also a function of who credit is extended to. There are not good or bad loan products, there are good or bad LOANS! Again, this is simple and obvious point but is completely missed by Her Highness Elizabeth Warren who thinks all you need to do is get rid of “bad mortgages”. A bank that sufficiently avoids capital controls can make NINJA-type loan using 20% down 30 year fixed or the equivelent.

    Banks keeping loans on books and being blocked from secondary market solves problem. CFPA makes problem worse in isolation. In combination CFPA is superflous, but leaves potential to make things worse as it dulls incentive to make credit worthy loan. It is like someone passed water into a wine bottle. Still want to drink it? Wine was very good.

    FDA is without a doubt the inspiration for CFPA. Unfortunately, since Warren Bernanke etc. do not undestand banks, this is like saying “sailing boat is like flying airplane”. analogy is not good enough. understanding the FIRST THING about industry and making right choices is critical. Otherwise you do some idiot thing like attach anchor to a plane. Then you have some appartchick say “OK, we’ll make it a little anchor” as if that is some kind of improvement.

  113. You are correct. Consumers have no chance of outsmarting tricky bankers.

    Standard product requirement clause no longer in CFPA. Not a harmful requirement, actually. If it just FDA style approval, which IS harmful for reasons I have gone on and one about at length elsewhere.

  114. Anyone who thinks banks are in any way part of “private system” is either idiot or thinks the rest of us are.

    i know what “private system” looks like. It looks like the 4 rent signs where my local dry cleaners and donut shop used to be.

  115. And yes. In my world banks would play 2 functions. 1: place to park your cash and handle check clearance (which is nice feature you cannot get with safe deposit box).

    2. Bank also would extend all private credit. Extension of private credit MAKES deposits, so it is good the two are in same institution. Private credit extension could be of whatever quality regulators and investors are comfortable with. Capital controls would restrict lending. Deposits would be backed 100% to any limit by FDIC. Banks would not be allowed to participate in secondary markets in any way.

    Non-banks can do whatever they please. Note, there is no securitization so all of that is gone, and no Money Market funds and therefore requirements for commercial paper (thanks Gods). Still you can prop trade, do advisory services, etc.

    Please do not associate this with narrow banking since the deposit side of the equation is easy and not a problem. The question is entirely: what enforces responsible private section credit extension?

    Keeping loans on books makes bank responsible 100% for quality of credit analysis. If loan goes bad, bank that made loan eats it. Securitization makes no one really responsible for loan quality and thus destroys all incentives to not LIE. CFPA destroys responsibility in the same way.

    If rural farmers want to hedge they find a counter party and hedge. This does not require any credit extension and they are free to engage in that with any entity that is not a bank.

  116. You said “but first the playing field has to be made equal.” I agree but you want rights without commensurate responsibilities, otherwise known as “free-riding” that leads to moral hazards.

    We are saying much of the same. I am putting forth a lesson plan from which you can derive a level playing field. The CFPA is just another bureaucratic rearrangement of the “deck chairs.” Doing the same thing over-and-over again is the definition of insanity according to Einstein. The CFPA is renovation not innovation. Former SEC Secretary Jonathan Katz echoed these concerns: “when the SEC adopts a rule it believes it has solved whatever problem it is addressing. … The solution is to rethink the rulemaking process. Instead of assuming, as lawyers do, that rules are self-effectuating, the SEC should adopt a scientific approach.”

    At the expense of “selling” see: We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of five SFO articles on capital market governance.

    Book Review: Brenda Jubin, Ph.D Thursday, October 8, 2009

  117. Zanon,

    Your set of comments here is very similar to a lot of what another contributor to this blog, perkurowski, writes. According to perkurowski most of the blame for the current financial crisis should be assigned to the misguided capital requirement regulations set up at the Basel II conference back in 2004. By mandating higher capital requirements for investments not rated AAA (and conversely lower capital requirements for AAA rated investments), the Basel II regulations created a perverse incentive for investors to pile into AAA rated instruments without really thinking through what they were investing in. Basically the excessive leverage that ended up sinking us all was encouraged and subsidized by the world governments. Classic case of unintended consequences. Perkurowski’s story is quite compelling and unfortunately for me it doesn’t really fit in well with the narrative I have presented here where stupid/greedy bankers are mostly to blame. I probably struggle with perkurowski’s writing more than anything else I read on the internet.

    Which brings me to your points. You’re correct that the standard product requirement clause is no longer in the proposed CFPA legislation. Since that was always my favorite part (all of the pieces I linked to before were lamenting its demise. Steve Randy Waldman was quite explicit in saying without vanilla products meaningful financial reform was over) now that it’s gone maybe I should rethink my cheerleading for the CFPA. Like perkurowski, the perverse incentive story you tell is quite compelling.

    My only problem with the solutions you propose, banning securitization and forcing banks to hold onto 100% of their loans (things I also support), is I don’t think they do much to address the problems in the credit card market. My reading of the situation is that many of the big banks did not engage in much securitization and marketing of their credit card debt holdings. I know J.P. Morgan has been suffering quite a bit lately because it has so many bad credit card loans on its books. But this is mostly do to astronomically high unemployment rates, normally banks do quite well in the credit card market even if many of the loans they make eventually end up going bad. Mike Konczal over at Rortybomb has a pretty good explanation of why this is so here:

    This is a dangerous dynamic for consumers, and for me it’s actually quite personal as I have had some mildly bad experiences with credit cards in the past. As it doesn’t seem to me that banning securitization will do much to change the way the credit card market is structured I’d hoped the CFPA would be able to address some of the more severe inequities in the system. But now that I think about it maybe instead of having an agency ban certain products or practices and approve others, a better way to go about doing things would be to either implement policies that encourage the development of safer products (through subsidies perhaps) or have the government create those safer products itself. Steve Randy Waldman has an interesting proposal along those lines toward the end of this post:

    You’ve certainly given me some things to think about. Thanks for that!

  118. Two more quick, but unrelated points:

    1) I haven’t really studied any accounting so I could possibly be wrong about this, but it was my understanding that funds banks loan out count as liabilities on their balance sheets. In a fractional reserve system banks fund their liabilities in part with assets (i.e. deposits, stocks, bonds, and other forms of debt or equity) and in part with…well nothing. This gives banks the power to literally create money and is the reason why they are heavily regulated. StatsGuy had a very interesting comment about this and how it relates to the current financial crisis here:

    So I guess my point is I’m not really sure what you mean when you say “bank loans CREATE deposits.” Do you mean when the person who took out the loan pays back what he or she owes money is created?

    2) I probably phrased my comment about third party rating agencies being private companies poorly. The point that I was trying to make was not that third party rating agencies are completely separate from the government, but that they are not transparent entities. Like private companies their books are not open. No one from the public can come in and demand to see the metrics they use to assign risk ratings. My understanding of the original CFPA proposal was that the proposed agency would not operate like that. Obviously the standardized products that would have been offered to the public would have been able to be viewed and evaluated by everyone under the sun. I also thought that deliberations about the kinds of products that would receive approval and those that wouldn’t would also be in the public domain. This could be different in the current proposal though. Maybe someone with more up to date information could let me know.

  119. Will answer your post above and below (threading is getting messed up).

    1. I have not read perkurowski, but what you describe if failure of regulation. Capital requirements is what constrains lending, so you have private capital in first loss position against loans. The riskier the loan, the more capital you want to set aside for losses.

    If people game the system with bogus ratings of course it will be screwed up. THis is why you need to keep loans on books, that way you are only lying to yourself. Basel Accord makes sense. Bankers find way around it to enrich themselves. Regulators have no clue or wink and nod. This is why all off balance sheet vehicles should be obviously illegal. It is a more subtle argument against securitization in general.

    2. I like Steve Waldman and respect him. he has come very far in his understanding of banking, which is excellent.

    3. Regarding credit cards. Yes, you have to accept that credit is pro-cyclical. When things go well, loans do better and vica versa. Nothing can be done about this, so just accept. Credit card debt though is not fundamentally destroying aggregate demand and banks, it is mortgage debt primarily and now CRE.

    This is one area where CFPA authorization would help actually. But it is pimple on the bottom of credit problem. Net, CFPA is still much more harmful.

    4. Your understanding of banking is incorrect. Not your fault, idiots at school taught you wrong. The correct mechanism is explained here:

    This is actually a deep and profound topic and not fit to raise on this blog. Point is that, if you go through accounting, you see that when a bank makes a loan, it creates the deposit. Banks do not loan out deposits. Therefore all the “narrow banking” nonsense is complete irrelevant and only serves to reveal their ignorance of finance and unqualification to have anything to do with banking system. Sadly they all seem to be economists and bankers, so I guess we are in deep trouble. Warren Mosler has some very technical readings that go through this as well, you can get via the wonderful Google.

    5. Regulators tell you what they want to tell you. Why do you think all this “audit the Fed” stuff has come up. I don’t care about transparency, I care about accountability and incentives. Ignorant busybody gadflys can produce bad decisions by the bucketload also.

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