By James Kwak
Last week I disagreed with Paul Krugman’s dichotomy between limiting banks’ scale and scope and restricting banks’ risky behavior. Today Krugman has another op-ed, this time criticizing the current Senate bill for not being sufficiently “fool-resistant.” This time, I basically agree with him.
The problem with the Dodd bill, in Krugman’s words, is that “everything is left at the discretion of the Financial Stability Oversight Council, a sort of interagency task force including the chairman of the Federal Reserve, the Treasury secretary, the comptroller of the currency and the heads of five other federal agencies.” Citing Mike Konczal,* Krugman points out, “just consider who would have been on that council in 2005, which was probably the peak year for irresponsible lending” — Alan Greenspan, John Snow, and John Dugan. (If you’re following the logic of Krugman’s argument, those would be “fools.”)
The better alternative is to have hard-coded restrictions in the bill itself, to reduce agency discretion. I agree with that, and that’s why I think size caps should be in legislation — not just the power for regulators to set size caps.
Here’s how Krugman concludes:
“I know that getting such things into the bill would be hard politically: as financial reform legislation moves to the floor of the Senate, there will be pressure to make it weaker, not stronger, in the hope of attracting Republican votes. But I would urge Senate leaders and the Obama administration not to settle for a weak bill, just so that they can claim to have passed financial reform. We need reform with a fighting chance of actually working.”
But I’m not hopeful. First of all, this isn’t just about politics; as far as I can tell, Treasury Secretary Tim Geithner actually disagrees with Krugman and thinks that it’s better to leave things to the discretion of regulators. Here are Mike Konczal and Felix Salmon discussing Geithner’s position.
Second, it’s largely about politics. Bear in mind, I’m not a political consultant. But if I only cared about the politics of financial reform, not the substance, this is what I would do. The Obama administration doesn’t want to lose, say, 52-48 (that’s 52 in favor of the cloture motion, 48 against), because that’s a political liability; then they failed to reform the financial system, and they were blocked by a bipartisan coalition (41 Republicans and 7 “Democrats”), and the Republicans will say it’s because they were being too extreme. So I think they will do everything they can to get all 59 Democrats on board. Then they can say to Mitch McConnell: “Either you let us pass this bill, or you block it on a strict party line vote, which will prove to the country that you, the Republicans — not us Democrats — are in bed with Wall Street.” That’s a win-win situation; either they get their bill and declare victory, or they have a real issue to use in November.
But the cost of keeping 59 Democrats on board is a very, very weak bill — on TBTF, on derivatives, and on consumer protection. And that’s where I think this is heading.
Now, the administration could say, “This is a weak bill, but it’s the best we could get given the opposition, and we’re going to keep fighting in the future.” But I don’t think they’ll say that, because politically you want to have accomplishments, and calling your own bill a weak bill is like shooting yourself in the foot. So I think they will take the weak bill and declare victory.
* Can I point out again that Mike Konczal was our guest blogger before he was Ezra Klein’s? Krugman says that Mike’s blog is “essential reading for anyone interested in financial reform.” Mike, when you’re all famous, don’t forget us little people.