By Simon Johnson
On behalf of key financial sector players, Keybridge Research has just published a report that claims the Dodd-Frank reforms for over the counter derivatives market “could cost 130,000” jobs. My MIT colleague, John Parsons, deftly takes this apart on his blog today – pointing out that the technical basis of this report is very weak (or nonexistent).
John is an expert on these issues and spends a great of time with nonfinancial companies that use derivatives in a sensible and responsible manner. His critique should carry weight – including with the relevant congressional hearings scheduled for this week.
But I would go further.
This is the “end-users coalition” at work again – a notorious lobby group for the derivatives industry that had great negative impact on the reform process in the past 18 months. And it is backed in this instance, apparently, by the full might of the Chamber of Commerce and its “Center for Capital Markets.”
The Keybridge document itself is pure lobbying masquerading as research. We know that financial sector players like to have as little capital at possible in all aspects of their business – a reckless degree of leverage is how they boost their return on equity (as Anat Admati is explaining to anyone who will listen). The Keybridge survey seems to have been structured to elicit responses that are pro-leverage.
The central issue here is system stability. Dodd-Frank is not perfect but that legislation – and Gary Gensler at the CFTC – have been arguing for sensible leverage-reducing restrictions.
If Congress now presses the regulators to defer to the industry lobby, that would be reckless and foolish. To do so on the basis of Keybridge’s “research” would be completely misleading.
This is not any kind of research. This is people who want to overleverage and risk the system – because, once again, they will get the upside and taxpayers/all citizens get the downside.