By Simon Johnson
In Washington today, “bipartisan” is a loaded term. The traditional usage of bipartisan is an agreement across the usual political divide – sometimes a good idea and in many cases the only way to get things done. But a darker meaning applies all too frequently – a group in which the members, irrespective of party affiliation, are very close to special interests and work to advance an agenda that helps a few powerful people while hurting the rest of us.
Financial deregulation in the 1980s and 1990s was pushed by both Democrats and Republicans. It reached its apogee when Alan Greenspan, a Republican, was chairman of the Federal Reserve and Robert Rubin, a Democrat, was Treasury secretary. Bill Clinton was president; Newt Gingrich was speaker of the House.
This is probably why President Obama and Mitt Romney shied away this fall from the issue of who was responsible for the financial crisis that brought us the deep recession and slow recovery of the last five years. Both political parties share culpability for allowing parts of the financial sector to take excessive risk while financing themselves with a great deal of debt and relatively little equity.
In this context, the new Financial Regulatory Reform Initiative of the Bipartisan Policy Center seems eerily familiar.
The introductory white paper published last week reads like a sophisticated manifesto preparing us for another round of deregulation. We have come a long way since the 1990s – and most of it has been downhill. No reasonable person can now espouse the kind of views that Mr. Greenspan repeatedly laid out during his libertarian push to allow banks to become as big and as dangerous as they wished. (In our book, “13 Bankers,” James Kwak and I go through the historical record of deregulation – and Mr. Greenspan emerges as a central character.) Mr. Greenspan’s bipartisan notion – that any financial-sector mess can be cleaned up easily and cheaply – is now completely exploded.
Still, the new initiative, underwritten by the Heising-Simons Foundation, seems likely for three reasons to push strongly for the rollback of important parts of the Dodd-Frank legislation.
First, the white paper frames the entire issue in a way that is incorrect – but highly informative about the attitudes at work: “Evaluating financial regulatory reform requires consideration of the inevitable trade-off between market stability and the combination of innovation, risk-taking and growth” (see Page 6).
There is no such trade-off. Financial crises destroy growth – and for a long period of time. If you want to undermine American productivity, as well as the power and prestige of the United States, step back and allow the financial sector to go crazy again. In the last decade, the United States lost its stability and its growth. It’s too bad the presidential candidates were not pressed on this point during the recent debates, and particularly on the cost of the crisis, estimated by Better Markets to be more than $12.8 trillion.
Second, of the task force’s 14 members, an overwhelming majority are very close to the industry’s way of thinking. Six are lawyers whose practices – according to their biographies on the Financial Regulatory Reform Initiative’s Web site — involve working with major financial-sector players. Two of them, Annette L. Nazareth and H. Rodgin Cohen, are among the most well-known advocates for Big Finance (see this profile of Ms. Nazareth from Bloomberg Businessweek). Another of these lawyers is John C. Dugan, comptroller of the currency from 2005 to 2010, head of an agency famous for being very friendly to the banks under its supervision. Mr. Dugan also features in “13 Bankers” – not as influential as Mr. Greenspan but still a person very much identified with deregulation and nonregulation.
Another two task-force members are senior figures at companies – Oliver Wyman and PricewaterhouseCoopers – for which Wall Street firms are important clients. Robert K. Steel is also on board; he is currently a deputy mayor in New York City and was previously chief executive of Wachovia and worked at Goldman Sachs for more than 30 years. Mark Olson, currently with Treliant Risk Advisors, is a past president of the American Bankers Association.
Powerful people in the industry were, naturally, happy to have regulators back off and supervision to become super-light in the past. In fact, they lobbied long and hard to make this happen – including, for example, the right to use their own risk models in calculating how much equity capital they needed to have. I hear the same arguments today.
With 10 of the 14 initiative members so close to big players in the financial sector, can this initiative in fact be “independent, objective and fact-based”? Their clients do not want to be regulated effectively.
Not everyone in this group should be considered close to big banks or Wall Street more generally. Three distinguished academicians are involved – John C. Coffee Jr., James D. Cox and Thomas H. Jackson. We shall see to what extent they can provide a counterweight to the financial sector. There is also one independent member from outside the academic world, Eric Rodriguez, vice president at the National Council of La Raza, which the Bipartisan Policy Center describes as “the largest national Hispanic civil rights and advocacy organization in the United States.”
If the organizers of the initiative were seeking experienced industry professionals, they should have invited the former insiders who form Occupy the S.E.C. — and who recently submitted another impressive letter on the Volcker Rule in response to a request from Representative Spencer Bachus, Republican of Alabama and chairman of the House Financial Services Committee, for “alternatives” to it.
Third, while the internal governance structure of the initiative is somewhat unclear, there is no reason to be optimistic about the decision-making process and the work product. The directors, Martin Neil Baily and Phillip Swagel, are former senior government officials who now work at think tanks (Mr. Baily is at Brookings and Mr. Swagel at the American Enterprise Institute and the Milken Institute) and a university (Mr. Swagel’s primary appointment is on the faculty of the University of Maryland).
Both are thoughtful people who are open to discussion. Mr. Swagel recently invited me to a forum at the Milken Institute where we debated – along with Harvey Rosenblum of the Federal Reserve Bank of Dallas and Peter Wallison of the American Enterprise Institute – whether big banks should be forced to become smaller (and, in my view and Mr. Rosenblum’s view, less dangerous). Mr. Swagel and Mr. Wallison strenuously opposed the proposition (you can watch this discussion on the C-Span archive).
Two senior advisers, whose role is not made clear on the Web site, seem very similar to most task-force members in terms of their background and current work. Gregory P. Wilson worked in the past with the Financial Services Roundtable (a lobbying group for large banks) and is still an external adviser to the group. James C. Sivon, a top banking lawyer, is a former senior executive at the Association for Bank Holding Companies.
The director of the initiative is Aaron Klein, a former senior Treasury official (under President Obama) who previously worked for Senator Chris Dodd, Democrat of Connecticut. Mr. Klein wrote the white paper, along with Mr. Baily and Mr. Swagel. It is striking – and disappointing – to see such figures endorse the idea of a “stability-growth trade-off” (see Page 7) for modern financial regulation in the United States.
This is the same attempted frame for the issues that I hear regularly from industry lobbyists and their lawyers (for example, at the Commodity Futures Trading Commission hearing on the Volcker Rule in May).
This is entirely the wrong way to look at our financial sector, including the global megabanks that have come to predominate. This particular special interest has become too powerful – and is working hard to repeal the restrictions that can limit its ability to damage the economy again.
Subsidizing, with implicit guarantees, the too-big-to-fail financial institutions is unfair and dangerous. Such subsidies distort and destroy markets. They undermine stability and make it harder to sustain growth. Fewer people will benefit from the growth that we do have.
Let’s be honest: Everyone would like an arrangement in which they personally get the upside and the taxpayer gets the downside. Imagine how much fun it would be to visit Las Vegas on that basis – and the size of the bets you would make.
Asked to comment, Mr. Swagel said, “It is easy and wrong to say that efforts to change Dodd-Frank are to weaken it.” He suggested that this bipartisan initiative could improve financial regulation and that such changes would be good for the economy and for all Americans.
My view is that, unfortunately, the Financial Regulatory Reform Initiative of the Bipartisan Policy Center seems likely to side with industry lobby groups on all substantive questions.
I hope I’m wrong, but their initial paper and the task-force membership suggests that they will just be another cog in the vast Wall Street influence machinery that has come to dominate Washington.
An edited version of this post previously appeared on the NYT.com Economix blog; it is used here with permission. If you would like to reproduce the entire column, please contact the New York Times.
The Baseline Scenario 
It bears watching…. thanks for always being there. I have loaned your book to many people.
I’m certain you won’t be wrong. Once again, it was the INEFFICIENCY of the democratic system itself, which bankrupt the country. It is bipartisan, greedy, arrogant, and shows signs of belligerence and hypocrisy when consuming alcohol. This is a recipe for trouble, which can’t get here soon enough for me.
Haha, just sour grapes from not being invited to join true thought leaders. Anything that Simon Johnson or the “bettermarkets” clowns are not a part of is bad, bad!! OMG!!
Instead of whining that, banks lobbied for, “the right to use their own risk models”, why don’t you do sometning constructive and design and recommend your own risk models? You do have access to many unemployed kids coming out of your educational institutions, dont you?
You have tremendous resources as well – your ATMs come and sit down in the class you teach (that is when you are not writing a book to make something extra on the side).
My bet – you yourself don’t know what a risk model is. it is very clear from your endless bloviation.
Yea, I don’t think he has any teeth either. Dam bad education system. 8?>
“Catch-22 says they can do anything we can’t stop them from doing.”
“In 2009, [Elizabeth] Warren reportedly earned more than $349,375 for her work at Harvard University Law School. Tuition at Harvard College is $37,576 per student. Warren’s salary alone, not including benefits and perks, would cover the tuition of more than nine full-time students for one year. With a Harvard Law School tuition bill of $47,600, Warren’s salary could fund more than seven law students for one year”: http://bit.ly/JrUQrd
The average tuition at Boston Law School (Sen. Brown’s) was reported to be $20,986 in 2009
interesting piece and i’m glad someone is trying to answer the question “why no arrests?” in the biggest financial fraud in human history. (clearly arrests are the cheapest way, yes? yes?) insofar as “putting the genie back in the bottle” it would seem to me a simple recreation of Glass/Steagal wouldn’t be all that bad. I know, I know. “Chinese firewall.” Still..until that wall was smashed to pieces (was it Sandy who said it was a mistake after having created it?) Wall Street simply didn’t have the FEDERAL GOVERNMENT’S balance sheet to play with, no? So obviously any solution has to involve “NO MORE BAILOUTS.” Which of course are ongoing…no? So before we past laws that banks despise and want to roll back perhaps a discussion of what ails us (“lack of liquidity in the marketplace”) and look for ways to SANELY bring us back to that point. FAILURE IS MORE THAN AN OPTION. It must be allowed. Speculate all you want…BUT NOT WITH PUBLIC MONIES. Hello…Bernie Madoff in charge of financing Government? This sounds like a bad idea. In other words “just bring back that one rule.” and that’s it! sure “the speculations continue”…but who will…ahem…”bail out New York City” when the Storm of the Century hits? Investment bankers? Really?
Unfortunately, reinstating Glass-Steagall wouldn’t corral the shadow banking sector which provides most of the financing channels in today’s economy. Glass-Steagall was 30s era legislation for 30s era banking. A 21st Century Glass-Steagall would by necessity be more voluminous and more comprehensive to firewall all the interrelationships that led to the 2008 crash. But Dodd-Frank is merely voluminous.
This is a joke right? There is no bipartisanship. The fascists in the gop are lockstep partisans who NEVER reach across the isle or work with democrats on any issue!!! Never. The fascists force compromises in the dems but they NEVER work in bipartisan ways. The term is a fiction and a joke, with absolutely zero application in current panjandrum. There is NO bipartisanship. The shaitans in the gop pimp and brute this fiction on TV, and in the gospel according to fox, but in practice application – in actual deeds – the gop is lockstep partisan – resisting and conflicting in lockstep partisan ways any compromise or even negotiation. It’s the gop way or the highway!!! The gop is a creature and spaniel of the predatorclass and the oligarchs!!!. They vehemently resist any regulation and pimp and brute the hilarious fiction there are socalled freemarkets, and real competition. These are naked patent lies!!! There is no bipartisanship , there are no freemarkets, absolutely NOTHING has changed since 2007 and the predatorclass and predatorclass oligarchs have returned to their nefarious and criminal behavior. The math is incontrovertible. There will be another crisis. The only question is when . The fed can print money out of the myst in a feable attempt to cloak these horrible wrongs – but again the basic math will rear it’s cutting head. Ashes, ashes, all fall down.
Burn it all down! Reset! It’s the only option!
http://www.huffingtonpost.com/2012/10/29/western-tradition-partnership_n_2038210.html
@Oregano – long observed that you cannot legislate morality.
The predators et al use that knowledge of “human nature” to write laws that lift them above the law. Theft, murder, mahem, NIHILISM – yup, all “legal” now…see, it’s in the small print here…and here…and it’s even in the *bible*…
Looks like Hurricane Sandy is occupying Wall Street today.
Go ahead and pepper spray HER, tough guys…
Nice to see that Clinton, Summers, and Rubin are finally acknowledged by the left(yes, me too) as having assisted in letting all those little Bernie Madoffs in the Futures Exchange and other con games. Democrats can be bought off just as easily as the Pubs. Just look at Chris Dodd and Chuck Schumer’s list of campaign contributors.
You might start by closing the Fed lending window to the boys that refuse regulation and also remove FDIC insurance of their customer’s accounts.
Lots of us understood perfectly well what was going on, left, right, and center. I think you can make a strong argument that those distinctions are largely meaningless at this point in any case. After all, we have so-called conservatives insisting that the state be inserted into every orifice of the body politic. Edmund Burke is rolling around in his grave.
Here’s a synopsis: Phil Gramm applied enough muscle to get what he wanted. Clinton was a fool for signing the bill, Rubin was greedy and delusional, while Greenspan, as had been his lifetime MO, was just delusional. Summers should know better but he can’t get past the ego thing. He’s certainly not the only one.
As for the banking sector, we shouldn’t expect anything else from it should we? In the words of Frederick Douglass: “Power concedes nothing without a demand, it never has and never will”.
Turns out it barely matters at this point, for the following reason.
I was tracking down references to the work of Haldane and May on modern banking ecology, the market for derivatives, and the instabilities built into that global crapshoot. In pursuing that track, I became aware of the fact that the revolution against macroeconomics is well on its way to over-throwing that near useless framework. Easy to predict that it will be be pushed aside, either via that revolution, or by the collapse of the economy. There are no other options at this point, so misguided are the tenets of that framework. Here’s your reading list:
http://www2.econ.iastate.edu/tesfatsi/afinance.htm
It’s hilarious to see the obsolete notions of risk models thrown around on this blog as if nothing had happened. Those models are dead. The zombies who still use them will find themselves on the outside looking in, or buried with their keyboards by their sides when the next crash comes. And come it will, thanks to the uncontrolled application of endless computing power. In their rush to get ahead of this trend, the smartest guys and gals in the room are absolutely clueless. They have no idea what they’re doing in this brave new world.
Once again, this is not about the probabilistic determination of risk. Those risk models, with their ridiculous assumptions about uncorrelated assets and the independence of actors, are useless in the larger state-space where these markets are performing their dynamical dance. The key poison, and it courses its way throughout all of these models, is the assumption that the only forces on the system are exogenous, in the form of external pricing mechanisms. Nothing, absolutely nothing, could be further from reality.
Nonlinear dynamical systems can transition onto other orbital wings of the state space all on their own. Those transitions are richly embedded throughout what might otherwise seem to be a completely smooth manifold. You can do all the statistics you want on that manifold and you’ll never see the freight train coming till it wipes you off the track.
In fact, using risk models and trying to do arbitrage on the margins of what you think are those orbital trajectories is a recipe for disaster.
Think of it. You’ll be able to tell your grand kids you were around for the overthrow of these antiquated ideas. The efficient market hypothesis is one of the most dangerous notions ever to find its way into folklore. It surely isn’t economics as experience on a day to day basis. It turns out it isn’t science either.
Bravo Norm Cimon, bravo!!!
Ditto the Tony F bravo for Norm.
A line from a Monty Python film is what I’ve been using a lot lately, “Not dead yet.”
The usury is EXTREME. CNBC were telling people who paid more in FEDERAL taxes over their shortened working lives (thanks to “outsourcing”) that “…not everyone DESERVES to own a home….” when the HOME they were trying to “own” cost LESS than the taxes they paid out so far to a GOVERNMENT that participating fully and with FULL KNOWLEDGE of what they were doing to the citizens – screwing them over royally.
JUST WAR!!!!
No one is going to contribute a fnk DIME to lower Manhattan’s clean up – not one fnk DIME. Talk about “delusional” – Bloomberg saying that the Marathon was on…that was INSANE.
Next one, and there will be a next one, BET ON IT, should take the place down for good.
Of course they got that billion dollar spy-on-citizens data center smack dab in the middle of Utah polygamy country – TALK ABOUT USELESS for the situation we have in NJ!!!
So think about the RANK injustice – this is so far into EVIL – yes EVIL – that the insanity they still try project via their billions controlling mass media channels – SPIRITUAL AUTHORITY – is enough to take them out.
How many MILLIONS of Middle Class people “…do not DESERVE to own a home…” that is worth LESS (without the interest) than what they PAID IN TAXES over their lives!!!???? INSANE LEVEL OF USURY!
Spy center in Utah my ass…what’s that gonna do now for millions in the way of modernizing infrastructure????
Still without power – maybe by Friday. So yeah, more cranky than usual – LOL
So how GENIUS was Gen X in getting everything “digital” when the infrastructure they were building their fetishistic gizmo world upon was 1920s “technology”.
USA with it’s 480 people worth 2.08 TRILLION is no longer ANY kind of “power”. It’s a delusional, violent, increasingly tribal, and totally PSYCHOTIC “economy”. Utterly without CULTURE.
Any QUESTIONS about how you can piss people off enough for them to BUILD a “gas chamber” final solution?
Man to Land ratio. Anything else is DELUSIONAL and not science, btw.
Scientists unite! :-))
Go ahead and keep throwing people out of homes around the country, banksters….