“More Silliness And Hysteria”: Gripes About Excessive Regulations And Taxes Often Are Baseless
In the last couple of months we have seen the country whipped up into near hysteria over the virtually nonexistent threat of Ebola.
While the only people who contracted the disease in this country were those who treated a man who died of the disease, tens of millions of people became convinced they were in danger on airplanes and public buses and even routine visits to the supermarket.
Politicians have sought to exploit the same sort of fears with their rants about regulations and high taxes sinking the economy. These complaints have as much foundation in reality as the Ebola threat.
The regulation screed usually focuses on the number of pages in bills like the Affordable Care Act and the Dodd-Frank financial reform bill. While lengthy bills are unfortunate from the standpoint of the trees cut down for the paper, the length bears no relationship to the amount of regulation.
To take one example, the Volcker Rule, which prohibits banks with government insured deposits from engaging in risky speculation, ended up more than three times its original length as the industry carved out an array of exceptions. The greater length was associated with less regulation, not more.
Dodd-Frank was about curbing the sorts of abuses that gave us the financial crisis. Is the argument that we need corrupt banks to foster growth?
The screams over the ACA are equally misguided. The rules have little impact on large firms, the vast majority of whom already offered insurance that met ACA requirements. It might have been expected to affect mid-sized firms that did not previously offer insurance, but none of the complainers has yet presented any evidence that these mid-sized firms have been especially hard hit in the last few years.
The tax complaints require some serious amnesia. Tax rates were higher for most people in the 1990s when we saw the strongest growth in almost three decades. We then lowered taxes in 2001 and saw a weak recovery followed by the collapse in 2008.
The explanation for the continuing weakness is not a surprise to those of us who warned of the housing bubble before the crisis. The bubble had been driving the economy both directly through its impact on construction and indirectly through the impact that $8 trillion of housing bubble wealth had on consumption. When the bubble burst, the economy lost its driving force.
The building boom of the bubble years lead to enormous overbuilding of housing. When the bubble burst, construction didn’t just fall back to normal. It fell to the lowest levels in 50 years, costing the economy more than four percentage points of GDP, amounting to $700 billion annually in lost demand. The loss of housing wealth meant that consumption fell back to more normal levels.
While both housing and construction are up from their low-points in the recession, they are not going to return to bubble peaks, at least not without another bubble. This means that the economy continues to have a huge shortfall in demand. Cutting taxes and reducing regulation will not magically fill this gap in demand.
There are essentially two ways to increase demand. One is directly through more government spending. This is currently taboo in Washington since we are all supposed to hate budget deficits.
The other is by reducing the trade deficit. The way to reduce the trade deficit is to make U.S. goods more competitive with a lower-valued dollar. Talk of a lower dollar is also taboo in political circles.
In short, it is not difficult to find ways to boost the economy; the problem is that politics prevents them from being discussed. Instead we get silliness about taxes and regulation.
By: Dean Baker, Co-Founder of the Center for Economic Policy and Research; The National Memo, November 20, 2014
“Hurt Feelings”: Banks Demand Pity Party Over Volcker Rule Losses
Whatever successes might have been attained within the hundreds of pages of regulations implementing the Volcker Rule, our nation’s bureaucrats must have known they couldn’t do anything that would force banks to unearth any long-buried losses in their financial reports. Because then many bankers would feel victimized. They would demand that regulators rush to soothe their hurt feelings. And America would never be the same until the banks could keep those losses unrecognized again.
Yes, I’m kidding. But the banking lobby isn’t. This week, a Utah-based lender, Zions Bancorp, said it would have to take a charge to earnings in the neighborhood of $387 million because the new rules will force it to sell a bunch of collateralized debt obligations. Those CDOs declined in value a long time ago. But the accounting rules said Zions didn’t have to include those losses in its earnings. Now that Zions has to sell them, it can’t keep the losses buried and must count them on its income statement.
A few hundred other lenders may be in similar situations, though probably none as extreme as the one at Zions. Now the banking industry’s numerous lobbying groups are complaining to regulators and asking for clarification of the rule — footnote 1,861, if you care to look it up — which means they don’t like it and want it changed. They also have enlisted several U.S. senators to intervene with regulators on their behalf.
It generally isn’t a good idea for the government to pick winners and losers or to tell companies what investments they can’t keep. Surely there is money to be made somewhere buying up assets that banks aren’t allowed to own anymore. It’s hard to tell if the regulators intended the consequences in this instance or not, as part of the rules’ prohibitions against banks sponsoring or owning stakes in hedge funds and private- equity funds.
That said, the point of the Volcker Rule was to keep banks from gambling with depositors’ money. So it shouldn’t come as a surprise that banks face new restrictions on the types of investments they can make. At some point, after three years of hand-wringing, the banking regulators have to stop revising what they’ve passed and declare it final, which they happen to have done already this month. Whining from bankers about their sudden inability to paper over losses on old CDOs isn’t a sufficient reason to reopen the process all over again.
By: Jonathan Weil, Bloomber View, Published in The National Memo, December 23, 2013
“Quaking In Their Boots”: Watch Out Wall Street, Sherrod Brown Is Coming
With Sen. Tim Johnson, D-S.D., officially headed for retirement, speculation regarding who will replace him as chairman of the Senate Banking Committee is well underway. And one option reportedly has Wall Street quaking in its boots: Sen. Sherrod Brown, D-Ohio.
As the Huffington Post’s Ryan Grim reported, Brown is fourth in line to head the Banking Committee – which oversees most financial regulatory matters for the upper chamber – but the three senators ahead of him all have reasons to take a pass. And if Brown were to become chairman, he would have a powerful new platform from which to continue his efforts to bust up the nation’s biggest banks. “I think everything from too-big-to-fail banks all the way down to issues impacting the unbanked and underbanked would suddenly see a new energy behind them,” one analyst told Politico.
Since the financial crisis of 2008, Brown has been one of the foremost critics of Wall Street’s mega-financial institutions. During the debate over the Dodd-Frank financial reform law, Brown tried unsuccessfully to secure passage of the SAFE Banking Act, which would have capped bank size as a percentage of the economy and reduced the amount of non-deposit liabilities that a firm could hold.
Brown’s plan would have gone much further than anything that ultimately wound up in Dodd-Frank, and would have been far preferable to the Volcker Rule, the unwieldy regulation meant to deter banks from threatening the financial system via risky trading.
Recently, Brown has joined with Sen. David Vitter, R-La., to once again call for breaking up big banks.
“How many more scandals will it take before we acknowledge that we can’t rely on regulators to prevent subprime lending, dangerous derivatives, risky proprietary trading, and even fraud and manipulation?” he asked. “We simply cannot wait any longer for regulators to act. These institutions are too big to manage, they are too big to regulate, and they are surely still too big to fail.”
It is certainly true that the last few years have seen the banking sector commit a slew of misdeeds: rampant foreclosure fraud; fixing of global interest rates; and the so-called “Whale Trade” that cost JP Morgan Chase billions of dollars (and yet still won the firm an award). And the root of the problem is that the largest banks aren’t only too-big-to-fail, they’re too-big-to-jail.
The Justice Department, in fact, explicitly said earlier this month that it is not prosecuting some of the biggest banks for fear of causing them to fail, which would endanger the rest of the financial system. Instead, banks have gotten off with slaps on the wrist and penalties that barely dent their bottom lines.
“Declining to prosecute either the banks themselves or individuals at the banks for financial fraud sends the message that crime pays,” said Sen. Charles Grassley, R-Iowa, another Brown ally. Indeed, if a bank is so big that prosecuting it is deemed too risky to the economy, that bank is too big, period!
As Brown joining with Vitter and Grassley shows, a coalition of left and right can be cobbled together when it comes to reining in banks for the good of the financial system. (The Senate even voted 99-0 recently to end federal advantages for too-big-to-fail banks, though the measure is non-binding.) Having Brown at the helm of the Senate Banking Committee certainly wouldn’t hurt that cause, and the economy would be better off for it.
By: Pat Garofalo, U. S. News and World Report, March 27, 2013
“Why We Regulate”: The Arrogance Of Wall Street And The Lessons Of History
One of the characters in the classic 1939 film “Stagecoach” is a banker named Gatewood who lectures his captive audience on the evils of big government, especially bank regulation — “As if we bankers don’t know how to run our own banks!” he exclaims. As the film progresses, we learn that Gatewood is in fact skipping town with a satchel full of embezzled cash.
As far as we know, Jamie Dimon, the chairman and C.E.O. of JPMorgan Chase, isn’t planning anything similar. He has, however, been fond of giving Gatewood-like speeches about how he and his colleagues know what they’re doing, and don’t need the government looking over their shoulders. So there’s a large heap of poetic justice — and a major policy lesson — in JPMorgan’s shock announcement that it somehow managed to lose $2 billion in a failed bit of financial wheeling-dealing.
Just to be clear, businessmen are human — although the lords of finance have a tendency to forget that — and they make money-losing mistakes all the time. That in itself is no reason for the government to get involved. But banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk they’re allowed to take on.
Why, exactly, are banks special? Because history tells us that banking is and always has been subject to occasional destructive “panics,” which can wreak havoc with the economy as a whole. Current right-wing mythology has it that bad banking is always the result of government intervention, whether from the Federal Reserve or meddling liberals in Congress. In fact, however, Gilded Age America — a land with minimal government and no Fed — was subject to panics roughly once every six years. And some of these panics inflicted major economic losses.
So what can be done? In the 1930s, after the mother of all banking panics, we arrived at a workable solution, involving both guarantees and oversight. On one side, the scope for panic was limited via government-backed deposit insurance; on the other, banks were subject to regulations intended to keep them from abusing the privileged status they derived from deposit insurance, which is in effect a government guarantee of their debts. Most notably, banks with government-guaranteed deposits weren’t allowed to engage in the often risky speculation characteristic of investment banks like Lehman Brothers.
This system gave us half a century of relative financial stability. Eventually, however, the lessons of history were forgotten. New forms of banking without government guarantees proliferated, while both conventional and newfangled banks were allowed to take on ever-greater risks. Sure enough, we eventually suffered the 21st-century version of a Gilded Age banking panic, with terrible consequences.
It’s clear, then, that we need to restore the sorts of safeguards that gave us a couple of generations without major banking panics. It’s clear, that is, to everyone except bankers and the politicians they bankroll — for now that they have been bailed out, the bankers would of course like to go back to business as usual. Did I mention that Wall Street is giving vast sums to Mitt Romney, who has promised to repeal recent financial reforms?
Enter Mr. Dimon. JPMorgan, to its — and his — credit, managed to avoid many of the bad investments that brought other banks to their knees. This apparent demonstration of prudence has made Mr. Dimon the point man in Wall Street’s fight to delay, water down and/or repeal financial reform. He has been particularly vocal in his opposition to the so-called Volcker Rule, which would prevent banks with government-guaranteed deposits from engaging in “proprietary trading,” basically speculating with depositors’ money. Just trust us, the JPMorgan chief has in effect been saying; everything’s under control.
Apparently not.
What did JPMorgan actually do? As far as we can tell, it used the market for derivatives — complex financial instruments — to make a huge bet on the safety of corporate debt, something like the bets that the insurer A.I.G. made on housing debt a few years ago. The key point is not that the bet went bad; it is that institutions playing a key role in the financial system have no business making such bets, least of all when those institutions are backed by taxpayer guarantees.
For the moment Mr. Dimon seems chastened, even admitting that maybe the proponents of stronger regulation have a point. It probably won’t last; I expect Wall Street to be back to its usual arrogance within weeks if not days.
But the truth is that we’ve just seen an object demonstration of why Wall Street does, in fact, need to be regulated. Thank you, Mr. Dimon.
By: Paul Krugman, Op-Ed Columnist, The New York Times, May 13, 2012
“Exceptions, Exemptions And Loopholes”: How J.P. Morgan Chase Has Made The Case For Breaking Up The Big Banks
J.P. Morgan Chase & Co., the nation’s largest bank, whose chief executive, Jamie Dimon, has lead Wall Street’s war against regulation, announced Thursday it had lost $2 billion in trades over the past six weeks and could face an additional $1 billion of losses, due to excessively risky bets.
The bets were “poorly executed” and “poorly monitored,” said Dimon, a result of “many errors, “sloppiness,” and “bad judgment.” But not to worry. “We will admit it, we will fix it and move on.”
Move on? Word on the Street is that J.P. Morgan’s exposure is so large that it can’t dump these bad bets without affecting the market and losing even more money. And given its mammoth size and interlinked connections with every other financial institution, anything that shakes J.P. Morgan is likely to rock the rest of the Street.
Ever since the start of the banking crisis in 2008, Dimon has been arguing that more government regulation of Wall Street is unnecessary. Last year he vehemently and loudly opposed the so-called Volcker rule, itself a watered-down version of the old Glass-Steagall Act that used to separate commercial from investment banking before it was repealed in 1999, saying it would unnecessarily impinge on derivative trading (the lucrative practice of making bets on bets) and hedging (using some bets to offset the risks of other bets).
Dimon argued that the financial system could be trusted; that the near-meltdown of 2008 was a perfect storm that would never happen again.
Since then, J.P. Morgan’s lobbyists and lawyers have done everything in their power to eviscerate the Volcker rule — creating exceptions, exemptions, and loopholes that effectively allow any big bank to go on doing most of the derivative trading it was doing before the near-meltdown.
And now — only a few years after the banking crisis that forced American taxpayers to bail out the Street, caused home values to plunge by more than 30 percent and pushed millions of homeowners underwater, threaten or diminish the savings of millions more, and send the entire American economy hurtling into the worst downturn since the Great Depression — J.P. Morgan Chase recapitulates the whole debacle with the same kind of errors, sloppiness, bad judgment, excessively risky trades poorly-executed and poorly-monitored, that caused the crisis in the first place.
In light of all this, Jamie Dimon’s promise that J.P. Morgan will “fix it and move on” is not reassuring.
The losses here had been mounting for at least six weeks, according to Morgan. Where was the new transparency that’s supposed to allow regulators to catch these things before they get out of hand?
Several weeks ago there were rumors about a London-based Morgan trader making huge high-stakes bets, causing excessive volatility in derivatives markets. When asked about it then, Dimon called it “a complete tempest in a teapot.” Using the same argument he has used to fend off regulation of derivatives, he told investors that “every bank has a major portfolio” and “in those portfolios you make investments that you think are wise to offset your exposures.”
Let’s hope Morgan’s losses don’t turn into another crisis of confidence and they don’t spread to the rest of the financial sector.
But let’s also stop hoping Wall Street will mend itself. What just happened at J.P. Morgan – along with its leader’s cavalier dismissal followed by lame reassurance – reveals how fragile and opaque the banking system continues to be, why Glass-Steagall must be resurrected, and why the Dallas Fed’s recent recommendation that Wall Street’s giant banks be broken up should be heeded.
By: Robert Reich, Robert Reich Blog, May 10, 2012
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