Obama’s Regulatory Reform Agenda
The Bush approach to financial regulation didn't work out very well.
Some on the left seem somewhat disappointed in the administration’s regulatory reform proposals. I think that’s misguided, and it comes from probably expecting too much from prophylactic regulation. If you look back at the Clinton and Bush years, it’s simply not the case that we had a situation wherein executive branch policymakers were chomping at the bit to clamp down on financial malfeasance and were being held back by a lack of statutory regulatory authority. In part, we can question the judgment of the policymakers but we also need to recognize that it’s an inherently difficult situation. Our past two bubbles have brought extremely low unemployment, and created huge quantities of paper wealth that individuals became psychologically anchored to. You can give regulators all the statutory authority you like, and the fact remains that there’s bound to be enormous reluctance to actually pull the trigger. It’s always hard to get government to clamp down on activities that very rich and powerful people want to engage in. When you’re talking about doing so in a way that could also jeopardize the jobs and 401(k)s of a mass public, well, it’s very hard.
Under the circumstances, parking systemic risk authority at the quasi-insulated Fed seems like the right call. So that’s one important decision the administration got right—to not hubristically insist that they, themselves would be immune to the political factors that make it difficult to do this kind of thing correctly.
What’s more, their regulatory package is reasonably strong on two ideas that I think could work. On the one hand, they have this consumer protection business. That’s probably not essentially to preventing global financial panics, but it will help protect the interests of individuals who interact with the financial system. That’s important. It also continues to be somewhat unclear exactly how much of the bad lending activity was truly fraudulent, but it’s at least possible that stronger consumer protections will help keep things under control. Last and most important of all, I think, is the idea of creating a clear legal process for the “resolution” of large, complicated financial firms. This is the one aspect of the crisis where I think you really can say that policymakers did want to do something different and better than what they did (ad hoc bailouts and bankrupties) and really were restrained by a lack of statutory and regulatory authority. There’s a plausible story to be told in which the global financial panic was caused less by the collapse of the bubble per se than by the fact that the system had no real way to process the failure of certain kinds of firms. Resolution authority, if done well, could really make a huge difference in the future. In my opinion, that’s the most important piece of the puzzle, and I think it’s right of the administration to focus on getting that piece right rather than to expend energy fighting battles about the organization chart.
All told, I don’t think we should place enormous faith in the idea that any regulatory setup will work forever and ever. Under the circumstances, these proposals seem like a plausible improvement on the status quo and should also leave us in a much better situation to mop up a future mess if it arises.
27 Responses to “Obama’s Regulatory Reform Agenda”
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June 17th, 2009 at 10:58 am
We’ve gone through this many times now, so I will just briefly mention again that I think Matt too heavily discounts the importance of good laws and regulatory rules–at a minimum, good laws and rules are a necessary condition for good regulation, even if they aren’t a sufficient condition.
Also, while I agree with Matt about the importance of the proposed resolution procedures, I think he is overlooking the importance of the proposed stricter capital, liquidity, and leverage rules. I’ve also addressed this point many times before, so again to be brief, such rules are very good all-purpose financial regulations because they don’t require specifying the exact nature of the future risks we are trying to moderate.
June 17th, 2009 at 11:15 am
There is exactly one thing that matters in Obama’s regulatory reform package: restrictions on leverage. The success of the reform will depend entirely on the enforcement of this issue. Everything else is much less important.
June 17th, 2009 at 11:23 am
Again Obama impresses. It’s only June and they got this done with everything else on their plate.
As Krugman notes it’s good to see they’ll regulate the shadow banking system. On PBS’s Frontline last night they discussed that famous meeting with Bernanke, Paulson, and Congressional leaders after Lehman Bros failed last fall.
Bernake and Paulson said if we don’t get this TARP money, the American economy and the global economy would completely collapse. Scary.
They need to prevent or better control the future collapses of companies like Bear Stearns, Lehman Bros and Merrill Lynch and/or make sure that the collapse of those companies don’t cause systemic risk.
June 17th, 2009 at 11:27 am
Considering that the quasi-insulated Fed leadership helped create the financial crisis, it’s odd to put more authority in it now with the expectation that it will prevent one in the future.
What liberals are looking for is something akin to a return to the post-depression, pre-1980s outlook regarding financial industry regulation. The S&L crisis was 20+ years ago and told us all we needed to know about the need for limits on risk taking by financial institutions. But we continue to make the same mistakes over and over, as though this time we can expect the bankers and Wall Street traders to remain prudent.
June 17th, 2009 at 11:27 am
“Under the circumstances, parking systemic risk authority at the quasi-insulated Fed seems like the right call.”
Right, because the Fed has such a good track record of spotting systemic risk:
“House price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas.”
— Fed Chairman Ben Bernanke, Oct. 20, 2005
“[The housing downturn] looks to be a very orderly and moderate kind of cooling.”
– Fed Chairman Ben Bernanke, May 18, 2006
“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.”
— Fed Chairman Ben Bernanke, May 17, 2007
June 17th, 2009 at 11:30 am
It’s hard to express just how contemptable this post is.
First of all, the Fed is the worst possible agency for regulation; it is a bank and cares most about banks, plus its history is one solid string of fuck-ups.
Secondly, most of the newer derivatives do nothing for main street, they just allow wall street to collect fees for shuffling paper. CDSs have no place in finance; they are pure gambling with no redeeming features.
Finally, a reasonable first step would be to reinstate the old regulations that were gutted. They weren’t perfect but they were a lot better than the new proposals.
June 17th, 2009 at 11:35 am
I’ve come to the conclusion that anything short of iron-fisted martial law on the financial system is inadequate for the left.
It’s becoming ridiculous to watch the left flip out at every proposal from the White House, even if the GOP is 100% in opposition to the proposals.
Wall Street and the GOP are already going crazy over these new regulations, yet, the left deems them “weak”, “inadequate”, and a “cave to the right-wing”. The left seems oblivious to the difference between perfection and what it politically viable.
June 17th, 2009 at 11:47 am
John Kenneth Galbraith perfectly describes the proper role of the Fed:
The central bank remains important for useful tasks – the clearing of checks, the replacement of worn and dirty banknotes, as a loan source of last resort. These tasks it performs well. With other public agencies in the US, it also supervises the subordinate commercial banks. This is a job which it can do well and needs to do better. In recent years the regulatory agencies, including the Federal Reserve, have relaxed somewhwt their vigilance. At the same time numerous of the banks have been involved in another or the age-old spasms of optimism and feckless expansion. The result could be a new round of failures. It is to such matters that the Federal Reserve needs to give its attention.
And that was back in 1975.
June 17th, 2009 at 11:56 am
I agree with pretty much everybody, believers, dissenters, Matt, which means I must not know what the hell is going on. I must be in the wait and see crowd, I guess.
Krugman seems cheerful these days. That is a good sign, I think.
June 17th, 2009 at 11:57 am
The most important point about the Fed:
The Fed and monetary policy is the beloved instrument of the plutocracy because of what it is not.
It is not the tax and spend of macro policy and it is not the wage and price controls of micro policy; the betes noire of the right.
The fact that monetary policy doesn’t work except when you don’t need it does not deter them. The fact that macro and micro in combination does work is something they will spend millions to bury.
June 17th, 2009 at 11:59 am
Tim F,
Wall Street and the GOP would go bananas no matter how light and cosmetic the regulation. That’s their strategy–preach market fundamentalism and go bananas at the slightest regulation (and you’re projecting by ascribing this behavior to the “left”).
And cosmetic regulatio is what we have here–or actually it’s a disguised power grab by the central bank–because Wall Street owns our government, including the Grand Ayatollah himself, Obama.
What you fail to recognize is our government gave $13 Trillion in direct payments and guarantees to the banks and is taking on huge sums on the Federal balance sheet via deficits–all of which is primarily for the benefit of the banks. Giving the super bank more power that enabled all of the prior excesses is hardly cracking down with an iron fist–in fact it’s quite the opposite!
There’s a reason the founding fathers feared a powerful and largely unaccountable central bank. The “left”, as well as the libertarians, are about the only ones that haven’t been wholly corrupted by the folly of 30 years of supply-side deregulation and voodoo economics. What really burns is the fact so many tools in the Democratic party have been tricked into supporting their corporate and banking masters (cough, Tim F., cough) with Orwellian rhetoric.
June 17th, 2009 at 12:09 pm
But Matthew, these aren’t the Clinton and Bush years. This isn’t an economic hiccup; this is the system shaking. And it should also be the shake-down of the system. Martin Wolf at the FT says as much, and gives links to some pretty pictures that say as much too. In however many words you want.
The multi-faceted left over at NewDeal2.0 will be debating the merits of Obama’s plan when it’s officially revealed this afternoon. Bring over some of these ideas. Nothing is less fun, after all, than unearned consensus.
June 17th, 2009 at 12:12 pm
The problem I see with Matt’s suggestion is that we did have a period between WWII up until the deregulating 80’s when even if we had our occasional recessions, there were no banking failures that might pose a greater economic threat, and prosperity was more broadly shared. That, it seems to me, should roughly be the goal of regulation, and these proposals they are not. I’m certainly no expert on this stuff, so perhaps there is a plausible reason we can’t go back to such an arrangement, but so far I haven’t seen anyone try and make that claim.
June 17th, 2009 at 12:31 pm
[...] Matt Yglesias points out, it’s unclear how much of this was fraudulent lending, but in light of stories like that involving Wells Fargo — [...]
June 17th, 2009 at 12:33 pm
Kafka & Ron:
You are both right. What happens when they put another Ayn Rand lover as the Fed Chief? The Fed doesn’t what it is good for the banks. Not what is good for the country as a whole. Putting more power in the hands of the Fed is a stupid and terrible mistake. And I know that MY knows this as well, yet he continues to ignore it.
June 17th, 2009 at 12:37 pm
Paul J.,
To be blunt, I think Matt’s commentary on this issue suffers from the fact that the Reagan years, let alone the pre-Reagan years, are all just ancient history to him. So, in his mind if something was true under both Clinton and Bush, it has never been otherwise.
That said, he is probably right that anything we do now to regulate the financial system won’t work “forever and ever”. But another 50-year run would be nice.
June 17th, 2009 at 12:39 pm
Paul J.,
Oh, but I should note I disagree with the claim that these proposals are necessarily insufficient for that purpose (another prolonged period of relative stability in the financial system). It will depend on the details and execution, but I believe the crucial elements are present.
June 17th, 2009 at 12:50 pm
[...] “All told, I don’t think we should place enormous faith in the idea that any regulatory setup will work forever and ever. Under the circumstances, these proposals seem like a plausible improvement on the status quo and should also leave us in a much better situation to mop up a future mess if it arises.” — Matt Yglesias, Think Progress [...]
June 17th, 2009 at 12:52 pm
You’re pretty far to my right on a lot of issues, Matt but I want to compliment you – that is a good analysis.
June 17th, 2009 at 12:59 pm
Anne
Thanks for the reference to Wolf’s article which has further reference to the fascinating Vox column of Eichengreen and O’Rourke. Depressing and Grating.
June 17th, 2009 at 1:41 pm
[...] [...]
June 17th, 2009 at 2:17 pm
I hope that’s Matt’s optimism pans out. On the no regulatory regime lasts forever point though, here’s a good one.
Would you rather have had the New Deal bank laws still on the books in 2008, or did we do just fine without them? DTM said: good laws are the starting point. Good intentions at the Fed or elsewhere are no substitute. And if we all have good intentions, tough laws should be no problem, right?
June 17th, 2009 at 3:26 pm
[...] “That’s probably not essentially to preventing global financial panics, but it will help protect the interests of individuals who interact with the financial system. That’s important. It also continues to be somewhat [...]
June 17th, 2009 at 3:53 pm
[...] All told, I don’t think we should place enormous faith in the idea that any regulatory setup will work forever and ever. Under the circumstances, these proposals seem like a plausible improvement on the status quo and should also leave us in a much better situation to mop up a future mess if it arises. –Matthew Yglesias, Think Progress [...]
June 17th, 2009 at 6:53 pm
Amen.
June 17th, 2009 at 7:15 pm
BHO has been such a huge disappointment — from a leadership standpoint — on these issues. Geithner and Summers are common criminals.
The elephant in the room is that banks should never be allowed to grow so big that they become “too big to fail.” There is absolutely no economic or social reason not to separate deposit-holding banks from investment banks. Allowing retail banking to be combined with risky investment banking to maximize profits, and then providing a taxpayer guarantee against failure is beyond fucking ludicrous.
And, DTM, so-called “stricter capital, liquidity, and leverage rules” are not yet a fact, and even IF they are “imposed,” made to be ignored or broken.
Obama meeting with bankers to figure out what regulations are necessary is liking calling in arsonists to prevent fires.
I’m with Bill Maher: this is not change I can believe in. This is NOT Barack leading; this is Barry trying to be popular and not rocking the boat.
And, MY, pardon my french, you have to stop kissing BHO’s ass.
June 17th, 2009 at 7:24 pm
[...] Matthew Yglesias Under the circumstances, parking systemic risk authority at the quasi-insulated Fed seems like the right call. So that’s one important decision the administration got right—to not hubristically insist that they, themselves would be immune to the political factors that make it difficult to do this kind of thing correctly. [...]