Big Fight Over Financial Reform

by: Mike Lux

Thu Apr 15, 2010 at 12:30


I am not an economist or a policy wonk, I am just an old political hack. But I do know one thing about banking policy that way too many economists and policy wonks don't seem to be aware of: anytime anyone gets too much power, good policy and smart regulation and sound economic theories and formulas all get trumped. That's what Paul Krugman and all the other smart economists who don't prioritize breaking up these big banks don't get: the big six banks have accumulated way too much market power and political power. Until and unless they are tamed, our democracy and our economy will be fundamentally damaged. With the power they have, these massive conglomerates will overwhelm markets, make outrageous financial gambles that they know they will never be punished for, buy off way too many politicians, court and convert and capture regulators. With them so powerful, our real economy will have trouble getting back on its feet, and even if it does, their manipulations could rapidly send it spiraling toward destruction again.

The pluralist political theory our Founding Fathers developed in crafting the American political system has its flaws, but it works pretty well if power is actually distributed widely as they theorized it would be. If a wide variety of regions and industries and constituencies and interest groups all have a fair amount of power, our system has the potential of achieving fair and sensible outcomes. If any one sector has way too much power and wealth compared to everyone else, we have a big problem, and these big banks have way, way, way too much. It corrupts our entire system and you don't have to be an economist to understand why that's bad.

So let's be clear: neither the House nor the Senate finance reform bills does nearly enough to berak up these banks or curb their power. But there is an interesting political dynamic going on here that is encouraging to me. Voters are so angry at Wall Street that the overwhelmingly outspent and undermanned reformers have a shot at making some decent gains. Congressional reformers like Alan Grayson in the House and Ted Kaufman in the Senate have been effective in pushing their ideas. The progressive coalition on the issue, Americans for Financial Reform, even though it's been outspent on a magnitude of about 200 to 1, has been remarkably effective in coordinating the lobbying and messaging of progressive groups. On the Republican side, Mitch McConnell made a serious mistake by going to a Wall Street fundraiser and then showing up on the Senate floor a couple of days later with an opposition statement echoing a Frank Luntz message memo on how to kill banking reform word for word. Meanwhile, the White House and Democratic leadership see this as a fight they want to have, and understand the politics is better for them if they push for a stronger rather than weaker bill.

There is no way to know yet how all of this will turn out. In 21st century America, one should never bet against big corporate interests with as much money as these bankers have. It is still quite possible that we could see the Senate bill get worse, and the conference committee could come out with a really disappointing bill. But there's also a chance that the politics of the issue and the reformers' work will pay off. If you actually  got a bill coming out of conference committee that combined the best (or close to it) of the House bill with the best (or close to it) of the Senate bill, that would not be enough to break up these big banks and rein in their power, but it would be a pretty decent first step. Let's keep fighting for it.

Mike Lux :: Big Fight Over Financial Reform

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Oh really? (0.00 / 0)
On the Republican side, Mitch McConnell made a serious mistake by going to a Wall Street fundraiser and then showing up on the Senate floor a couple of days later with an opposition statement echoing a Frank Luntz message memo on how to kill banking reform word for word.

I would agree, except when the media was propagating McConnell's words, they forget to mention the part about the Wall Street fundraiser.  


Is "first step" realistic? (0.00 / 0)
I never bought the idea that the health reform as passed would preclude more and better changes down the road. Fortunately, the Dems continue to talk about it as a historic first step. It seems very likely that that will prove to be the case.

But is financial reform the same kind of animal? HCR is relatively easy to understand, once you get used to it. Financial reform, OTOH, is not, and its effects cannot be easily judged by one's own personal experience. I have to wonder if whatever passes this year will pretty much be it for a long time to come. Maybe this time it makes perfect sense to hold out for real reform or nothing. Buying off the angry folks with a few credit reforms will do little to prevent the financial oligarchy from doing business as usual until they destroy even more of our economic prospects. There's a good case to be made that nothing short of destroying them will do much good.


too much emphasis on consumer agency (0.00 / 0)
that stuff does not get to the corps

I think that the 1930s concept of full disclosure in underwriting stocks

should be applied to bonds

with a private right to sue for deception

It would have prevented the mortgage backed security crisis that has sunk the economy, and stuck trillions in bad debt onto the Fed Reserve's books


Who Calls the Shots And Who Pays (0.00 / 0)
I absolutely agree with you that the economics professionals sometimes seem to miss the political aspects of TBTF.  Some do not, most notably Simon Johnson in The Quit Coup:
http://www.theatlantic.com/mag...

I think another important aspect of this mess is who pays.  Right now, the "official" policy of "extend and pretend" whether it's working or not, is designed to make the bad debts created by Wall St, be paid by the tax payers.  This is a crippling blow to fledgling HCR, SS, and Medicare which suddenly become the pot of money used to pay for the fraud committed by Wall St.  

Wall St MUST PAY.  Unfortunately, no matter how this is done, innocent Americas will be impacted by this since it will serious dent 401Ks, and other assets tied up in Wall St, but the larger lesson is that government's obligations to it's citizens takes precedence over unregulated gambling by rich people with somebody else's money.  The TBTF banks on Wall St MUST FAIL before America fails.


Mike, you are right about this... (0.00 / 0)
And, although I am a big Krugman fan, there are important voices speaking out from within the system on this, and they trump what Krugman is saying. Whether they will be listened to is the "100 Billion Dollar question" as the Bank of England's Andrew Haldane says?

Yesterday, the CEO of the Dallas Federal Reserve Bank followed up, and agreed with CEO of the Kansas City Federal Reserve Bank in saying that the "to big to fail" (TBTF) MUST be broken up. These are very high up players, and being the two of the most influential Reserve Banks in the country, and essentially, the two who speak for Americas heartland, Dallas & Kansas City, should have some effect on the debate, although maybe not in DC as much as it should. New York Fed, Team Obama, and Wall Street will be absolutely livid with what these two are saying.

This challenges the thinking of Team Obama and Wall Street directly, who seem to feel that the Mega Banks give USA some benefit in dominating the world. As the Dallas CEO discussed, Japan thought that at one time too, and look where that got them.

Also, no matter what, the rest of the world will have an effect on these matter as well. If congress passes something that is too weak, our banks and businesses will suffer worldwide.

One of the other pieces that is out is a speech given by a top guy at the Bank of England, and he echoes a lot of what the CEO's of the Dallas and Kansas City Reserve banks said.
It is important that people hear about what these influential insiders have to say, so here are some articles to peruse, if you have the interest in whether we can fix these problems.  

KC Fed guy - http://www.huffingtonpost.com/...

Dallas Fed guy - http://www.huffingtonpost.com/...

Bank of England guy - http://www.bankofengland.co.uk...


Re (0.00 / 0)
I have to wonder if whatever passes this year will pretty much be it for a long time to come. Maybe this time it makes perfect sense to hold out for real reform or nothing. Buying off the angry folks with a few credit reforms will do little to prevent the financial oligarchy from doing business as usual until they destroy even more of our economic prospects.

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