The hyperactivity of the presidential election has raised the level of discussion of financial regulation, at least in terms of noise if not enlightenment. Mr. Glover has provided an instructive insight into the mega-meme that will guide the opponents of regulation:
“What’s good for big finance is good for the US!”
Of course, this argument must negotiate past one massive impediment to public acceptance. The financial crisis, caused by big finance, ushered in the Great Recession, the second worst economic catastrophe of the modern era. It is abundantly clear that that was not good for America. But maybe even worse, the financial sector no longer grows jobs and wealth. It does just the opposite, dragging down the middle class and increasing shameful inequality of income and wealth.
Let’s look at the top four tactics for avoiding the truth that underlies the Dodd-Frank Act and, the wisdom of expanding regulation to remove finance’s drag on jobs, incomes and wealth equality.
This argument is downright insulting to the public. It is not beyond the ability of reasonable sentient humans to comprehend that there were multiple causes of the crisis.
It is clear that both the Clinton and George W. Bush administrations encouraged broadened ownership of homes. It may be that they intended to offset the effects of voodoo economics that the Reagan administration had put in motion. These crushed middle and lower class incomes and wealth and immensely enriched the 1 percent. Assistance to acquire an investment in a house was intended to offset that.
Regardless of the fact that an aggressive housing policy was a necessary condition to the occurrence of the crisis, the financial sector facilitated the financing of bad loans and their sale around the globe. It was these financing structures that failed, and it is now clear that many in the sector saw it coming and just kept raking in the profits for as long as they could. To top it off, the financial sector also created a highly concentrated and interconnected system of finance that was (and still is) subject to catastrophic failure. These were the proximate causes, as they say in legalese, meaning the ones that count.
This, of course, conveniently omits Washington Mutual. But even ignoring this, it is still incorrect. While it is true that Bear Stearns, Lehman, and AIG were not depository institutions, they were elements of a financial sector that was defined by the big banks. When the big depository banks got into the investment banking and trading businesses, the entire financial sector went through a massive consolidation. Commercial banks acquired some investment banks, and the commercial banks merged into mammoth institutions.
The remaining investment banks consolidated and grew by going public. While there were dozens of major investment banks in the 1980’s, by 2008 there were only five. Lehman went bust, and Bear Stearns and Merrill Lynch were merged into big depository banks to technically avoid failure. Goldman and Morgan Stanley converted to depository banks overnight to come under the wing of the US Government, and then there were none.
As for AIG, this behemoth insurance company was known when I was on Wall Street as the place to go if no one else would buy your deal. It was not surprising to me that AIG went down because it was so connected to the big banks as an outlet for risky deals. Regardless, the failures of Lehman, Bear Stearns and even AIG were not the problem.
The problem was that these failures came within a hair’s breadth of bringing the entire financial system and all of the big banks to a crashing stop. The reason was that the big banks were far too big and interconnected.
It is clear that the community banks were excluded from most regulation in the Dodd-Frank Act pursuant to an agreement reached by Barney Frank and the lobbyist for smaller banks to secure tacit approval of the bill. Nonetheless, there are some compliance burdens and, given the power of the community bank lobby, they will be ratcheted back.
But it is important to note that the troubles of the community banks predate Dodd-Frank and even the crisis itself. Their problems arise from the inability to resist the incursions of the mega-banks and the decline in local business activity. Moreover, companies have benefitted heavily from financial reform, though you would not know it from listening to their complaints. They get better deals from the banks and the reforms protect them from being ripped off by the banks in complex and costly deals.
When all else fails, the financial sector claims that a rule or regulation will kill liquidity. They do this because their target audience is unlikely to understand the nuances of liquidity, much less fact check the claim. The principal claim is that financial regulation has damaged bond market liquidity, which is directly dependent on liquidity in the US Treasury bond market since most prices reference treasury rates.
In a July report, the Fed reports that there has been no discernable decline in liquidity in that bond market. Moreover, Tiemann Investment Advisors has published a thorough analysis that finds that corporate bond market liquidity is not falling. On top of all this, the markets have had an overabundance of liquidity for years and could use some cooling down.
There are plenty more financial regulation myths floating about and expect them all to surface in the presidential debate as well as in the periodic, death-defying showdowns over funding the government. Just remember, they are not true.