Several Items on Banking Regulation

by Dollars and Sense

Several interesting items about financial (re-)regulation, and the unlikelihood of anything approaching adequate regulation getting through Congress, have come across our desk.

First, the business section of Friday's New York Times had a pretty good piece by Joe Nocera on financial regulation, Have Banks No Shame? He partially skewers Barney Frank for watering down the planned regulations, and there are some nice quotes from MIT economist Simon Johnson, a vocal critic of the banking industry. But Nocera ends up endorsing the flawed bill, even with its severely weakened provision for a consumer financial protection agency.

Next, our friends Jane D'Arista and Gerald Epstein and folks at the Political Economy Research Institute have started a new organization of economists pushing for tougher banking regulation:

Economists' Committee for Stable, Accountable, Fair and Efficient Financial Reform
September 2009 -- The Economists' Committee for Stable, Accountable, Fair and Efficient Financial Reform (SAFER) is a focal point, clearinghouse and coordinating mechanism for progressive economists and analysts to gather and present their views on financial re-regulation and reform; to reach, to the degree possible, a consensus on the key issues relating to regulation and reform; and to help incorporate this work into the public debate over these issues that will ensue over the coming six to nine months or so. By bringing these analysts together to speak in a concerted voice, we will be able to broaden the perspective on financial regulation and reform, and enhance our impact on this public debate.

SAFER was founded by economists Gerald Epstein and Jane D'Arista. Read more about them and the other analysts involved with SAFER here.

Next, the Sunlight Foundation's blog has a great post (with this great graphic) about how members of the House Financial Services Committee are "on F.I.R.E":

One year after the biggest economic collapse since the Great Depression, Congress is still debating new financial regulations to protect consumers and prevent risk-taking in the financial sector. The House Committee on Financial Services is currently undertaking the important first step of writing, amending and voting on some of the pieces of the long-proposed financial regulatory reform. While debating these issues top committee members have been the recipients of disproportionate campaign contributions from the very industry that they are tasked with regulating. Twenty-seven committee members have so far received over one-quarter of their contributions from the finance, insurance and real estate (FIRE) sector. This includes Chair Barney Frank, Ranking Member Spencer Bachus, four subcommittee chairs and four subcommittee ranking members. Of the twenty-seven, twelve committee members received over 35% of their contributions in 2009 from the FIRE sector. Ranking Member Bachus, a crucial decision maker on the committee, received 71% of his campaign contributions from the finance, insurance and real estate (FIRE) sector so far this year. (These numbers run from January 1-June 30.) For his career, the Alabama congressman receives 45% of his contributions from the FIRE sector. Bachus leads the committee in his reliance on FIRE sector campaign contributions. Bachus has taking a position in opposition to most of the regulatory reforms. Bachus recently stated in a hearing, “this is absolutely the wrong time to be creating a new government agency empowered not only to ration credit, but to design the financial products offered to consumers.

Read the rest of the post.

Last but not least, the Buffalo News had an article on the conference of post-Keynesians that was held in the rust-belt city last weekend (with D&S classroom readers available at the book exhibit). The article has its charmingly corny moments, starting with the title (get it?) and the first quotation, but it's nice coverage.

Scholars Are "Keynes" on Regulation

Economists Argue Financial Instruments Need More Scrutiny

By George Pyle | The Buffalo News, N.Y. | Oct 10, 2009

Before the financial meltdown, before the housing bubble, even before the dot.com crash, the weakness of the American economy had its roots in the collapse of its industrial base.

That was the argument of a Cornell University scholar, who said Friday that it was therefore appropriate that a conference of economists pondering the roots and the remedies of the Great Recession chose to meet in Buffalo.

"All progressive economists, wherever they live, are residents of Buffalo," said Charles J. Whalen, a Ph.D. economist and former Buffalo resident, in an echo of the speech President John F. Kennedy delivered in West Berlin. "And, therefore, as an economist, I take pride in the words 'Ich bin ein Buffalonian.' "

Whalen was a presenter at the Cross-Border Post Keynesian Conference, a bi-annual gathering of like-minded scholars hosted this year at the Burchfield Penney Art Center by the Buffalo State College economics department. He was among those arguing that an economy that no longer invests in the manufacture of tangible goods finds itself inventing other, much more mysterious things in which to invest and, hopefully, make money.

But, they said, exotic instruments such as securitized mortgage certificates and credit default swaps not only don't provide the industrial infrastructure -- and the jobs -- that the old manufacturing economy built up, they also aren't fully understood by those who create them, those who buy them and those who regulate them. Or those who would regulate them if the law hadn't been changed to allow those financial processes to operate beyond the reach of government.

Eric Tymoigne, an economics professor from Lewis and Clark College in Portland, Ore., argued that new financial instruments should be regulated in the same manner as medicines, tested and approved before they are allowed on the market.

"If the side effects kill you," Tymoigne said, "it probably wasn't a good innovation."

Presenters in Friday morning's sessions condemned the deregulation of financial institutions that has been going on over the past 15 years, with the support of both Democrats and Republicans.

Robert W. Dimand, economics professor at Brock University in St. Catharines, Ont., said investment bankers convince themselves, and then convince government, that they can control their own creations and that they no longer need the kind of regulatory regime that was put in place in answer to the Great Depression.

"The mistakes in policy did not just happen," Dimand said. "They were mistakes that the banks lobbied for."

Participants said the deregulatory trend ignores the lessons of history as well as the precepts of noted economists such as the namesake of their conference, John Maynard Keynes, and the post-Keynes scholar that most of them cite in their work, Hyman Minsky.

Both taught that governments need to be more aggressive than they usually are in regulating financial markets and in stepping in with such things as public works spending during economic downturns. But, while Keynes is often cited (wrongly, these scholars contend) as arguing that government intervention is needed only rarely, Minsky was more explicit in claiming that markets are inherently unstable and run the risk of frequent global crashes without outside supervision and, as needed, intervention.

Whalen lamented that it is only in times of financial crisis that government leaders, and even most mainstream economists, heed Keynes or even hear tell of Minsky. The rest of the time, they said, both government and academia hew to the belief, which he called seriously mistaken, that markets are rational and self-regulating.

Buffalo State professor William T. Ganley quoted 19th century journalist Charles McKay to make his point: "Men think in herds and go mad in herds. They only recover their senses slowly, and one by one."

The conference continues today with sessions for scholars, students and, starting at 2 p.m., presentations that are open to the public at no charge. They include a lecture by Buffalo State history professor Mark Goldman on the Great Depression and Buffalo art culture, a panel discussion on the future of capitalism and, at 8 p.m. a presentation of songs, stories and images from the Great Depression entitled "... Whose Names Are Unknown."

Read the original article.

Labels: banking regulation, barney frank, Gerald Epstein, Jane D'Arista, Joe Nocera, PERI, post-Keynesianism

 

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10/14/2009 01:14:00 PM