Elizabeth Warren Calls Out Wall Street

by Dollars and Sense

From James Kwak at Baseline Scenario; hat-tip to LF.

Although the Consumer Financial Protection Agency made it through the House more or less intact, the banking lobby is taking another, better shot at killing it in the Senate, and is planning to use the magic words: "big government" and "bureaucracy." Elizabeth Warren wrote an op-ed for Tuesday's Wall Street Journal that lays out the confrontation. For most of the past two decades, many Americans trusted the banking industry—not necessarily to be moral exemplars, but they trusted that the banks were basically doing what was right for customers and for the economy. Then in 2007-2008 that mood abruptly reversed, as it became apparent that unscrupulous mortgage lenders, the Wall Street banks that backed them, and the credit rating agencies had been ripping off mortgage borrowers on the one hand and investors on the other.

The big banks face a choice. They can agree to sensible reforms that protect consumers and rein in the excesses of the past decades. Or they can simply decide to screw customers, but do it openly this time, since they have so much market share it almost doesn't matter what customers think. How else do you explain, say, Citigroup's concocting a new credit card "feature" explicitly to get around a new requirement of the Credit CARD Act? Or Jamie Dimon saying that financial crises are something to be expected every five to seven years, so we should just get over it?

A year ago, it might have been possible to twist the banks' arms hard enough to get them to agree to new ways of doing business (such as a CFPA), because they needed government support so badly. Now it's too late. So the solution has to come from the other kind of arm-twisting—pressure from the president, the administration (that means you, Tim Geithner), and ordinary voters. If people feel screwed by the financial sector—and many of them should after the past decade—then they should want the CFPA.

But last month, Republican political consultant Frank Luntz wrote a memo laying out how Republicans could kill financial regulatory reform. "Ordinarily, calling for a new government program ‘to protect consumers' would be extraordinary popular," he wrote. "But these are not ordinary times. The American people are not just saying ‘no.' They are saying ‘hell no' to more government agencies, more bureaucrats, and more legislation crafted by special interests." The goal is simple: to make Americans think that the CFPA is their enemy, because it's part of the government, and that the banks are nice cuddly ewoks by comparison.

This is absurd.

We like to make fun of government in this country, but really, what are you and a few of your buddies going to do to fight JPMorgan Chase on your own? For all of our beloved rugged individualism (and our individual right to handguns), it doesn't do much good when you're up against your credit card issuer. There is no Chicago-school free market solution to an oligopoly that, on top of all its other advantages, has an implicit government guarantee that gives it a major funding cost advantage over its competitors. One of the purposes of government is to protect ordinary people from forces (hurricanes, terrorists, monopolies) against which free market forces do not provide adequate protection. This is why we need a Consumer Financial Protection Agency. And this is what Frank Luntz wants to trick people into forgetting.

Read the original post.

Labels: Baseline Scenario, CFPA, Elizabeth Warren, James Kwak

 

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2/09/2010 09:59:00 AM 0 comments

 

The Preliminary G20 Financial Reform Meeting

by Dollars and Sense

Yves Smith cautions us to view the communique with caution. She also says this on the quibble on the Basel II (which were wholly ineffective in the run-up to the crisis, and indeed contributed mightily to it) capital adequacy standards between the US and France.


Simon Johnson says that assumption that we need modern (characteristic of the last 30 years) finance for economic growth, which all the G20ers seems to assume as gospel, is misconceived. He also says that modern finance has provided, more than anything else, a means for the wealthy to capture state power. The former point cannot be made emphatically enough after the bogus recapitalization of the banks.

Finally, perhaps to illustrate the latter point in a particularly enraging way, here's what some of the creative minds in finance have been up to lately.

Labels: bailout, banking regulation, Baseline Scenario, financial crisis, G20 summit, insurance industry, international finance, Naked Capitalism, securitization, shadow banking system, Simon Johnson

 

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9/05/2009 02:47:00 PM 0 comments

 

This Is What We Get for All the Bailout Money

by Dollars and Sense

Two related posts here: Simon Johnson of Baseline Scenario looks at the shakeout in the banking system that he says is leading to the creation of a two-tier economy that benefits connected-insiders of virtually Naomi Klein proportions (that's him, not me). And here's also a FT piece from early July that goes into the matter in more detail.

And Yves Smith discusses one way in which this is being done, via the use of forms of leverage that contributed to the blowup last year. Seems like we really saved the banking system only to increase the likelihood that we'll be hit by it again. I hope, if that happens, we don't repeat this mistake again next time.

Labels: bailout, Baseline Scenario, financial crisis, Naked Capitalism, Naomi Klein, Simon Johnson, Yves Smith

 

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8/29/2009 11:28:00 AM 0 comments

 

How Insurers Value End of Public Option

by Dollars and Sense

From a posting on Baseline Scenario (from a few weeks ago, reposted by Mark Thoma at Economist's View) by Arindrajit Dube, who will be joining our friends and comrades at U-Mass Amherst soon. Here's a tidbit:

President Obama may have harsh words for the insurance companies. But those are not the words investors in these companies are paying attention to. They are paying attention to whether President Obama will sign a bill with vague "co-ops" or demand a public option. And the reaction by these investors bodes poorly for "co-ops" fulfilling their role as a serious competitive alternative to private insurance companies.

This guest post was written by Arindrajit Dube, an economist at UC Berkeley Institute for Research on Labor and Employment who is joining the Department of Economics at the University of Massachusetts, Amherst. His work focuses on labor and health economics topics, as well as political economy.

Why have pivotal members of the Congress been reluctant to allow individuals the choice to buy into a public health insurance option? A political-economic reason is that the "bipartisan" group of six senators responds more to the interests of health insurance companies than public opinion, including the median voter. While this is hard to assess directly (although we do know they receive substantial campaign finance from insurance companies), we can however observe the effects of (a somewhat unanticipated) decision they made on those who stand to privately benefit from that decision.

Here is how the share prices of three major insurance companies (Cigna, United Healthcare Group, Aetna) responded on Tuesday, July 28 to the Monday night announcement that the group of six senators is going to eliminate the public option from their version of the health care reform legislation [graph produced using Yahoo Finance]. We have basically an 8-10 percent gain for these companies from the Senate announcement. And as the graph below shows, the S&P 500 index (yellow) was essentially flat. The market caps of these three companies together are around $53 billion, which suggests a $4-5 billion value from the announcement by the group of 6.

Read the rest of the post

Labels: Arindrajit Dube, Barack Obama, Baseline Scenario, Economist's View, health care, insurance industry, public option

 

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8/18/2009 09:54:00 AM 0 comments

 

Two Views of the Crisis

by Dollars and Sense

A brief, clear comparison from Simon Johnson on the Baseline Scenario blog:

There are two views of the global financial crisis and—more importantly—of what comes next. The first is shared by almost all officials and underpins government thinking in the United States, the remainder of the G7, Western Europe, and beyond. The second is quite unofficial—no government official has yet been found anywhere near this position. Yet versions of this unofficial view have a great deal of support and may even be gaining traction over time as events unfold.

The official view is that a rare and unfortunate accident occurred in the fall of 2008. The heart of the world’s financial system, in and around the United States, suddenly became unstable. Presumably this instability had a cause—and most official statements begin with “the crisis had many causes”—but this is less important than the need for immediate and overwhelming macroeconomic policy action.

The official strategy, for example as stated clearly by Larry Summers is to support the banking system with all the financial means at the disposal of the official sector. This includes large amounts of cash, courtesy of Federal Reserve credits; repeated attempts to remove “bad assets” in some form or other, and—the apparent masterstroke—regulatory forbearance, as signaled through the recent stress tests.

But most important, it includes a massive fiscal stimulus implying, when all is said and done, that debt/GDP in the United States will roughly double (from 41% of GDP initially, up towards 80% of GDP).

Not surprisingly, funneling unlimited and essentially unconditional resources into the financial sector has buoyed confidence in both that sector and at least temporarily helped shore up confidence in financial markets more broadly.

And now, in striking contrast to the dramatic action they call for on the macroeconomic/bailout front, the official consensus claims relatively small adjustments to our regulatory system will be enough to close the case—and presumably prevent further recurrence of problems on this scale. If the exact causes and presumed redress are lost in mind-numbingly long list of adjustments, so much the better.

This is, after all, a crisis of experts—they deregulated, they ran risk management at major financial firms, they opined at board meetings—and now they have fixed it.

Maybe.

The second view, of course, is rather more skeptical regarding whether we are really out of crisis in any meaningful sense. In this view, the underlying cause of the crisis is much simpler—the economic supersizing of finance in the United States and elsewhere, as manifest particularly in the rise of big banks to positions of extraordinary political and cultural power.

If the size, nature, and clout of finance is the problem, then the official view is nothing close to a solution. At best, pumping resources into the financial sector delays the day of reckoning and likely increases its costs. More likely, the Mother of All Bailouts is storing up serious problems for the near-term future.

We’ll double our national debt (as a percent of GDP), and for what? To further entrench a rent-seeking set of firms that the government determined are “too big to fail,” but will not now take any steps to break up or otherwise limit their size.

We need to disengage from a financial sector that has become unsustainably large (see slides before and after #19; the cross-country data should be handled with care). We can do this in various ways; there is no need to be dogmatic about any potential approach—if it works politically, do it. But the various current proposals for dealing with this issue—both from the administration and the leading committees of Congress—would make essentially zero progress.

As moving in this direction does not seem imminent, the probable consequences or—if you prefer—collateral damage looks horrible. You can see it as higher taxes in the future, lower growth, a bigger drag on our innovative capacity, fewer startups, and less genuinely productive entrepreneurship. Plenty of people will be hurt, and they are starting to figure this out—and to think harder about what needs to be done and by whom.

“Small enough to fail” may well prevail eventually—at least sensible ideas have won through in past US episodes—but it will take a while. The official consensus always seems immutable, right up until the moment it changes completely and forever.

Go to the original blog for links, including the slides he mentions.

Labels: bailout, banking crisis, banking regulation, Baseline Scenario, deregulation, finance sector, financial crisis, financial regulation, fiscal stimulus, larry Summers

 

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6/23/2009 09:57:00 AM 0 comments

 

Confusion, Tunneling, and Looting

by Dollars and Sense

Interesting post from the blog Baseline Scenario.

Emerging market crises are marked by an increase in tunneling—i.e., borderline legal/illegal smuggling of value out of businesses. As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves.

Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt. Confusion helps the powerful, he argued. When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms. The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.

This is the prospect now faced by the United States.

Treasury has made it clear that they will proceed with a "mix-and-match" strategy, as advertized. And people close to the Administration tell me things along the lines of "it will be messy" and "there is no alternative." The people involved are convinced—and hold this almost as an unshakeable ideology—that this is the only way to bring private capital into banks.

Read the rest of the post.

Labels: bank nationalization, Baseline Scenario, Corporate Fraud, financial crisis, fraud, nationalization

 

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3/06/2009 02:33:00 PM 0 comments