There are those who believe we have made great strides with Dodd-Frank and if we implement it well, all will be fine. Some believe that that the industry is over-regulated, which may be true, but we should not confuse over-regulated with well-regulated. And some of us are certain that in spite of all that’s been done and debated, the soundness of the largest financial institutions and the systemic risks they continue to pose is no better. In my view, it is even worse than before the crisis. As well-intentioned as the Dodd-Frank Act may be, it will not improve outcomes.
It was not intended to improve outcomes. It was intended to polish the knobs of Jamie Dimon, Lloyd Blankfein and others by not only providing the cover for the Statute of Limitations to expire, but also to prevent meaningful reform.
There are many villains in the story of the recent crisis and much written to name them, describe them and even curse them. If you want to know how it happened, read “Thirteen Bankers” and “All the Devils Are Here.” If you want to know how to fix the problem, I highly recommend “Regulating Wall Street,” from New York University’s Stern School of Business. If you want to understand why the American public refuses to ignore the injustices associated with executive compensation in bailed out companies versus budget cuts borne by the middle class, read Rolling Stone’s article “Why isn’t Wall Street in Jail?” If you wonder why “no one saw it coming” then I suggest you read up on Brooksley Born or, a decade later, Meredith Whitney.
You could also read the upcoming book Leverage, which will point out not just why it happened this time, but more-importantly why it always happens, why we have a history of doing the same stupid things and why we had better change our ways – along with how we can.
But I get ahead of myself…. by a few months….
Or, you might even read the remarks of an Iowa-educated bank regulator turned-policy maker in Kansas City. Fifteen years ago, I gave a speech entitled “Rethinking Financial Regulation,” which summarized the major threats facing our financial system. My suggestion then was to take steps to reduce interdependencies among large institutions and to limit them to relatively safe activities if they chose to provide essential banking and payments services and be protected by the federal safety net.
Eh. The problem with the system as it exists today Mr. Hoenig is that it is designed to allow people in these institutions to lie.
Sound banking is not all that difficult to do. One Dollar of Capital along with forcing all derivative and other market bets into the open where they’re blinded and exchange-traded (so as to force margin supervision on a nightly basis) solves nearly all the problems.
But that means there’s no scam to be had in complex securitized products. You can’t appear to “create money out of air” by ignoring the common law of business balance. You can’t lie to people and get away with it.
Instead, banking becomes a simple and low-margin thing. It’s a payment-clearing mechanism, primarily.
We must make the largest institutions more manageable, more competitive, and more accountable. We must break up the largest banks, and could do so by expanding the Volcker Rule and significantly narrowing the scope of institutions that are now more powerful and more of a threat to our capitalistic system than prior to the crisis.
How about just prosecuting the scams, starting with the one at The Fed. You know, the butchering of the English language where “stable prices” becomes “2% inflation” – which in fact turns into about 3%, or looked at another way, a ninety-five percent devaluation of purchasing power of the dollar over 100 years.
It is no coincidence that two principal features of this crisis were heavily bloated safety nets and major financial institutions that were treated as being too big to fail. History shows that these two elements have become more intertwined – the growth of one is linked to growth of the other, in an increasingly pernicious cycle.
Actually, you could simply call it what it is – financial terrorism.
What do you think the authorities would call it were I to call in a threat to blow up the financial landscape if I didn’t get $700 billion? Is that really any different than threatening to do it with a hydrogen bomb?
Both are, in essence, the same thing. Both are a threat to blow everyone – and everything in the economy – to bits if you don’t get what you want. And both are born of first creating a mess which leads to to make a demand that the government “cannot refuse.”
Let’s just call it what it is: Financial Terrorism.
Then Hoenig goes on to advocate a few things….
More effective supervision. The idea of more effective regulation and supervision is a major focus in the Dodd-Frank Act.
Really? Where is the “or else” in that legislation? Can you find a criminal penalty? Nope. There isn’t one. It is therefore well over a thousand pages of exactly nothing, because there is no penalty if the law is ignored.
As an example, two decades ago we were told that supervision based on “prompt corrective action” was the answer to the thrift and banking crisis of the 1980s. This system may have led to more timely supervisory enforcement steps and established a timeframe for the resolution of most institutions.
Prompt corrective action was ignored because there is no penalty clause in the legislation. It therefore is a legal nullity, and the results were obvious.
Higher capital standards. I also support stronger capital standards, especially in the form of a maximum leverage ratio based on equity capital. The idea of more effective regulation and supervision is a major focus in the Dodd-Frank Act.
One dollar of capital against each dollar of unbacked credit exposure, marked to the market nightly.
End of problem.
Of course, that presumes that anyone in positions of power and authority actually want to fix it.
Isn’t it easier to steal huge bonuses and then kick some of it back through “campaign contributions” to lawmakers?
Now there’s something to think about.