Posted by Pete Davis
As the Senate lurches toward the goal line on financial reform, senators and staff are doing their best curtail the future financial excesses of bad guys without harming good guys. It's not easy to do.
Derivatives -- How do you curtail "naked" bets without hurting hedges by "end users?" If you're a farmer or an airline, the last thing you want is higher costs of exchange trading, centralized clearing, and higher capital and margin requirements for hedging corn and jet fuel to reduce risks and increase transparency. Those higher costs could put some firms out of business. How do you distinguish "proprietary" trading from "market making" trading? A trade is a trade. It doesn't come with an attached electronic note that says, "A good client insisted on buying this, so we had to go short," or "We hate this client, so we're going short to screw him and make a lot of money." As Goldman executives tried to explain at an April 27 Senate hearing, the price of a trade determines how risky it is, not the existence of the trade. In other words, it may be a ripoff if you sell your newly painted clunker for $3,000, but it may be a good deal at $2,000.
Consumer Financial Protection Bureau -- Should this new regulatory body cover dentists who extend credit to patients? Should auto dealers be covered? Should small businesses be covered? If they are, they will incur higher costs and bureaucratic interference. Again, some good guys will go out of business, but some bad guys will too. The bad guys don't go around wearing signs that say "I'm a financial predator." Should a poor person with a bad credit history pay a higher price for a payday loan? Probably, but some payday lenders enjoy local monopolies that allow them to overcharge. If we limit what they can charge, does that help the poor person who can no longer get a loan? What about debt settlement companies, which step in to help those in over their heads? Most achieve enough debt reduction to justify their fees, but some fly-by-night operators have given the industry a bad name by collecting up front fees and failing to deliver much debt reduction. Will the new CFPB curtail mortgage lending for those who can't afford it, or will Congress act as it has in the past and push regulators to expand "opportunities" for home ownership?
Bank (fee) tax -- Although the $50 billion fee was dropped from the Senate bill, the idea could reappear. Charging large financial institutions a fee of 0.15% of their overall liabilities is a good idea in theory, but making it work in practice will be difficult. Most of the bad actors from the financial crisis are long gone. Why should the ones who survived pay? Well, many of them survived because of the government bailout, but, except for AIG and the auto companies, that money has been paid back at a very good rate of return for the taxpayers. If such a fee is imposed, will the existence of that trust fund embolden financial institutions to take more risks? That was one of the main reasons the fee was dropped.
Bottom line: Separating the bad guys from the good guys is very difficult and costly. As we economists like to say, there are lots of tradeoffs. We need more protection against future financial crises, but how much and at what price?
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The GSEs have not paid back bailout money
"except for AIG and the auto companies, that money has been paid back at a very good rate of return for the taxpayers."
You missed the GSEs, whose bailout has cost $145bn to date, and is expected by the CBO to cost a further $254bn over the next eight years.
GSEs
Of course. I was thinking private sector only, and I still have a hard time thinking of them as private entities. Good catch.
Honestly, come on. For every
Honestly, come on. For every single question you ask, the answer is 'how many unintended people will be effected and how vs. how many intended people will be effected and how', and estimate the overall value impact on society. Show me one federal level piece of legislation ever that didn't have a negative impact on at least someone that is wasn't supposed to. Just because you net in some nonzero population that you didn't want to doesn't directly imply this entire legislative effort is difficult.
Why avoid doing the necessary because it may be insufficient?
"As the Senate lurches toward the goal line on financial reform, senators and staff are doing their best curtail the future financial excesses of bad guys without harming good guys. It's not easy to do."
It is not. But just because something is not a sure thing, may not be sufficient, is NO REASON to disparage what is NECESSARY. Cessation from smoking will not guarantee good health, but id one IS interested in good health one does not smoke.
In the case of derivatives, the requirement would be that the originator of the derivative must have an insurable interest. Risk could be transferred by the farmer, airline, but not by those merely trolling for suckers.
Ditto for the argument against a cap on interest rates. While one could make the case that allowing an ER physician to charge what the market will bear in applying a tourniquet to a life threatening wound (the patient would, I agree, be better off alive than dead) most folks would find the patient/victim better served by price regulation in conditions that do not meet the conditions of asymmetric information and bargaining. (And you do know the difference between a hypothesis and a theory, que no?. So why confuse those that might not????)
Re bank fees and moral hazard, why did you omit "breaking up banks too big too fail? Where one to separate casino functions from functions facilitating trade (including legitimate transference of risk) one would care less whether one was "emboldened to assume more risk". If they assume too much, let them go belly up and good riddance. If some want to insure against "reasonable risk" with a pooled insurance vehicle let them. What I care about is that the banks not usurp MY RIGHTS, by forcing me to pay for their incompetence.
P.S. And please don't say "we economist". I too am an economist and I find what you write pure shill.
But then I was warned by Joan Robinson decades ago that economists come in two flavors, those that search for "truth" (with a small "t"), and those that say whatever pays the highest return, irrespective of impacts on others. Thankfully there many economists that understand the limitations, as well as the virtues, of markets. Joe Stiglitz, Robert Kuttner, Jamie Galbraith, Dean Baker, Simon Johnson, David Korten, Gar Alperovitz, William Black, Robert Reich are those that come immediately to mind. I suggest folks that want to avoid future banking crisis's listen to those.
Unfortunately truth does not pay as much as misdirection when there are really no "free markets", but rather entry is so limited to favor a few, whose private interests suggest these high payments for obfuscation.
"Yet Another Budget Wonk" but
"Yet Another Budget Wonk" but I see someone has stolen my name. But no big deal. Henceforth I shall be "The Commenter Formerly Known as ,,,"
Anyway, I agree with your post. The problems you describe mainly arise from a single mistake: treating what are essentially problems about numbers as problems based on identification of people. If the Senate would redefine the problem in terms of numbers, we get simple solutions that would be much better and have none of the classification issues you see. Example: instead of distinctions among users of derivatives, simply impose margin requirements that are marked to market every day - numbers. Then let people take naked bets if they post collateral for their liability every day. Similarly, instead of CFPB, just have have a national usury law that caps interest rates at some spread over Treasuries. Again - using numbers makes for a clearer and simpler solution to the problem of consumer overcharges.