Exactly one year ago, I wrote a piece entitled, “Financial Reform Bill Exposed As Hoax” wherein I expressed my outrage that the financial reform effort had become a charade. The final product resulting from all of the grandstanding and backroom deals – the Dodd–Frank bill – had become nothing more than a hoax on the American public. My essay included the reactions of five commentators, who were similarly dismayed. I concluded the posting with this remark:
The bill that is supposed to save us from another financial crisis does nothing to accomplish that objective. Once this 2,000-page farce is signed into law, watch for the reactions. It will be interesting to sort out the clear-thinkers from the Kool-Aid drinkers.
During the year since that posting, I felt a bit less misanthropic each time someone spoke out, wrote an article or made a presentation demonstrating that our government’s “financial reform” effort was nothing more than political theater. Last July, Rich Miller of Bloomberg News reported that according to a Bloomberg National Poll, almost eighty percent of those surveyed expressed “just a little or no confidence” that the financial reform bill would make their financial assets more secure. Forty-seven percent believed that the bill would do more to protect the financial industry than consumers. The American public is not as dumb as most people claim!
This past week brought us three great perspectives on the worthlessness of our government’s financial reform facade. I was surprised that the most impressive presentation came from a Fed-head! Thomas M. Hoenig, President and CEO of the Kansas City Federal Reserve Bank, gave a speech at New York University’s Stern School of Business, concerning the future of “systemically important financial institutions” or “SIFIs” and the Dodd-Frank Act. (Bill Black prefers to call them “systemically dangerous institutions” or “SDIs”.) After a great discussion of the threat these entities pose to our financial system and the moral hazard resulting from the taxpayer-financed “safety net”, which allows creditors of the SIFIs to avoid accountability for risks taken, Tom Hoenig focused on Dodd-Frank:
Following this financial crisis, Congress and the administration turned to the work of repair and reform. Once again, the American public got the standard remedies – more and increasingly complex regulation and supervision. The Dodd-Frank reforms have all been introduced before, but financial markets skirted them. Supervisory authority existed, but it was used lightly because of political pressure and the misperceptions that free markets, with generous public support, could self-regulate.
Dodd-Frank adds new layers of these same tools, but it fails to employ one remedy used in the past to assure a more stable financial system – simplification of our financial structure through Glass-Steagall-type boundaries. To this end, there are two principles that should guide our efforts to restore such boundaries. First, institutions that have access to the safety net should be restricted to certain core activities that the safety net was intended to protect – making loans and taking deposits – and related activities consistent with the presence of the safety net.
Second, the shadow banking system should be reformed in its use of money market funds and short-term repurchase agreements – the repo market. This step will better assure that the safety net is not ultimately called upon to bail them out in crisis.
Another engaging perspective on financial reform efforts came from Phil Angelides, who served as chairman of the Financial Crisis Inquiry Commission, which conducted televised hearings concerning the causes of the financial crisis and issued its final report in January. On June 27, Angelides wrote an article for The Washington Post wherein he discussed what caused the financial crisis, the current efforts to “revise the historical narrative” of what led to the economic catastrophe, as well as the efforts to undermine, subvert and repeal the meager reforms Dodd-Frank authorized. Angelides didn’t pull any punches when he upbraided Congressional Republicans for conduct which the Democrats have been too timid (or complicit) to criticize:
If you are Rep. Paul Ryan, you ignore the fact that our federal budget deficit has ballooned more than $10 trillion annually since the financial collapse. You disregard the reality that two-thirds of the deficit increase is directly attributable to the economic downturn and bipartisan fiscal measures adopted to bolster the economy. Instead of focusing on the real cause of the deficit, you conflate today’s budgetary disaster with the long-term challenges of Medicare so you can shred the social safety net.
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If you are most congressional Republicans, you turn a blind eye to the sad history of widespread lending abuses that savaged communities across the country and pledge to block the appointment of anyone to head the new Consumer Financial Protection Bureau unless its authority is weakened. You ignore the evidence of pervasive excess that wrecked our financial markets and attempt to cut funding for the regulators charged with curbing it. Across the board, you refuse to acknowledge what went wrong and then try to stop efforts to make it right.
David Sirota wrote a great essay for Salon entitled, “America’s unique hatred of finance reform”. Sirota illustrated how bipartisan efforts to undermine financial reform are turning America into – what The Daily Show with Jon Stewart called – “Sweden’s Mexico”:
On one hand, Europe’s politics of finance seem to be gradually moving in the direction of Sweden — that is, in the direction of growth and stability. As the Washington Post reports, that Scandinavian country — the very kind American Tea Party types write off with “socialist” epithets — has the kind of economy the U.S. can now “only dream of: growing rapidly, creating jobs and gaining a competitive edge (as) the banks are lending, the housing market booming (and) the budget is balanced.” It has accomplished this in part by seriously regulating its banking sector after it collapsed in the 1990s.
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After passing an embarrassingly weak financial “reform” bill that primarily cemented the status quo, the U.S. government is now delaying even the most minimal new rules that were included in the legislation. At the same time, Senate Republicans are touting their plans to defund any new financial regulatory agencies; the chairman of the House Financial Services Committee has declared that “Washington and the regulators are there to serve the banks” — not the other way around; and the Obama administration is now trying to force potential economic partners to accept financial deregulation as a consequence of bilateral trade deals.
Meanwhile, the presidential campaign already looks like a contest between two factions of the same financial elite — a dynamic that threatens to make the 2012 extravaganza a contest to see which party can more aggressively suck up to the banks.
Any qualified, Independent political candidate, who is willing to step up for the American middle class and set out a plan of action to fight the financial industry as well as its lobbyists, would be well-positioned for a 2012 election victory.
No Consensus About the Future
As the election year progresses, we are exposed to wildly diverging predictions about the future of the American economy. The Democrats are telling us that in President Obama’s capable hands, the American economy keeps improving every day – despite the constant efforts by Congressional Republicans to derail the Recovery Express. On the other hand, the Republicans keep warning us that a second Obama term could crush the American economy with unrestrained spending on entitlement programs. Meanwhile, in (what should be) the more sober arena of serious economics, there is a wide spectrum of expectations, motivated by concerns other than partisan politics. Underlying all of these debates is a simple question: How can one predict the future of the economy without an accurate understanding of what is happening in the present? Before asking about where we are headed, it might be a good idea to get a grip on where we are now. Nevertheless, exclusive fixation on past and present conditions can allow future developments to sneak up on us, if we are not watching.
Those who anticipate a less resilient economy consistently emphasize that the “rose-colored glasses crowd” has been basing its expectations on a review of lagging and concurrent economic indicators rather than an analysis of leading economic indicators. One of the most prominent economists to emphasize this distinction is John Hussman of the Hussman Funds. Hussman’s most recent Weekly Market Comment contains what has become a weekly reminder of the flawed analysis used by the optimists:
Hussman’s kindred spirit, Lakshman Achuthan of the Economic Cycle Research Institute (ECRI), has been criticized for the predictiction he made last September that the United States would fall back into recession. Nevertheless, the ECRI reaffirmed that position on March 15 with a website posting entitled, “Why Our Recession Call Stands”. Again, note the emphasis on leading economic indicators – rather than concurrent and lagging economic indicators:
Unlike the partisan political rhetoric about the economy, prognostication expressed by economists can be a bit more subtle. In fact, many of the recent, upbeat commentaries have quite restrained and cautious. Consider this piece from The Economist:
A great deal of enthusiastic commentary was published in reaction to the results from the recent round of bank stress tests, released by the Federal Reserve. The stress test results revealed that 15 of the 19 banks tested could survive a stress scenario which included a peak unemployment rate of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in housing prices. Time magazine published an important article on the Fed’s stress test results. It was written by a gentleman named Christopher Matthews, who used to write for Forbes and the Financial Times. (He is a bit younger than the host of Hardball.) In a surprising departure from traditional, “mainstream media propaganda”, Mr. Matthews demonstrated a unique ability to look “behind the curtain” to give his readers a better idea of where we are now:
When mainstream publications such as Time and Bloomberg News present reasoned analysis about the economy, it should serve as reminder to political bloviators that the only audience for the partisan rhetoric consists of “low-information voters”. The old paradigm – based on
campaign fundingpayola from lobbyists combined with support from low-information voters – is being challenged by what Marshall McLuhan called “the electronic information environment”. Let’s hope that sane economic policy prevails.