June 28, 2010
You don’t have to look too far to find damning criticism of the so-called financial “reform” bill. Once the Kaufman-Brown amendment was subverted (thanks to the Obama administration), the efforts to solve the problem of financial institutions’ growth to a state of being “too big to fail” (TBTF) became a lost cause. Dylan Ratigan, who had been fuming for a while about the financial reform charade, had this to say about the product that emerged from reconciliation on Friday morning:
It means that the same people who brought you these horrible changes — rising wealth discrepancy, massive unemployment and a crumbling infrastructure – have now further institutionalized the policies that will keep the causes of these problems firmly in place.
The best trashing of this bill came from Tyler Durden at Zero Hedge:
Congrats, middle class, once again you get raped by Wall Street, which is off to the races to yet again rapidly blow itself up courtesy of 30x leverage, unlimited discount window usage, trillions in excess reserves, quadrillions in unregulated derivatives, a TBTF framework that has been untouched and will need a rescue in under a year, non-existent accounting rules, a culture of unmitigated greed, and all of Congress and Senate on its payroll. And, sorry, you can’t even vote some of the idiots that passed this garbage out: after all there is a retiring lame duck in charge of it all. We can only hope his annual Wall Street (i.e. taxpayer funded) annuity will satisfy his conscience for destroying any hope America could have of a credible financial system.
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In other words, the greatest theatrical production of the past few months is now over, it has achieved nothing, it will prevent nothing, and ultimately the financial markets will blow up yet again, but not before the Teleprompter in Chief pummels the idiot public with address after address how he singlehandedly was bribed, pardon, achieved a historic event of being the only president to completely crumble under Wall Street’s pressure on every item that was supposed to reign in the greatest risktaking generation (with Other People’s Money) in history.
Robert Lenzner of Forbes focused his criticism of the bill on the fact that nothing was done to limit the absurd leverage used by the banks to borrow against their capital. After all, at the January 13 hearing of the Financial Crisis Inquiry Commission, Lloyd Bankfiend of Goldman Sachs and JP Morgan’s Dimon Dog admitted that excessive leverage was a key problem in causing the financial crisis. As I discussed in “Lev Is The Drug”:
Lloyd Blankfein repeatedly expressed pride in the fact that Goldman Sachs has always been leveraged to “only” a 23-to-1 ratio. The Dimon Dog’s theme was something like: “We did everything right . . . except that we were overleveraged”.
At Forbes, Robert Lenzner discussed the ugly truth about how the limits on leverage were excised from this bill:
The capitulation on this matter of leverage is extraordinary evidence of Wall Street’s power to influence Congress through its lobbying dollars. It is another example of the public servants serving the agents of finance capitalism. After pumping in gobs of sovereign credit to replace the credit that had been wiped out and replace the supply of credit to the economic system, a weak reform bill will just be an invitation to drum up the leverage that caused the crisis in the first place.
Another victory for the lobbyists came in their sabotage of the prohibition on proprietary trading (when banks trade with their own money, for their own benefit). The bill provides that federal financial regulators shall study the measure, then issue rules implementing it, based on the results of that study. The rules might ultimately ban proprietary trading or they may allow for what Jim Jubak of MSN calls the “de minimus” (trading with minimal amounts) exemption to the ban. Jubak considers the use of the de minimus exemption to the so-called ban as the likely outcome. Many commentators failed to realize how the lobbyists worked their magic here, reporting that the prop trading ban (referred to as the “Volcker rule”) survived reconciliation intact. Jim Jubak exposed the strategy employed by the lobbyists:
But lobbying Congress is only part of the game. Congress writes the laws, but it leaves it up to regulators to write the rules. In a mid-June review of the text of the financial-reform legislation, the Chamber of Commerce counted 399 rule-makings and 47 studies required by lawmakers.
Each one of these, like the proposed de minimus exemption of the Volcker rule, would be settled by regulators operating by and large out of the public eye and with minimal public input. But the financial-industry lobbyists who once worked at the Federal Reserve, the Treasury, the Securities and Exchange Commission, the Commodities Futures Trading Commission or the Federal Deposit Insurance Corp. know how to put in a word with those writing the rules. Need help understanding a complex issue? A regulator has the name of a former colleague now working as a lobbyist in an e-mail address book. Want to share an industry point of view with a rule-maker? Odds are a lobbyist knows whom to call to get a few minutes of face time.
At the Naked Capitalism website, Yves Smith served up some more negative reactions to the bill, along with her own cutting commentary:
I want the word “reform” back. Between health care “reform” and financial services “reform,” Obama, his operatives, and media cheerleaders are trying to depict both initiatives as being far more salutary and far-reaching than they are. This abuse of language is yet another case of the Obama Administration using branding to cover up substantive shortcomings. In the short run it might fool quite a few people, just as BP’s efforts to position itself as an environmentally responsible company did.
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So what does the bill accomplish? It inconveniences banks around the margin while failing to reduce the odds of a recurrence of a major financial crisis.
The only two measures I see as genuine accomplishments, the Audit the Fed provisions, and the creation of a consumer financial product bureau, do not address systemic risks. And the consumer protection authority was substantially watered down. Recall a crucial provision, that banks be required to offer plain vanilla variants of products, was axed early on.
So there you have it. 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.
Not Getting It Done
August 9, 2010
Are the Democrats trying to lose their majorities in both the Senate and the House in November? Their two biggest accomplishments, the healthcare “reform” bill and the financial “reform” bill haven’t really impressed the electorate. According to a Gallup Poll, voter reaction to the passage of the “Affordable Healthcare Act” is 49 percent contending that the bill is a “good thing” as opposed to 46 percent who believe it is a “bad thing”, with 5 percent undecided. Criticism of the “Wall Street Reform and Consumer Protection Act of 2010” has been widespread, as I have previously discussed here, here and here. The latest critique of the bill came from Professor Thomas F. Cooley, of the Stern School of Business at NYU. His Forbes article entitled, “The Politics Of Regulatory Reform”, was based on this theme:
Rahm Emanuel’s infamous doctrine, “You never want a serious crisis to go to waste” is apparently being disregarded by Rahm Emanuel and company at The White House. Of course, the entire economic catastrophe has provided the Obama administration with a boatload of crises – most of which have already gone to waste. For example, consider this fiasco-in-progress: The “small business” sector plays such an important role in keeping Americans employed, a bill to facilitate lending to small businesses has been sponsored by Senator Mary Landrieu (D-Louisiana). An August 7 report by Sharon Bernstein of the Los Angeles Times provided this update on the status of the measure:
The ineffective efforts of Senate Democrats are unfairly souring public opinion on their more unified counterparts in the House. In attempt to redeem the image of Congressional Dems, House Speaker Nancy Pelosi scheduled a special session of Congress for Tuesday, August 10, (an interruption of their August recess) to pass a $26-billion bill to avert public employee layoffs.
With the passing of time, it has become more obvious that President Obama’s biggest mistake since taking office was his weak leadership in promoting the economic stimulus effort. Many commentators have expressed the opinion that Christina Romer’s resignation as chair of the President’s Council of Economic Advisors was based on her frustration with the under-funded stimulus program.
I recently wrote an “I told you so” piece, referencing my July, 2009 prediction that it would eventually become necessary for President Obama to introduce a second stimulus bill because the $787 billion proposal would prove inadequate. At his blog, liberal economist Paul Krugman similarly reminded readers of his prediction about the consequences for failing to pass an effective stimulus bill:
The reality has turned out even worse than Krugman’s prediction because we are now approaching September 2010 – an election year – and the unemployment rate is being understated at 9.5 percent. The conflation Krugman discussed has manifested itself in the narrative of the Tea Party movement. In September of 2009, I discussed why Obama should have been listening to Australian economist Steve Keen, who – by that point – was saying basically the same thing:
Economist Joseph Stiglitz recently provided us with this update about how the global financial crisis is affecting Australia in August of 2010:
Meanwhile, President Obama and the Democrats have decided to utilize a mid-term campaign strategy of assessing all of the blame for our current financial chaos on President George W. Bush. Criticism of this approach has been voiced by people outside of the Republican camp. Frank Rich of The New York Times lamented the lack of message control exercised by the Democrats and their ill-advised focus on the Bush era:
At this point in American history, it’s becoming more obvious that the two-party system has served no other purpose than to perpetuate the careers of blundering grafters. The voting public must accept the reality that the only way it will be honestly and effectively represented in Washington is by independent candidates. The laws that keep those independents off the ballots must be changed.
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