Body
In Politico, I question whether the president should really be seen as "centrist" or "moderate" with regard to financial reform. His staff goes to great lengths to make this claim, including both the specific quotes and general tone in the Financial Times on Tuesday (May 18, p. 7).
Treasury Secretary Tim Geithner:
"I would say [the president] is fundamentally at the center and promarket. But he recognizes the market cannot solve all problems."
Larry Summers:
"Sometimes the most courageous thing to do is not to take the largest and most sweeping course of action."
But if this is the correct way to frame the president's position, how can we explain the fact that it is moderates—not left-wing radicals—who are pushing (against the White House, among others) for stronger reform both within the administration and in Congress? I suggest another interpretation: On financial reform, the president does not hold the middle ground.
Finally, the Republicans Come out to Fight. Where Is the President?
May 19, 2010
The Senate Republicans are refusing to allow a vote on the Merkley-Levin amendment, which would put a meaningful version of the Volcker Rule into law (splitting off proprietary trading from major banks).
After weeks of dancing around, the Democrats finally have a signature issue on which to fight. Senator Carl Levin frames it exactly right: "It's a sad day when the power of Wall Street can overwhelm the power of the American people in the US Senate."
This is the opportunity that White House claims it has long sought—to have an intense fight on a financial reform issue that everyone can understand. Paul Volcker made his determination long ago: the big banks are too big and must, in this fashion, be broken up. Senators Merkley and Levin negotiated the precise language of their amendment in good faith. The Republicans have made their answer clear: No way.
Time for President Obama to make the call.
Only the president can break through the daily logjam of information. Only the president can define the issues in the simple, powerful, and convincing terms that people can grasp. Only the president can insist—this is a matter of urgent national priority.
The economic analysis (Volcker), political back story (Brown-Kaufman and all that involved), and just the right rhetoric are already in place:
"We got into this financial crisis because Wall Street set the rules to benefit itself, and now with an assist from Senate Republicans, they're doing it again," said Merkley. "Obviously the lobbyists are afraid they'll lose this vote, and in typical Wall Street fashion their solution, with help from Senate Republicans, is to rig the result. Main Street is being shut out of this debate. It is time to stop letting Wall Street call the shots—let this amendment have a vote."
"The long arm of Wall Street reached directly into the Senate chamber today," Levin said. "By blocking us from even debating this amendment, the Republican leadership is carrying Wall Street's water and standing in the way of real reform."
This is a defining issue for the president. Either he takes up the Volcker Rule—proposed by his administration in January—to great fanfare (and some skepticism). Or he rolls over—admitting that Wall Street has won.
We know where Goldman Sachs and its allies stand on this issue—adamantly and publicly opposed. And we pointed out here in February which way the Republicans were likely to go.
"But if you don't have the votes in the Senate, what can you do?" This one is easy. You stop the clock and put everything else on hold. The president calls the American people to order and asks them to take a long hard look at the issues and the corporate interests at stake.
And then you start to pound away. Day in and day out, the president and other leading members of his administration need to come out swinging with relentless pursuit of substance on TV talk shows and prime time speeches—demanding an up-or-down vote on Merkley-Levin.
Admittedly, this may be awkward for leading officials, who have been rather accommodative to financial interests over the past 15 months or so. That's unfortunate (for them), but now entirely water under the bridge. All is forgiven to the policymaker who finally gets it and changes course in the right direction.
Don't move on. Pick up the baseball bat that Paul Volcker has given you. Either that or go down to the most embarrassing, humiliating, and memorable defeat in the history of Wall Street–Washington confrontations. It's the president's call.
Thinking about Financial Reform
May 17, 2010
There are three contending narratives regarding the financial reform legislation that this week approaches its final hurdles in the US Senate.
The first narrative is "the reforms would make things worse." This view, advanced recently by some Republican leadership, seems to have receded in recent weeks—at least with regard to systemic risk—particularly after Senator Ted Kaufman dealt with it rather brutally on the Senate floor. For the most part, this line has sunk down to the level of sneaky Astroturf campaigns.
There is still a rear-guard action by special interests against consumer protection on financial products, but here the administration started out with a sensible vision and—with strong support along the way from the likes of Elizabeth Warren—reasonable safeguards will eventually emerge. The biggest remaining item is probably the Whitehouse Interstate Lending Amendment, which would definitely help—call your senator, but only if you don't like being gouged by credit card companies.
The second narrative is "Obama administration as heroes." Against the odds, in this view, the administration has prevailed in the teeth of tough opposition.
The problem with this story is that—even in the official version—the only people who have been trying hard to strengthen reform, beyond the initial proposals, over the past year are those relatively outside the main White House–Treasury team: Gary Gensler and Paul Volcker.
Gensler has won some battles—although the final outcomes on derivatives are not yet clear. And, in any case, the industry won its main battle some months ago when the "end user" exemption prevailed. The big broker-dealers in over-the-counter (OTC) derivatives mobilized their clients to lobby the Senate Banking Committee—it was all handled in the most professional and (socially) damaging way possible. This loophole seems relatively small now (10 to 15 percent of all OTC derivatives), but no doubt it will expand greatly over time. Watch this space closely for the next crisis.
Volcker's ideas are still in play—in fact, the big fight this week will likely be on the Merkley-Levin amendment, which would greatly strengthen the idea that the biggest banks should stop already with their "proprietary trading," which leads them into great and completely botched risks, as well as repeated conflicts of interest with their clients.
The big banks have no good arguments on their side—they are reduced to asserting that being able to take risks in this manner actually makes the system more stable, a point directly contradicted by their experience in the run up to September 2008. It was the bank's own holdings of "toxic assets," you may recall, that were the focus of rescue attempts organized by both Hank Paulson and Tim Geithner. Holdings at this scale were not acquired in the day-to-day mundane business of bringing buyers and sellers together. Instead, very smart people at the big banks thought this was a good investment—a point on which they proved devastatingly wrong.
The administration says it favors Merkley-Levin, but let's see how hard they fight for it. Personally, I rather expect their support will be lukewarm and this will ultimately not tip the balance. I'd be happy to be proved wrong.
More broadly, of course, all of these reforms add up to little more than "baby steps." The big mistake was made long ago, when the administration decided not to push the megabanks when they were politically weak (the argument of 13 Bankers). This was only compounded and confirmed when Treasury and the White House came out against the Brown-Kaufman amendment.
As a result, the financial system will remain largely the same as it was before September 2008—perhaps the megabanks will be slightly constrained in their activities, most likely not (at least for Goldman, JPMorgan Chase, and Morgan Stanley).
As we argued in our start of the year piece on Bloomberg, all of this sets us up for another boom-bust cycle, this time centered around emerging markets. Savings will be recycled out of emerging markets through "too big to fail" banks and similar institutions in the United States and some parts of Western Europe—generating debt-based capital flows back into other parts of those same emerging markets.
"China can only go up," "Russia is back," and "Brazil and India are now different" are the siren calls. And of course, to some extent there is truth in this rhetoric—but the expectations are already becoming exuberant.
All great bubbles begin with a truly convincing shift in fundamentals. And many of them are kept going by reckless lending on the part of Citigroup and its competitors—remember emerging markets in the 1970s and 1990s, US commercial real estate in the 1980s, and US residential real estate in the last decade.
