Blogs and Stories
The Looming Banking Battle
Chip Somodevilla / Getty Images
Chris Dodd's proposal to reregulate Wall Street puts Obama’s efforts to shame—but it doesn't go far enough, says Jeff Madrick. Still, the fight brewing over the senator's plan will at least force Washington to face the reality of the banking mess.
Perhaps democracy works! Running for reelection to the Senate and scarred by accepting a discount mortgage from Countrywide, Christopher Dodd (D-CT) managed to hear the anger America now feels toward Wall Street. He has ushered through the banking committee, which he chairs, a proposal to reregulate Wall Street that puts both Barney Frank’s and the Obama administration’s efforts to shame. It has teeth, relevance, and some moxie. It is also clumsy, inadequate (if less so), and kicks the can down the road on the more difficult decisions.
What is most striking in the whole discussion is how little serious analysis is taking place on all sides of the regulatory-proposals arguments.
But Dodd deserves congratulations for facing reality when his counterparts at the other end of the Capitol and the other end of Pennsylvania Avenue continue to bury their heads in the sand. And that’s to be charitable. They may simply be more willing to comply with the demands of the financial lobbyists who have basically set up camp on the Hill. Dodd has a decidedly different political agenda.
The shallowness of the Obama white paper, issued last June, is now only too obvious. It could not hold together an intellectual consensus and certainly not a political one. Its only serious reform of financial institutions was to enable the Federal Reserve to raise capital requirements (and restrict leverage) both for banks and nonbank financial institutions deemed too big or too interconnected to fail. At least it included the nonbanks—mostly the investment banks that made up the banking system, now called the shadow banks.
• Jeff Madrick: Why Washington Won't Prevent Another Meltdown
• Nomi Prins: How Big Banks Fleece You The Obama team apparently gave little thought to why the Fed would be up to the job after having failed so dismally to do it for 20 years. The Fed had plenty of tools to tighten the screws on the commercial banks. Had it been imaginative, it may have figured out it could even regulate the major investment banks as primary U.S. bond dealers, a bit of authority its chairman, Alan Greenspan, gladly gave away in the 1990s as being too interventionist. The Fed essentially didn’t do its job because it was dominated by the free-market fundamentalism of Greenspan, the disciple and romantic idolator of libertarian Ayn Rand.
Dodd knows better. He would basically strip the Fed and three other agencies of key supervisory powers over banks. His proposal also would create a consumer protection agency to oversee credit cards and mortgages, as would Obama. Again, the Fed would lose its consumer powers to the new agency.
As for the all important systemic risk regulator, as it has come to be called, Dodd would not rest the authority with the prestigious Fed, in contrast to Obama. Dodd’s proposal has a nine-member board with an independent chairman to determine who is too big to fail, set higher capital requirements, and have the authority to cut a bank’s size if necessary.
This is fairly radical stuff by Washington standards today. The Fed’s nose is more than a little out of joint. But it is not good enough. One supervisory regulator for supervisory tasks may indeed make sense. But why would a board do better than the Fed at managing systemic risks? Won’t they be subject to the complaints of the industry or overconfidence in the next boom? I think they may well, but at least they will not be the bankers’ agency, as the Fed now is, with all its hauteur.
Stars Celebrate the Super Bowl
The Daily Beast is dedicated to news and commentary, culture, and entertainment. We carefully curate the web’s most essential stories and bring you original must-reads from our talented contributors.
How Rich People Smoke Pot
Paul Schrodt is a writer living in New York City. He has contributed to New York magazine, Radar, and Esquire.com.
Geithner's Stock Plummeting
Jeff Madrick is a contributor to the New York Review of Books and a former economics columnist for the New York Times. He is editor of Challenge Magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.
Why Washington Won't Prevent Another Meltdown
Jeff Madrick is a contributor to the New York Review of Books and a former economics columnist for the New York Times. He is editor of Challenge Magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.
The Do-Nothing G-20
Jeff Madrick is a contributor to the New York Review of Books and a former economics columnist for the New York Times. He is editor of Challenge Magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.
Ozone69
Dodd is playing catch up ball. His coziness with bankers and insurance execs is almost laughable. His authorizing of the bonuses to bailed out company executives is almost criminal. When will Conn. vote him out?
hockeydog
"The American people probably assume an educated and well-staffed set of lawmakers..."
The American people assume nothing of the sort!
The American people assume that Dodd, and all the rest of our esteemed House of Lards will do what they have always done.
Bluff and bluster, blow and show, while they pad their own bank accounts, and take care of themselves, showing nothing but disdain for the little people. Then when their own re-elections are imminent, these little people are suddenly, and miraculously transformed into "voters".
crypto
It's hard to second guess the state of Conn. But I believe , if he has a modertately strong challenger, Dodd will be gone this time. Voters across the nation are looking into these sleazeballs wallets as well as their own. Suddenly it becomes astounding. "These guys have gotten rich and I can't pay for my home" Yep, this may be the year of the voter.
MCrothers
This proposed legislation, like health care, has a tiny element of genuine public policy, and a much greater element of political gamesmanship. Most legislation is passed to prove to the electorate that 'we did something' -- it limps out of congress to the president's desk to unleash its muted impact and unintended consequences. Here's a thought: this is just a political feint to give Mr. Dodd some cover in his upcoming campaign. He and 'Wall Street's Man' in the senate, Charles Schumer, are presiding over a piece of financial reform that will never pass, but they'll get to crow about how they stood up for reform in the aftermath of the financial crisis while taking calls from the investment bankers between committee hearings. It's just gaming the system to insure self-preservation.
greeneg1114
So, is it better for Dodd to propose legistation that actually has teeth that will never pass, or weak legislation that will pass so he can be seen as "doing something"? You can't have it both ways...
MCrothers
The 'political education' of Ben Bernanke, administered by Rep. Barney Frank (the House Financial Services Committee Chairman) represents the other side of this legislation. Mr. Frank's legislation is the 'weak legislation' that will pass because 1) 'reform' and 'oversight' are synonymous with a liberal progressive agenda and Mr. Frank's bill (or the house bill) will have the imprateur of 'reform' without actually doing much and 2) he is actively coaching and conversing with the Fed Chairman to preserve the Feds relative autonomy and oversight within the legislation. To your point: I believe that Mr. Dodd will be able to have it both ways. He'll take a tough stand for reform, and have final bill look much more like Mr. Frank's (which won't compromise his political donor base). If he looses the election, then chalk it up to anti incumbency . . . Mr. Schumer is there to keep the torch lit for the financial establishment. The provenance for Secy Geithner, Mr. Summers, Mr. Bernanke, the six or eight heads of the banks and Insurance Giants are all relatively similar so the idea of 'regulation' and 'oversight' is a bit like the wolf guarding the hen house. This is another act of political theater meant to assuage anger on 'main street.' In my opinion, the repeal of Glass Steagall was a watershed moment in creating the structural conditions that brought about this crisis. There SHOULD be a firewall between commercial banking and investment banking, but the desire to increase the inertia of capital throughout the financial system (and therefore the profits) proves time and again to be too strong. 'Doing with less' is not an American ideal, it's an unfortunate temporary condition for quite a few of us -- myself included.
Michael323
A tax on financial transactions is clearly justified, as actions within this industry have brought about great costs to the government and tax payers. I'd like to see some serious detailed proposals on this.
periscope
The Raygun/Republican Party legacy of deregulation has not done enough damage yet I guess.
The fact is the banks, Wall St., and any other investment entities need to be strictly monitored or greed will allow them to come up with other "derivatives" that provide short term payoffs for the executives and long term disaster for the country.
How many times do we have to repeat economic collapse before the people demand rigid, control of our financial system????
hammer
Chris Dodd is an imbecile. If you listened to his questions and comments during the Congressional hearing a year or so ago you would know he knows nothing. He is you basic politician taking graft, helping his friends, waffling on issues and acting imperious. His nearly 2000 page proposal is full of favors, earmarks and doesn't address the real problems.
He should:
1) Adjust the Glass-Steagall passed by in the 1990s
2) Repeal the "Enron" loophole on derivatives.
3) Adjust mark-to-market accounting so that traders cannot recognize all the cashflows upfront on a present value basis.
4) Require traders to partially fund their business with their own capital.
5) Crack down on "bogus" capital like deferred tax credits.
6) Stop the shams of FHA loans, Fannie and Freddie bailouts by politicians and the continuation of life support of AIG.
7) Close the Fed discount window for trading arms of firms. Where else in the world can traders and speculators borrow at 0 to 0.25%?
Instead, Dudd is proposing yet another bureaucratic nightmare that will not stop systemic risk and avert the next subprime like crisis. Dudd has never had a bill that he sponsored let's hope we can keep it that way.
MCrothers
I like the list, but real reform (as you enumerate) has real consequences . . .also, as an aside, wasn't Glass Steagall repealed in the 90s? It was passed in the 30s in the aftermath of the Great Depression. We've been strenuously avoiding 'real consequences' since Mr. Paulson' epoch making announcement invoking TARP . ... the subsequent bank bailouts and the abrogation of shareholders rights with Chrysler & GM's pre-packaged bankruptcies . . . or was it slowly accumulated in all of Mr. Greenspan's testimonies before the Senate Banking & Finance Committee -- a montage of those grousing testimonials is like listening to a married man extricate himself from evidence of an inamorata before a council of women who both want to be the lover and alternately upbraid him for cheating -- the powerful exhibiting coquetry about money. Her identity is never known, but her existence is unquestionable and the evidence is atmospherics. Simon Schama could do an expose on him -- clips of Greenspan and quotes from "The Sphinx" with 'disambiguation' from the curator/archivist/forensic accountant, Schama. Good, dry stuff.
Perhaps the Pols are right, adding another half a million to the unemployment roles by letting the auto companies fail would have tipped the country into Depression, but the 'cure' is looking a lot like Japan's "Lost Decade." More than just the 10 states the Pew Study highlighted in its financial health study are going to be in deep **** by the end of 2010. We are a 1st world nation sliding much faster than I would have imagined toward the 3rd world -- the revaluation of salaries, wages, etc, banana republic style economic policies (protecting crony capitalism and printing money). Is 'social media' going empower the consumer and drive the economy forward? Facebook maybe? It'll employ technologists and ad wonks, but what are people buying, and more importantly, what are they producing? People will work for a lot less than the would have a year ago . . . and populist outrage will be really just a lever with which to change the color of a bunch of seats in the Congress, but it won't change much operatively. The professional class still believes in it's right to professional compensation -- we can't cap a doctor's salary, a pharmaceutical company's marketing budget or an insurance company's health policy cost . . . let alone a bankers pay or a lawyers hourly rate, but we can advise the middle class to work for a lot less and charge everyone for health care. I am entirely dystopic about the future of America.
crypto
WOW Hammer!! Good stuff!!!
gameon
The same fools who got us into this mess,Dems. and repubs.,are the same ones we put in charge to fix it.I can't be the only one who thinks this is insane.
We should vote out all incumbents for at least one round of voting,elect successful business people,leave social issues aside and take care of our financial problems,balance our budgets and stop the endless cycle of political tricks and cronyism.
Chris Dodd is bought and paid for by the banking industry,do you honestly think he would do anything to jeopordize his cushy Senate job?Any regulations he puts in place will have an equal amount of loopholes and deregulations that allows the money changers to manipulate and screw us in ways we haven't even heard of yet.
We have to stop this financial mismanagement and bank bailout mentality or we'll all suffer greatly from this excessive national debt.It's unsustainable.
MarkMedinnus
Really? "...the free-market fundamentalism of Greenspan"
The sun was shining on the sea,
Shining with all his might:
He did his very best to make
The billows smooth and bright -
And this was odd, because it was
The middle of the night.
AmericanMuser
The announcement of financial overhaul legislation in the U.S. Senate last week smacked of irony as its author, Senator Chris Dodd-the recipient of a sweetheart rate on his own home mortgage-announced a sweeping 1,136 page piece of legislation to "protect consumers." It appears at this point that the protection consumers and Middle America really need is from this nation's politicians, who have too long lined their pockets with campaign contributions from big business and who have allowed financial institutions to fleece Middle America.
It wasn't but a couple of years ago that big business and congress all but eliminated the ability of consumers to effectively discharge their debts in bankruptcy proceedings. At the same time, banks and financial institutions were making loans to borrowers who clearly could not qualify. Banks, financial institutions and credit card companies continued extending generous limits on credit cards and lines of credit to consumers. Now be fair, much of the mortgage activity came from Democrats in congress who believed that everyone had an inalienable right to own a home, evidently whether they could afford it or not. And naturally, Republicans, who long ago sold their soul to big business, positioned their bank and financial institution contributors for all of the mortgage business.
Middle America knew and assumed the risk that what goes up would someday come down, perhaps crashing down, which it did. But when it did and as many Americans lost and continue today to lose their jobs, bankruptcy was and is simply not an available option. Our politicians and big business have virtually eliminated it as an effective option for many consumers.
Now, consumers that are interested in honestly reworking their mortgages cannot even get a return phone call from their lender, and if they do they are told they do not qualify for any sort of loan modification.
So here we are-after encumbering themselves with mortgages they cannot afford, credit cards and credit lines they cannot pay down, financial institutions have the shameless and arrogant audacity to raise consumers' credit card interest rates to 30%. Clearly, consumers have to take a certain degree of responsibility for their own condition, but how did our elected members of congress and the senate allow big business to systematically repeal consumer protections at virtually every turn?
Middle America really needs to understand how and why our politicians have allowed financial institutions to raise credit card interest rates to a level that is clearly usury. No consumer knowingly consents to a 30% interest rate, regardless of whether there's a meaningless disclosure on the back of his or her monthly credit card statement on page 3 in tiny type font. Nor do consumers knowingly consent to what has become an ordinary practice by banks and financial institutions of charging consumers $35 for overdraft protection or checks returned due to insufficient funds. Sure, consumers can choose to bank elsewhere, but the practice of fleecing consumers with fees has become so universal by financial institutions that consumers really have no choice.
Without bankruptcy as a viable option for many in Middle America, there is plenty of pain left in the pipeline for years to come as consumers will remain enslaved with unmanageable consumer debt. With no end in sight, consumers will continue to labor under the heavy load of mortgages on devalued homes they cannot afford, credit card bills they cannot pay, and no available remedy in a bankruptcy court that can set them free to start over. It appears that consumer protection is dead and caveat emptor is alive and well.
A. Muser
http://americanmuser.wordpress.com/
Thank you.
As a first time user, your comment has been submitted for review. It can take anywhere from a few hours to a day or two for your comment to be reviewed, depending on the time of week and the volume of comments we receive.