Five Guideposts For Understanding As American Financial “Reform” Proceeds
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25 May 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com.
The US now starts the process of legislatively finalizing the finance “reform” bill.
As this painfully slow and agonizing march proceeds, here are five “guideposts” to make the whole thing easier to understand – even if you don’t “believe” some of the things that are happening.
25 May 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com.
The US now starts the process of legislatively finalizing the finance “reform” bill.
As this painfully slow and agonizing march proceeds, here are five “guideposts” to make the whole thing easier to understand – even if you don’t “believe” some of the things that are happening.
The first is that it’s so limited that everyone on Wall Street is breathing a sigh of relief, as this article in the New York Times points out:
[quote]The financial reform legislation making its way through Congress has Wall Street executives privately relieved that the bill does not do more to fundamentally change how the industry does business.
Despite the outcry from lobbyists and warnings from conservative Republicans that the legislation will choke economic growth,
bankers and many analysts think that the bill approved by the Senate last week will reduce Wall Street’s profits but leave its size and power largely intact.
[/quote]
Many executives apparently spent the weekend trying to assess the impact of the legislation, which has yet to take the all-important final form.
With some crucial differences between the House and Senate versions of the bill remaining,
lawmakers will confer over the next few weeks and try to reach a final version before Congress’s Fourth of July recess.
This is to give you some sense of the time-line involved in this crucial legislation, so you won’t wonder why it seems to be taking so long – everybody knows this from the beginning.
And even if you aren’t American, who can forget the endless saga of the health “care” “reform” legislation ???
Don’t expect this to take much less time … 😉 …
All this said, Wall Street’s initial verdict seems to be that it could have been much more worse.
And given the time-line involved, there will be plenty of opportunity for industry officials to take actions that, in their view, will soften several of the most “punitive” provisions before it will FINALLY be signed into law.
Which, of course, brings up the SECOND key point:
This is going to be a lobbying bonanza probably unparalleled in American history –
and, given the eternity of the health “care” drama, that’s saying something.
And not to be too cynical about how effective this lobbying effort by the banks and the rest of the financial sector is going to be, here’s some historical perspective:
[quote]When Congress split off commercial banking from investment banking in the early 1930s, after the Crash of 1929,
there were predictions that Wall Street was hamstrung and businesses would not be able to raise capital as a result, said Charles Geisst, a professor of finance at Manhattan College.
“Almost all of the same arguments that you’re hearing today were made then,” Professor Geisst said.
“It’s hard to keep them down, they ultimately find a way. I’m sure they’re finding a way to work around these new rules even before they’ve passed.”
[/quote]Consider that for a moment:
“I’m sure they’re finding a way to work around these new rules even before they’ve passed” –
and that’s BEFORE the lobbyists have had their chance to get to the Congresspeople involved,
which, as THIS article from the New York Times makes clear, you can be sure, they most assuredly will:
[quote]Last Wednesday, Representative David Scott, Democrat of Georgia, mingled with insurance and financial executives and other supporters at a lunchtime fund-raiser in his honor at a chic Washington wine bar before rushing out to cast a House vote.
Nearby, supporters of Representative Michael E. Capuano, Democrat of Massachusetts, gathered that evening at a Capitol Hill town house for a $1,000-a-head fund-raiser.
Just as that was wrapping up, Representative Peter T. King, Republican of New York, was feted by campaign donors at nearby Nationals Park at a game against the Mets.
It was just another day in the nonstop fund-raising cycle for members of the House Financial Services Committee,
which has become a magnet for money from Wall Street and other deep-pocketed contributors,
especially as Congress moves to finalize the most sweeping new financial regulations in seven decades.
Executives and political action committees from Wall Street banks, hedge funds, insurance companies and related financial sectors
have showered Congressional candidates with more than $1.7 billion in the last decade,
with much of it going to the financial committees that oversee the industry’s operations.
In return, the financial sector has enjoyed virtually front-door access,
and what critics say is often favorable treatment from many lawmakers.
[/quote]
The THIRD major guidepost is understanding the “thinking” behind the Obama administration’s “strategy” when it came to financial “reform”, as yet another article from the New York Times makes clear:
[quote]Broadly speaking, there were two ways for the federal government to respond to the financial crisis: supersize regulation or downsize the financial industry.
The Obama administration chose more regulation.
The financial legislation passed by the Senate last week, largely built to specifications that the administration provided last summer,
vastly increases the scope and sophistication of federal regulation.
It grants more resources and more authority to those charged with overseeing the industry.
It is hoped that this will produce better results.
The bill does not, as some liberal Democrats and populist Republicans had advocated, require the breakup of conglomerated behemoths.
It does not prohibit some of the most speculative genres of Wall Street trading.
It does not reduce the vast menagerie of financial companies that compete with banks.
[/quote]Which, undoubtedly, is why Wall Street is, in general, so happy with what the administration and its Democratic allies in Congress – the grateful recipients of all that lobbying money – are putting forward.
But wait – there’s more !!!
[quote]The approach embraced by President Obama largely reflected the judgments of Treasury Secretary Timothy F. Geithner and Lawrence H. Summers, the director of the National Economic Council.
They argued that the financial system was fundamentally sound, and that the problem was a lack of government.
[/quote]And what a surprise THAT is from the people who GAVE the world basically unregulated derivatives 😉 .
[quote]“Our assessment was that the deepest problems seemed to be associated with failures of regulation,
and that’s why strengthening regulation is the approach that we chose to take,” Mr. Summers said Friday in an interview.
He emphasized that the legislation did not simply rely on an improved performance by regulators.
It also creates larger margins for error and tries to give companies incentives to behave.
[/quote]Just what the world financial system needs – larger margins for error !!!
And we’ve seen how well – NOT – companies respond to “incentives to behave” if it interferes IN ANY WAY with their profits.
[quote]Mr. Summers compared the approach to increasing highway safety through seat belt laws and guardrails, rather than relying on driver education.
“This is not a system that relies on people being smarter in the future,” he said.
[/quote]Well, isn’t THAT reassuring, since, as Professor Geisst pointed out above, those “smart” people have probably ALREADY figured out to GET AROUND whatever forms the regulations finally DO take.
In that context, the FOURTH major “guidepost” is that, if there is ONE institution that is going to get more power, it will be the Federal Reserve.
And you thought it would be an independent Financial Consumer Protection Agency ???
You must be thinking of a DIFFERENT Obama administration.
[quote]In particular, the administration waged a long and ultimately successful fight to maintain the Federal Reserve as the nation’s central financial regulator.
The legislation would significantly expand the Fed’s powers and responsibilities.
Senate Finance Committee chair, the soon-to-be-retired Christopher Dodd proposed last fall that the Fed instead be stripped of its regulatory responsibilities.
He said in an interview that he still had misgivings about the administration’s approach but that he had lost the argument.
Administration officials said there was no viable alternative to the Fed.
It was, in one of Mr. Geithner’s favorite phrases, a case of “plan beats no plan.”
[/quote]Really ???
But somehow the “smart” people in the Obama administration couldn’t quite grasp that.
[quote]The real test of this legislation, of course, will be the next crisis.
But several of the bills’ architects also cited a more immediate benchmark: restoring faith in the financial system.
Ms. Warren said that her grandmother lived through the Great Depression in the dust bowl of Oklahoma, and long afterward would say that the presidency of Franklin Delano Roosevelt could be summarized in two parts:
he made it safe to put money in banks, and he did a lot of other good things.
“That’s how I think of this, too,” she said.
[/quote]Hmmmmm … and I guess the sovereign debt crisis happening now in Europe – not to mention the continuing disaster in the US housing sector – don’t constitute crises.
Must be nice to have lots of money.
And LAST BUT NOT LEAST – you didn’t think we’d leave out DERIVATIVES, did you – are our favorite “financial weapons of mass destruction.”
About the ONLY positive thing you can say about them is that they REMAIN one of the few UN-resolved aspects of this whole mess.
Unfortunately, they won’t be banned.
Nor will they even be fully transparent – and if the lobbyists have their way, well …
[quote]The biggest flash point for many Wall Street firms is the tough restrictions on the trading of derivatives imposed in the Senate bill approved Thursday night.
Derivatives are securities whose value is based on the price of other assets like corn, soybeans or company stock.
The financial industry was confident that a provision that would force banks to spin off their derivatives businesses would be stripped out,
but in the final rush to pass the bill, that did not happen.
The opposition comes not just from the financial industry.
The chairman of the Federal Reserve and other senior banking regulators opposed the provision, and top Obama administration officials have said they would continue to push for it to be removed.
[/quote]And to quote the ever-popular Gomer Pyle, “surprise, surprise, surprise” –
neither the now-even-more-powerful Fed NOR the Obama administration
are willing to take a hard line on the financial instruments
that have ALREADY caused the world economy to collapse, and are still making it hold on for dear life.
Again – what a surprise.
[quote]And Wall Street lobbyists are mounting an 11th-hour effort to remove it when House and Senate conferees begin meeting, perhaps this week, to reconcile their two bills.
Lobbyists say they are already considering the possible makeup of the conference panel to focus on office visits and potential fund-raising.
The House’s version of the bill does not include the tougher derivatives ban,
and Wall Street lobbyists said one chief target would be Representative Barney Frank, the Massachusetts Democrat who leads the Financial Services Committee and shepherded the House bill.
Others include Representative Paul E. Kanjorski, the Pennsylvania Democrat with a senior role on the House financial services panel,
and Representative Collin C. Peterson, Democrat of Minnesota, who leads the House Agriculture Committee, which has jurisdiction over futures contracts and derivatives.
“This is not the end of the process,” said David Hirschmann, senior vice president of the Chamber of Commerce, which has spent more than $3 million to lobby against parts of the bill.
[/quote]Does that sound like a promise or a threat 😉 ???
[quote]He said the chamber planned to keep fighting for a loosening of the regulatory restrictions —
first in the House-Senate conference,
then in the implementation phase after final passage of a bill,
and “if all else fails,” in court.
[/quote]Gee, do you think there’s something at stake here for these guys ???
[quote]Scott Talbott, a senior executive at the Financial Services Roundtable, a lobbying group that represents about 100 of the largest financial companies,
said his group had already begun meeting with House members it believes will be important in getting the derivatives restrictions stripped from the Senate bill.
While the industry’s objections are widely known this late in the debate,
Mr. Talbott said that the way to press the case was to meet with lawmakers and their aides as often as they could.
“There’s no substitute for old-fashioned gumshoe lobbying,” Mr. Talbott said.
“The staff here knows it. We offer to resole their shoes when they wear them out.”
[/quote]Okay, folks, there you have it – the best guideposts you could have as this monstrosity, in the Sartrean sense of course, makes its way through the torturous American legislative process.
Don’t say you haven’t been warned.
David Caploe PhD
Chief Political Economist
EconomyWatch.com
President / acalaha.com
