Lame (Really Lame) Reform Part 2
It doesn’t improve overnight. Having vented my frustration at the extraordinarily limp regulatory response to the financial crisis yesterday I thought I would take a deep breath and come back today refreshed. My hope was that I would discover something I overlooked before which would then redeem the proposal.
No such luck.
“So the solution to bad risk management is to be wrong more quickly?”
A second reading merely confirmed my opinion: this proposal, which will most likely get watered down in Congress is lame stuff. I am not alone: the folks at The Baseline Scenario agree, as does Joe Nocera in today’s New York Times.
I won’t repeat my rant from yesterday, but I will provide you with more color.
Even the tone of the preamble is dull. It is almost entirely couched in a bureaucratically passive voice. No blame is apportioned. No fingers are pointed. There is no ire. This is despite the devastation that the failure of the financial system wrought. Instead what we get is a dry, detached, and deliberately evasive intonement of the things that need to be corrected. Some of the things that is. The big stuff? Not so much.
Nobody did anything wrong apparently. These were all jolly good chaps who just happened to be in the middle of a storm – that they had nothing to do with. What rotten luck!
Oh my.
Where, oh where, is the spine?
Some parts even read like a banker wrote them. The banks that are ‘to-big-to-fail’ mustn’t be ‘over regulated’ just in case that stifles our economic growth … or their profits? So instead of making sure that they can’t ruin our economy again, we will try to nudge them towards better behavior. After all we mustn’t hurt their feelings must we?
At another point we are told that banks should do their risk analysis more speedily. As if getting those models of theirs to run more quickly would help. How about getting the models right? We are going to rely on the old, and quite obviously wrong, models. So the solution to bad risk management is to be wrong more quickly?
Ugh.
I suppose I have to give up. Clearly there is no real intent on fixing the system. There are pages and pages of detailed proposals: exactly what you’d expect from a major bureaucratic effort. Lots of it seems very sensible. But none of it attacks with gusto the essential point: as long as there are banks big enough to ruin our economy we cannot run an effective economic policy. They will always have the potential to destroy our wealth. So what are we going to do with them?
Paul Volcker tells us that if they are too big to fail they should be severely limited in what they do. For instance they should be banned from trading derivatives on their own account. That eliminates the gambling part of banking and turns them into utilities churning out gobs of credit card, auto, and business loans. That sounds sensible. It won’t stop the from losing money in a future recession, but it would probably stop them from causing it. You know: like they caused this one with their gambling. I realize that such severe limits on activity takes all the fun out of banking and may even drive all that ‘top talent’ out. But after this crisis I have a yen for making sure the big banks are emasculated. Neutered. Like my big old cat: they can lumber around dull and staid and not do any harm. Heck they even become lovable.
Overall the entire proposals document oozes with smooth bureaucratic pablum. It seems designed not to upset the sensibilities of the bankers who caused our crisis and whose recklessness has cost millions of people their livelihoods. On the contrary, while banker lobbyists will not doubt claim that the proposals stifle the industry and cramp its innovative abilities, I see nothing in it that will stop a repeat asset bubble inflation and therefore economic crash: the document bends over backwards to avoid recrimination.
It’s as if we taxpayers simply love forking over cash to banks so that they can continue gambling and profiteering safe in the knowledge we will clean up after them.
We do don’t we?
