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« Stress-tested | Main | Deep Roots bonds »

Mar 25, 2010


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greensboro transplant

No. sitting on their hands during what you accurately described as "bank-bashing" was a good idea. (Just as the dems whoopin' and cheerin' when obama ridiculed the supreme court was inappropriate and a bad idea.)

We need a strong, private, banking system. hopefully that's the goal of any reform effort.

it's kinda odd that you link an advantage in reform to the reps reaction to o's pandering at what shouldn't be another campaign speech. not at all related.

Ed Cone

Political pressure is required to make reform a reality, because there's plenty of pressure in the opposite direction, on both parties.

My hope was that the Dems would choose public interest over Wall Street cash. I'm realistic enough to understand that they probably needed a reason (votes) to do the right thing.

Yes, a strong private banking system is the goal. We had one for decades, then made changes in rules and philosophy that allowed the bankers to ruin themselves, and us.

Good regulation protects the strong private banking sector.

Jim Caserta

When did we have a strong/private banking system? Jamie Dimon pointed out the ubiquity of crises recently, and if you go back pre-Depression they were just as regular.

We need some gov't involvement, ie FDIC. We also need to set it up so that a single institution failing does not cause systemic shocks. The idea that no gov't rescues will be done going forward, no matter the ideology of a gov't, is false. We can't have a let-em-fail philosophy, when the cost of failure is a system collapse. Firms, on their own, will not eliminate that risk, it has to be done through regulation.

I guess the difference between my comment & Ed's is the definition of a 'private' banking system. I think we agree on non-gov't run banks (Fannie would qualify as a gov't run bank) with strong gov't regulations.

Ed Cone

We had a strong private banking system from the '30s through the '90s. That period also saw sensible regulation.

Account Deleted

I have to agree with Ed that Glass-Stegall worked well for almost 70 years.

Jim Caserta

Semantics issue. The period you cite had obvious public influence on the banking sector through regulation.

Money quote:
“I don’t think people realize that this is an issue that almost every American wants to see passed. There’ll be a lot of pressure on every senator and every House member to pass financial regulation.”

Ed Cone

I think the disconnect is in the definition of "private banking system" -- I don't mean "private" as "no public influence," but as private ownership, and I think that's the commonly understood definition.

Beyond Glass Steagall, we needed to keep an eye on newer products and entities, and stuff like leverage ratios too.


Yeah, I agree the need for regulation eluded some sensible folks in the 2000's. The mere thought of it made them "pissed off" and "very upset". Why fix what's not broke?
Frank: "I don't see anything to report that raises safety and soundness problem". Maybe the current chairman of House Financial Service Committee will take things more seriously.

GT, whatever gave you the idea that one party was being singled out for blame for the financial crisis? Nobody bashes around here. we're just intellectually rigorous pragmatic problem solvers.


Keep an eye on K Street too.

Ed Cone

Blame for deregulation goes to both parties, with much of it done under Clinton and Rubin, as has been discussed here many times, CP.

Plenty of things to whine about at this shitty blog, no need to make stuff up.


If you catch someone whining or making stuff up , you let me know and I'll open up a can on 'em.

Steve Harrison

It helps to have a little context, Cheri.

During the time of this hearing, there was a huge push by the Administration and Republicans in both houses to (while they had the chance) set up the framework to dismantle Fannie and Freddie piece by piece. Not because they were corrupt or ineffcient, but because they wanted to shift control of that huge amount of business into the private sector.

That "regulation" they were referring to was (primarily) the establishment of a new directorship answerable to President Bush almost exclusively, which would have nearly unlimited powers to "decertify" individual GSE's managed by F&F, which would eventually, through attrition, accomplish something they could never do through Congress-the destruction of Fannie and Freddie.


Am I reading between your lines that you're confident Obama would never usurp comparable powers to similar purpose, ie that private health insurance, by attrition, will eventually go away? He has plainly stated that is what he would like to see. (Admittedly off-topic, but, hey, we all do it).

The fact is, these guys, one by one said "there was nothing wrong" with Fannie and Freddie. Bush's name and your theory about the motivation wasn't mentioned, and they were unbelievably rude and bullying (at least one of them) to a guy who was simply doing his assigned job.

I appreciate your attempt to interpret the statements in this hearing, though and I realize the video was likely spliced for maximum partisan effect. I've always found it unsettling and wanted more explanation. You're the first person who has ever tried. If you know a source to a more balanced summary of the dispute, I would like to see it and stand corrected if necessary.
(I know, Wiki- or Google it your own damn self)


Consider this: The idea of financial "reform" will be exclusively written by the politicians whose favorite little theme is "the more we spend, the more we save".

Their rhetoric on health care reform shows us the preview of what to expect from financial "reform". If they're successful in thugging this thing through, expect the their follow up pitch to resemble something straight out of a Billy May commercial: "But wait, there's more!"

Jim Caserta

Look at my 12:39 comment. That 'scandal' at Fannie was about smoothing earnings - you earn $2B one quarter, break even the next, you report as $1B this and $1B the next - overall gain/loss was the same. Nothing in THAT report showed real 'safety & soundness problems. Misconduct, yes, systemic risk, no.

That was not the reason Fannie is now under full gov't control. The source of problems:

1. They had huge leverage ratios (OK, it took to 7:33 for this to be raised), partially due to their
2. They had an implicit gov't guarantee.
3. Their mission kept them lending when the other systems dried up. This was akin to the fed buying MBS.

That Raines said that Fannie's assets (fannie's fanny??) were so riskless that they could support a leverage ratio (mentioned by Ed @ 2:06) of 50X is about as bad as Joe Cassano (AIG) claiming that AIG wouldn't lose a dime on credit default swaps.

The worst part was that lots of people who should be targeted by affordable housing programs stopped getting serviced by the GSE's during the bubble, and instead got toxic loans that Wall St. was buying & packaging.

That said, what we need is either a very small purely public program with a very limited scope, or real private programs. If everyone believes in an implicit backing, then the backing is there, and someone will pay for it.

The problems I listed at that point, Jan 2008, were overleverage and a mispricing of risk. Any FinReg should address those two. FWIW, home prices fell 23% since that point, for a net fall of 30% from peak (most of the fall is in the bubble regions, but everywhere has been impacted). It might be instructive to see who thought housing's problems were minor at that point, and who thought they were serious warranting in-depth analysis.


"The idea of financial "reform" will be exclusively written by the politicians whose favorite little theme is "the more we spend, the more we save"."

Minimally relevant to that or anything else, but possibly a microcosm of sorts, I learned twenty years ago that anytime my wife bursts into the house carrying bags and an excited look on her face saying "you wouldn't believe how much money I saved us today!" , I know I'm complete toast.

Jim Caserta

Most of that video focused on the accounting problems & shifting income from quarter to quarter. Eliminate that problem, and then saying GSE's would be OK, would be CP nipping my benign polyps and giving me a clean bill of health when my BP was 300/150. You can fix a problem or symptom and still leave the patient in an extremely unhealthy condition.

Ed Cone

Deregulating finance has cost a lot more than regulating it did.

What are the specific, expensive problems with the bills under discussion?


So the republicans mistakenly saw the polyp, not the BP as the bigger problem, and the dems saw no problem with either one and were angered by the unnecessary meddling that still left the patient in extremely unhealthy condition? That's putting it in terms I can understand. I must confess a lot of your economic analysis sails way beyond my grasp.

But Steve's interpretation, on the other hand, is that the repubs were insidiously trying to kill the patient by slow asphyxiation.
Well were they just incompetent, if well-intentioned, doctors, or were they Kevorkians?

Steve Harrison

"Well were they just incompetent, if well-intentioned, doctors, or were they Kevorkians?"

Well, you can read my partisan election year Dole-bashing from a few years ago (interesting debate with a Libertarian in the comments), and/or you can take a look at the American Enterprise Institute's observations, for instance:

" Perhaps most important, the bill gives the regulator the power to control Fannie and Freddie's assets and investment portfolio growth. If S. 1508 becomes the baseline for a Senate Banking Committee bill this year, it will be an important step forward.

The Committee has long been on record in favor of the complete privatization of Fannie and Freddie. In the Committee's view, regulation--even tight regulation--will never fully relieve the taxpayers of the potential liability associated with a congressional bailout of either company, and will not fully mitigate the potential systemic losses that a failure of either company might create.

While the Hagel-Sununu-Dole bill permits the regulator to establish standards “for the management of asset and portfolio growth,” the Committee believes this provision should be strengthened so that the regulator will have the power to limit on the size and compel the gradual divestment of Fannie and Freddie's mortgage and MBS portfolios. Only in this way, and not through tougher regulation, will the risks they create be substantially controlled.

The elimination of Fannie and Freddie's power to buy and hold mortgages and MBS will not significantly impair whatever value they provide to the mortgage market. They can continue to securitize mortgages they purchase from banks and other lenders. As Federal Reserve economists recently noted, the elimination of their power to purchase and hold mortgages and MBS will have a negligible effect on mortgage rates."

Jim Caserta

No, the polyp was there, but for the most part you've got it. Fannie engaged in accounting misconduct, it just wasn't a fatal problem. The Dems shown in the video did not see a problem with the leverage ratio.

However, many Republicans, then as now, do not like Gov't involvement in affordable housing for low-income populations. They may have been trying to Kevorkian the GSE's, but that would have been a mess. If we had said, 'there is no guarantee', how would that have been different than what they were already saying?

CP, you should be able to understand my writing, so the problem is with the writer not reader. Raines (Fannie CEO) said their assets were so riskless, 2% reserves were fine. Shays (R-CT) said most banks need at least 4%.

Say you have $100 in investments, a $100 loan, and $2 in cash to cover losses. If your investments fall to $95, you only have $97 to cover your $100 loan. Someone is unhappy. If you have $10 to cover losses you're in a much better position...but you would have made far fewer loans or paid out much less in dividends. If you believe your investments will never fall in value, you take a very aggressive approach with reserves.

Say the magic cost of a loan to me, due to my risk, is 6%. You want my business, so you charge me 4%. Even though you are only charging me 4%, the real risk is 6%. Someone is bearing the additional 2% of risk. In this simple case, it's you. Funny enough, in Fannie's case, it was you too! Unfunny, we were also bore a lot of the risk that AIG took - there was a lot to spread around.

FNM & FRE had a 'book of business' of $5T. 2%/yr mispricing of risk for 3 years is $300B.


"CP, you should be able to understand my writing, so the problem is with the writer not reader."

You give me too much credit on educational background, if not intellect, but that last post was more digestible.Thanks. Ditto Steve.


Steve, believe it or not, I didn't know you had a blog. Can I come over and play sometime?


"Deregulating finance has cost a lot more than regulating it did."

That is an unprovable statement as one cannot quantify the cost of regulation in a dynamic economy.

Andrew Brod

So Spag thinks the 70 years without a financial crisis was of such dubious value that we shouldn't mind the damage caused by the recent financial implosion?

In any case, many economists have found ways to quantify the cost of regulation, financial and otherwise. It's definitely doable.

Andrew Brod

Hey, I have an icon again.


"Hey, I have an icon again."

Did Krugman write something that sent a tingle up your leg?


Andrew, that isn't at all what I said. Go back and read my exact words. If you think you can quantify how the economy would have performed with more regulation during that time period, go for it. In order to fall from high places, one has to first get there.

Andrew Brod

That's not true. One can estimate how high the high place is. It's done all the time.


Then it must not be that hard. Go for it.

Andrew Brod

Dude, as requested, I read your exact words. You said one cannot quantify the cost of regulation. I said one can. If what you meant was that Andy can't do it, well, that's another discussion.

Steve Harrison

"Steve, believe it or not, I didn't know you had a blog. Can I come over and play sometime?"

You're more than welcome, Cheri. But you may want to bring a poncho, though. Every now and then the shit does actually hit the fan, and it gets all over the place when that happens.


"We had a strong private banking system from the '30s through the '90s. That period also saw sensible regulation. "

Tell us about the failure of the Savings and Loan banking system along with the governing body called RTC.....and then discuss sensible


Ed Cone

Marshall: no human system is perfect, and I don't think anyone would argue that the financial system operated flawlessly for all those decades.

It did, however, operate without the wheels coming off.

The S&L system did undergo a crisis -- although as you might remember, that crisis followed the deregulation of S&Ls.

That era thus presents a good argument in favor of sensible regulation.


Actually what you said was "So Spag thinks the 70 years without a financial crisis was of such dubious value that we shouldn't mind the damage caused by the recent financial implosion" which is not something Spag said or thinks at all.

So maybe we should ask why Andrew thought it was necessary to make that claim.

greensboro transplant


I agree, and i don't think anyone disagrees we need regulation (albeit we need effective regulation and not the sort that allowed madoff to operate for decades).

My concern is not that Obama's SOTU speech comments were designed to generate pressure, but that his comments were representative of a basic belief that banks and bankers are evil and that he has contempt for the private sector.

I don't think this is such a stretch as he clearly believes it about insurance companies. He has demonstrated his contempt for that private sector. he has also demonstrated contempt for CEO salaries - even in successful companies. i think he has a problem with capitalism.

"no human system is perfect, and I don't think anyone would argue that the financial system operated flawlessly for all those decades."

to that point, since the introduction of medicare and medicaid, we have been creating a healthcare system from a healthcare market. there wasn't widespread fraud in charges and payments prior to this. with the new legislation, we've added another system for insurance companies, unethical medical providers, drug companies, and even individuals to game to game.

Ed Cone

GT, there's a difference between castigating institutions for bad behavior, and demonizing the same insitutions as inherently evil.

The banks behaved badly. We need banks.

I'm comfortable that Obama is on the right side of that equation -- he recognizes the value of Wall Street and insurers, but also recognizes their excesses and their limitations.

In terms for politicking against Wall Street, it starts with speaking some simple truths, even if they are unpleasant ones. And as I said, a certain amount of fire is necessary to counter the politicking by Wall Street. Could it go too far? Sure, but I have not seen signs of that happening under the current administration (I've had more of the opposite worry).

Insurance companies (a target of public scrutiny back to the days of Teddy Roosevelt) are valuable in many ways, but are not set up to deliver adequate health coverage to a lot of people without regulation of the sort just passed into law.

The question is not whether the system is or can be perfect (no) but whether it is better than the alternatives.

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