The Acid Test for Conservative Populism

Avatar

Will

Will writes from Washington, D.C. (well, Arlington, Virginia). You can reach him at willblogcorrespondence at gmail dot com.

Related Post Roulette

32 Responses

  1. Breaking up the banks is a reasonable thing to discuss (and I think Bernie Sanders solves the problem quite elegantly here), but Glass-Steagall is a total red herring. Arnold Kling puts it well:

    “Moss and others appear to blame the financial crisis on the repeal of Glass-Steagall. Yet most of them do not argue for restoring Glass-Steagall. No one says that restoring the separation between commercial banking and investment banking would prevent future crises. Hardly anyone even suggests that it would be helpful.

    People are not specifically arguing that Glass-Steagall was wonderful regulation. Instead, they are waving around Glass-Steagall in order to make a vague, generic claim that regulation works and deregulation fails.

    Beyond this generic “regulation good, deregulation bad” mantra, there is very little that these people have to say that specifically backs up their own regulatory proposals. In contrast, I say that housing policy, securitization, and regulatory capital arbitrage were at the heart of the crisis. I propose changing housing policy to stop trying to use cheap, lenient mortgage credit to promote affordable housing. I propose disconnecting the feeding tube of government support from the mortgage securities market. And I propose attempting to make failure of financial institutions a viable, credible option for regulators. There is a connection between my proposals and what I see as the causes of the crisis.”

    A very shallow look at the crisis yields the same intuition. With the glaring exception of Citicorp, the institutions that failed were generally NOT the ones that had combined investment and commercial arms. Glass-Steagall is largely irrelevant when discussing the Great Crash of ’09, and tends to be mentioned by some on the left largely due to a “regulation is a panacea” mentality that pays no attention to the substantive content of regulations.Report

    • Avatar Will in reply to Will Wilson says:

      Is it true that Glass-Steagall is largely irrelevant? I was under the impression some smart people – notably Paul Volcker and Joseph Stiglitz – think that the connection between investment and commercial banks contributed to the crisis:

      http://www.nytimes.com/2009/10/21/business/21volcker.html%5D

      Anyway, I probably shouldn’t have jumped into this debate without doing my homework. Thanks for the links.Report

      • Avatar Will Wilson in reply to Will says:

        Well, I’m not going to debate financial regulatory policy with Volcker, at least not before I challenge Zatoichi to a duel at dawn, though I may try to find out why he thinks G-S is so vital in a slightly more technical venue than the New York Times. I’m open to correction on this point, and I’ll let you know what I find.

        That said, friends close to the man tell me that he’s getting increasingly annoyed as Obama, Geithner, et al. haven’t listened to a word of his advice since this little situation started.Report

      • Avatar Will Wilson in reply to Will says:

        That said, friends close to the man tell me that he’s getting increasingly annoyed as Obama, Geithner, et al. haven’t listened to a word of his advice since this little situation started.

        Bah! Looks like the NYT article says the EXACT same thing! Clearly my confidential intel is no longer confidential intel…Report

    • Avatar Dave in reply to Will Wilson says:

      Glass-Steagall is largely irrelevant when discussing the Great Crash of ‘09, and tends to be mentioned by some on the left largely due to a “regulation is a panacea” mentality that pays no attention to the substantive content of regulations.

      Yes, this is a mantra that has been repeated by both right-leaning political talking heads and conservative/libertarian economists. However, since the repealing of Glass Steagall largely contributed to Citigroup’s becoming the massive monster that it became, it should be evaluated in light of that.

      It is not unreasonable to suggest that Citigroup’s status as Too Big to Fail had something to do with the repeal of the law that allowed Citicorp and Traveler’s to merge?Report

      • Avatar Will Wilson in reply to Dave says:

        Think about this like a scientist. If it were the case that repeal of G-S were the primary thing wrong, we would expect to see many institutions with combined investment/commercial arms failing and very few other institutions failing.

        Instead, we actually see the exact opposite. This suggests, while the repeal of G-S may have been a particular problem for Citigroup, that it is unlikely that it was the root cause for the more general crisis.

        Also, repealing G-S had nothing to do with Citigroup’s status as TBTF. Citigroup’s status as TBTF was primarily a product of Timothy Geithner’s brain, with a couple of secondary influences.Report

        • Avatar Dave in reply to Will Wilson says:

          I’ve never argued that G-S is a primary cause of the crisis although it is a primary reason (but not the sole reason) that Citigroup became the systemically significant firm that it did. If you want to prevent a TBTF scenario, a real easy place to start is to restrict the abilitiy of depository institutions to engage in proprietary trading activity.

          By the way, what were those secondary influences you were thinking of?Report

  2. Is Kling serious? AIG, an insurance corporation (that functioned well) minus the fact that it got involved in swaps. The GSEs were solvent on loans they issued but got in trouble because they dabbled in securitized debt. Investment banks that traditionally dealt with things like equities and commercial paper used derivitive instruments to leverage up and buy securitized debt. A lot of what led to a chain reaction in the overall capital markets that helped lead to the whole liquidity crisis was institutions dabbling in things they had no business doing as a matter of their general constitution.

    There’s a big bit of empirical data that does suggest that regulation works, deregulation doesn’t. Number of financial crises from 1945 – 1975? 1. Number of crises since? 19 and counting. There’s some evidence that the repeal of Glass-Steagall did lead to some problems in terms of the types of financial instruments held by institutions that were inappropriately structured for holding them.

    G-S is a red-herring in that it’d be impossible to reimplement it now without significant disruption in credit and capital markets, but something that requires different accounting and regulatory standards for investment vehicles with different maturity and subsequent separation of institutions between those maturity terms is probably a good idea. The main point of regulation in this case should be to build fire-walls around various types of financial instruments, not limit them entirely. We got in to a lot of trouble this time around because we left things interconnected so when one part of the financial sector blew up, it took the rest of it down with it.

    And on the subject of securitization and other instruments…
    Derivatives don’t kill banks. People using derivatives to leverage up kill banks.Report

    • Avatar Chris Dierkes in reply to Nob Akimoto says:

      nob,

      well said. one person off the top of my head (who I take very seriously) whose is talking about separation of investment from “regular” banking is Nicolas Nasim Taleb.

      Kling’s “no one is talking separation would end financial crises” is technically correct but essentially stupid. Separation of said instruments plus a rule structure whereby if you get into the investment game you either win or lose your money (i.e. you don’t ever get bailed out) wouldn’t end financial crises. It would simply firewall off those crises from so-called Main Street Economy and banking.Report

    • I’m not sure “empirical data” means what you think it means. That or somebody proved that correlation in fact implies causation while I wasn’t looking.Report

  3. I suggest the death penalty for the top 10 officers of any company that goes broke in a big enough way to require a government bailout. (Perhaps plea-bargained down to a year in jail and a fine of anything they’ve got left.)Report

  4. Avatar Herb says:

    I’m not sure Mike’s suggestion should be taken seriously, but if this was China, that would probably be happening. Which is why they’re going to kick our economic asses.

    Just look at how they executed…yes, executed…the main culprits in the melamine scandal. Heartless? Sure. But effective.Report

  5. Avatar Bob Cheeks says:

    And, oh yes, let’s have congress require banks to lend money to people who have no way of paying the loan. That works well!Report

  6. I think when it comes to conservative populism and these huige banks, the easiest question to ask ourselves is, “What would TR do?”Report

  7. Avatar Barry says:

    “As I said, I think this is a sound approach to financial reform. But I also think the politics of a “break up the banks” platform are tailor-made for a smart conservative populist. ”

    Which don’t exist, in any number worth mentioning. The strong point of the GOP for the past 40-odd years, IMHO, was mixing economic elitism with faux-populism, to the point where a Yale/Harvard graduate/millionaire/son of a multimillionaire/son of a former president could say ‘nukyular’, and half of the American voters would believe him.

    Bob Cheeks: “And, oh yes, let’s have congress require banks to lend money to people who have no way of paying the loan. That works well!”

    Oh, STFU- the CRA loans were what? 1/2% of loans? At this point, anybody repeating that line marks himself as ignorant or dishonest.Report

  8. Avatar Dave says:

    Mike Farmer,

    Government housing policies didn’t cause this crisis and people who think that mortgage brokers were responding to a government that had little to no control over what they were doing best understand WHY mortgage-backed securities backed by subprime mortgage bonds became so attractive during the last boom period. It had nothing to do with government housing policies.Report

  9. Avatar Dave says:

    We’re still discussing the CRA? Why? I thought I beat the crap out of that idiotic argument.Report

  10. As I grow increasingly fond of saying, “it’s more complicated than that”. The CRA was not solely responsible for the crisis, and those who claim that it is are oversimplifying for ideological reasons. On the other hand, those who claim that it had nothing to do with the crisis are also oversimplifying for ideological reasons. Like most overreaching pieces of legislation, the CRA had some unintended consequences, some of which helped this crisis along, though they probably weren’t the primary cause.

    Also, do bear in mind that the CRA is a vast piece of legislation that has been amended many times to make it more vast, and that the low-income loans are just a part of it.Report

    • Avatar Dave in reply to Will Wilson says:

      On the other hand, those who claim that it had nothing to do with the crisis are also oversimplifying for ideological reasons

      I’m sorry, but it’s a little more complicated than that.

      http://www.ordinary-gentlemen.com/2009/06/theyre-coming-to-get-you-barbara/Report

    • Avatar angullimala in reply to Will Wilson says:

      I don’t think it’s that complicated at all.

      As Dave said “Nonbank lenders and mortgage brokers generated their revenues based on the volume of loans they originated. They took little to no risk that the underlying loans would default (I think the window was 90 days tops). Once they were sold off to Wall Street or to investors, the risk was someone else’s problem. ”

      It used to be a conservative axiom that people will act irresponsibly if they are protected from the negative results of their actions … and especially if they are only protected from the negative results while allowed to reap any benefits that might accrue.

      What happened?Report

      • It is still a conservative axiom that the poor and dark-skinned will act irresponsibly if they are protected from the negative results of their actions. Rich white people, on the other hand, sometimes need help to drive the great engine of capitalism. It’s the same logic that makes Sonia Sotomayor an undeserving beneficiary of special favors while John Podhoretz is a shining example of the meritocracy in action.Report

  11. Avatar angullimala says:

    Barry,

    It’s true that housing policies had nothing to do with the crises.

    It’s also true that so many conservatives have been trained to instinctively blame problems on minorities that they are incapable of resisting this wrong argument.Report

  12. Avatar Reason60 says:

    I don’t claim an expertise in economics, and will remain agnostic on Glass-Stegall. However, it just seems intuitively correct that if we have institutions that are too big to fail, then they are too big to exist; if a restaurant goes under, it is the creative destruction of the marketplace; if AIG goes under, it is the end of life as we know it. This is insane.

    But to touch on Will’s original point, this IS the acid test for conservatives- conservatism is at its best when it is cautious, reasoned, and based on emprirical evidence and experience. Today the conservative movement is wedded to the abstraction of the Free Market as a religious faith, a single magic solution for all of our ills; this is why they can’t seem to come up with anything other than “tax cuts” and “deregulation”.
    Rod Dreher makes the point that Palin and by extension the conservative movement yearn for a moral order, a stable civil society, yet embrace the very chaos and anarchy of capitalism uncritically, without any reservation or exception. If we follow a philosophy that depends on “creative destruction” is it any wonder we end up with frequent bouts of destruction?Report

    • Avatar Chris Dierkes in reply to Reason60 says:

      reason60,

      yes…except that the individuals (or rather let’s corporations) responsible don’t face the destruction that they rightfully deserve. It’s the worst of all possible situations in that the rules allow for the creation of these zombie banks but then we can’t kill them (i.e. they’re zombies).Report

  13. Avatar Bob Cheeks says:

    “The causes of the financial crisis remain a mystery for many people, but certain causes can apparently be excluded. The repeal of Glass-Steagall by GLBA is certainly one of these, since Glass-Steagall, as applied to banks, remains fully in effect. In addition, the fact that a major CDS player like Lehman Brothers could fail without any serious disturbance of the CDS market, any serious losses to its counterparties, or any serious losses to those firms that had guaranteed Lehman’s own obligations, suggests that CDS are far less dangerous to the financial system than they are made out to be. Finally, efforts to blame the huge number of subprime and Alt-A mortgages in our economy on unregulated mortgage brokers must fail when it becomes clear that the dominant role in creating the demand–and supplying the funds–for these deficient loans was the federal government.”

    Well, it isn’t all that complicated and thanks Mike! Maybe we hang some bankers and congressmen/women. You pick the bankers and I’ll pick the congressmen.Report

    • Avatar Dave in reply to Bob Cheeks says:

      The repeal of Glass-Steagall by GLBA is certainly one of these, since Glass-Steagall, as applied to banks, remains fully in effect.

      The bigger concern with G-S is not as much as the previous crisis (although Citigroup is a notable problem), it’s that firms like Goldman Sachs and Morgan Stanley are now designated as bank holding companies and engaging in a lot of the same sort of trading and business they were doing before the crisis came to a head.

      Should bank holding companies be allowed to access the Fed Funds window at a cost of next to nothing and basis operate highly leveraged proprietary trading desks? I’m not so sure that’s a good idea. I have no problem with commercial banks engaging in certain investment banking functions since there’s no real reason not to allow M&A and advisory functions to exist at commercial banks. Therefore, a investment banking/commercial banking brightline separation may not be the best way to look at this.

      In addition, the fact that a major CDS player like Lehman Brothers could fail without any serious disturbance of the CDS market, any serious losses to its counterparties, or any serious losses to those firms that had guaranteed Lehman’s own obligations, suggests that CDS are far less dangerous to the financial system than they are made out to be.

      Lehman’s failure caused a lot of disturbances. First, there’s AIG. Next, there were all the hedgies and other players who had sold CDS contracts on Lehman that were forced to unwind those position and make good on those claims. They had to sell securities in the markets en masse to raise the cash to do so (I mean, who expected those securities to default given the intervention on Bear Stearns behalf).

      Finally, efforts to blame the huge number of subprime and Alt-A mortgages in our economy on unregulated mortgage brokers must fail when it becomes clear that the dominant role in creating the demand–and supplying the funds–for these deficient loans was the federal government

      Please elaborate.Report

  14. Avatar Art Deco says:

    Will,

    Gov. Palin is interested in selling books because she has $500,000 in lawyers fees to pay off. Casino bankers (think Robert Rubin) are not known to have much affinity for the Republican Party.

    Arnold Kling has in the past simply declined to address an objection to universal banking: that the FDIC, as a receiver of insolvent institutions, has a long history of successfully selling, closing, amalgamating, and managing deposits-and-loans institutions. It has next to no history of superintending an institution engaged in a mess of rapid fire proprietary trading.

    One might also note that Citigroup’s deposits are predominantly domiciled abroad and not insured. Is there some mechanism whereby this is not a problem?

    J.P. Morgan and others have been heavily involved in recent years in lending to hedge funds and such. (I think this is a component of what they call ‘prime brokerage’ and what JP Morgan calls “Worldwide Securities Services”. Is that something you should be doing with depositors money?

    One might also recall twenty-five years ago there was quite a bit of complaint in the press about institutionalized conflicts of interest in businesses implicated in the capital markets. One suggestion to consider: if a Chinese wall has to be constructed within a particular enterprise, is that a suggestion that said enterprise is conducting lines of business that ought to be separated?

    Risk pooling through insurance makes sense when your house, car, hardware store, or person is at risk. Is it really all that useful when the value of a fungible set of financial assets is at risk for marginal losses? Can’t you just change the composition of the asset pool? Is not a purchase of insurance (or ‘credit default swap’) just passing the trash?

    Last time I checked, JP Morgan Chase had a “Corporate Lending” portfolio of $53bn. IIRC, the four megabanks have about $2.7 tn in deposits and JP Morgan has about a quarter of the total. If the others are as given to corporate lending, the four have between them $200-odd bn in loans outstanding. I think that there are $2,000 bn in corporate bonds issued by non-financial corporations, $800 bn in commercial paper, and that the market value of publicly traded equities is around $12,000. Could it be so that the capital markets are adequate for the purposes of large corporations and the world can do without mammoth deposits-and-loans institutions?

    Kling’s shtick is that credit-default swaps and the secondary mortgage market are responses to poorly conceived regulations, and that an unregulated market would have no need of such strategems. That may be true; it seems a rather predictable thesis for a soi-disant libertarian to argue.Report

Leave a Reply

Your email address will not be published. Required fields are marked *