Will Obama Push for Financial Stability? By SIMON JOHNSON Today's Economist Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.” The official reconciliation process between Senate and House financial-regulation bills will begin next week, but the behind-the-scenes maneuvering and intense lobbying is already well under way. The main remaining question is whether the final legislation will ultimately make the financial system at all safer than it was in the run-up to the crisis of September 2008. How do big banks repeatedly get themselves into so much trouble? Dangerous banking in today’s world involves banks trading securities and, in that context, taking positions — that is, betting their own capital. For example, almost all the profits made by big banks in 2009 came from securities trading. When market conditions are favorable and traders get lucky, the people running these banks (and, hopefully, their shareholders) receive tremendous profits. But when this same risk-taking behavior results in big losses, the major negative impact is felt in terms of a major recession, raising government debt and sharply lower employment. “Wall Street gets the upside, and society gets the downside” is an old saying now more relevant than ever. This asymmetry in incentives explains how smart people with concentrated financial power can cause so much damage — as the Bank of England, among others, has demonstrated. The derivatives market is the arena where much of this risk-taking activity occurs. And while the financial regulatory bill makes some effort to bring the derivatives market onto exchanges — although the exemptions granted are far too sweeping — it does disappointingly little to separate out risky trading from the critical banking infrastructure, the payments system and relatively boring parts of traditional retail and commercial banking without which any modern economy cannot operate. Ending the cohabitation of the risky and the boring is exactly what inspired the Glass-Steagall Act of 1933 and, while these specific arrangements had drawbacks and ultimately broke down, they did serve the American economy well for close to 50 years. (James Kwak and I review exactly what happened to Glass-Steagall and why in the book “13 Bankers.”) The spirit of the reforms advocated by Paul Volcker and his current thinking on the subject — championed, at least in principle, by the Obama administration — is to update and apply the principles behind Glass-Steagall. We need to separate the relatively high-risk parts of banking from the relatively boring and safer parts that are essential to the payments system and to the routine credit needs of households and business. Two proposals currently under consideration for the reconciliation of the Senate and House versions of the bill seek to address this problem. While each is valuable, they come at the problem from different directions. Senator Blanche Lincoln’s approach — which focuses exclusively on derivatives trading (the purview of the Agriculture Committee, of which she is chairwoman) — would require banks to set up separate subsidiaries, within which they would need to hold a great deal more capital against their trading books. In this way, her approach addresses all derivatives trading, including the use of their own capital (known as proprietary capital) The Lincoln proposal would have real teeth and — if properly implemented by regulators — would make derivatives trading substantially less risky. It would also make such trading less profitable; requiring more capital to be held against losses will also reduce the potential for profits. This is a feature, not a bug. Naturally, the big Wall Street banks are furious and fighting hard, with all the lobbying power and potential campaign contributions at their disposal, to ensure that profits prevail over social considerations (that’s their job, after all). All indications are that the megabanks will prevail and the Lincoln proposal will be stripped from the final bill. Senators Jeff Merkley and Carl Levin would go a considerable distance in the same direction, although with greater focus on separating out — and not allowing, if regulators follow through — the bets with proprietary capital that recently crippled even the biggest banks. Remember that Bear Stearns and Lehman were broken by their holdings of toxic real estate-related assets, while Citigroup, Bank of America and others were brought low by wrongly believing that certain kinds of derivatives were good bets. The Merkley-Levin approach leaves client-focused trading (buying and selling securities for others) where it is now within the big banks, but would exclude the inappropriate use of proprietary capital across all types of financial instruments — not just derivatives. The Merkley-Levin amendment gathered great momentum in the Senate and would almost certainly have prevailed in a floor vote, but through some parliamentary maneuvering, no doubt abetted by banking lobbyists, it was denied a vote. Within the reconciliation process, Merkley-Levin still has a chance, although the precise odds depend on how hard the White House wants to fight. The president announced the Volcker rule to great acclaim in late January, but unfortunately the detailed follow-up by his own team was lackluster at best. Senators Merkley and Levin stepped into the political and legislative gap, pushing hard for at least some version of the Volcker principles to be adopted in Senator Christopher J. Dodd’s bill. They were turned back at every stage but have remained doggedly on message. Ultimately, this comes down to President Obama. Is he willing to put his political capital seriously into play? Or is his newfound (and oil-spill inspired) rhetoric against runaway corporate power and pathetic regulation at best completely empty and at worst a smokescreen for continued abuses? We will learn a great deal in the coming weeks, not just about the future stability of our financial system, but also about what President Obama really stands for.
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viernes, 11 de junio de 2010
The new york times 11/6/2010
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