Radio commentary, July 15, 2010
It’s now becoming quite obvious that the burst of strength in the first quarter of the year has given way to something much less yeasty. The rate of job growth has slowed dramatically, and the retail sales report released earlier in the week revealed that Americans just haven’t been spending money in the last few months with the vigor they showed in the winter and early spring. I’m not at all surprised by this development—this is what recoveries from financial crises look like. And the Federal Reserve has now come around to believing that the economy’s slowing down. That hasn’t stopped some of its more hawkish elements from advocating for an interest rate increase. But I don’t think they’re going to get their way anytime soon.
[This was written before Goldman got fined, as the FT couldn’t resist calling it in a headline, an amount equal to five days trading revenues and had to admit to nothing of consequence. It’s stunning how little the greatest financial crisis and worst recession in 80 years has changed things.]
So the Senate passed the financial regulation bill on Thursday afternoon, sending it along to the White House for the president’s signature. It would be an exaggeration to call it nothing, but it would also be an exaggeration to call it a major transformation of the financial landscape.
The bill (text here)is named after Connecticut Senator Christopher Dodd, whose state is home to a good deal of the hedge fund industry, and Massachusetts Representative Barney Frank, whose state is home to a number of large mutual fund and money management firms. While Dodd–Frank will change the way Wall Street does business to some extent, bankers headed off the biggest threats, and security analysts estimate that the hit to profits will be less than 10%. Banks will be required to boost their capital—though this is part of a broader international effort coordinated through the Bank for International Settlements. One point: the capital requirements mandated (capital in this sense meaning a wad of hard cash that isn’t borrowed and therefore is free to tap into in a crisis) in this bill are in the range possessed by Lehman Bros. before it went under. So clearly that’s not much of a guarantee of anything.
Some other features. Banks will be forced to stop trading on their own account (the so-called Volcker Rule, named after former Fed chair Paul Volcker), and will also be required to spin off part of their derivatives business into separately capitalized subsidiaries. These moves put something of a firewall between those dangerous activities and a federal safety net. But regulators will have to devise specific rules based on the legislation, an activity in which bank lobbyists will no doubt figure prominently. And the rules won’t go into full effect for four to five years. The hodge-podge of regulators—the Fed, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Comptroller of the Currency, just to name a few—will be left largely intact, though they will be encouraged to consult more closely. That is less than Bush’s Treasury Secretary Henry Paulson wanted to do: in a Treasury paper issued late in his term, Paulson proposed creating a single overarching regulatory authority. Insurance will still be regulated at the state, and not the federal, level—a rare thing among the “advanced” countries, and a guarantee that regulation will continue to be fragmented and weak.
Bank regulators will be given the power to wind down large, system-threatening institutions before they go under instead of during or after their failure. But a $19 billion levy on the banks to prepay the costs of such resolutions was dropped—the same day that the House killed an effort to extend unemployment benefits, amidst the worst outbreak of long-term unemployment since the 1930s. Dropped as well was Obama’s original proposal for an independent and powerful consumer financial protection agency; instead, a new body will be created inside the Fed, an institution not previously known for its attentiveness in protecting consumers from hungry bankers. The original consumer agency was one of the few “progressive” elements in the Obama administration’s original finreg proposal—but they never fought hard for it, and so it was easily killed by industry lobbyists.
comforting anxious capital
Soon after the House passed the bill the other week, Treasury Secretary Timothy Geithner went on Lawrence Kudlow’s TV show to correct the perception, common in the so-called business community, that the administration is anti-business. The choice of outlet is interesting: Kudlow, a former Reagan administration budget official, is a militant supply sider and all-around right-winger with a one-dimensional worldview. Geithner appealed to that dimensional singularity by assuring Kudlow and his CNBC audience that the administration plans to keep a lid on the favorable tax treatment of capital gains and dividends, and emphasizing that “this president understands deeply that governments don’t create jobs, businesses create jobs.” The administration has a “pro-growth agenda,” which is a phrase that Kudlow loves to use himself. But despite all these efforts to placate capital, capital remains fairly hostile to the administration and its modest regulatory efforts—which will, no doubt, prompt further efforts by Obama & Co. to placate business, efforts that will never satisfy, and will so have to be repeated. And repeated.